Overview

BH Macro Limited ("BHM") is a closed-ended investment company, registered and incorporated in Guernsey on 17 January 2007 (Registration Number: 46235).

BHM invests all of its assets (net of short-term working capital) in the ordinary shares of Brevan Howard Master Fund Limited (the "Fund").

BHM was admitted to the Official List of the UK Listing Authority and to trading on the Main Market of the London Stock Exchange on 14 March 2007.

Total Assets: $2,024 mm¹

1. Estimated as at 30 June 2014 by BHM's administrator, Northern Trust.

BH Macro Limited NAV per Share (estimated as at 30 June 2014)

BH Macro Limited NAV per Share % Monthly Change

Source: Fund NAV data is provided by the administrator of the Fund, International Fund Services (Ireland) Limited. BHM NAV and NAV per Share data is provided by BHM's administrator, Northern Trust. BHM NAV per Share % Monthly Change is calculated by BHCM.  BHM NAV data is unaudited and net of all investment management fees (2% annual management fee and 20% performance fee) and all other fees and expenses payable by BHM. In addition, the Fund is subject to an operational services fee of 50bps per annum.

NAV performance is provided for information purposes only. Shares in BHM do not necessarily trade at a price equal to the prevailing NAV per Share.

*Estimated as at 30 June 2014

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS

Brevan Howard Master Fund Limited

Unaudited Estimates as at 30 June 2014

Source: BHCM

* These estimates are unaudited and have been calculated by BHCM using the same methodology as that used in the most recent audited financial statements of the Fund. These estimates are subject to change.

Level 1: This represents the level of assets in the portfolio which are priced using unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: This represents the level of assets in the portfolio which are priced using either (i) quoted prices that are identical or similar in markets that are not active or (ii) model-derived valuations for which all significant inputs are observable, either directly or indirectly in active markets.

Level 3: This represents the level of assets in the portfolio which are priced or valued using inputs that are both significant to the fair value measurement and are not observable directly or indirectly in an active market.

The information in this section has been provided to BHM by BHCM.

During the month, the Fund suffered some losses mainly in FX trading and to lesser extent in USD interest rate trading. These losses were partially offset by gains in EUR interest rate trading.

Monthly, quarterly and annual contribution (%) to the performance of BHM USD Shares (net of fees and expenses) by strategy group

Monthly, quarter-to-date and year-to-date figures are estimated by BHCM as at 30 June 2014, based on total performance data for each period provided by the Fund's administrator, International Fund Services (Ireland) Limited.

Methodology and Definition of Monthly Contribution to Performance:

Attribution is approximate and has been derived by allocating each trader book in the Fund to a single category. In cases where a trader book has activity in more than one category, the most relevant category has been selected.

The above strategies are categorised as follows:

"Macro": multi-asset global markets, mainly directional (for the Fund, the majority of risk in this category is in rates)

"Rates": developed interest rates markets

"FX": global FX forwards and options

"EMG": global emerging markets

"Equity": global equity markets including indices and other derivatives

"Commodity": liquid commodity futures and options

"Credit": corporate and asset-backed indices, bonds and CDS

"Systematic": rules-based futures trading

The information in this section has been provided to BHM by BHCM. 

Market Commentary

US

The juxtaposition of weak GDP growth and strong job gains was the highlight of the data in June. First-quarter GDP was revised down to show a contraction of 2.9% (annualised rate). Incoming indicators for the second quarter - in particular a surprisingly soft path of consumer spending despite another solid increase in purchases of motor vehicles - led to downward revisions in the tracking estimate of second-quarter GDP growth. Looking at the data, growth in the first-half of the year was about flat, a significant disappointment compared with expectations at the start of the year for 3% growth in 2014. Temporary factors such as the weather and rebalancing inventories with final sales as well as technical factors such as measuring health care expenditures account for most of the softness. However, we will be paying close attention to whether growth in the third-quarter looks firm.

Meanwhile, payroll employment posted another strong increase. Employment has risen by approximately 1.4 million jobs in the first half of the year. That is the best six-month increase in the history of the expansion since 2009 and nearly matches the peak gains seen in the prior business cycle. At the same time, the unemployment rate declined to 6.1%. The unemployment rate is expected to drop below the important 6% threshold in the third quarter. Broader measures of slack also improved.

Mechanically, weak GDP growth and strong employment growth means that productivity posted a large decline in the first half of the year. This is a puzzling and troubling development. The tension is expected to be resolved going forward by consistent 3% GDP growth. But if that doesn't happen, then a number of macroeconomic assumptions would be called into question, including the potential growth rate of the economy, the appropriate stance of monetary policy, and stock market valuations.

Wage and price inflation are beginning to take centre stage in the macroeconomic debate. With the labour market firing on all cylinders and the assumption that GDP growth will return to a consistent above-trend pace, wage and price inflation will dictate the timing of  monetary policy normalisation. Core PCE inflation has picked up to 1.5% year-over-year and looks to be trending up gently. However, wage inflation is hovering around 2%, a modest pace at best. With wages not showing any signs of labour market tightening, the Federal Reserve are likely to be comfortable keeping rates low so long as price inflation does not threaten to rise quickly above its 2% target.

EMU

The unfolding of 'hard' data suggests that the eurozone business cycle is softening, at odds with the more bullish indications provided by 'soft' data, like business and consumer surveys. In particular, in May both retail sales and, especially, industrial production were soft, with the latter contracting sharply although due somewhat to calendar effects. These dynamics point at a likely soft outcome of EMU GDP growth in the second-quarter, which would likely disappoint the more upbeat expectations formulated by both private sector analysts and the ECB.  In June, business surveys softened too, although from still elevated levels: the EMU Composite PMI fell to 52.8 from 53.5 in May. The drop of the EMU Composite PMI was led by the core countries, France and Germany. The euro area HICP inflation is moving sideways at very low levels: 0.5% y/y in June, in line with consensus expectations, but still far away from levels consistent with the ECB definition of price stability. The annual growth rate of broad money supply M3 rebounded to 1.0% y/y in May from 0.7% y/y in April. On the banks' asset side, net lending to non-financial corporations (adjusted for sales and securitisation) declined by €4bn, following a contraction of €3bn in April, showing little change from previous months. The annual growth rate of net lending to households moved only slightly up. 

At its July meeting, the ECB kept policy rates unchanged, but announced that, as of 2015, it will hold monetary policy meetings every six weeks instead of every month. This will allow the Council more time between the meetings to publish 'accounts' of the discussions. ECB President Mario Draghi stressed that interest rates would stay low for a prolonged period of time, and that, if inflation remains low the ECB would undertake further action, including asset purchases.  In addition, the ECB published the details of the upcoming T-LTROs. Draghi added that the maximum amount banks could borrow from the new T-LTROs could be as large as €1 trillion - €400bn in this year's operations and €600bn in the following two years through the additional six operations from March 2015 to June 2016. Conditions for borrowing in the T-LTROs are generally easy to meet.

After many weeks of heated debate among EU leaders and politicians, the former prime minister of Luxembourg Jean-Claude Juncker was nominated as the next president of the European Commission despite the campaign led by the UK against his appointment. The decision must still be ratified by the European parliament. In the concluding document of the European Union Summit, the economic section referred to making use of margins for flexibility in the EU budget rule along with structural reforms to lift growth, following requests by France and Italy. Italian Prime Minister Matteo Renzi had been leading calls in early July for more flexibility in applying the EU's rules on limiting debt and deficits, arguing that Europe must switch its focus away from strict budget austerity towards encouraging job creation and economic growth.

UK

The ongoing theme in the UK data is strong growth with benign inflation. Monthly business indicators over the past months have stabilised at high levels or eased back slightly, but have generally remained resilient, pointing to GDP growth above 3%. Consumer confidence has risen above pre-crisis levels, as have car registrations. Unemployment claims data point to ongoing rapid improvement in the labour market, consistent with growth well above trend. It is expected that the UK is probably only 1-2 years away from full employment. The composition of growth is also becoming better balanced, which reduces the risk that it will fall back sharply. The initial growth pick-up relied heavily on housing and savings-financed consumption. But more recent data show better balanced growth in two respects. First, business investment is making an increasing contribution to growth. Second, rising real household income growth is putting consumption growth on a more sustainable footing. External rebalancing remains a painfully slow process, as this relies on eurozone demand improving by more than currently seems likely. The Bank of England ("BoE") have also resigned themselves to this.

Inflation remains benign, in a 1½ to 1¾ % range and likely to remain there for some time. Official data on wage inflation remains very weak, around 1%. But survey evidence on wage inflation shows some sign of a pick-up from low levels. The BoE switched from quantitative to qualitative guidance in February, specifying that rate hikes will be gradual, limited and still some time away. Over the past year, the Monetary Policy Committee ("MPC") has systematically underestimated the speed at which slack is being reduced, so the date of rate lift-off is approaching more rapidly than they initially anticipated. This trend was confirmed in June when Governor Carney specifically mentioned that rates might have to go up sooner than markets anticipated, and in the June MPC Minutes which opined that the market was underpricing the risk of a rate hike this year. Moreover, an increasing number of MPC members are realising that, in order to preserve the 'gradual' nature of rate hikes that they are aiming for, it is important not to delay the start of the normalisation process for too long. In parallel to the MPC, the Financial Policy Committee ("FPC") has debated the extent to which the housing market is posing a financial stability problem. A first FPC step was to introduce the Mortgage Market Review earlier this year, which formalises the procedure for checking and documenting affordability. This has led to a fall in mortgage and housing activity in the past few months as banks struggled to cope with the longer approvals procedure. It is expected that this fall is temporary, but there is clearly a risk that the FPC has had a bigger impact than it intended. In June, the FPC introduced two further housing measures to reduce future financial stability risk: it capped the share of high loan to income mortgages in total mortgage lending, and introduced a specific interest rate buffer that banks should take into account when assessing affordability. Both of these limits were set at levels that do not bind today, but that might bind in a few years if the housing recovery continues apace.

Japan

Economic activity appears to be bouncing back from the swings induced by the April consumption tax hike, but levels in May were still generally below those seen around the turn of the year.  There have been partial improvements in monthly measures such as industrial production ("IP") and retail sales, as well as qualitative surveys of current conditions, such as consumer confidence and business measures (Shoko-Chukin survey of small and medium-sized enterprises and the Economy Watchers survey).  The latest Tankan survey showed a further improvement in current conditions in the second-quarter among large enterprises but a dip among small and medium-sized firms.  Expectations for future activity remain generally healthy.

Media coverage of Governor Kuroda's speech in late June generally focussed on his comments on the Government's third-arrow plans, but it was his discussion of the outlook for inflation that was important.  Kuroda carved out more room for the Bank of Japan ("BoJ") to remain on hold when he said that the BoJ expects inflation to slip a little in the near term before turning back up.  Later in the year, the BoJ expects inflation to pick-up to reach the 2% target in 2015.  It follows from his analysis that the BoJ thinks that output moving above the potential growth rate drives some of the acceleration in prices, but the relevant Phillips Curve that Kuroda presents is too flat to account for the entire projected increase.  It is apparent that Kuroda is also banking on a further increase in inflation expectations to push inflation to the 2% goal; in his framework such an increase represents an upward shift in the Phillips Curve. However, understanding how inflation expectations are formed and adjusted is difficult.  Japan's own history since 1999 suggests that expectations can shift so that inflation (or in Japan's case deflation) finds a new equilibrium.  The Volcker-Greenspan era suggests that policy can help change expectations.  Disinflation in the United States over that period was faster than economists thought possible with their models that did not include a role for expectations but at the same time was slow enough to indicate that inflation expectations do not suddenly shift because the head of a central bank speaks.  In that regard, the recent slippage in inflation expectations as measured in the consumer survey is somewhat worrisome. Actual inflation prints, however, have been better of late.  The national core measure for May should not be taken at face value as some energy price increases included the introduction of the consumption tax that was delayed given billing practices. On the other hand, western core prices, which exclude all food and energy costs, rose in line to slightly above expectations in April and increased a further 0.1% in May on a seasonally adjusted basis.  Tokyo western core prices in June also rose 0.1%.

Prime Minister Abe formally announced his new package of third-arrow reforms, including much-needed corporate governance changes, a proposed corporate-tax cut and measures to boost the roles of women and foreign workers in the labour market.  Some analysts described the announcement as disappointing as it lacked details. However, the announcement at the start of summer commits the cabinet to the programme, and it becomes the job of the bureaucracy to develop specific legislation to implement it thereafter.  To be sure, the details matter, but the lack of details at this time is not a reason by itself to change views.

China

The Chinese Government's selective easing has continued. In particular, the Chinese Banking Regulatory Commission ("CBRC") has announced the details of the adjustment of the loan-to-deposit ratio to support targeted credit to priority sectors. However, bank credit is also constrained by the People's Bank of China ("PBoC") window guidance of credit quota issued directly to banks, and thus it is not clear how many extra loans could be released. That said, it is encouraging to see that both the PBoC and the CBRC are now on the same page to support growth. In addition, fiscal spending in May accelerated after Premier Li told the local governments that "when we say we should not chase GDP as a primary goal, it does not mean that GDP is not important" and urged the local governments to spend budgeted expenses in a timely manner. However, despite the acceleration of fiscal spending in May, the fiscal stance year-to-date is approximately neutral. A further acceleration in fiscal spending is likely in the coming months to support growth, which would imply a tighter fiscal position around year-end. Another signal of easing can be seen in the total social financing ("TSF") dynamics. Although May TSF was in line with market expectations, it was the first month since January that it outpaced its 2013 corresponding level, in a sign that credit policy may have become more supportive of growth too. In particular, the pick-up in new RMB loans in May was quite encouraging as it carries a higher policy signal than other components in the TSF. On the other hand, net trust product issuance has shrunk to nearly zero. Another method of easing would be a further cut of the reserve required ratio ("RRR"), in either a selective or broad way. Despite an impressive trade surplus of $36bn and stable FDI inflows in May, the PBoC's net FX purchase recorded only $6.2bn versus $18.8bn in April. This implies net capital flows that are not explained by either the trade balance or FDI (a proxy for hot money flows) of about $38bn in May. If such trends persist, the chance of a broad RRR cut is likely to rise accordingly in order to neutralise the impact of slower capital inflows on domestic liquidity conditions.

On the real side of the economy, signs of a cyclical pick-up are increasing. In June both the HSBC and the official PMI recorded better readings, particularly the HSBC PMI. However downside risks in the property sector remain and property prices declined further in May. Out of the 70 major cities, 34 cities registered a price decline (m/m basis) in May versus only 10 cities in April. The number of cities that saw a price increase in May was only 18 cities versus 47 cities in April. The Government has already tried to introduce offsetting measures including asking banks to distribute mortgages in a timely manner.

In addition, the anti-corruption campaign has escalated again with a formal accusation against Xu Caihou that he has accepted bribes, a top military official and so far the highest level government official that has been arrested since the start of the anti-corruption campaign early last year. In addition, the anti-corruption campaign has now spilled to the financial sector, with several banking managers being arrested for malpractice of loan approval in exchange of bribes.

Northern Trust International Fund Administration Services (Guernsey) Limited

Harry Rouillard +44 (0) 1481 74 5315