EFTA00788475.pdf

Global Liquid Markets Weekly Bank of America e-a Bitcoin: a new liquid market? Merrill Lynch 24 July 2017 The View: Bitcoin: a new liquid market? Liquid Markets Weekly Global Is bitcoin a currency? A commodity? Neither? A proper store of value like the EUR. T- bills, or gold is measured by 3 factors: safety, liquidity, and return. Diversification is a Francisco Bland. plus. Bitcoin remains very volatile. But it has experienced a surge in liquidity in the last Commodity & Dertv Strategist six months, surpassing $2bn a day. Moreover, bitcoin is uncorrelated to any financial MLPF&S asset, commodity, or currency we study in this note. The flipside of extreme See Team Page foe Ust of Analysts diversification is that there is no way to explain let alone predict returns. Could bitcoin see a virtuous cycle of increased liquidity, lower volatility, attractive returns. and wider acceptance? Possibly, if regulated financial institutions move to allow bitcoin as pledgeable collateral. However, large inherent risks to digital tokens such as fraud, hacking, theft, new protocol adoption, limited acceptance, and that it is not legal tender many places in the world make it an unlikely development. — F Blanch 610 FX: Despacito until the fall More short-term EUR upside, balanced JPY risks, downside for GBP, prepare for higher FX vol this fall, hedge long EM. — A. VarnvakIdls; R. Gal Rates: Trading the central bank aftermath We review yesterday's ECB meeting and its impact on EUR rates. With the tapering discussion implicitly pushed back, the ECB have given the green light to carry trades. With our econ team pushing the first hike to Spring 2019, we stay long Mar19 Euribors. — S. Salim R. Hounhane; E Satko; 6 Moec EM: The girl with the dovish tattoo With the Fed moving to a more dovish stance, solid growth in China and lower geopolitical tensions, inflows into EM continue and despite tight valuations. We like receiving rates in the belly in Brazil, long Indonesia and Turkey local debt and TRY/2AR. We like long EUR/PLN call spread and JPY/KRW as efficient risk off hedges. — C. lrigoyen Commodities: Get ready for a nat gas rally The recent drop in US nat gas prices hard to justify and the underlying fundamentals are painting a far more positive picture. We expect the inventory surplus to be gone early August and end of October stocks at just 3.5 tcf, the tightest since 2008. We re-iterate our bullish call for 2018 US natural gas prices to average 53.50/MMBtu, significantly above the current forward. — S. Schels; F. Blanch 1 ej Trading ideas and investment strategies discussed herein may give rise to significant risk and are not aa absorb suitable for all investors. Investors should have experience in FX markets and the financial resources to any losses arising from applying these ideas or strategies. BofA Merrill Lyndt does and seeks to do business with issuers covered In its research reports. As a 5 result, Investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 26 to 28. 11766548 Timestamp: 24July 2017 0131AM EDT EFTA00788475 Our medium-term views Rationale GIOFX USD is likely to continue to face near-term headwinds as central banks move in tandem towards poky normalisation. eroding the US Wad advantage. Our expectations fora stronger USD by yearend are being challenged as the GOP has not repealed Obamacare. The path of least resistance remains for a weaker JPY as the Bei continues to anchor YCC towards 0%. The ECB has taken the director) of going further towards poky nonalsafion and the risks are building that EURIJSD ends the year closer to $1.20. GBP is stuck in a range and remains a trade on the Brexit deal. Data continues to play a secondary role but we ream a structurally higher vol bias. Scandnavian FX should beneft from a more constructive ECB and we remain directionally long NOK and long SEK volatility. G10 Rates With game' risks fading, we expect EUR duration to move more in line with the (improving) economic data and the effective reduction in the amount of duration the ECB absorbs in Buts through OE (compared to late last year). We see toy term premium as having the potential to rise by another 10-15bp. Very few Technical hkes" are priced in the very fronlend so we Ike paying Jan18 Eonia. However, we view the 30bp of hkes priced by 1019 to be excessive. With tapering inevitable. hvd guidance on rates• beyond any potential technical move early in 2018. would have to be strengthened. We are bearish Gifts on stretched crossmarket valuations and challenging demand 8, sup* dynamics ahead. We like being shod 3y Gilts vs. OIS on Brexit risks and paying 1y2y forward yield in Gifts on midi:upload rate hke risks and RV anomalies. EM While we expect valuations to get more expertsigus long as the DXY is weak or stable. we are watchful of crowded positioning that could be vulnerable. Triggers for a correction could be weakness in the crowded and HY trades in the US. possbly from weaker corporate earnings or conceded ECPSFed tightening in the autumn. We prefer RV trades or idiosyncratic longs in pockets of remaining vake and take out inmate in options formal However. we remain structwally buyers of EM dips. as we believe that growth is likely to continue to outperform relative to DM for a while. Comedies With OPEC cuts working at a slower pace than we expected. we are adjusting our nventery projections. With output set to rise and oft demand disappointing. global balances point to deficits of 210 kbd in 2017 and 90 kbd in 2018. We lower our WTI forecasts to average $47 this year and $50.bbl next year. We cut Brent to $50 this year and $52bbl in 2018. We now beleve oil stays in contango by yearend. but see a WTI forward anchor al $45.50 and S5 backwardation by next summer. Our key forecasts 3017 4Q17 1Q18 2018 3m Libor 1.35 1.60 185 2.10 10y Thole 2.60 2.85 285 245 toy Efund 0.50 0.55 OR 0.60 EUR4JSD 1.10 1.08 1.10 1.10 USD4PY 119 117 117 115 LtSCi•CNY 6.95 7.05 7.10 7.15 USEIRRL 3.35 3.40 145 3.50 USDINR 66.50 66.80 66.30 66.00 USD•RUB 60.00 60.00 63.00 63.00 WTI Crude Oil 44.00 47.00 47.00 47.00 Gild 1.275 1.350 1.400 1350 Safe, gnfAhleff 11t)n,h(iibYRef"..-sol rvermoilities Research What we like right now IX Buy 6M ATM EURSEK straddles: We see a number of key events for the rest of the year wtich should see EURSEK vol rise including ECB and Riksbank meetings as well as the announcement of a new Riksbark Governor. EUR?SEK vol looks cheap on our metrics. Buy EURAJSO out spreads: near.temi headwits for EUFL1JSD are moulting: the Fed remains hawkish & p3sitioring is a constraint. Risks to the trade are further deieriorat& in US data and Fed officials turning more dovish. Buy teionth 102/107 USCUPY out spreads: the upside for USD is likely fmited until there is greater clarity on tax reform. positioning is relatively clean and there are signs that Japanese investors have lately been soling USCL'JPY. Rates In EUR. we like gong long Mar19 Eunbors on ECB Sequencing. We also like peripheral hedges and shod breakevens. In the UK. we pay ty2y Gilt retds. EM Long JPYARW: long USDHKD forward: long INR and IDR against SGD: long OTIA USD callIDR put. long USDKRW 3m NDF points: long EURPLN 3m call. spreads. stay cautious RUB. long TRWZAR: long ARS: shod CLP: neutral BRL. MXN. PEN: long I rontend MXN volatility: construcfive on India: receive China rates: long 15y IndoGB: receive 1.2.5y MYR NDIRS. receive 1.2-5y INR NDIRS: pay Czech 5y. Nand 2yty IRS: long forward steepeners in Turkey swaps: receive Jans19 and Jan21 in Brazil: pay ly IBR and 2y inflation breakevens in Colontia: 2w5y TIIE sleepeners in Mexico: long end of Soberanos Curve. Convnothes We like buying the crude oil dips. We also see a continued run.te in copper. zinc and nickel paces. Still. gold prices could potentially drop further as the USD strengthens and US rates move higher. For a complete list of our open trade ideas and our trade ideas closed, please refer to pace 19. 2 Global Liquid Markets Weekly 124 July 2017 Bankof America 40' Merrill Lynch EFTA00788476 The View Francisco Blanch MLPF&S From metal-backed to fiat to aypto, money keeps evolving The world economy has used different types of currencies as a means of exchange for millennia. From commodity-backed to precious metal-backed to fiat to crypto. the meaning of currency has changed with varying economic needs, political trends, and technological change. For example, salt was once mined and treasured in the ancient world and used a means of exchange. However, commodity-backed currencies were often neither a practical nor a durable means of exchange. So the global economy moved on. Governments coined currency to create standard economic units of account using either precious metals like gold or industrial metals like copper, a practice that continues to this date. Huge deposit discoveries preceded the advent of silver currency The discovery of large silver deposits in Bolivia by the Spanish in the 16th century set the basis for the world's monetary system until late in the 19h century (Chart 1). These silver dollars were the international trading currency of choice for nearly 400 years and kept a stable value relative to gold. The Spanish milled dollar was even used as a standard to set up the US dollar by the Federal Government. However, carrying large amounts of silver or gold was not practical. So the world started to move steadily to paper money, particularly in the last 200 years. At first, most governments maintained an asset or precious metal-backed currency system where paper currency could be exchanged for hard metal at a fixed rate. However, the supply of this money was fixed, creating huge inflationary and deflationary waves in the economy as the business cycle fluctuated every few years (see US example in Chart 2). Chart 1: Silver dollars were the international tracing arrency of choke Chart 2: However, the supply of this money was fixed, creating huge for nearly 400 years and kept a stable value relative to gold inflationary and deflationary waves every few years History of gold and silver price US inflation rate history $1.800 $35 30% annual M. $1.600 $30 25% change $1.400 20% $25 $1.200 15% $1.000 $20 10% $800 $15 5% $600 0% $10 $400 -5% $200 $6 -10% $0 -15% N COON cl'0030N 0'000N mr<DOZI 0) 0— 0 <0 N. CO — NO •O' CD l•-• CO 0) 0 N CO CO CO CO CO CO CO CO CO Or 0 0 01 01 01 01 01 0 -20% —Gold (LHS) Silver (RHS) 2.7agS3Z2S6- MSSZT;MSSCRialIRMET: Source Mco.Elloonterg Source. Minneapolis Fed Macro financial stability considerations propelled flat currencies Following the Great Depression in 1933. the US government moved away from the gold standard domestically and left the economy running solely on silver, in effect a quantitative easing of sorts. Still, international payments were settled in gold. The domestic silver standard was eventually constrained by Kennedy in 1963. as inflation caught up with dollar silver certificates issued by the Treasury. Then Nixon announced in 1971 that the US government would no longer redeem US dollar currency for gold in international markets. A major spike in precious metals prices followed (Chart 3). As of today. most countries have moved to locally minted fiat currencies that have no intrinsic BankofAmenca'," Global Liquid Markets Weekly 124 July 2017 3 Merrill Lynch EFTA00788477 international value other than the full faith of the issuing government In effect, central banks safeguard the value of the fiat currency mainly by complying with their inflation mandate. However, central banks have the ability to create fiat currency at will as long as the pre-established inflation target has not been met (Chart 4). Chart 3: The end of dollar/gold convertibility In 1971 led to a major Chart 4: Central banks safeguard the value of a fiat currency by mainly spike in precious metals prices complying with their inflation mandate, but can create currency at will _ Pit o history of precious metals Total assets of major mutat banks 2000 40 20000 -USD bn USD 800 - 35 18000 1600 - 16000 - 30 1400 - 14000 1200 - - 25 12000 1000 - - 20 10000 800 - - 15 8000 600 - 10 6000 400 - -5 4000 200 CO 0 2000 co 1, .0 P.- 03 0 00 0 0:1 0) 0 g0)03010101010101 02 03 04 05 06 07 08 09 10 It 12 13 14 15 16 17 —Gold — Platinum — Palladium — Silver (RHS) • FED = BOJ • PBoC n ECB Source INoombergioth Memll Lynch Global Research Some FRED- St. LouisFed Bbomberg Technological advancements have enabled cryptocurrencles Decentralized digital cryptocurrencies first came about at the depth of the Global Financial Crisis in 2009 when a group of developers created Bitcoin. The idea of a virtual means of exchange that is controlled by an algorithm and escapes government control certainly has appeal to many. Ever since, cryptocurrencies have expanded in a dramatic fashion by making transactions cheaper and faster. Indeed. cryptocurrencies have a few advantages over fiat currencies, such as the ability to transfer money instantaneously anywhere in the world at a low cost or to code in specific contractual obligations. Also, while paper money is arguably untraceable and digital money can be hard to trace at times, cryptocurrencies allow for full transaction traceability through a digital ledger. also known as a blockchain. True, users in some jurisdictions may remain anonymous, but that is unlikely to be the case for bitcoin trades happening in exchanges based in the US. Europe, or Japan. Now, what turns a digital token into a proper store of value? We would argue that a reserve currency has to meet three "must have" criteria: safety, liquidity, and retum. Also, there are "nice to have" criteria such as diversification benefits. Bitcoin and other cryptocurrencies score well on some, and not so well on others. Bitcoin does not score well on the safety parameter On the first parameter, safety, it is hard to argue that a crypto token meets the criteria of a reserve currency. On the one hand, the system creates enough incentives for miners to guarantee settlement of bitcoin transactions within hours, compared to 2 or 3 days for conventional securities such as equities or bonds. On the other. the lack of a centralized decision-making process or authority creates risks such as a currency split. If participating coders (also referred to as miners) cannot agree on a solution to a specific problem. a digital currency can break into two. This risk is arguably behind the sharp selloff observed across the cryptocurrency world in recent weeks. Also, risks such as hacking, identity theft or outright scams are a recurring problem. But you could also argue that fiat currency holdings are exposed to them. Most importantly. volatility is the key parameter to understand the concept of safety in a reserve currency, in our view. In that regard. bitcoin's score has improved in recent years as volatility has continued to drop (Chart 5). Still, bitcoin's volatility is very high compared to the euro, the yen or even gold. But it fell twice last year below the volatility of silver (Chart 6), the world's currency for 400 years. 4 Global Liquid Markets Weekly 124 July 2017 Bankof Amenca 40" Merrill Lynch EFTA00788478 Chart 5: Volatility is a key parameter for safety Ina reserve armicy and Chart 6: True, bitcoin's volatility is very high compared to the euro, the blurt vols have been falling for a while yen or even gold, but it is starting to approach silver Annualied STDEV of daily returns 3M-rolling annualized stdev of daily returns 100% 300% 90% 80% 250% 70% - 200% 60% 50% 150% 40% - 30% 100% 20% - 50% 10% - 0% 0% Bitcoin Gold Silver EUR any • Last 5yr Last 4yr • Last 3yr • Last 2yr • Last tyr —Sltcoln —Gold -Silver Source &tombs& Both MentliLynCh Elctd Research Source Blomberg BoWAMm11Lynch Gbbal Research A wide array of risks obscure the future of cryptocurrencles When examining the safety of any asset, volatility is not the only source of concern. In the case of bitcoin and other virtual tokens, worries are magnified given that it is not legal tender in many places in the world or regulated by any government bodies. In fact. decentralization is central to bitcoin. As such, risks like fraud, hacking, and outright theft have plagued the cryptocurrency world in recent years. In particular. the surge in initial coin offerings seems hard to justify and creates a risk of fragmentation in the market. Confidence could suffer if many of these offerings tum out to be outright scams to circumvent investor protection regulations. After all, it is hard to "know your client' if a bitcoin transaction happens through an exchange in an obscure jurisdiction. Other issues more specific to the functioning of cryptocurrencies, such as finding an agreement regarding the adoption of certain protocols, are also worth mentioning. For example. should bitcoin split into two digital tokens because miners cannot find common ground. a collapse in confidence and value could follow. Lastly, it is worth noting that cryptocurrency transactions are taxable in many jurisdictions, presenting additional challenges to users that are unfamiliar with the fiscal implications of using bitcoin. Yet, EM currency pegs and capital controls encourage bitcoin use True, bitcoin is still volatile compared to even Emerging Market currencies. But it is also worth noting that EM FX volatility tends to be artificially suppressed by controls. When looking at 16 countries with severe capital controls based on IMF indicators (Algeria, Angola, China, Malaysia, Tunisia, Cote d'Ivoire. India. Morocco, Pakistan, Philippines, Sri Lanka, Swaziland. Tanzania, Togo, Ukraine, and Uzbekistan), we find that bitcoin is more volatile than these currencies (Chart 7). However, it is not uncommon for these EM currencies to suffer from high inflation rates (Chart 8). When pegged or semi-pegged FX regimes face high inflation or sharp FX reserve drawdowns, steep exchange rate adjustments eventually follow. So the more official and black market exchange rates diverge, the more attractive bitcoin may appear to some as a means of payment and store of value. And the more liquidity and scale bitcoin builds to, the lower the volatility over time, in our view. BankofAmenca ea* Global Liquid Markets Weekly I 24 July 2017 5 Merrill Lynch EFTA00788479 Chart 7: We find that bItcoin is more volatile than the currendes with Chart 8: However, it is not uncommon for these EM currendes to suffer severe capital controls from high inflation rates Annualized STDEV of weekly returns Average inflation rates over the past 5 years 60% 55 50 50% 45 40 40% 35 30% 30 Average inf ation rate for the world 25 over the past 5 years = 2.93% 20% 20 15 10% ......,1,11.._•_11•1. ri<% .8. -4, .4., 4.,.4,e .40 t issp .., et my> cp oe .Oe ae 10 5 0 0-cr#etse,z,c4? _-0 o,.21,1,/.0.0 ..43 „0 4.6v x ,„ se ,be „N." .t e> ,,-- o rie sbte secsla-204., -, .3v 0.9 ,et? 0> et• cp „," e e <te eg „e CR Sarre Bloomberg. Bofn Merrill Lynch00M Ftesea«h Some FRED- St. LouisFed Bbomberg BMA Memll Lynch GlobS Researth Liquidity, however, keeps increasing at a very fast rate Moving on to our second parameter, liquidity, it is hard to ignore that trading volumes for major digital currencies like bitcoin and ethereum have skyrocketed in recent years. For example, daily trading volumes for bitcoin were $400mn in 2012 and have now moved up to about $2bn a day at present (Chart 9). Meanwhile. ethereum had daily trading volumes of $1.5mn when it first launched in 2015 and it is now experiencing daily trading of about $1bn. Most importantly. for a digital token to become a currency. it must build to a certain scale, a bit like the silver mine in Bolivia found by the Spanish. In some ways, this is exactly what has been happening in recent quarters, with the total market value of digital tokens growing exponentially from $1.5bn to around $87bn at present (Chart 10). Put differently, cryptocurrencies have built scale rapidly and are now accepted as a means of payment by some corporations and individuals. Chart 9: Daily trading volumes for bitcoin were $0.04bn In Jan. 2014 and Chart 10: The total market value of bitcoin exploding growing have now moved up to about $1bn a day at present exponentially from $1.5bn to around $43bn at present Daity trading volume for GLD and BItcoln Market cap of cryptocurrencies 6 100 bn USD bn USD 90 5 80 4 70 60 3 50 40 2 30 20 10 0 0 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16 Jul-17 Ap -13 Apr-14 Apr-15 Apr, t 6 Apr- 17 —GLD US Equity —Bitcoln ■ Bitcoin • Ethereum • Ripple . Litecoin Source conmarketcap ccol Source corcroketcap corn Returns of cryptocurrencies depend mostly on price appreciation... On our third parameter, there are several ways to look at the return produced by a reserve currency. Because a government issues both debt and currency simultaneously. perhaps the most important measure of value for a reserve currency is the real interest rate (Chart 11). Then there is the term premium, as fixed income markets typically make it more expensive to borrow for longer periods of time. In fact despite quantitative easing, most major currencies like the EUR, the USD, or the GBP maintain a positive 6 Global Liquid Markets Weekly 124 July 2017 Bankof America 40' Merrill Lynch EFTA00788480 spread between their 2 year and their 10 year interest rate (Chart 12). Yet, there are some widely accepted reserve assets like gold or even the WY that do not pay a yield. Chart 11: The most Important measure of value for a reserve arrency is Chart 12: The term premium means that currencies maintain a positive the real Interest rate spread between their 2 year and their 10 year interest 7 Real 10 year yield based on headline CPI 2Y10Y goverment bond yield spread 6 5 4 3 1 0 -1 -2 -3 -4 97 99 01 03 05 07 09 11 13 15 17 94 96 98 00 02 04 06 08 10 12 14 16 —US —Japan —Euro Area — Euro US - UK Source Bloomberg Smoce Bloomberg ...although some exchanges offer a return for borrowing tokens Bitcoin and other digital currencies do not have an interest rate set by a central bank And it is hard to calculate a real interest rate, as there is no specific national inflation metric to match it against However, just like in gold, there is still an interest rate set by the market After all. bitcoin exchanges need digital currency for short lending purposes. Some of the most popular services offer 1% for 14 days and scales to 5% for 1 year. Even then, retums paid by exchanges are arguably more of a credit spread than a real interest rate. Moreover, with volatility in excess of 50% or higher, a 5% return on a cryptocurrency over the course of 1 year as compensation for lending a bitcoin to an online exchange does not seem like a particularly attractive proposition. A key step for bitcoin would be to become pledgeable collateral Still. bitcoin and ethereum have delivered impressive returns so far (Chart 13) as fiat currency flowed into these digital tokens. Is it realistic to assume cryptocurrencies will continue to appreciate over time? The dollar price of gold has appreciated over centuries in line with inflation (Chart 14), but some periods have experienced much faster gold price appreciation than others. Moreover, periods of high real interest rates have been particularly damaging for gold returns in the past. In our view. cryptocurrency returns will mostly depend on the faith placed by individuals, corporations, and financial institutions on this emerging technology. As discussed earlier, there are large inherent risks to digital tokens such as fraud, hacking, outright theft, new protocol adoption. limited acceptance, and that it is not legal tender in many places in the world. Moreover, a crucial hurdle remains. Most regulated financial institutions allow their clients to borrow against financial or physical assets. but we are not aware of any major institution that takes cryptocurrency as collateral at the moment. Thus, in our view, a key step for bitcoin would be for it to become pledgeable collateral. BankofAmencae Global Liquid Markets Weekly 124 July 2017 7 Merrill Lynch EFTA00788481 Chart 13: So far, bitcoin has delivered exceptional returns as flat Chart 14: The dollar price of gold has appreciated over centuries in line currency flowed into these digital tokens with inflation, but returns have fluctuated over the cycle 1 Yearly once returns (Bitcoin) Annual gold returns 600% 140% 120% 500% - 100% 400% - 80% 300% - 60% 40% 200% - 100% - 20% 0% -20% 11 ILI 1) ir 1 1 0% -40% -100% -60% 2017 2016 2015 2014 2013 2012 2011 •-• <0 •-• <0 •-• <0 •-• CD •-• <0 •-• <0 •-• <0 •-• <0 •-• <D 0 0 el. O N <0 <0 03 03 0 0 0 0 (YTD) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 CY CY CY CY 0 Source Bloomberg Saute Bloomberg Note Data avarbbie fromjuly1010 u> current There were almost non puce fluctuations before 1011 Bitcoin correlations to EM and 610 flat currencies are near zero-. Lastly, a financial instrument tends to be more attractive if it offers diversification benefits. In that regard. bitcoin and other cryptocurrencies score well. For starters, we find near zero correlation in weekly returns between bitcoin and fiat currencies (Table 1). Remarkably, while some currency like DXY arid CHF exhibit a correlation of 0.67, bitcoin returns are uncorrelated to any other major EM or G10 currency in our analysis. Table 1: EM and GIO currencies - weekly returns correlation BItcoln DXY EUR JPY GBP MXN CNY KRW CAD CHF Bitcoln -0.04 0.04 4.01 0.05 -0.06 4.04 0.02 0.01 4.01 DXY -0.96 0.45 -0.69 0.33 0.25 025 0.53 0.67 EUR .0.30 0.59 -028 -0.20 -0.25 0.42 -0.62 JPY 4.19 0.02 0.17 0.11 0.14 0.32 GBP -026 822 -0.34 0.44 -0.43 MXN 0.19 0.43 0.55 0.19 CNY 025 0.26 0.14 KRW 0.49 026 CAD 026 CHF Source Bloomberg Bofil blemll Lynch Gobi Research Note Dauasailiok fromiltiy 2010 tocurrenc There~wimps,nopnce flucruauons bete«lot I ...and bitcoin is also uncorrelated to volatile, inflation prone EM FX Arguably. bitcoin is not particularly attractive as a means of exchange in a very large and stable economy like the US that boasts the world's pre-eminent trading currency. But what about emerging markets? After all, bitcoin does not face the same capital controls and banking rules as do some currencies in highly constrained economies. It could potentially deliver low cost fast cross border transactions. We look again at the correlations between EM FX and bitcoin and we find that bitcoin lacks correlation to a whole range of EM currencies (Table 2). 8 Global Liquid Markets Weekly I 24 July 2017 Bankof America e Merrill Lynch EFTA00788482 Table 2: Inflation prone EM FX - weekly returns correlation Bitcoln DZD AOA CNY MYR TND XOF INR MAD PKR PHP LKR SZL TZS UAH UZS Bitcoin 4.07 4.03 403 4.06 0.02 4.02 4.01 4.02 0.03 401 4.06 0.02 4.01 406 .0.07 DZD 0.03 0.32 0.31 0.40 0.49 0.17 0.54 0.06 0.13 0.05 0.27 0.01 0.05 -0.15 AOA 0.25 0.12 0.00 0.01 0.02 1.01 1.03 -0.01 0.00 0.13 0.16 0.01 -0.07 CNY 0.30 0.16 0.16 0.15 0.17 1.01 0.20 0.09 0.26 0.03 0.07 0.01 MYR 0.15 0.23 0.43 0.26 0.02 0.56 0.14 0.45 0.03 1.10 -0.07 TNO 0.77 0.17 0.79 0.06 0.10 0.05 0.31 0.03 1.03 -0.08 XOF 0.22 0.95 0.10 0.16 0.04 0.34 0.03 1.03 -0.09 INR 0.24 0.07 0.45 0.20 0.39 0.00 1.01 -0.14 MAD 0.08 0.17 0.05 0.37 0.04 -0.04 -0.07 PKR 0.07 0.09 0.01 1.05 .0.09 -0.06 PHP 0.15 0.31 0.03 0.01 0.03 LKR 0.05 0.01 0.04 0.03 SZL 0.01 -0.04 -0.05 TZS 0.19 -0.06 UAH -0.01 UZS s.urct, tiii.:niters, Befit Memll Lynch Glohal Research Note Data aattabk fromMy2010 COcurrent_ There were almost no puce flt.ctuations before 2011 Bitcoin correlations to gold, oil, or copper are also about zero The same applies to commodities. While gold and silver maintained a correlation on weekly returns of around 80% since 2011, we do not observe any meaningful correlation between bitcoin and precious, industrial or energy commodities (Table 3). Table 3: Commodities - weekly returns correlation Blicoin Gold Silver Platinum Palladium BCOM Brent Copper Bitcoin 0.05 0.04 _ 0.07 0.06 0.06 0.05 0.02 Gold 0.80 0.70 0.35 0.40 0.14 0.26 Silver 0.68 0.46 0.56 0.27 0.44 Platinum 0.60 0.50 0.28 0.43 Palladium 0.44 0.27 0.48 BCOli1 0.74 0.57 Brent 0.34 Copper Sout<e 0gvntr8 Befit Memil LynchGlobal Research Note. Data asailtok fromMy2010 COcurrent_ There were almost noprice flLctuations before 2011 When looking at equities, we also observe minimal correlations Equity markets, partly because of their interconnectedness. tend to move together with average correlations nearing or exceeding 50%. Once more. bitcoin exhibits near zero correlation with all major equity markets around the world (