Week in Focus Bubble therapy: China set to follow Japan
Transcription
Week in Focus Bubble therapy: China set to follow Japan
Economic Research Week in Focus 7 November 2014 Bubble therapy: China set to follow Japan In the wake of excessive investment and huge credit expansion, many fear a crash in China. However, the case of Japan in the 1990s shows that there is another option which would allow the distortions to correct themselves over many years. Huge state intervention and the artificial resuscitation of near-bankrupt institutions (“zombification”) could prevent a major recession in China. The likely price would be a long phase of comparatively low growth. Page 2 The Week in Focus in 100 seconds Please follow this link for a video summary. One bubble in China has already burst Equity index, quarters before and after the peak (peak = 100), Japan: Nikkei, China: Shanghai Composite 120 100 80 60 40 20 0 -16 -12 -8 -4 0 4 Japan (Q4.1989 = 100) 8 12 16 20 24 28 32 China (Q4.2007 = 100) Source: Bloomberg, Commerzbank Research India: Reforms or modernisation of bureaucracy? Although Indian Prime Minister Modi continues to enjoy strong public support, five months after sweeping to power, questions remain over whether he is a reformer or merely a modernizer. We don’t see the two as mutually exclusive but see the latter as a prerequisite for the former. Page 5 Product Idea: Forward Plus Exporter in EUR-USD. We recommend EUR buyers to participate in a Forward Plus EUR-USD in order to benefit from the EUR-USD down move which we expect will continue in the coming months. Page 6 Outlook for the week of 10 November to 14 November 2014 Economic data: Available data points to another slight contraction of the German economy in Q3, which would fulfil the often used definition of a recession. Together with Italy, Germany would also be the worst performer among the large euro countries. Page 9 Bond market: ECB President Draghi gave the impression that there is full support from the Council for further measures if needed. Downside risks to inflation may well emerge as soon as next week, weighing on break-even inflation rates. Ten-year Bund yields are thus likely to continue fluctuating around 0.85%. Page 12 FX market: The JPY is under pressure thanks to the BoJ’s very expansionary monetary policy. However, the depreciation trend appears to be coming to an end. Page 13 Equity market: The recent improvement in M1 money growth in the euro zone and in the US indicates that a DAX bear market is unlikely, in our view. Investors should continue to use periods with a DAX below 9,000 to increase equity exposure. Page 14 Commodity market: The nosedive in crude oil prices does not appear to be over yet and both OPEC and the US Energy Information Administration are likely to lower their oil demand forecasts further. Page 15 For important disclosure information please see page 18. research.commerzbank.com / Bloomberg: CBKR / Research APP available Chief economist Dr. Jörg Krämer +49 69 136 23650 [email protected] Editor: Peter Dixon +44 20 7475 4806 [email protected] Economic Research | Week in Focus Bubble therapy: China set to follow Japan Bernd Weidensteiner Tel. +49 69 136 24527 China is showing worrying parallels with previous economic miracles where growth collapsed following a bursting of the bubble. In the wake of excessive investment and huge credit expansion, many fear a crash in China. However, the case of Japan in the 1990s shows that there is another – and more likely – option: huge state intervention and the artificial resuscitation of near-bankrupt institutions (“zombification”) could prevent a major recession. The likely price would be a long phase of comparatively low growth. China: Crash … For a long time, China was the growth star of the global economy; today some see it as the problem child. China’s very high investment rate (chart 1) suggests that overcapacity is increasing. Furthermore, the loan portfolio has been expanding at a much faster rate than the overall economy for some years (chart 2). This also suggests that many unprofitable investment projects have been financed. Moreover, house prices are falling after a long and sharp rise, which will reduce the quality of many loans. Many such imbalances or bubbles have ended in a crash. The most extreme example is the global economic crisis at the beginning of the 1930s when the sharp rises in loans and asset prices in the US were followed by a deep economic slump. … or the Japanese solution? However, the example of Japan in the 1990s shows that there is an alternate outcome. The burst of the bubble was comparable to the USA a good 60 years earlier. At the end of the 1980s, Japan accounted for half of global property assets by valuation. The impact that followed on the financial markets was substantial: the equity market peaked in Q4 1989 and then plunged 60% by mid-1992, with the trough only occurring in 2003 following a total loss of 80%. House prices have fallen steadily since their peak in 1991 and were recently 51% lower. The real economy did not slump though. Indeed, it grew at an average rate of around 1% per capita (compared to 4% in the 1980s) and only towards the end of the decade did real GDP marginally fall (chart 3, page 3). Japan chose the gentle therapy … This difference between the USA in the 1930s and Japan in the 1990s is partly due to the fact that the economic crisis of the 1930s was a global phenomenon, whereas Japan had the support of exports in the 1990s due to economic growth in the USA and China. That said, a more important factor was probably that Japanese economic policy reacted differently after the crash than the US in the 1930s. It pertained to different approaches towards running up excessive debt. CHART 1: China is investing huge amounts … CHART 2: … financed by a big rise in loans Investment, % of GDP Total loan portfolio (“Total Social Financing”), % of GDP. 60% 220 50% 200 40% 180 30% 160 20% 140 10% 120 0% 1950 1960 1970 1980 China Source: IMF, Commerzbank Research 2 1990 2000 2010 100 2003 2004 2005 2006 2008 2009 2010 2011 2013 2014 Japan Source: Global Insight, Commerzbank Research 7 November 2014 Economic Research | Week in Focus In the USA, the radical option was taken in the spirit of a school of economic thought which required an end to the funding of unprofitable projects; a curtailment of lending to inefficient companies and banks had to appraise their loans more realistically, i.e. written off. In short, the problems were to be resolved by shock therapy so that the rest of the economy could grow again on a healthy basis. Nobody put that approach better than the then Treasury Secretary Mellon. His advice to President Hoover was: “Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate…it will purge the rottenness out of the system […] Values will be adjusted, and enterprising people will pick up from less competent people”. In Japan too, many companies that had previously expanded strongly on the back of easy credit were suddenly (technically) insolvent at the beginning of the 1990s. Their assets plunged in value after the property market crash. Sectors linked to the booming housing market were hard hit and banks’ loan books were infused by bad loans. It may have been partly because of the terrible experience of the 1930s that the authorities decided on a cautious approach. The supervisory authority did not insist on an objective appraisal of loans. Banks subsequently extended many loans to insolvent companies (“Evergreening”) and thus prevented swift and fatal write-offs. At the same time, the central bank and the state reacted with expansionary measures to shore up the economy. … but only created “zombies” This strategy had a price though, which has increased over time, as untenable economic structures have been preserved. The companies (so-called “zombies”) kept alive by “evergreening” and subsidized loans were competitors to healthy businesses and were partly able to undercut their prices. Furthermore, it was harder for new companies to gain loans. Market access for new and innovative businesses was thus hindered, which delayed necessary structural change and dampened productivity growth.1 What’s more, countless economic stimulus programmes led to a sharp rise in public debt. Since the restoration to health of banks’ balance sheets, and overall restructuring took a very long time, the government decided to change its strategy at the end of the 1990s. It forced banks to undertake more write-offs, while at the same time recapitalising banks on a large scale. The problems were corrected by these measures to such an extent that Japan was able to leave its lost decade behind. Since 2000, Japan’s economy has been growing at a similar rate, in per capita terms, as the US (chart 4). China: Signs of a correction crisis are growing … At worst, China is still in the early stages of a correction crisis. A broad deterioration in credit quality is an increasing risk although not at a critical point as yet. China is unlikely to opt for a radical structural correction as it is not in the government’s interest to provoke economic shocks which could challenge its claim to power. CHART 3: USA vs. Japan – slower was better … CHART 4: … but correction crisis was inevitable Real GDP per capita, 1929 = 100 (USA, Year “0”) and 1990 = 100 (Japan, Year “0”), annual data. Real GDP per capita, 2000 = 100 115 110 105 100 95 90 85 80 75 70 120 115 110 105 100 95 90 85 80 75 0 1 2 3 4 5 USA 6 7 Japan Source: Global Insight, IWF, Commerzbank Research 8 9 10 1990 1993 1996 1999 2002 Japan 2005 2008 2011 2014 USA Source: Global Insight, Commerzbank Research 1 Classic studies on this subject are Caballero/Hoshi/Kashyap: “Zombie Lending and Depressed Restructuring in Japan“. American Economic Review 2008, 98:5 and Peek/Rosengren: “Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan”, NBER Working Paper 9643, April 2003 7 November 2014 3 Economic Research | Week in Focus The Chinese government will presumably do its utmost to control the crisis. Consequently, like Japan, China will probably also decide on prolonged life-sustaining measures for its struggling businesses, especially as the state has the necessary means to support such measures, at least for now. The focus at the moment is not so much on the stability of banks or companies but more on the growing problems in local government finances, which so far have largely been driven by revenues from land sales. Recently these revenues amounted to 7% of GDP, a rise of five percentage points in ten years. The weakening of the property market and the increasing problems of companies in this sector, allied to the difficulties encountered by land developers, are undermining this funding model. Regions can therefore be expected to scale back expenditure on infrastructure, which should further dampen growth. This will mean increasing problems for highly indebted companies. … but the government is supporting non-performing companies In the past few months, the authorities have allowed some payment defaults, but these were primarily to prevent investors from blindly trusting that the state will come to the rescue of every business. On the other hand, the predominantly state-owned banks are unlikely to cut their credit lines to large companies, even if they are insolvent. Indeed, non-performing loans are more likely to be extended. Consequently, the percentage of “non-performing” loans on banks’ balance sheets will increase. Problem loans could then be removed from banks’ balance sheets and transferred to “asset management companies”. These assets could then be written off over a period of time. The state would then ensure that these banks are recapitalised if need be, and would also probably encourage a consolidation of the banking sector. However, it is questionable whether these steps would happen quickly, or whether it would take place only if banks’ balance sheets are at risk of running completely out of control, as in Japan. The government’s readiness to support large non-performing businesses was evident recently when the government surprisingly imposed import duties on coal after a coal mine encountered payment difficulties, a move that supports non-competitive domestic producers. China: no crash but disappointing growth Such a policy will allow China to avoid an economic slump; a crash is therefore unlikely in our view. But “zombification” would increasingly rob the economy of momentum. Furthermore, not every country will enjoy the luxury of a favourable global economic environment to support a domestic economy riddled with inefficiencies. On a longer horizon, China is therefore likely to register disappointing growth rates. What’s more, such a solution would not come cheap for the state. To cushion the process, further economic stimulus programmes are likely to be introduced. As in Japan in the 1990s, this will drive up public debt. In Japan, public debt to GDP in 1990 was comparatively low at around 65%. Many years of supportive measures have changed that and debt now stands at 230% of GDP. 4 7 November 2014 Economic Research | Week in Focus Charlie Lay Tel. +65 6311 0111 India: Reforms or modernisation of bureaucracy? Victories in the two recent state elections suggest that Indian Prime Minister Modi continues to enjoy strong public support, five months after sweeping to power. Questions remain over whether Modi is a reformer or merely a modernizer of bureaucracy. We do not see the two as mutually exclusive but see the latter as a prerequisite for the former. On the economy, growth is bottoming out and inflation has moderated which gives RBI greater policy flexibility. A question posed recently was whether PM Narendra Modi is indeed a market reformer or merely a modernizer of existing levels of bureaucracy. We see the two going hand in hand in as part of an attempt to force India to tap into the global supply chain and the wider global economy. Much is talked about the twin deficit problem for India – the current account deficit and the fiscal deficit. The fact is that India faces much bigger problems, in what we could call a quadruple deficit: deficiencies in 1) governance; 2) infrastructure; 3) education; and 4) foreign investor trust. These are huge hurdles for Modi to overcome. There are no quick fixes and it is too early to assess the government’s performance so far amid elevated expectations for reforms. The initiatives announced so far continue to bode well for the bulls hopeful of change, these include: 1) Accountability: In early October, the government launched a Biometric Attendance System (BAS) for government employees to track attendance records. The aim is to raise the productivity of a cumbersome and inefficient public sector. Over time, this could be extended to hospitals, state schools, courts etc; 2) Curtailing corruption: On 28 August, PM Modi launched the ambitious “Pradhan Mantri Jan Dhan Yojana” (PMJDY) or the Prime Minister People Funding Scheme. It aims to provide at least one bank account for every family in the next six months. To date, it is estimated that 55mn new accounts have opened and USD700mn deposited with a target of 75mn by January 2016. Apart from providing modern banking to the poor, the bigger picture is to better channel government subsidies to the needy and in turn, reduce graft; 3) Review of labour laws: The Ministry of Commerce and Industry has placed 20 labour laws on review arguing that they are obsolete and discourage foreign investment e.g. the Factories Act of 1948 which stipulates that companies employing over 100 people require state approval for dismissals; and 4) Welcoming FDI: in the July budget, the government raised the foreign ownership limit in the defence and insurance sectors from 26% to 49%. In the railway sector, it approved 100% foreign ownership in special projects e.g. in high-speed rail and in the construction sector. In October, the government removed controls on diesel and natural gas prices. This is one of the more significant announcements to date, signalling the administration’s intent to attract greater investment in the energy sector. Overall, the feel-good factor from BJP’s election victory is still apparently strong. We remain hopeful of continued progress, with Modi still enjoying healthy public support. This is seen by the positive reception Modi received in his speech at Madison Square Garden in September and the recent state election victories, in two of India’s economically more important states, Maharashtra and Haryana. At the same time, however, we maintain a realistic timetable for change. One cannot overestimate the enormity of the challenges ahead to restructure an inefficient system with so many number of distortions that hinder FDI. Furthermore, more ambitious reforms are likely to encounter resistance from vested interest groups and from within BJP. There will be no quick fixes and Modi will need time. On the economy, there are positive developments in that inflation has moderated and growth is showing signs of bottoming out. We continue to look for around 5.5-5.8% growth in FY2014-15 vs sub-5% for the previous two years. Inflation is set to easily reach RBI’s target of 8% by January 2015 and on course to reach the 6% target by January 2016. This may not necessarily portend a rate cut but it does provide RBI greater leeway to respond to the G7 environment in 2015. 7 November 2014 5 Economic Research | Week in Focus Product Idea: Forward Plus Exporter in EUR-USD Peter Kinsella Tel. +44 207 475 3959 EUR-USD hedging and limited participation in weaker EUR We recommend EUR buyers to participate in a Forward Plus EUR-USD in order to benefit from the EUR-USD down move which we expect will continue in the coming months. The ECB’s November meeting once again highlighted the risks to the European economic outlook. With growth and inflation risks pointing clearly to the downside, the market will increasingly begin to price in an ECB QE policy. This has not yet been fully discounted by the markets and therefore if and when the ECB actually implements such a policy, it will be a burden for the EUR. This alone is reason enough to expect lower EUR-USD levels to manifest in the coming months; however external developments will also place further pressure on the single currency. The Federal Reserve is now closer to satisfying its dual mandate of low inflation and low unemployment than at any time in the past 7 years. Already the Fed ended the tapering program which was broadly priced in by markets and did not have a significant impact upon EUR-USD exchange rates. However the markets’ focus will now be upon the development of short term US interest rates, which trade significantly below FOMC expectations. If and when these rates correct to more realistic levels, investors can expect that the trend of USD appreciation will continue and even gather pace. This is not an insignificant risk given the divergence in market expectations from the expectations of the FOMC. All told, the reasons to expect a broadly stronger USD remain firmly in place. We therefore recommend EUR buyers to consider participating in a Forward Plus EUR-USD. The rationale is that the structure allows investors to have a defined hedging rate in EUR-USD at 1.2550 whilst also benefitting from any continuing down move towards 1.1700. Product idea: Forward Plus in EUR-USD Spot rate (sample calculation) 1.2425 Hedging rate 1.2550 Lower limit (‘trigger’) 1.1700 Hedging nominal USD 500,000 Duration 6 months Cost Zero cost The Forward Plus allows investors to lock in a fixed hedging rate. At the same time, they have the chance to benefit from an exchange rate trend that is positive for their underlying position. On the maturity date, a currency exchange will always be carried out. If, (‘American-style trigger’) the EUR-USD spot rate touches or falls below the trigger (1.1700) during the tenor of the trade or if the EUR-USD spot rate trades above the hedging rate (1.2550) at maturity, the currency exchange will only be carried out at the agreed hedging rate (1.2550). If the spot rate has not touched the trigger (1.1700) during the tenor of the trade (‘American style') and the EUR-USD spot rate trades below the hedging rate (1.2550) at maturity, the net hedging result will be equivalent to the (better) EUR-USD spot fixing. 6 7 November 2014 Major publications from 31 October – 6 November 2014 Economic Insight: Euro Inflation expectations no longer firmly anchored - a model analysis Long-term market-based inflation expectations are beginning to lose their anchorage. In the last few weeks, they have been visibly lower than our model had implied based on core inflation, the oil price and risk perception. Expectations are apparently meanwhile showing a much stronger reaction to disappointing economic data. Amid probable continued weak economic growth in the euro zone, inflation expectations are set to fall further. We therefore believe that the ECB is likely to decide on broad-based government bond purchases. more Economic Insight: The Unfinished As from 3 November, the European Central Bank (ECB) supervises the most important banks in the euro area. The banking union has taken a great step forward. But there are still dangerous gaps in the rules and regulations of the monetary union. more FX Hotspot: USD-JPY – Longer dated riskies offer good value Last week the BoJ took the market by surprise and increased its asset purchase program. USDJPY consequently moved higher and the prospect of a stronger USD means that further significant upside in USD-JPY should not be discounted. We recommend investors to buy longer dated risk reversals in order to benefit from this dynamic. more FX Hotspot: What's the best dollar? Following Wednesday’s hawkish FOMC meeting, market participants can now have no doubts that the USD rally is for real and looks set to continue. That being the case, the question for most market participants is what is the best way to express this view? Essentially, what is the best dollar? more 7 November 2014 7 Economic Research | Week in Focus Preview – The week of 10 to 14 November 2014 Time Region Indicator Period Forecast Survey Last Monday, 10 November 2014 1:30 9:00 CHN ITA CPI Industrial production Oct Sep yoy mom, sa 1.6 0.3 1.6 – 1.6 0.3 Oct Sep Sep Sep Sep mom, k, sa %, sa yoy mom, sa yoy mom -25.0 5.9 0.8 1.0 0.2 -3.0 -25.0 5.9 0.9 0.7 -0.1 -1.3 -18.6 6.0 0.7 -1.8 -1.9 4.7 Oct Oct Oct 8 Nov yoy yoy 1998=100 k, sa 8.0 0.3 125.7 280 8.0 – – – 8.0 0.3 125.9 278 qoq yoy qoq yoy, swda yoy qoq yoy yoy yoy mom mom sa 0.2 0.4 -0.1 0.9 0.9 0.1 0.7 0.4 0.8 0.3 0.3 87.0 – – 0.1 0.9 1.0 0.1 0.6 0.4 – 0.3 0.2 87.5 0.0 0.1 -0.2 1.3 0.8 0.1 0.8 0.4(p) 0.7(p) -0.3 -0.2 86.9 Tuesday, 11 November 2014 No relevant data is due for release. Wednesday, 12 November 2014 9:30 GBR 10:00 EUR Claimant count unemployment Unemployment rate (ILO) Average earnings (three month average) Industrial production 23:50 JPN Machinery orders GBR: Bank of England releases Inflation Report (10:30) Thursday, 13 November 2014 Industrial production CPI CPI ex tobacco 13:30 USA Initial claims EUR: ECB releases Survey of Professional Forecasters (9:00) • 5:30 7:45 CHN FRA Friday, 14 November 2014 • 6:30 FRA GDP Q3 7:00 GER GDP Q3 10:00 EUR GDP Q3 CPI, final Oct CPI excl. food and energy, final Oct Retail sales Oct • 13:30 USA Retail sales ex autos Oct 14:55 Consumer confidence (University of Michigan), Nov preliminary ECFIN meeting: EU Finance Ministers discuss budget plans G20: Finance Ministers meeting and Leaders’ Summit (15/16 November) Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 5 hours for EST. add 1 hour for CET). # = Possible release; mom/qoq/yoy: change to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; • = data of highest importance for markets 8 7 November 2014 Economic Research | Week in Focus Dr Ralph Solveen Tel. +49 69 136 22322 Economic data preview: Germany: In recession? Available data points to another slight contraction of the German economy in Q3, which would fulfil the often-used definition of a recession. Together with Italy, Germany would also be the worst performer among the large euro countries. In the US, retail sales likely increased in October despite considerably lower petrol prices. Is Germany the new problem child in the euro zone? This view, which emerged in early October in light of the very weak August figures (that were mainly owed to special factors), will likely receive fresh support in the week ahead. Available data – excluding the September figures for industrial production released this morning – give reason to expect that real GDP in Germany contracted slightly for the second consecutive occasion in Q3. With the monthly data for production and real sales, the average over July and August was mostly below the average of Q2 (chart 5). Moreover, a particular statistical effect2 likely also subtracted from GDP in Q3, and so, despite likely small growth rates in most service sectors – for which no monthly data is available – we forecast a mild decline in GDP of 0.1% on the quarter (consensus: +0.1%). Germany will thus likely bring up the rear among the large euro countries together with the perennial problem child Italy (chart 6). For France, 0.2% growth on the quarter seems to be on the cards going by available figures, and for Spain, an increase in real GDP of 0.5% has already been reported. Since the economy probably also expanded in most of the smaller countries, we forecast a growth rate of 0.1% for the whole euro area (consensus: 0.1%) after stagnation in Q2. US: Petrol price subtracts from retail sales growth In October, the petrol price declined further from $3.48 to $3.26 per gallon. This alone likely lowered the growth rate of retail sales by two tenths. But the decline in the petrol price since July has freed up resources, part of which will be spent by consumers spend on other goods. For this reason we expect an increase in retail sales in October of 0.3% on the month (consensus: 0.3%). CHART 6: Euro area – Germany bringing up the rear CHART 5: Germany – minus signs dominate Real, percentage change of July/August average vs. Q2 average, in percent; *including September Real GDP, percentage change on quarter, Q3 own estimate except for Spain 0,6 0,5 0,4 0,3 0,2 0,1 0,0 -0,1 -0,2 Euro area Germany Q2 Source: Global Insight, Commerzbank Research France Italy Q3 Spain Source: Global Insight, Commerzbank Research 2 In Q2, gross value added fell more steeply than GDP, which profited from a sharp rise in indirect taxes. In Q3, we are likely to see a countermovement (for more details see “Germany’s soft patch makes QE more likely”, Week in Focus of 2 October 2014). 7 November 2014 9 Economic Research | Week in Focus Central Bank Watch (1) Fed The Republican Party’s landslide victory in the midterm elections is unlikely to leave the Fed unscathed. It will be even more difficult for President Obama to find candidates for the two vacancies on the Federal Reserve Board who are acceptable to the Republicans. After all, the relevant Senate committee will now be led by the Republicans. The Federal Reserve should be prepared for more headwinds from Congress. In recent years, Republican members of Congress presented several bills aimed at subjecting the Fed to tighter supervision. These even included direct intervention in monetary policy, such as the bill that would have made Fed policy subject to a rule. According to the Chairwoman of the Federal Reserve Board, Janet Yellen, this would be a “significant mistake”, as expressed in a hearing in summer. Dallas Fed President Richard Fisher already warned against limiting the Fed’s independence. The new political climate should make it more difficult for the Fed to stick to ultra-loose policy for too long. This, too, supports our expectation of a first interest rate hike in mid-2015. Bernd Weidensteiner +49 69 136 24527 CHART 7: Expected interest rate for 3-month funds (USD) 2,0 1,5 1,0 0,5 0,0 current Dez 14 Futures Mrz 15 06.11.14 Jun 15 Sep 15 30.10.14 Dez 15 Commerzbank TABLE 1: Consensus forecasts Fed funds rate Q4 14 Q2 15 Q4 15 Consensus 0.25 0.25 1.00 High 0.25 1.00 2.00 Low 0.25 0.25 0.25 Commerzbank 0.25 0.50 1.50 Source: Bloomberg, Commerzbank Research ECB During the ECB’s monthly press conference, ECB president Draghi re-emphasised the ECB’s balance sheet approach by including an explicit balance sheet objective in the introductory statement to the press conference: “…our balance sheet … is expected to move towards the dimensions it had at the beginning of 2012”. In addition, Draghi stressed that the Council “has tasked ECB staff and the relevant Eurosystem committees with ensuring the timely preparation of further measures to be implemented, if needed.” The ECB president said that in case the balance sheet were not to increase as expected or in case inflation expectations were to fall further, the central bank would act again. As we expect both growth and inflation to surprise on the downside, and a significantly lower balance sheet increase than the ECB expects, we continue to forecast that the ECB will opt for broad-based government bond purchases. Regarding the timing of further measures, Draghi said that there is no deadline for the ECB staff to prepare measures and that discussing specific measures now was premature. In addition, the second TLTRO will take place after the December Council meeting. All in all, therefore we think more measures next year are more likely than this year. Dr Michael Schubert +49 69 136 23700 10 CHART 8: Expected interest rate for 3-month funds (EUR) 1,0 0,8 0,6 0,4 0,2 0,0 current Dez 14 Futures Mrz 15 06.11.14 Jun 15 30.10.14 Sep 15 Dez 15 Commerzbank TABLE 2: Consensus forecasts ECB minimum bid rate Q4 14 Q2 15 Q4 15 Consensus 0.05 0.05 0.05 High 0.05 0.05 0.05 Low 0.05 0.05 0.05 Commerzbank 0.05 0.05 0.05 Source: Reuters, Bloomberg, Commerzbank Research 7 November 2014 Economic Research | Week in Focus Central Bank Watch (2) Bank of England (BoE) Although this week's MPC meeting did not produce any changes to monetary policy, the Committee will have discussed the Inflation Report which is due for release next week. We look for three main discussion points at the press conference: (i) An abatement of global and domestic price pressures is expected to prompt a downward revision to the BoE's inflation projections. This places the two MPC dissenters – Martin Weale and Ian McCafferty – in an awkward position since their argument that the UK faces an inflation threat is being undermined by the data. Whilst their reasoning is based on inflation prospects on a two to three year horizon, it is tactically difficult to consider a rate increase so long as inflation is below target and falling; (ii) The degree of economic slack remains at the forefront of the BoE’s thinking. With evidence to suggest that the margin of spare capacity is higher than implied by the headline unemployment rate, any inflation threat from this source is likely to be muted; (iii) Finally, the BoE will be concerned about the impact of international headwinds on the UK economy. In view of the uncertainty surrounding the nearterm economic outlook, this is another factor which will encourage the BoE to sit on its hands for the time being. CHART 9: Expected interest rate for 3-month funds (GBP) 2,0 1,5 1,0 0,5 0,0 current Dez 14 Mrz 15 Futures 06.11.14 Jun 15 30.10.14 Sep 15 Dez 15 Commerzbank Source: Bloomberg, Commerzbank Research Peter Dixon +44 20 7475 4806 RBNZ (New Zealand) At the end of October, the RBNZ came up with a surprisingly neutral statement, dropping its bias on higher interest rates. Instead, it said “a period of assessment remains appropriate before considering further policy adjustment”. Between March and August, the RBNZ had raised its policy rate by a total of 100 basis points to 3.5% to prevent the economy from overheating. The central bank can thus afford a waitand-see stance. The rate of inflation dropped even lower than expected, to 1%, in the third quarter and the pace of house prices inflation has slowed, not least due to tighter mortgage lending regulations imposed a year ago. The growth outlook remains favourable, despite the significant fall in commodities prices and weaker demand from major importing countries. Impetus continues to come from construction, high immigration and still relatively low interest rates. Moreover, the RNBZ repeated its verbal interventions, stating that it was expecting a further significant NZD-depreciation. This would provide further impetus to the economy as it will improve business competitiveness. Overall, we expect the RBNZ to stay on hold until next autumn before hiking interest rates further. CHART 10: Expected interest rate for 3-month funds (NZD) 5,0 4,5 4,0 3,5 3,0 current Dez 14 Mrz 15 Futures 06.11.14 Jun 15 30.10.14 Sep 15 Dez 15 Commerzbank Source: Bloomberg, Commerzbank Research Elisabeth Andreae +49 69 136 24052 7 November 2014 11 Economic Research | Week in Focus Rainer Guntermann Tel. +49 69 136 87506 Bond market preview: Bumpy sideways trend continues ECB President Draghi gave the impression that there is full support from the Council for further measures if needed. The Survey of Professional Forecasters and poor GDP data are likely to stress the downside risks to inflation expectations as early as next week, weighing also on break-even inflation rates. The expected slight increase in longer-dated Bund yields following what is likely to be solid US labour market data thus looks set to revert again over the course of the week, with ten-year Bund yields likely to fluctuate around 0.85%. TABLE 3: Weekly outlook for yields and curves Bunds US Treasuries Yield (10 years) sideways Moderately higher Curve (2 - 10 years) neutral flatter Source: Commerzbank Research Outlook for the Bund future, 10-14 November Economy ↑ Inflation → Monetary policy ↓ Trend → Supply → Risk aversion ↑ ECB President Draghi has demonstrated once more that he is a clever tactician. Despite eyecatching press reports about a large rift in the Governing Council in the run-up to the meeting he stated that there is not only full support for the ECB’s balance sheet goals but also for the preparation to implement further measures at short notice, if need be. Bund yields should thus drift moderately upwards in coming days as risk sentiment recovers, especially since the expectation of solid US payrolls will probably add to headwinds on bond markets today. The agenda in coming weeks features a cascade of event which are likely to further increase the pressure on the ECB to act. The Survey of Professional Forecasters and poor economic growth in the euro zone look set to put the ECB’s relatively optimistic economic and inflation outlook to the test, adding to the pressure for additional measures at the Council meeting in early December when the ECB will most likely markedly revise down its macro projections. Any rise in core government bond yields and risk premiums on peripheral bonds is therefore likely to run out of steam quickly. Increasing political risks in the periphery – above all in Greece but also in Spain – together with more cautious bank demand ahead of the balance sheet data at year-end argue for a cautious stance towards the periphery in coming weeks. The Bund outlook remains mixed though. On the one hand, longer-dated Bund yields are more likely to fall and test their lows amid rising QE expectations, and also due to the decline in market-implied inflation expectations. On the other hand, sound US economic data should add to jitters of an imminent shift in the US central bank's rhetoric in December and therefore limit the downside in yields. Consequently, we expect ten-year Bund yields to keep fluctuating around current levels for now. CHART 11: Draghi has so far failed to fuel inflation CHART 12: Bund yields continue looking to US Treasuries 5y5y € inflation rate, derived from inflation-linked swaps, in % Ten-year government bond yield, in % 2.4 2.3 'risks of low inflation' Jul HICP Jackson Hole 2.2 Oct HICP 2.1 2.0 1.9 1.8 1.7 Jan 14 1.3 2.6 1.2 2.5 1.1 2.4 1.0 2.3 0.9 2.2 0.8 2.1 0.7 2.0 Aug 14 Apr 14 Jul 14 Source: Bloomberg, Commerzbank Research 12 2.7 Oct 14 0.6 Sep 14 Oct 14 UST Nov 14 DE Source: Bloomberg, Commerzbank Research 7 November 2014 Economic Research | Week in Focus Lutz Karpowitz Tel. +49 69 136 42152 FX market preview: JPY weak but not about to collapse The JPY is under pressure thanks to the very expansionary monetary policy of the Bank of Japan. Although losses are fundamentally based, depreciation appears to be coming to an end. TABLE 4: Expected trading ranges for next week EUR-USD EUR-JPY USD-JPY Range Bias 1.2150-1.2600 140.00-145.50 112.75-118.50 Ô Ò Ò EUR-GBP GBP-USD EUR-CHF Range Bias 0.7700-0.7900 1.5550-1.6050 1.2000-1.2110 Ô Ô Î Source: Commerzbank Research Hardly any currency (apart from the collapsing Russian rouble) has been under as much pressure as the JPY over the last few days (chart 13). The reason for JPY weakness is easy to find. The Bank of Japan (BoJ) surprisingly expanded its asset purchase programme last week. Instead of the 60-70 trillion JPY recorded so far, the BoJ’s balance sheet total will now rise by 80 trillion JPY per year. Furthermore, this growth should be achieved almost solely through government bond buying. The purchases will increase the monetary base by an annual 16% of GDP. Even at its peaks, the Fed’s QE3 only once reached 6.5% of GDP. Consequently, from a fundamental perspective, the reaction of the FX market is quite understandable. To achieve its target, the BoJ has to buy more government bonds than the Finance Minister issues new debt. Japan’s budget deficit is only about 10% of GDP. Consequently, the BoJ has to buy an increasing amount of government bonds. It is therefore only a question of time before the BoJ has all government bonds offered on the market on its balance sheet. The purpose of this is to finally boost inflation. Despite the VAT increase, inflation has not gained any momentum as of yet (chart 14) and the underlying price trend is close to zero again. Even with its mega QE programme, the BoJ is unlikely to bring inflation to its target of 2%. It will be disappointed again. There is further downside potential for the JPY since the BoJ could take additional measures. Even so, we do not expect JPY to lose too much value. The introduction of QE in April 2013 put huge pressure on the JPY but the currency then remained relatively stable although it soon became clear that the central bank could miss its inflation targets. The next depreciation phase started when the BoJ acted again. And the BoJ will definitely not open the floodgates wider in the next few months. This should provide a breather for the JPY. CHART 13: JPY is suffering from QE expansion Chart 14: Japan: Inflation is not gaining traction USD-JPY, spot price Consumer price index in Greater Tokyo, year-on-year in per cent 116 115 114 113 112 111 110 109 108 107 106 105 15.10 4 3 2 1 0 -1 17.10 21.10 24.10 28.10 Source: Bloomberg, Commerzbank Research 31.10 4.11 -2 Jan-12 Jul-12 CPI Jan-13 Jul-13 ex VAT effect Jan-14 Jul-14 underlying trend Source: Ministry of Internal Affairs and Communication, Commerzbank Research 7 November 2014 13 Economic Research | Week in Focus Andreas Hürkamp Tel. +49 69 136 45925 Equity Market Preview: Strong money growth in the US remains a key DAX bull trend The recent improvement in M1 money growth in the euro zone and in the US indicates that a DAX bear market is unlikely, in our view. And falling inflation expectations should result in an ongoing accommodative global monetary policy. Therefore we stick to our view that during the remainder of 2014 investors should continue to use periods with a DAX at or below 9,000 to increase equity exposure. TABLE 5: Equity Market with subdued start to November Earnings 2014e Performance (%) since Index points Growth (%) P/E 2014e Index 31/10 30/09 31/12 current 31/12 current 31/12 current DAX 30 9.315 -0,1 -1,7 -2,5 708,1 731,1 1,9 11,6 13,2 31/12 13,1 MDAX 16.176 0,3 1,1 -2,4 930,6 994,2 26,6 41,6 17,4 16,7 Euro Stoxx 50 3.092 -0,7 -4,2 -0,6 221,4 242,3 4,5 12,1 14,0 12,8 S&P 500 2.024 0,3 2,6 9,5 116,6 119,3 7,5 9,9 17,4 15,5 Source: Commerzbank Corporates & Markets, I/B/E/S The recent recovery of leading indicators – e.g. the ISM rose to 59.0 from 56.6 in the US and the German manufacturing PMI rose from 49.9 to 51.4 – has resulted in declining recession fears, and the DAX has recovered back to our expected trading range of 8,800 to 10,200. The bears interpret the recent DAX recovery as a dead-cat-bounce in a recession scenario and forecast the next painful downturn in the coming months. However, we do not believe in this bear market scenario as monetary indicators such as M1 money growth – a proven leading indicator for equity markets – have improved. In the euro zone, M1 money growth rose in September from 5.8% to 6.2% and in the US M1 money growth has accelerated from 9.9% to 10.7%. China's M1 money growth, however, continues to send warning signs with another decline to 4.8% from 5.7% – China's economy might continue to present lacklustre trends. The falling trend in inflation (expectations) has become one of the biggest surprises of 2014. In the euro zone, long-term inflation expectations have slumped from 2.2% in January to 1.8% by November, and in the US expectations declined from 2.9% to 2.6%. In China measured inflation fell to 1.6% from 3.4% at the beginning of the year. We interpret these inflation trends as positive for equity markets as falling inflation expectations might result in (a) a full-scale purchases of government bonds by the ECB (quantitative easing), (b) a more-relaxed-than-feared Fed policy and (c) further measures by the central bank to stabilise the Chinese economy. CHART 15: Euro zone – 6.2% M1 money growth Eurozone: Annual M1 money growth in % CHART 16: US – 10.7% M1 money growth US: Annual M1 money growth in % 25 16 14 20 12 15 10 10 8 6 5 4 0 2 0 1985 1990 1995 2000 Source: Bloomberg, Commerzbank Research 14 2005 2010 -5 1985 1990 1995 2000 2005 2010 Source: Bloomberg, Commerzbank Research 7 November 2014 Economic Research | Week in Focus Barbara Lambrecht Tel. +49 69 136 22295 Commodities market preview: A lot of data, not much new information The nosedive in crude oil prices does not appear to be over yet. OPEC and the US Energy Information Administration are likely to further lower their oil demand estimates, following the International Energy Agency, which reduced its forecast in October. Weak gold demand in the third quarter should not surprise anyone either. Even so, the gold price could still drop further. In the case of corn, expectations of a record high US crop should be sufficiently priced in at the current low level. TABLE 6: Tendencies in important commodities Per cent change Tendency Commodity specific events 6 Nov 1 week 1 month 1 year short-term Brent (USD a barrel) 82.5 -3.6 -10.4 -21.0 Þ EIA and OPEC (12th), IEA (14th) Copper (USD a ton) 6619 -1.8 -1.4 -7.0 Ö CHN: Trade balance (8th) Gold (USD a troy ounce) 1145 -4.5 -5.2 -13.1 Þ WGC: Gold Demand Trends for Q3 (13th) Corn (USD a bushel) 3.69 -1.3 11.0 -12.4 Ö WASDE (10th) Source: Bloomberg, Commerzbank Research No end to the nosedive on the oil market is in sight: at just under 82 USD per barrel, Brent was at a four-year low at mid-week. The new estimates of supply and demand are unlikely to trigger a change in market sentiment. OPEC and the US Energy Information Administration are likely to trim their forecasts again for global oil demand, thus following the International Energy Agency, which already corrected its global oil demand forecast significantly downwards in October (chart 17). The fact that Saudi Arabia had recently cut its selling price in the US indicates that the largest and most influential OPEC oil producer primarily wants to defend its market share. As long as OPEC does not show any readiness to reduce market oversupply through production cuts, the nosedive is unlikely to end. Ahead of the OPEC meeting at the end of November, the market might even wish to test the oil cartel’s pain threshold further. However, in the medium term, Brent should settle at 85 USD per barrel. Precious metals are also still under pressure. Gold slid under 1150 USD per troy ounce and is now at its cheapest level in 4½ years. The new quarterly Gold Demand Trends report from the World Gold Council does not promise much fresh impetus. Demand was presumably weak in the third quarter. Although the lower outflows from gold ETFs show that investment demand in the West did not have quite such a negative impact as in the year before (chart 18), buying interest from the Chinese was much lower. As long as demand from Asia does not pick up, a price recovery on the gold market is unlikely. In the short term, a stronger dollar and rising equity markets could cause the gold price to fall to new lows. CHART 17: Pessimistic energy agencies Expected rise of global oil demand in 2014, million barrels a day CHART 18: Outflows from gold ETFs have slowed in the meantime million ounces, USD a troy ounce 1.4 1.3 1.2 1.1 1.0 0.9 0.8 0.7 0.6 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 EIA IEA Source: EIA, IEA, OPEC, Commerzbank Research 7 November 2014 OPEC 90 80 70 60 50 40 30 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 ETF holdings, left 1900 1700 1500 1300 1100 900 700 500 300 Gold price (US$/oz), right Source: Bloomberg, Commerzbank Research 15 Economic Research | Week in Focus Commerzbank forecasts TABLE 7: Growth and inflation Real GDP (%) Inflation rate (%) 2013 2014 2015 2013 2014 2,2 2,2 2,9 1,5 1,7 1,8 2,0 2,3 2,5 0,9 2,1 2,0 Japan 1,5 1,0 1,3 0,4 2,8 1,5 Euro area -0,4 0,7 0,8 1,4 0,6 1,0 - Germany 0,1 1,3 1,3 1,5 1,1 2,1 - France 0,4 0,3 0,5 0,9 0,6 0,7 - Italy -1,7 -0,2 0,3 1,2 0,4 0,6 USA Canada 2015 - Spain -1,2 1,4 2,3 1,4 0,0 0,5 - Portugal -1,4 1,0 1,5 0,3 -0,2 0,8 - Ireland 0,2 5,2 3,1 0,5 0,6 1,4 - Greece -4,2 1,0 2,0 -0,9 -1,3 0,5 United Kingdom 1,7 3,0 2,6 2,6 1,6 1,9 Switzerland 2,0 1,7 1,8 -0,2 0,0 0,5 China 7,7 7,3 6,5 2,6 2,3 2,5 India 4,7 5,8 6,2 6,3 6,5 6,2 Brazil 2,5 0,3 0,9 6,2 6,3 6,5 Russia 1,3 0,3 0,9 6,8 7,3 6,5 World 2,9 3,1 3,4 • The ultra-expansionary policy of the Fed is boosting the US economy. At the same time, fiscal policy is at least no longer a headwind. We therefore expect US growth to markedly accelerate. • Growth in China decelerates further, also due to decreasing house prices. • The recovery in the euro zone will only continue at a slow pace. GDP growth will remain lower than that of the USA. • EMU has survived the sovereign debt crisis, but is gradually evolving into an “Italian-style monetary union”. • Despite its current weakness, the German economy looks set to continue outperforming the rest of the euro area – partly because ECB target rates are much too low for Germany. • High unemployment in most countries is keeping inflation low for the time being. In the long term, however, inflation is likely to rise, as central banks have given up some of their independence. TABLE 8: Interest rates (end-of-quarter) 06.11.2014 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 Federal funds rate 0,25 0,25 0,25 0,50 1,00 1,50 3-months Libor 0,23 0,25 0,30 0,80 1,35 1,90 2 years* 0,53 0,70 0,90 1,20 1,60 2,00 5 years* 1,65 2,10 2,40 2,70 2,95 3,20 10 years* 2,37 2,70 2,90 3,10 3,30 3,50 Spread 10-2 years 184 200 200 190 170 150 Swap-Spread 10 years 14 10 10 10 15 15 USA Euro area Minimum bid rate 0,05 0,05 0,05 0,05 0,05 0,05 3-months Euribor 0,08 0,05 0,05 0,05 0,05 0,05 2 years* -0,05 -0,10 -0,10 -0,10 -0,05 0,00 5 years* 0,12 0,25 0,20 0,25 0,35 0,40 10 years* 0,83 1,10 0,80 1,00 1,20 1,35 Spread 10-2 years 89 120 90 110 125 135 Swap-Spread 10 years 22 15 25 30 35 35 United Kingdom Bank Rate 0,50 0,50 0,75 0,75 1,00 1,25 3-months Libor 0,56 0,80 0,90 1,05 1,25 1,40 2 years* 0,67 1,00 1,25 1,30 1,35 1,55 10 years* 2,25 2,60 2,85 3,05 3,20 3,35 • The Fed has ended its QE3 programme. Interest rate hikes are on the cards from 2015Q2, due to a continuously decreasing US unemployment rate and gradually rising inflation. • Due to the deteriorating growth outlook and increasing downside risks for inflation we expect the ECB to announce QE within the next 12 months. • 10y Bund yields are likely to stabilise around 1% later this year when the Fed communication changes but mark new record lows when the ECB announces QE in 2015. Thereafter, yields should rise gradually. The structurally low interest rate environment remains intact. • The focus on the Fed’s lift-off will put upward pressure on US$ rates. A return to 3% for 10y USTs is only on the cards for 2015, though. The curve is in for a textbook-style flattening via the short-end in the coming quarters. • Risk premiums of peripheral government bonds are set to decline further. TABLE 9: Exchange rates (end-of-quarter) 06.11.2014 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 EUR/USD 1,24 1,25 1,22 1,19 1,17 1,15 USD/JPY 115 117 117 120 122 125 EUR/CHF 1,20 1,21 1,21 1,21 1,21 1,21 EUR/GBP 0,78 0,77 0,76 0,75 0,74 0,73 EUR/SEK 9,20 9,10 9,00 8,95 8,90 8,90 EUR/NOK 8,52 8,80 8,60 8,55 8,50 8,40 EUR/PLN 4,22 4,15 4,10 4,08 4,06 4,05 EUR/HUF 310 312 310 309 308 306 EUR/CZK 27,77 27,50 27,30 27,00 27,00 26,90 AUD/USD 0,86 0,87 0,85 0,83 0,81 0,80 NZD/USD 0,77 0,77 0,75 0,73 0,71 0,70 USD/CAD USD/CNY 1,14 1,13 1,15 1,16 1,17 1,18 6,11 6,10 6,05 6,00 5,95 5,95 • USD should further profit from the expectations of Fed interest rate normalization. Current USD rates have not priced in the speed of rate hikes that we expect. • The high yielding G10 currencies should particularly suffer from US rate hikes. • EUR will remain under pressure due to increasing likelihood of an ECB QE program. ECB wants a weaker EUR and is active in achieving this goal. • CEE currencies are generally benefiting from the dovish ECB backdrop, meaning central banks have room to cut rates further. HUF, PLN and RON should trade range-bound, while EUR/CZK will float above the 27.0 floor set by the CNB. Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs 16 7 November 2014 Economic Research | Week in Focus Research contacts (E-Mail: [email protected]) Chief Economist Dr Jörg Krämer +49 69 136 23650 Economic Research Interest Rate & Credit Research FX Strategy Commodity Research Dr Jörg Krämer (Head) +49 69 136 23650 Christoph Rieger (Head) +49 69 136 87664 Ulrich Leuchtmann (Head) +49 69 136 23393 Eugen Weinberg (Head) +49 69 136 43417 Dr Ralph Solveen (Deputy Head; Germany) +49 69 136 22322 Alexander Aldinger +49 69 136 89004 Lutz Karpowitz +49 69 136 42152 Daniel Briesemann +49 69 136 29158 Elisabeth Andreae (Scandinavia, Australia) +49 69 136 24052 Rainer Guntermann +49 69 136 87506 Peter Kinsella +44 20 7475 3959 Carsten Fritsch +49 69 136 21006 Dr Christoph Balz (USA, Fed) +49 69 136 24889 Peggy Jäger +49 69 136 87508 Thu-Lan Nguyen +49 69 136 82878 Dr Michaela Kuhl +49 69 136 29363 Peter Dixon (UK, BoE), London +44 20 7475 4806 Markus Koch +49 69 136 87685 Esther Reichelt +49 69 136 41505 Barbara Lambrecht +49 69 136 22295 Dr Michael Schubert (ECB) +49 69 136 23700 Michael Leister +49 69 136 21264 Dr Michael Schubert (Quant) +49 69 136 23700 Equity Markets Strategy Eckart Tuchtfeld (German economic policy) +49 69 136 23888 David Schnautz +1 212 895 1993 Cross Asset Strategy Dr Marco Wagner (Germany, France, Italy) +49 69 136 84335 Benjamin Schröder +49 69 136 87622 Bernd Weidensteiner (USA, Fed) +49 69 136 24527 Dr Patrick Kohlmann (Head Non-Financials) +49 69 136 22411 Andreas Hürkamp +49 69 136 45925 Ted Packmohr (Head Covered Bonds and Financials) +49 69 136 87571 Technical Analysis Christoph Weil (Euro area) +49 69 136 24041 Emerging Markets Simon Quijano-Evans (Head) +44 20 7475 9200 Dr Bernd Meyer (Head) +49 69 136 87788 Christoph Dolleschal (Deputy Head Research) +49 69 136 21255 Gunnar Hamann +49 69 136 29440 Markus Wallner +49 69 136 21747 Achim Matzke (Head) +49 69 136 29138 Other publications (examples) Economic Research: Economic Briefing (up-to-date comment on main indicators and events) Economic Insight (detailed analysis of selected topics) Economic and Market Monitor (chart book presenting our monthly global view) Commodity Research: Commodity Daily (up-to-date comment on commodities markets) Commodity Spotlight (weekly analysis of commodities markets and forecasts) Interest Rate & Credit Research: Ahead of the Curve (flagship publication with analysis and trading strategy for global bond markets European Sunrise (daily comment and trading strategy for euro area bond markets) Rates Radar (ad-hoc topics and trading ideas for bond markets) Covered Bonds Weekly (weekly analysis of the covered bonds markets) Credit Morning Breeze (daily overview on European credit market) Credit Note (trading recommendations for institutional investors) FX Strategy: Daily Currency Briefing (daily comment and forecasts for FX markets) Hot Spots (in-depth analysis of FX market topics) FX Alpha (monthly analyses, models, and trading strategies for FX markets) Weekly Equity Monitor (weekly outlook on equity markets and quarterly company reports) Equity Markets Strategy: Monthly Equity Monitor (monthly outlook on earnings, valuation, and sentiment on equity markets) Digging in Deutschland (thematic research focusing on the German equity market) Emerging Markets: EM Week Ahead (weekly preview on events of upcoming week) EM Briefing (up-to-date comment of important indicators and events) EM Outlook (quarterly flagship publication with EM economic analysis and strategy recommendation) Cross Asset: Cross Asset Monitor (weekly market overview, incl. sentiment and risk indicators) Cross Asset Outlook (monthly analysis of global financial markets and tactical asset allocation) Cross Asset Feature (special reports on cross-asset themes) To receive these publications, please ask your Commerzbank contact. 7 November 2014 17 Economic Research | Week in Focus This document has been created and published by the Corporates & Markets division of Commerzbank AG, Frankfurt/Main or Commerzbank’s branch offices mentioned in the document. Commerzbank Corporates & Markets is the investment banking division of Commerzbank, integrating research, debt, equities, interest rates and foreign exchange. The author(s) of this report, certify that (a) the views expressed in this report accurately reflect their personal views; and (b) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views expressed by them contained in this document. The analyst(s) named on this report are not registered / qualified as research analysts with FINRA and are not subject to NASD Rule 2711. Disclaimer This document is for information purposes only and does not take into account specific circumstances of any recipient. The information contained herein does not constitute the provision of investment advice. It is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the financial instruments and/or securities mentioned in this document and will not form the basis or a part of any contract or commitment whatsoever. Investors should seek independent professional advice and draw their own conclusions regarding suitability of any transaction including the economic benefits, risks, legal, regulatory, credit, accounting and tax implications. The information in this document is based on public data obtained from sources believed by Commerzbank to be reliable and in good faith, but no representations, guarantees or warranties are made by Commerzbank with regard to accuracy, completeness or suitability of the data. Commerzbank has not performed any independent review or due diligence of publicly available information regarding an unaffiliated reference asset or index. The opinions and estimates contained herein reflect the current judgement of the author(s) on the date of this document and are subject to change without notice. The opinions do not necessarily correspond to the opinions of Commerzbank. Commerzbank does not have an obligation to update, modify or amend this document or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. This communication may contain trading ideas where Commerzbank may trade in such financial instruments with customers or other counterparties. Any prices provided herein (other than those that are identified as being historical) are indicative only, and do not represent firm quotes as to either size or price. The past performance of financial instruments is not indicative of future results. No assurance can be given that any financial instrument or issuer described herein would yield favourable investment results. Any forecasts or price targets shown for companies and/or securities discussed in this document may not be achieved due to multiple risk factors including without limitation market volatility, sector volatility, corporate actions, the unavailability of complete and accurate information and/or the subsequent transpiration that underlying assumptions made by Commerzbank or by other sources relied upon in the document were inapposite. Commerzbank and or its affiliates may act as a market maker in the instrument(s) and or its derivative that has been mentioned in our research reports. Employees of Commerzbank and or its affiliates may provide written or oral commentary, including trading strategies, to our clients and business units that may be contrary to the opinions conveyed in this research report. Commerzbank may perform or seek to perform investment banking services for issuers mentioned in research reports. Neither Commerzbank nor any of its respective directors, officers or employees accepts any responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this document. Commerzbank may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Commerzbank endorses, recommends or approves any material on the linked page or accessible from it. Commerzbank does not accept responsibility whatsoever for any such material, nor for any consequences of its use. This document is for the use of the addressees only and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose, without the prior, written consent of Commerzbank. The manner of distributing this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves about and to observe such restrictions. By accepting this document, a recipient hereof agrees to be bound by the foregoing limitations. Additional notes to readers in the following countries: Germany: Commerzbank AG is registered in the Commercial Register at Amtsgericht Frankfurt under the number HRB 32000. Commerzbank AG is supervised by the German regulator Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Marie-Curie-Strasse 24-28, 60439 Frankfurt am Main, Germany. United Kingdom: This document has been issued or approved for issue in the UK by Commerzbank AG London Branch. Commerzbank AG, London Branch is authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details on the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request. This document is directed exclusively to eligible counterparties and professional clients. It is not directed to retail clients. No persons other than an eligible counterparty or a professional client should read or rely on any information in this document. Commerzbank AG, London Branch does not deal for or advise or otherwise offer any investment services to retail clients. United States: This document has been approved for distribution in the US under applicable US law by Commerz Markets LLC (‘Commerz Markets’), a wholly owned subsidiary of Commerzbank AG and a US registered broker-dealer. Any securities transaction by US persons must be effected with Commerz Markets, and transaction in swaps with Commerzbank AG. Under applicable US law; information regarding clients of Commerz Markets may be distributed to other companies within the Commerzbank group. This research report is intended for distribution in the United States solely to “institutional investors” and “major U.S. institutional investors,” as defined in Rule 15a-6 under the Securities Exchange Act of 1934. Commerz Markets is a member of FINRA and SIPC. Commerzbank AG is a provisionally registered swap dealer with the CFTC. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. Under no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. In Canada, the information contained herein is intended solely for distribution to Permitted Clients (as such term is defined in National Instrument 31-103) with whom Commerz Markets LLC deals pursuant to the international dealer exemption. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities may not be conducted through Commerz Markets LLC. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offence. European Economic Area: Where this document has been produced by a legal entity outside of the EEA, the document has been re-issued by Commerzbank AG, London Branch for distribution into the EEA. Singapore: This document is furnished in Singapore by Commerzbank AG, Singapore branch. It may only be received in Singapore by an institutional investor as defined in section 4A of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”) pursuant to section 274 of the SFA. Hong Kong: This document is furnished in Hong Kong by Commerzbank AG, Hong Kong Branch, and may only be received in Hong Kong by ‘professional investors’ within the meaning of Schedule 1 of the Securities and Futures Ordinance (Cap.571) of Hong Kong and any rules made there under. Japan: Commerzbank AG, Tokyo Branch is responsible for the distribution of Research in Japan. Commerzbank AG, Tokyo Branch is regulated by the Japanese Financial Services Agency (FSA). Australia: Commerzbank AG does not hold an Australian financial services licence. This document is being distributed in Australia to wholesale customers pursuant to an Australian financial services licence exemption for Commerzbank AG under Class Order 04/1313. Commerzbank AG is regulated by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) under the laws of Germany which differ from Australian laws. © Commerzbank AG 2014. All rights reserved. Version 9.17 Commerzbank Corporates & Markets Frankfurt Commerzbank AG DLZ - Gebäude 2, Händlerhaus Mainzer Landstraße 153 60327 Frankfurt Tel: + 49 69 136 21200 18 London Commerzbank AG, London Branch PO BOX 52715 30 Gresham Street London, EC2P 2XY Tel: + 44 207 623 8000 New York Commerz Markets LLC 225 Liberty Street, 32nd floor New York, NY 10281 - 1050 Tel: + 1 212 703 4000 Singapore Branch Commerzbank AG 71, Robinson Road, #12-01 Singapore 068895 Tel: +65 631 10000 Hong Kong Branch Commerzbank AG 29/F, Two IFC 8 Finance Street Central Hong Kong Tel: +852 3988 0988 7 November 2014