July 25, 2017
As markets enter into the summer lull, it is useful to take a step back. The global economy is in better shape than it has been in several years. This has allowed other central banks to follow the Fed and gradually start their exit journey, a process that is a historic challenge given the unprecedented level of monetary accommodation. But with inflation still below target, a key part of the normalisation puzzle is still missing.
Although labour market tightness has not yet fed to wages, and hence to inflation, we expect it will. Core inflation should move higher over the medium-term in the US and Europe, supporting further monetary tightening and a normalisation of yield curves. While no policy change is expected by the Fed on 26-July, an announcement to begin phasing out its balance sheet reinvestment is likely in September and we expect another rate hike in December. As for the ECB, rate hikes are still far off, and we expect the central bank to announce another QE extension and tapering in October.
Our global macro outlook is little changed this year. We expect growth to rebound from the slowest pace post-crisis in 2016, though relative to consensus we are more positive on the US and more bearish on Japan. In China, we continue to expect a gradual deceleration, but see upside risks to growth in the second half of the year.
We are generally constructive on risk assets, expecting material upside to US equities in the next 18 months and positive but more balanced performance in EM. There are signs the dollar has peaked, but we do not expect a material devaluation yet. We are more positive on the euro, seeing upside versus the dollar and sterling. We expect yield curves to normalise gradually, but there is risk of a more sudden upward shift, depending on the path of core inflation.
David Folkerts-Landau, Group Chief Economist
Key pages this month:
P6 Global economy in a better place
P8 Central banks overview
P11 Current low inflation regime vs. 1960s and 1980s
P17 Signs of dollar top
You can access a two-page update of Deutsche Bank Research's views on global macro, monetary policy and markets, as well as some of the key themes driving them, at any time by downloading The House View Snapshot from: houseview.research.db.com. [more]
Deustche Bank Research The House View: The Final Countdown Research Deutsche Bank The House View Taking a step back DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 25 July 2017 firstname.lastname@example.org email@example.com firstname.lastname@example.org Distributed on: 25/07/2017 04:05:00 GMT 0bed7b6cf11c Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com Month in Review 2 CNBC, July 12, 2017 Market Watch, July 16, 2017 FT, July 16, 2017 Bloomberg, July 06, 2017 Bloomberg, July 21, 2017 Market Watch, July 20, 2017 CNBC, July 12, 2017 Value Walk, June 26, 2017 NYT, June 26, 2017 FT, July 16, 2017 FT, July 19, 2017 Bloomberg, July 18, 2017 Daily Mail, July 23, 2017 ForexPromos , July 14, 2017 Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com As markets enter into the summer lull, it is useful to take a step back . The global economy is in better shape than it has been in several years . This has allowed other central banks to follow the Fed and gradually start their exit journey, a process that is a historic challenge given the unprecedented level of monetary accommodation . But with inflation still below target, a key part of the normalisation puzzle is still missing . Although labour market tightness has not yet fed to wages, and hence to inflation, we expect it will . Core inflation should move higher over the medium - term in the US and Europe, supporting further monetary tightening and a normalisation of yield curves . While no policy change is expected by the Fed on 26 - July, an announcement to begin phasing out its balance sheet reinvestment is likely in September and we expect another rate hike in December . As for the ECB, rate hikes are still far off, and we expect the central bank to announce another QE extension and tapering in October . Our global macro outlook is little changed this year . We expect growth to rebound from the slowest pace post - crisis in 2016 , though relative to consensus we are more positive on the US and more bearish on Japan . In China, we continue to expect a gradual deceleration, but see upside risks to growth in the second half of the year . We are generally constructive on risk assets, expecting material upside to US equities in the next 18 months and positive but more balanced performance in EM . There are signs the dollar has peaked, but we do not expect a material devaluation yet . We are more positive on the euro, seeing upside versus the dollar and sterling . We expect yield curves to normalise gradually, but there is risk of a more sudden upward shift, depending on the path of core inflation . David Folkerts - Landau, Group Chief Economist 3 The House View, 25 July 2017 Taking a step back The views in this publication are informed by Deutsche Bank’s Global Strategy Group, which advises management and clients on broad market risks and global economic and financial developments. The views and forecasts of the group, which consists of senior research staff, may occasionally differ from those disseminated by their research colleagues Table of contents Introduction 4 - boxes Total returns Taking a step back World economy Policy stance Low inflation Macro outlook Global growth China growth Political risk Market views Summary Bullish US equities Dollar top Rates normalisation EM in H2 - 2017 Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com Fed : announcement on balance sheet policy in September; next rate hike in December, 3 more in 2018 ECB : slowly progressing toward exit. Next move QE extension at slower pace, announced by year - end BoJ : no change expected in target short rate or yield curve control policy for much of this year BoE : expect to stay on hold; risk of a one - off rate hike over next 12 months but not the start of a hiking cycle PBoC : baseline is no benchmark interest rate hike in 2017 - 18 but chance of one in 2018 rising EM : low inflation allows EM to continue easing (most of LatAm , parts of EMEA) or wait before tightening (Asia) Global growth to rise to 3.6% in 2017 (from 3.1%) and pick up further to 3.7% in 2018. Most synchronised growth environment in last six years US economy to accelerate: forecast 2.5% growth on average in 2017 - 18 . Limited fiscal stimulus expected; risk of recession remains low Eurozone above - trend growth to continue : 1.9% in 2017, 1.6% in 2018. Reduction in political risk supports growth; euro strength not expected to weigh materially EM: growth to pickup to 4.7% in 2017, 4.9% in 2018 . China growth beat expectations; upside risk in H2 - 17 Central banks on exit path : gradually starting to nor - malise unprecedented monetary easing. Sustainable rise in inflation needed for more meaningful shift Low inflation : medium - term view largely unchanged despite recent US disappointments: labour market tightness will feed into wages and in turn inflation Political risk : our base case of high event risk not materialising is playing out. UK and Brexit negotiations are the key exception, though expected Dollar “top” forming : US dollar could be nearing cycle highs but conditions not in place for sharp devaluation Views on key themes Economic outlook Central bank watch Key downside risks to our view Notes: H / M / L indicates estimated probability of risk (High, Medium, Low ). 4 Low inflation signals deeper growth issues Trump disappointment: policies tilted to negatives, under - delivery vs. expectations , US growth doesn’t rise China financial instability : property bubble deflates; rising dollar, DM yields put pressure on outflows, RMB Political risk escalation in Europe derails recovery – Italy remains the key flash point De - globalisation : rise of anti - trade policies exacerbates anaemic global trade and sharply slows growth M M L S ynchronised global growth, but stubbornly low inflation is helping to keep central bank hawkishness in check L M Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com 25 14 13 12 8 8 7 7 6 5 -10 6 5 4 3 3 0 -2 11 6 5 5 3 -5 -8 9 -12 -15 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 MSCI EM Mexico IPC Italy Milan US S&P 500 French CAC 40 Europe Stoxx 600 UK FTSE 100 German DAX 30 Shanghai Composite Japan Nikkei Russia Micex US HY - ex - energy US IG EUR HY US HY - energy EUR IG US France Germany EUR EM FX JPY GBP CNY GBPEUR Dollar Index Gold Iron Ore Brent Oil Since Draghi's speech (Sintra) Returns* per asset class in 2017 Equities Commodities** FX** Sovereign debt Corporate Credit YTD2017 5 Note: (*) Total return accounts for both income (interest or dividends) and capital appreciation. (**) FX, Commodities are spot returns. Source: Bloomberg Finance LP, Deutsche Bank Research. As of COB, 26 June 2017 Strong performance for risk assets continues. ECB’s more hawkish tone impacting eurozone assets Weighed down by stronger euro since Draghi’s Sintra speech Sterling supported by more hawkish BoE – but still weaker vs. euro Sell - off in European rates following Draghi’s Sintra speech Sharp drop in oil mostly a supply story. But prices stabilising Unwind of Trump foreign policy trades Performance supported by weaker pound Strong performance this year; resilient to recent rise in rates Signs of dollar top forming Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com 0 20 40 60 80 100 2000 2002 2004 2006 2008 2010 2012 2014 2016 Note: Diffusion index calculated as % of Composite PMIs above 50 (based on 8 - 18 countries) Source: Haver Analytics , Markit , Deutsche Bank Research Global growth hasn’t been as synchronised globally for many years % Rising synchro- nisation over the last year - 3 - 2 - 1 0 1 2 15 16 17 18 15 16 17 18 15 16 17 18 Note: (*) The output gap is a measure of slack in an economy: it is the difference between output and potential output. A negative gap means the economy produces less than potential. Source: Haver Analytics , OECD, Deutsche Bank Research Major developed economies have closed / are closing output gaps % of GDP Eurozone US Japan 6 The global economy is in a better place than it has been in several years Global economy is in a better place Global growth World economy escaping 5 year low - to - no growth period Growth to rebound after bottoming in 2016 to slowest pace post - crisis Broad - based uptick Growth broad - based globally Most synchronised growth in last 6 years Economic slack Economic slack falling Employment gap, output gap closing across major DM economies Political risk Political event risk materially diminished Brexit and to a lesser extent Italy the notable exceptions Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com The policy mix post - crisis saw monetary policy as “only game in town”, compensating for tight fiscal policy, tight (financial) regulation, lack of reform This unbalanced policy mix became exhausted − Declining marginal benefit of monetary easing − Calls for fiscal easing to counter rising inequality − Peak in regulatory tightening 2016 was a pivotal year for central banks’ stance − BoJ first to recognise negative side effects of aggressive monetary easing – yield curve control* introduced de - facto taper of QE − ECB followed with QE taper and other measures − Fed hiked rates three times since Dec - 2016 − In Jul - 2017, Bank of Canada first G10 central bank to hike after the Fed The direction of travel is clearly a shift toward a tightening of monetary policy, albeit a gradual one The other policy levers are also likely to turn − Risk is for some form of fiscal easing, loosening of financial regulation 7 This has allowed central banks to start their exit process from ultra easy monetary policy “ As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can [adjust policy] – not in order to tighten the policy stance, but to keep it broadly unchanged. ” ECB President Mario Draghi , 27 - Jun - 2017 Note: (*) BoJ introduced YCC in Sep - 2016. By targeting a 10 - yield level, BoJ introduced flexibility in the amounts of QE purchases Policy mix becoming more balanced Post - crisis Shift Comment Monetary policy Shift toward gradual tightening Fiscal policy Risk of some fiscal easing Financial regulation Past peak tightening Structural reform Some upside risk in France “ Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year. ” BoE Chief Economist Andy Haldane, 21 - Jun - 2017 “[ T]he current outlook warrants today’s withdrawal of some of the monetary policy stimulus in the economy. Future adjustments to the target for the overnight rate will be guided by incoming data (…). ” BoE Chief Economist Andy Haldane, 21 - Jun - 2017 Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com 8 The Fed, ECB and to a lesser extent BoE are now on an exit path Federal Reserve European Central Bank Bank of England Bank of Japan Macro backdrop Strong macro backdrop, growth above trend At full employment, output gap nearly closed Strong macro backdrop, growth above trend Employment gap, output gap closing steadily Economy slowing – FX - led real income shock weighs on growth Close to full employment Economy slowing down into 2018 Inflation low and well below target Key challenge Falling inflation weakens case for faster pace of hikes Market reluctant to price Fed rate hike guidance Euro strength Inflation rise not yet self - sustaining Weak wage inflation Conflicting goals: higher inflation, weak sterling warrant higher rates, but this threatens growth Impact of Brexit talks Inflation not rising despite massive BoJ stimulus Counter - cyclical nature of Yield Curve Control* Policy stance Committed to gradual exit – burden of proof for deviating from plan is high Slow and gradual exit As economy improves, v iew current policy as increasingly easy On hold despite more hawkish rhetoric in recent months On hold, talk of exit not justified at present Dovish turn in board as two members terms end What we expect Sep - 17: announcement of tapering of balance sheet reinvestments Dec - 17: rate hike 2018: three hikes Oct - 17: 6 - month QE extension, at € 40bn/ mth Mid - 18: deposit rate hike H2 - 18: likely QE exten - sion at lower pace Mid - 19: start of hikes Base case is no policy move through end - 2018 Risk of a one - off 25bp hike in next 6 - 12 months – but not a start of a hiking cycle BoJ not under pressure for urgent action No change expected in target short rate or YCC in 2017 Note: (*) BoJ introduced YCC in Sep - 2016. Rather than maintaining a commitment to a JPY amount of QE purchases, the BoJ started targeting a 10 - year yield around zero. The policy has a countercyclical nature: the more inflation normalises and yields rise, the more bonds the BoJ will purchase, thus easing when not needed; the opposite also holds true. Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com 9 We need to remember that the policy normalisation process is a historic challenge given how accommodative monetary policy is Monetary policy easing since the crisis is the largest and longest monetary expansion in modern history − Policy rates cut to all - time lows − Central bank balance sheets bloated by QE – all - time high assets of USD15tn for main DM CBs − ECB, BoJ continuing with their QE purchases for the foreseeable future − Constitutes unprecedented monetary policy experiment 0 2 4 6 8 10 12 14 16 18 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Fed BoJ ECB BoE SNB Source: Haver Analytics , Deutsche Bank Research Central banks are sitting on trillions of dollars of assets accumulated since the crisis – with the ECB and BoJ continuing to add USD tn +$11tn The normalisation process itself will also be an unprecedented monetary policy experiment − No template in history for the scope of unwinding that needs to take place − Policy remains far from normal, even as the macro normalisation is well underway and in some cases almost complete 0 4 8 12 16 20 24 1960 1970 1980 1990 2000 2010 Distance from targets* Distance from "normal policy"* Note: zero means at target and normal policy Source: Haver Analytics , Deutsche Bank Research In the US policy remains far from normal even as unemployment and inflation are very close to the Fed’s targets Policy remains far from normal, though not as extreme as in 2014 - 16 Economy broadly at target Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com 10 The missing link has been inflation - 0.5 0.0 0.5 1.0 1.5 2.0 2.5 US Euro Area Japan Latest Average (2002 - 07) Source: Haver Analytics , National Sources, Deutsche Bank Research Core inflation below pre-crisis averages %y/y * Core PCE inflation used for US 1.6 1.8 2.0 2.2 2.4 2.6 00 02 04 06 08 10 12 14 16 US 10y CPI inflation expectations (ls) EA long - term mean HICP inflation expectation (rs) Source: Haver Analytics , Phil FRB, ECB, Deutsche Bank Research Inflation expectations have moved lower %y/y Average 2001 - 07 0.5 1.0 1.5 2.0 2.5 3.0 37 41 45 49 53 57 61 65 2000 2004 2008 2012 2016 ISM Nonmanufacturing, 19m lag (ls) Core CPI (rs) Macro momentum supports rebound in core inflation Index %yoy 0 1 2 3 2013 2014 2015 2016 2017 2018 EU US Core inflation %yoy Core inflation expected to improve from recent lows Inflation still below target in major DMs despite stronger macro backdrop − US core inflation slowed recently, ~0.5pp below target − Eurozone core inflation higher but still below target − Japan core inflation falling Persistent inflation shortfall is: − Leading to a down drift in inflation expectations − Raising questions about link between inflation, slack − Challenging central bank credibility to deliver inflation Medium-term inflation view larg- ely unchanged: core inflation should move sustainably higher − Uptrend to continue in Europe − Most likely in 2018 in US − Labour market tightness will feed into wages and inflation Source: Haver Analytics, BLS, ISM, Deutsche Bank Research Source: Haver Analytics, Eurostat, BLS, Deutsche Bank Research Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com Today’s low inflation regime despite low unemployment has interesting historical parallels Similar to 1980s: oil price plunge contributed to low inflation expec - tations and “pricing out” of high inflation risk Similar to first half of 1960s: core inflation stuck below 2% despite unemployment near 4% Some unique aspects led to infl - ation surge in second half of 60s − Large jump in fiscal spending − Medicare, Medicaid introduct - ion boosted medical inflation − Fed did not tighten enough For current episode, suggests: − Should not expect replay of magnitude of 60s surge − B ut higher realized inflation and low unemployment could lift inflation expectations 11 The current regime of low inflation and inflation expectations in the US has interesting parallels to the 1960s and 80s 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 1 2 3 4 5 61 62 63 64 65 66 67 68 69 Core PCE inflation (ls) Unemployment rate (rs) Source: Haver Analytics , BEA, BLS, Deutsche Bank Research Similar to today, unemployment and inflation were both low in first half of 1960s %y/y % 0 2 4 6 8 10 83 84 85 86 87 88 89 90 91 92 93 25th percentile 75th percentile CPI Source: UMICH, Haver Analytics, Deutsche Bank Research Risk of high inflation outcomes was priced out (e.g., consumer inflation expectations) % y/y 0 2 4 6 8 -10 0 10 20 30 63 64 65 66 67 68 69 70 71 72 73 % Federal defense outlays growth (ls) Core CPI (rs) Source: OMB, BLS, Haver Analytics, Deutsche Bank Research Fiscal spending jumped ahead of inflation in 1960s % y/y Trapped in a low inflation expectations regime? Lessons from the 60s and 80s – 23 - June - 2017 - 80 - 40 0 40 80 120 160 80 85 90 95 00 05 10 15 Spot oil price: West Texas Intermediate Source: EIA/CME, Haver Analytics, Deutsche Bank Research Similar oil price plunge in mid - 1980s % y/y Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com 1.8 1.4 6.5 1.0 1.0 1.5 1.7 1.7 1.4 2.5 2.0 4.8 3.7 - 1 0 1 2 3 4 5 6 7 Russia Brazil China India Japan Italy France Eurozone Germany UK US DM EM World 2016 2017 - 18 - 4 Real GDP growth* (%yoy) 12 We have a positive macro outlook, and expect a rebound in global growth from the slowest pace since the crisis in 2016 Big picture Rationale US More bullish than consensus Stronger growth led by capex on deregulation, elevat - ed business confidence, better global momentum O nly limited fiscal stimulus expected. Significant tax cuts or spending increases an upside risk But growth will remain low by historic standards Eurozone Positive outlook Highest growth in years. Above - trend pace to continue Reduction in political risk supports growth Euro strength not to weigh materially Growth uptick remains cyclical, raising questions as to how long it can last UK Growth to slow down Consumption to suffer from drop in consumers’ real disposable income – high inflation, subdued wage growth, high leverage Brexit uncertainty to weigh on business spend Weaker sterling not feeding through to exports China Upside risks this year Big picture, gradual growth slowdown continues But export recovery has propped up growth recently – see upside risks into year - end High level of debt the key concern EM Benign macro backdrop Growth revised up marginally, especially in Asia Momentum eased somewhat but still strong; robust DM growth a positive pull factor Vulnerabilities pose localised not systemic risks Note: Arrows denote change from 2016 to 2017 - 18 average Source: Deutsche Bank Research Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com China is in a phase of managed deceleration as the economy rebalances away from investment, exports − Services accounts for more than 50% of GDP, from under 40% back in 2000 Amid this gradual slowdown, growth remained stronger than expected in the first half of the year In the second half there are 2 main risks to watch... − Slowdown in property and land markets − Over - tightening of financial regulation ...But on both these fronts, we have a positive view, and see upside risk to our growth forecasts − Property sales and new housing starts both rebounded strongly in June − A new Committee for Financial Stability and Development will support economic growth Big picture, high and rising debt levels are the main concern – but authorities are trying to address this − Issue particularly at state - owned enterprises and local governments − Credit growth remains higher than GDP growth, but at a lower rate than in 2016 13 In China, growth has been better than expected and we see upside risk in the second half of the year 51.6 40 42 44 46 48 50 52 54 0 2 4 6 8 10 12 Real GDP growth DB Forecast Services Value Added (RHS) Source: World Bank, Deutsche Bank Research Gradual deceleration continues as the economy rebalances % % of GDP - 20 0 20 40 60 80 2014 2015 2016 2017 Property sales value, ytd yoy % Property sales value, implied monthly yoy % Source: WIND, Deutsche Bank Research The rebound in property sales points to upside risks to growth in H2 +30.3% % yoy China: We see upside risk to H2 growth outlook – 17 - Jul - 2017 Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com Germany federal election Next government coalition at stake Little overall risk, limited to fine tuning of domestic policy 2017 was to be a year fraught with political risk especially in Europe At the half - year mark, our base case of political risk not escalating is playing out − Underperformance of right - wing eurosceptics in France and Netherlands − Most market - friendly outcome to French elections − Latent risk but no disruption in Italy, Spain While political risk events remain in H2 - 2017, the same pattern of no escalation should prevail UK and Brexit negotiations the key exception, though expected Concern over Italy likely to rise toward year - end and into 2018 January February March April M T W T F S S M T W T F S S M T W T F S S M T W T F S S 1 1 2 3 4 5 1 2 3 4 5 1 2 2 3 4 5 6 7 8 6 7 8 9 10 11 12 6 7 8 9 10 11 12 3 4 5 6 7 8 9 9 10 11 12 13 14 15 13 14 15 16 17 18 19 13 14 15 16 17 18 19 10 11 12 13 14 15 16 16 17 18 19 20 21 22 20 21 22 23 24 25 26 20 21 22 23 24 25 26 17 18 19 20 21 22 23 23 30 24 31 25 26 27 28 29 27 28 27 28 29 30 31 24 25 26 27 28 29 30 May June July August M T W T F S S M T W T F S S M T W T F S S M T W T F S S 1 2 3 4 5 6 7 1 2 3 4 1 2 1 2 3 4 5 6 8 9 10 11 12 13 14 5 6 7 8 9 10 11 3 4 5 6 7 8 9 7 8 9 10 11 12 13 15 16 17 18 19 20 21 12 13 14 15 16 17 18 10 11 12 13 14 15 16 14 15 16 17 18 19 20 22 23 24 25 26 27 28 19 20 21 22 23 24 25 17 18 19 20 21 22 23 21 22 23 24 25 26 27 29 30 31 26 27 28 29 30 24 31 25 26 27 28 29 30 28 29 30 31 September October November December M T W T F S S M T W T F S S M T W T F S S M T W T F S S 1 2 3 1 1 2 3 4 5 1 2 3 4 5 6 7 8 9 10 2 3 4 5 6 7 8 6 7 8 9 10 11 12 4 5 6 7 8 9 10 11 12 13 14 15 16 17 9 10 11 12 13 14 15 13 14 15 16 17 18 19 11 12 13 14 15 16 17 18 19 20 21 22 23 24 16 17 18 19 20 21 22 20 21 22 23 24 25 26 18 19 20 21 22 23 24 25 26 27 28 29 30 23 30 24 31 25 26 27 28 29 27 28 29 30 25 26 27 28 29 30 31 14 With the notable exception of Brexit , political risk is now greatly diminished in Europe UK trigger Article 50 Started two - year negotiation countdown for exit 2017 European political calendar Netherlands general election Right - wing, eurosceptic PVV party underperformed vs. expectations Government formation ongoing France elections Most market - friendly result President Macron has abs - olute Parliament majority Positive outlook for reform in France, for EU / eurozone UK early election Increased political uncertainty Brexit outcome now more binary: higher risk of “crash Brexit ”, but also higher risk of more benign “softer Brexit ” Political uncertainty Catalonia independence referendum in October is headline grabbing but little risk At national level, weak centre - right government continues Italy election Political uncertainty to continue Collapse of electoral reform means 2017 election is unlikely Eurosceptic government in 2018 possible but unlikely* Austria election Right - wing FPO losing ground in polls since end - 2016 Likely to finish 2nd or 3rd largest but may join coalition with mainstream parties Note: (*) Eurosceptic Five Star Movement underperformed in most recent elections Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com 15 Summary of market views Asset class View Rationale Equities Constructive US equities Material upside over next 18 months, supported by double - digit earnings growth and synchronised global growth Rising rates to encourage asset rotation from fixed income to equities Europe vulnerable to turn in surprises European equities have been supported by strong macro momentum Slumping macro data surprises could weigh, favour defensives over cyclicals Rates Strategically bearish Exit from easy monetary policy means rates should rise Normalisation process has had several false starts – stronger evidence of rising inflation needed for a decisive leg up in rates FX Dollar topping out Dollar top may be forming in this mature bull cycle But sharp devaluation unlikely More positive on euro Euro broke top of 2.5 - year range of 1.05 - 1.15; expect move to 1.20 in 2018 Strength driven by better eurozone fundamentals. See move up vs. sterling Credit Constructive Europe Performance more positive than expected but valuations stretched Risks weighted to downside but remain neutral, happy to earn carry for now US HY resilient Impressive performance as s preads tighten in a rising rate environment Technicals weak however, with sizeable fund outflows in recent weeks EM Positive but more balanced Strong EM performance in H1 to be followed by positive but more balanced performance in H2. Economic momentum easing but still stronger than DM Com - modities Oil prices stabilising Although global inventory remains high, demand growth is strong and US rig count may have reached a plateau in response to prices OPEC will begin monitoring exports as well as production Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com We remain constructive US equities and see material upside over the next 18 months Several factors will continue to support equities − Most synchronised global growth in 6 years, and expect it to strengthen further − Double - digit earnings growth in 2017 - 18 − Stable valuations − Low risk of recession for the next year Contrary to common belief, rising rates are positive − Low rates are a tax on households, raise the savings rate and depress consumption − Unnaturally easy monetary policy with respect to inflation and GDP growth undermines confidence − Rising rates encourage asset reallocation out of fixed income and into equities − Correlation between rates and equities strongly positive for last 20 years − Equity risk premium still stands above 4% -- with ample room to fall in the event of h igher real rates and higher equity prices - 10% - 5% 0% 5% 10% 15% 20% 2012 2013 2014 2015 2016 2017 S&P Earnings growth (% yoy) Consensus DB Forecast Source: Bloomberg Finance LP, Deutsche Bank Research Our model points to faster - than - consensus Q2 earnings growth 16 We remain constructive on US equities and see material upside over the next 18 months, on rapid earnings growth Q2 Earnings Preview: Settling Into A Historically Typical Double Digit Range? -- 5 Jul 2017 - 2% - 1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Equity Risk Premium (S&P earnings yield - real rates) Source: Bloomberg Finance LP, Deutsche Bank Research Equity risk premium remains high and has room to fall to absorb a rise in real rates Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com Dollar has weakened by 10% this year – and there are signs of a dollar ‘top’ forming in this mature bull cycle (typically 6 - 7 years) In previous dollar tops (1985, 2002) the currency’s initial downward slide was sharp However, conditions are not in place for a sharp dollar devaluation this time around , at least not yet − Dollar tops are typically signalled by valuation extremes, but dollar hasn’t exceeded + 20% overvaluation band − US current account is stable, owing to better energy balances – whereas generally it worsens by 1.5pp of GDP in the 2 years before a peak − Dollar interest rates are typically falling on G10 ranking tables in a dollar downcycle – this is not the case at the moment 17 In FX, there are signs that a dollar “top” is forming, but conditions are not in place for a sharp devaluation 70 80 90 100 110 120 130 140 150 - 6 - 4 - 2 0 2 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 US Current Account Balance USD (rhs) Source: Bloomberg Finance LP, Deutsche Bank Research US current account typically worsens ahead of dollar peaks, triggering overvaluation fears and intervention to weaken the dollar % of GDP Previous USD highs after falling Current Account balance US current account is stable this time around Dollar index 55 65 75 85 95 105 115 125 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 PPP USD TWI 20% band USD trade - weighted index Source: Bloomberg Finance LP, Deutsche Bank Research Trade weighted USD above fair value, but not at previous extremes Elongated USD top with long EUR lead time, 7 Jul 2017 Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com 18 Euro at $1.20 by 2018 We turned more positive on euro Currency has since broken the top of 2.5 - year 1.05 - 1.15 range Short - end rate differentials now less of a driver for EURUSD rate Macron brings political upside to currency, i.e., France / Germany policy initiatives, fiscal stimulus Real money underweight euro Bearish sterling versus Euro Limit to sterling downside vs. dollar as BoE uncomfortable with weak pound But currency uniquely exposed to earlier / faster ECB tightening − G10’s largest current account deficit, lowest real rates By end - 2018 see sterling down 5%+ vs. euro, but only around 3% vs. dollar - 40 - 30 - 20 - 10 0 1999 2001 2004 2007 2009 2012 2015 Goods Goods ex. Oil & erratics Source: Bloomberg Finance LP, Deutsche Bank Research Trade balance close to record deficit UK trade balance in goods GBP bn Bidirectional risks to USDJPY With BoJ on hold, Fed tightening, we see a weaker yen with USDJPY up to 120 by end - 2018 But risks are high on both sides − Weaker yen if US inflation rises and Fed tightens faster − Stronger yen if Japan policy continuity is seen at risk Bidirectional risks mean implied USDJPY volatility is too low We are more positive on the euro, with upside to the dollar and sterling. We see yen weakening, but with risks on both sides 1 2 3 1.00 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 2012 2013 2014 2015 2016 2017 Source: Bloomberg Finance LP, Deutsche Bank Research Euro at last broke the top of a 2.5 - year range EUR/USD Euro broke top of 2.5 - year range 6 8 10 12 14 16 18 Jul - 16 Oct - 16 Jan - 17 Apr - 17 Jul - 17 USDJPY 1M ATM Implied Vol Source: Bloomberg Finance LP, Deutsche Bank Research Bidirectional risk at odds with implied volatility close to 18 - month lows % This year’s EUR/USD range is too small, 10 Jul 2017 The Bank of England’s new FX policy, 30 Jun 2017 Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com 19 The normalisation of rates has had several false starts. Stronger evidence of rising inflation needed for a decisive leg up in rates We expect this rise in inflation to happen into 2018 – with central banks in turn getting more hawkish and supporting a sell - off in rates − Calling the exact timing is difficult Recent episodes have shown that the correction in rates can be sharp and material − Have seen several 80+ bp sell - offs in months – with moves of more than 100bp during 2013’s taper tantrum For several years, ultra easy monetary policy, a tentative macro backdrop and a series of shocks have kept rates low by historical standards Since 2013 there have been several normalisation false starts – with rates rising sharply, led by the US In each of those cases the normalisation got interrupted and reversed, at least partially Rates appear low relative to growth, unemployment – but a sustained sell - off is unlikely without clear evidence of rising inflation 140 130 80 20 50 40 30 10 30 80 20 10 0 50 100 150 UK US Germany Japan Taper tantrum (8 months) 2015 (8 months) Post - Trump (2 months) Source: Bloomberg Finance LP, Deutsche Bank Research Once it gains traction, the sell - off can be sharp and material bp sell - off, rounded* - 0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 1.2 1.4 1.6 1.8 2.0 2.2 2.4 2.6 2.8 3.0 2013 2014 2015 2016 2017 US Germany (RHS) Source: Bloomberg Finance LP, Deutsche Bank Research Rates normalisation process has had several false starts % % Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com A very strong first half for EM assets fuelled by a supportive macro backdrop − USD weakness has been the main boost; EM FX +4% in H1, and still fundamentally undervalued − Low inflation allowing central banks to continue to ease ( LatAm ) or delay tightening (Asia) − Upward revisions to growth in Asia Performance in the second half will be less stellar , with more balanced returns under a range - bound USD, although EM macro will still outperform DM − Outflows during 2013’s Taper Tantrum were partly reversed in subsequent years − But positioning is structurally lighter than in 2013 − We stay marketweight EM credit and focus on idiosyncratic factors for asset allocation Main risk to our call is a surge in risk aversion and dollar strength, i.e., a reversal of H1 tailwinds − However that would require a major repricing of growth, inflation, commodities or EU risks 20 A supportive macro backdrop helped EM perform strongly this year. The second half should be positive but less stellar - 200 0 200 400 600 800 1,000 1,200 1,400 2009 2010 2011 2012 2013 2014 2015 2016 2017 Jun - 09 to May - 13 Jun - 13 to May - 17 EM positioning is still structurally lighter than in 2013 Debt & equity flows, cumulative, USD bn Taper tantrum (May 2013) - 10% - 5% 0% 5% 10% 15% 20% 25% Commodities IG US treasuries EM local rates (hedged) EM Corp Credit US HY EMFX (spot) EU equities EM Sov Credit US equities EM local rates EM equities EM DM Source: Bloomberg Finance LP, Deutsche Bank Research EM outperformance in first half YTD return EM Monthly: Half full..., 13 Jul 2017 Source: IIF, Deutsche Bank Research Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com Keep informed with our regular The House View publications at houseview.research.db.com The House View range The House View Infographic Special Snapshot Macro Forecasts Monthly report Summarises key financial and economic developments Provides context on Deutsche Bank’s forecasts and outlook for economic growth, monetary policy and financial markets A one - pager that tackles a current topic in a few charts and visuals Ad - hoc in depth reports on major underlying topics affecting global economic growth and markets A handy two - page summary of Deutsche Bank Research macro and markets views A summary of Deutsche Bank Markets Research macroeconomic, fixed income, foreign exchange and commodities forecasts 21 Research Deutsche Bank The House View – 25 July 2017 email@example.com http://houseview.research.db.com DB forecasts Source: Deutsche Bank Research 22 ASIA: China, HK, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam DM: Australia, Canada, Denmark , Eurozone , Japan, New Zealand, Norway, Sweden, Switzerland, UK, US * CPI (%) forecasts are period averages CEEMEA: Czech Rep . , Israel , Egypt, Hungary, Kazakhstan, Nigeria, Poland , Romania, Russia , Saudi Arabia, South Africa, Turkey, UAE and Ukraine LATAM: Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela GDP growth (%) 2015 2016F 2017F 2018F CPI inflation, YoY * (%) 2015 2016F 2017F 2018F Global 3.3 3.1 3.6 3.7 US 0.1 1.3 2.0 1.9 US 2.6 1.6 2.4 2.6 Eurozone 0.0 0.2 1.6 1.5 Eurozone 1.9 1.7 1.9 1.6 Japan 0.8 - 0.1 0.4 0.5 Germany 1.7 1.9 1.6 1.7 UK 0.1 0.6 2.7 2.8 France 1.0 1.1 1.4 1.6 China 1.4 2.0 1.7 2.7 Italy 0.8 0.9 1.0 1.0 Spain 3.2 3.2 2.7 2.1 Central Bank policy rate (%) Current Q4 - 17F Q4 - 18F Q4 - 19F Japan 1.1 1.0 1.2 0.7 US 1.125 1.375 2.125 3.125 UK 2.2 1.8 1.6 1.2 Eurozone 0.00 0.00 0.00 0.50 China 6.9 6.7 6.7 6.3 Japan - 0.10 - 0.10 - 0.10 - 0.10 India 7.5 7.9 7.0 7.8 UK 0.25 0.25 0.25 0.25 EM Asia 6.2 6.2 6.1 6.1 China 1.50 1.50 1.50 1.50 EM CEEMEA 1.6 1.4 2.7 2.8 EM LatAm - 0.3 - 1.1 1.1 2.2 Key market metrics Current Q4 - 17F Q4 - 18F Q4 - 19F EM 4.2 4.2 4.7 4.9 US 10Y yield (%) 2.25 2.75 DM 2.1 1.6 2.0 2.0 EUR 10Y yield (%) 0.50 0.65 #N/A #N/A EUR/USD 1.164 1.17 1.20 1.20 USD/JPY 111 116 120 110 S&P 500 2,469 2,600 #N/A #N/A Stoxx 600 379 375 #N/A #N/A Oil WTI (USD/bbl) 46.4 52.0 52.0 53.0 Oil Brent (USD/bbl) 48.7 55.0 55.0 56.0 Current prices as of 24 - Jul - 2017 Research Deutsche Bank The House View – 25 July 2017 firstname.lastname@example.org http://houseview.research.db.com Analyst Certification This report covers more than one security and was contributed to by more than one analyst. 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