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September 18, 2017
Unlike the last few years, this summer was relatively quiet. As markets look ahead to the rest of the year, the key theme will continue to be the major central banks’ tentative progress toward removing monetary accommodation. Investors have so far not priced in this outlook. Since the prospects for growth across all the major countries is better than it has been for some time it remains a puzzle why there hasn't been a greater sell-off in bond markets. [more]
Deustche Bank Research The House View: The Final Countdown Research Deutsche Bank The House View Back to school DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. 18 September 2017 marcos.arana@db.com matthew.luzzetti@db.com michael.hsueh@db.com Distributed on: 17/09/2017 21:59:00 GMT 0bed7b6cf11c Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com Month in Review 2 FT, September 12, 2017 The Guardian, August 01, 2017 The Washington Post, September 06, 2017 FT, August 31, 2017 FT, August 09, 2017 FT, August 28, 2017 Reuters, September 11, 2017 FT, August 26, 2017 Newsmax, 28 August, 2017 FT, August 29, 2017 NYT, September 01, 2017 Economic Times, September 02 2017 NYT, June 26, 2017 Bloomberg, September 14 2017 Nasdaq, September 10, 2017 NYT, September 06, 2017 Bloomberg, September 14 2017 Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com Unlikethelastfewyears,thissummerwasrelativelyquiet.Asmarketslookaheadto therestoftheyear,thekeythemewillcontinuetobethemajorcentralbanks’ tentativeprogresstowardremovingmonetaryaccommodation. Investorshavesofarnotpricedinthisoutlook.Sincetheprospectsforgrowthacross allthemajorcountriesisbetterthanithasbeenforsometimeitremainsapuzzle whytherehasn'tbeenagreatersell-offinbondmarkets. Thefailureofinflationtorisetothecentralbanktargetsofaround2%isonlypartof theexplanation.Geopoliticalandpoliticalriskhavealsoplayedarole.Butthelatest dataintheUShavestartedtoeasefearsofapersistentlowinflationscenario,and thisshouldpromptafurthermovehigherinratesasthetighteningpathforcentral banksbecomeseasier. Agradualrepricingofratesshouldnotprovedisruptiveforriskassets,asitreflectsa strongmacrobackdrop.Butasharpriseinrates,precipitatedbyamoremeaningful pickupininflationwhichrevealsthatcentralbanksmaybebehindthecurve,couldbe highlydisruptivetoassetpricinggenerally.2013’stapertantrumprovidesan example,withUSratesrising140bpin8monthsandwipingbillionsoffriskasset valuations. David Folkerts-Landau, Group Chief Economist 3 The House View, 18 September 2017 Back to school 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 Summer review  Key market moves  Rationale and our views Macro outlook  Global growth  Monetary policy Politics  Brexit  German election Summaries  Market views  Forecasts Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com  Fed : Announcement on balance sheet policy in September; next rate hike in December, 3 more in 2018  ECB : QE extension and tapering to be announced in October, despite euro strength  BoJ : Not under pressure to act, no change expected in target short rate or yield curve control policy this year  BoE : We now expect a 25bp hike in November, but not the start of a hiking cycle  PBoC : No urgency to change policy stance, interest rates to remain at the current relatively high level  EM : Low inflation buying time for EM CBs, either allowing rate cuts (BR, RU, SA) or delaying rate hikes  Global growth near potential at 3.7% in 2017-18, up from 3.1% in 2016. We see upside resulting from capex growth, labour shortages, synchronised recovery  US economy improves from 2.2% to 2.4% growth in 2018 . Volatility in labour market data should not alter Fed’s view of full employment with solid momentum.  Eurozone cyclically strong : Our upgraded forecasts are above consensus at 2.2% in 2017, 2.0% in 2018. Exports & pent-up domestic demand driving growth.  EM: growth rising to 4.7% in 2017, 4.9% in 2018 . China unexpectedly slowed in Aug, but risks balanced in H2  Central banks on exit path :But signaling remains tentative outside the US; tug of war between CB messaging and market pricing is mediated by inflation  Low inflation :US inflation data improved; expect labour market tightness to feed into wages and in turn inflation. USD weakness could be a further boost.  Political risk : Intensification of North Korean crisis since late July but diplomatic resolution remains likely  Regime shift in FX :Rebalancing of investment flows takes over, relative rate expectations lose importance Views on key themes Economic outlookCentral bank watch Key downside risks to our view Notes: H / M / L indicates estimated probability of risk (High, Medium, Low). 4  Sharp rise in rates: taper tantrum-type scenario if inflation rises faster, central banks seen behind curve  China financial instability : property bubble deflates; rising dollar, DM yields put pressure on outflows, RMB  DM growth deceleration: rising policy rates interrupt macro momentum, mild recession  De-globalisation : rise of anti-trade policies exacerbates anaemic global trade and sharply slows growth M L Steady global growth, macro views shift in favor of Europe. Latest data reinforce central banks’ stance toward tighter policy L M Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 30 18 13 11 11 10 9 9 7 4 -4 6 5 5 2 3 0 -1 13 7 7 6 6 -5 -9 15 -3 -4 -15 -10 -5 0 5 10 15 20 25 30 35 40 MSCI EM Italy Milan US S&P 500 Mexico IPC Shanghai Composite French CAC 40 German DAX 30 Europe Stoxx 600 UK FTSE 100 Japan Nikkei Russia Micex US HY EUR HY US IG EUR IG US France Germany EUR EM FX GBP CNY JPY GBPEUR Dollar Index Gold Brent Oil Iron Ore In USD terms Returns* per asset class in 2017 EquitiesCommodities** 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 Risk assets have performed strongly, and especially so in dollar terms given the greenback’s weakening Sterling can narrow underperformance gap as market prices in November hike European rates recover from post- Sintraselloff Gold prices boosted by lower Treasury yields Still strong, but spreads widened on demand for safe havens Dollar decline gaining momentum +8.4% average ytdreturn on non- USD equity indices becomes +19.7% once translated back into USD-equivalent terms Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 0 10 20 30 40 50 60 1,000 1,200 1,400 1,600 1,800 2,000 20102011201220132014201520162017 VIX IndexMXWO Index Source: Bloomberg Finance LP, Deutsche Bank Research A relatively quiet summer for markets relative to previous years MSCI World indexVixindex 6 Unlike the last couple of years, the summer period was relatively quiet for markets Aug-15: surprise CNY devaluation Jun-16: Brexit vote May-13: taper Tantrum Jul-12: Draghi’s “all it takes” Aug-11: US sovereign debt downgrade May-10: eurozonedebt crisis  Every summer since 2010 had seen market moving events – 2014 the exception − Large swings in markets − Considerable volatility spikes  In this respect this summer was relatively quiet − Few if any major events − Muted volatility − Resilient equity markets Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com  Major central banks surprised with what came across as a co-ordinatedhawkish message at the ECB's annual conference in Sintrain June − ECB, Fed, BoE clearly signalledthey were on an exit path − Backdrop of robust global growth, receding political risk and inflation progress toward target supported the message  Tone did not go unnoticed, prompting sharp rises in core rates –20-30bp rise in 5-year yields over a couple of weeks  Sell-off was short-lived, with a relentless reversal over the last two months… − Sharp rally in core rates − Current valuations close to or even below pre- Sintralevels  ...And this despite growth remaining strong, central banks not having changed their message  In last week, hawkish signals from ECB and BoE, some optimism of US fiscal reform and a better US inflation print have again sparked a rate selloff Key central banks sent what came across as a co-ordinated hawkish message at Sintra’sECB annual conference in June -20 -10 0 10 20 30 40 EurozoneUKUSJapan PeakTroughCurrent Note: yield changes since ECB conference in Sintraon 26-Jun-2017 Source: Bloomberg Finance LP, Deutsche Bank Research Core rates reversed this summer the rise that followed Sintra 5y yield, bpchange 7 One of the key moves in markets was the reversal of the rate rise that followed central banks’ hawkish messages in June Bloomberg, 28-Jun-2017 Bloomberg, July 06, 2017 Reuters, 28-Jun-2017 Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 8 In part, this was due to geopolitical risk, notably the escalation of tension between the US and North Korea  NK sees acquisition of strategic nuclear capability as key to its survival − Makes US conventional weapons less effective in case of war  Timing of escalation coincides with breakthroughs on both missile and nuclear technology by NK  US adamantly opposed to a nuclear NK − Direct threat to US − Broader US / Russia / China geopolitical concern − Higher likelihood of Japan, South Korea becoming nuclear powers  Escalation of tension between US and North Korea grabbed significant attention over last few months − More daring actions by NK, more heated rhetoric  Military conflict remains unlikely − Costly for North Korea and South Korea, but also for Japan and, indirectly, for China via disruption of supply chains − Little chance of achieving much − UN, Europe to temper US response –e.g., latest sanctions don’t include oil embargo, which would have likely triggered military response from NK 8 10 12 14 16 18 20 May-17Jun-17Jul-17Aug-17Sep-17 US equities implied volatility… Source: Bloomberg Finance LP, Deutsche Bank Research Volatility spikes this summer driven by US-North Korea tensions –but markets take a sanguine view, with spikes low and falling “Fire and fury” Internal White House politics Missile over Japan “North Korea best not make any more threats to the United States. (…) They will be met with fire, fury and frankly power the likes of which this world has never seen before.” US President Trump, 9-Aug-2017 “There can only be a peaceful and diplomatic solution [for North Korea].” German Chancellor Merkel, 5-Sep-2017 Bloomberg, 12-Sep-2017 The Guardian, 29-Aug-2017 Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 9 The main driver though was the limited inflation pressure, espec- iallyin the US. This will be the key focus in the coming months  After nearing the Fed’s objective, core inflation in the US fell sharply − Core PCE 0.6pp below Fed’s target, having fallen from 1.9%  Decline partly due to negative outliers − Wireless services inflation plunged most on record due to Verizon unlimited data plan  There was also some evidence of broader weakness  However, the latest inflation data (CPI) rebounded…  …And we still expect core inflation to move sustainably higher in 2018: − Positive base effects from recent weak prints − Support from strong growth and recent dollar weakness − Tight labour market -8 -6 -4 -2 0 2 4 6 201220132014201520162017 % m/m CPI-U: wireless telephone services CPI-U: lodging away from home Some of the weakness due to one-offs (e.g., wireless and lodging away) Source: BLS, HaverAnalytics, Deutsche Bank Research 0 0.1 0.2 0.3 0.4 Mar-17Sep-17Mar-18Sep-18Mar-19Sep-19 Impact on %yoy core PCE inflation from recent dollar weakness Decline in dollar should help boost core inflation: Peak impact around mid-2018 pp Source: Deutsche Bank Research 0.5 1.0 1.5 2.0 2.5 3.0 0.5 1.0 1.5 2.0 2.5 3.0 00051015 Core PCECore CPI Source: BEA, BLS, HaverAnalytics, Deutsche Bank Research Core inflation has fallen sharply in recent months %y/y %y/y -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 2012201420162018 Headline CPICore CPI Source: BLS, HaverAnalytics, Deutsche Bank Research Medium-term view in US broadly unchanged: Inflation should rise from recent lows % y/y Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com  From a strategic point of view, rates are low − Market priced persistently low inflation, at odds with our view of rising inflation in next quarters − Little monetary tightening priced, despite clear central banks exit bias − Growth outlook robust, financial conditions are supportive –no reason for slowdown without tighter monetary policy − Market not pricing easing of fiscal policy or regulation  Latest developments on the main fronts that had kept rates low suggest rates should now rise − Inflation: tentative signs of normalisation in coming quarters − Geopolitics: short-lived reaction to latest tit-for-ta suggest greater escalation will be needed to keep rates from rising  Risk remains of a sharp repricingof rates − Inflows into risky assets (e.g., EM debt, corp. credit) as long as central bank tightening delayed − 2013 taper tantrum a template –US 10y rising 140bp in 8 months -15 0 15 30 201520162017 Source: EPFR, HaverAnalytics, Deutsche Bank Research Material flows into risky assets, especially corporate debt and EM bonds % AUM, cumulative US Equity EU Equity EM Equity Sov. Bonds Corp IG EM Bonds Corp HY 10 The latest data pointing to inflation normalising ahead vindicate our strategic view of higher rates 90 95 100 105 Mar-16Jun-16Sep-16Dec-16Mar-17Jun-17Sep-17 Note: DB baskets of US high tax (DBUSHTAX) and low tax (DBUSLTAX) companies Source: Bloomberg Finance LP, Deutsche Bank Research Markets went from pricing material tax reform just after Trump’s election, to pricing hardly any stimulus currently Performance of high vs. low tax companies Trump election and peak pricing 2 weeks later Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 11 The other salient market move over the summer has been in FX, with dollar weakness and euro strength 0 2 4 6 8 10 But weakness broad based, not just vs. euro % change vs. USD, since 20-Jun-17  But this cycle got interrupted this year –with dollar strength giving way to material weakness  Weakness accelerated during the summer − Euro surge on robust eurozonegrowth and as ECB confirmed monetary policy tightening bias − Decreasing confidence on Fed’s ability to continue hiking, as US inflation faltered  This is not just a euro vs. dollar story –dollar lost value vs. all major currencies 70 80 90 100 110 2011201220132014201520162017 Source: Bloomberg Finance LP, Deutsche Bank Research Dollar multi-year upcycleinterrupted this year Dollar index Dollar upcycle  Dollar started an upcyclein mid-2011 − Supported by stronger economy, higher rates in US vs. Europe, Japan − 40%+ rise in a little over 5 years, with strongest gains as Fed ended QE and started hiking rates − Upcyclestypically last several years 90 95 100 105 110 Jan-17Mar-17May-17Jul-17Sep-17 DollarEuro Dollar weakness this summer as euro gained Trade-weighted Jan = 100 Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 12  Eurois more likely to overshoot above 1.20 than to reverse lower − Euro only just approaching fair value − Speculative positioning not particularly long despite the recent build − Post-crisis structural underweight in euro assets is still to be covered, generating demand for the currency  Sharp rise in euro, vs. dollar but also on a trade weighted basis –up ~10% in 4 months  Currency at our year-end targets during the summer  Despite speed of rise, move is not that extreme − Sharp move brings year-to-date trading range back in line with historic ranges  ECB mild pushback not enough to halt appreciation − High euro weighs on growth, lowers inflation − Strong growth backdrop and ECB desire to start policy exit make verbal intervention less credible Despite the speed of euro appreciation in the last couple of months, we see risks of a drift higher rather than a reversal Draghiis not that powerful-EUR/USD update –30-August-2017 0.0 0.5 1.0 1.5 2.0 2.5 3.0 1.251.301.35 Additional growth needed to hit inflation target GDP growth as euro rises Source: Deutsche Bank Research Further appreciation would challenge the ECB’s targets Real GDP growth Avg. 2017-20 EURUSD level by end 2018 1.20 1.19 1.23 1.24 1.15 1.20 1.25 SpotBEERPPPFEER Source: Deutsche Bank Research Euro is only just approaching fair value 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2Y real rate differential (EU minus US, lhs) EUR/USD (rhs) Source: Bloomberg Finance LP, Deutsche Bank Research EURUSD exchange rate no longer driven by rates differential pp Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 13 These developments are in a context of a supportive macro backdrop 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 t o slowest pace post-crisis Broad-based uptick  Growth broad-based globally, highly synchronised across regions  Momentum remains strong despite r ecent weakening Economic slack  Economic slack falling  Employment gap, output gap closing ac ross major DM economies Political risk  Political event risk materially diminished  Brexitand to a lesser extent Italy t he not able exceptions 0 20 40 60 80 100 1998200020022004200620082010201220142016 Global growth remains highly synchroniseddespite recent easing in momentum % Source: HaverAnalytics, Markit, Deutsche Bank Research Note: Diffusion index calculated as % of Composite PMIs above 50 (based on 8-18 countries) -3 -2 -1 0 1 2 151617181516171815161718 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: HaverAnalytics, OECD, Deutsche Bank Research Major developed economies have closed / are closing output gaps % of GDP EurozoneUSJapan Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 14 <0% 0-1% 1-2% 2-3% 3-5% 2017 real GDP growth (% yoy) >5%n/a Most major economies are growing healthily, and expected to continue to do so through 2018 US: solid growth to continue  Growth above recent trend on stronger capexand solid consumer spending  Near-term data volatility due to hurricanes  Limitedfiscal stimulus expected: upside risks from significant tax cuts / spending increases  But growth to be low relative to history China: managed slowdown  Gradual growth slowdown continues  Export recovery supported H1 growth  B ut newly introduced supply side reforms have and will continue to w eigh on industrial production  Property and land markets key concern into 2018, as sector boom risks fading Eurozone: positive outlook  Highest growth in years; above-trend pac e to continue  Reduction in political risk supports growth  Euro strength a negative, but impact lower than in the past  Growth uptick remains cyclical, raising questions as to how long it can last 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 Japan: slowdown expected  Economy slowing down into 2018  Investment cycles coming to an end (business, consumer durables)  Work style reforms introduced by the government impose cuts to work hours 1.9 2.3 6.5 7.0 1.3 1.3 1.3 1.7 1.8 2.1 2.3 4.8 2.1 3.7 012345678 Russia Brazil China India Japan UK Italy France Germany Eurozone US EM DM World Avg 2017-18 Real GDP growth* (%yoy) Global growth outlook UK: growth to slow down  Consumption to suffer from drop in c onsumers’ real disposable income – high inflation, subdued wage growth, high leverage  Brexituncertainty to wei gh on bus iness spend  Weaker sterling not feeding through to exports, but limiting BoE easing room Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com  In recent weeks, the Southern US has been hit by back-to-back severe hurricanes that have devastated the Houston area and Florida  At this point it is difficult to assess the likely impact on GDP growth, but our early expectations are for: − Near-term negative impact on activity (e.g., trade, industrial production) which could subtract at least 0.2pp from H2 growth − Beyond near-term, rebuilding effort should help lift GDP, with effects more dispersed over time  Past hurricanes (e.g., Katrina) suggest that labour market data could also be severely impacted − Job gains plunged in Sep-2005 after Katrina: -35k versus ~175k average on the previous 3 months − Initial jobless claims have already spiked higher  For inflation, primary effect is temporary boost to headline inflation from jump in gas prices − Potential for some spill-over to core (e.g., lodging away as displaced households seek shelter)  Muddied data picture will complicate the Fed’s job, but we anticipate they will look through volatility 15 After two devastating hurricanes in the US, growth will likely be hurt temporarily and data releases will be volatile for some time -40 -20 0 20 40 60 9702071217 Texas exports of petroleum/coal production & oil/gas extraction US exports of petroleum/coal production & oil/gas extraction Source: WISER, Census, HaverAnalytics, Deutsche Bank Research %y/y Hurricane Harvey likely to have large temporary drag on energy trade Correlation = 0.90 -80 -30 20 70 120 Mar-2005Jun-2005Oct-2005Jan-2006 Source: DOL, HaverAnalytics, Deutsche Bank Research Jobless claims likely to be volatile, similar to hurricane Katrina in ‘05 Weekly, chg. 1.50 1.75 2.00 2.25 2.50 2.75 3.00 201520162017 Source: AAA, Bloomberg Finance LP, Deutsche Bank Research Gas prices have spiked following the hurricanes Gasoline prices, USD per gallon Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 16  We expect the Fed to raise rates again in December − Inflation developments will be key, and some further evidence of a firming inflation trend likely needed  Some Fed “dots” are likely to fall at the September meeting but we expect the signal to be that a December hike remains very possible  In 2018, we see three rate increases –the first coming in June –in line with the Fed and well above the market (<1)  Fed policy decisions are being made in the presence of strong countervailing forces − On the hawkish side are solid growth / labour market momentumand loose financial conditions − On the dovish side is soft inflation  We expect Fed to announce start of balance sheet reinvestment phase out at the 20-Sep. meeting − Hiking cycle paused to assess impact of announcement  The bigger question for markets is when the next rate hike will occur Fed should announce start to phasing out QE reinvestment at its September meeting. Next rate hike in December if inflation firms 0 20 40 60 80 2017201820192020202120222023 Allow to mature Reinvest Reinvestment cap Source: US Treasury, Deutsche Bank Research Projection of roll-off of Fed Treasury holdings USDbn 0 1 2 3 4 5 FOMC projectionsMedian projections Market pricingDB forecasts 201720182019 Longer run Source: FRB, Bloomberg Finance LP, Deutsche Bank Research % Disconnect persists between Fed, market on rate hikes -8 -6 -4 -2 0 2 4 6 -5 -4 -3 -2 -1 0 1 2 000204060810121416 2q % chg, AR DB high frequency FCI (1q ahead, ls) Real GDP (rs) Source: BEA, HaverAnalytics, Deutsche Bank Research Loose financial conditions supporting growth Index, 13w MA Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 17 To recap, 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  Strongmacro backdrop, growth above trend  Employment gap, output gap closing steadily  Economyslowing –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  Soft inflation casts doubt over Fed’s rate guidance  Market reluctant to price upcoming normalisation of inflation  Euro strength weighs on growth, lowers inflation  Inflation rise not yet self- sustaining  Weak wage inflation  Conflicting goals: high inflation, weak sterling warrant higher rates, but this threatens growth  Brexituncertainty  Inflation not rising despite massive BoJ stimulus  Counter-cyclical nature of Yield Curve Control* Policy stance  Sticking to gradual exit  Would like to see convincing evidence of firmer inflation to continue rate hikes  Slow and gradual exit  Easy policy needed to reach inflation target  Static policy increasingly easy as economy firms  Tightening bias  Growth backdrop sufficient for BoE to focus on inflation and FX concerns  On hold, talkof 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- sionat lower pace  Mid-19: start of hikes  Now expect one-off 25bp hike in Q4-17 –but not a start of a hiking cycle  BoJnot under pressure for urgent action  No change expectedin target short rate or YCC in 2017 Note: (*) BoJintroduced YCC in Sep-2016. Rather than maintaining a commitment to a JPY amount of QE purchases, the BoJstarted targeting a 10-year yield around zero. The policy has a countercyclical nature: the more inflation normalises and yields rise, the more bonds the BoJwill purchase, thus easing when not needed; the opposite also holds true. Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 18 As Brexittalks slowly continue, the key question remains what, if any, transition deal is struck to avoid a negative "crash Brexit"  Acknowledgment across the board that a transition period has to be agreed to avoid exit without deal − Time is too tight to have negotiated future relation by Brexitday in Mar-2019  Limited progress to date, solely focused on exit issues (e.g., divorce bill, status of UK / EU citizens, etc.)  Conflicting messages from UK government as to what kind of end-deal is being sought –has to be addressed for transition to be agreed − Smooth transition has to resolve tension between globalist Brexiteersand those that wish to stay closer to the EU single market  Current UK political setup not conducive to the necessary domestic compromises  UK political and / or economic crisis necessary to drive UK into EEA-style + customs transitional agreement  Minority government starves PM May from much needed flexibility to carry out negotiations − Eurosceptic MPs can easily hold government hostage  No signs of cracks on EU-27 front means UK’s negotiating position is weak − If anything, across Europe the EU is more in favour than at time of Brexitvote in Jun-2016 The big picture Key issues Economic argument  Remain as close to single market as possible ‒Goods trade ‒Services trade  Accept EU’s playing rules Brexitrationale  Trade deals with rest of world  Control of immigration  Supremacy of UK law vis-à-vis European Court of Justice vs. Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 19 The end-September German election is likely to be a non-event for markets, but it will clear the way for EU integration talks -0.2 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1996 - 2000 2001 - 2005 2006 - 2010 2011 - 2015 2016 - 2020 2021 - 2025 Total factor productivity Capital services Hours worked Potential growth in % Source: Deutsche Bundesbank, Deutsche Bank Research Declining trend economic growth on lower hours worked % 010203040 CDU/CSU SPD Left AfD FDP Greens Others Source: Wahlrecht.de, Deutsche Bank Research * Average of major surveys (Allensbach, InfratestDimap, Forsa, ForschungsgrupperWahlen, TNS Emnid) Pro-European parties garner greatest support Surveys published end-July 2017, %  Chancellor Merkel widely seen as securing a fourth term against centre-left SPD’s Martin Schulz  Uncertainty remains over what the governing coalition will look like − Several options, given how different parties poll − “Colour” of coalition will drive policy trade-offs  New government to face important domestic issues − Erosion of economic drivers –underlying trend growth expected to weaken over next decade  Multiple issues also on the international front − Migration flows − Brexitand future EU-UK relations − European integration  This last area is key --much has changed in the last year and EU leaders are less reticent about calling for more Europe − Macron election in France, underperformance of euroscepticparties across Europe − With German election behind, it could be the time for moving into more active integration talks Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 20 Summary of market views Asset classViewRationale Equities  US: constructive  S&P500 long overdue a pullback, but positive economic backdrop should dominate any correction. Maintain 2,600 year-end target  Europe: risk of tactical downside  Easing of macro momentum consistent with a correction to European equities in coming months  European equities are however at bottom of range vs. US Rates  Strategically bearish  Market still pricing low inflation, little further tightening (“Fed is nearly done”)  Latest developments (e.g., US inflation) comfort our bearish positioning FX  Dollar risks are asymmetric  Market refuses to price in any additional rate hikes from the Fed. Asymmetric (downside) risk to the dollar as Fed Funds rate approaches neutral.  Euro upside on investment flows  Relative ECB/Fed monetary policy expectations no longer the prime mover  Euro responding to investment flow imbalances –rebalancing underway of the structural underweight of European assets built post-crisis Credit  Constructive Europe  IG spreads likely to move sideways in the short term, with moderate widening bias through the end of the year. Wehold a bias for European HY credit spreads widening further in the short term, in the face of significant issuance. EM  Staying positive  Strong YTD performance to give way to reduced and more carry-dependent returns in the remainder of the year.EM macro still stronger than DM Com- modities  Oil prices stabilising  Temporary dislocations resultingfrom Hurricane Harvey  Threat of oversupply persists in 2018, requiring OPEC to extend its restraint Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com DB forecasts Source: Deutsche Bank Research 21 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, UAEand Ukraine LATAM:Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela GDP growth (%)201520162017F2018FCPI inflation, YoY * (%)201520162017F2018F Global3. US2. Eurozone1. Germany1. France1. Italy0. Spain3. Central Bank policy rate (%)CurrentQ4-17FQ4-18FQ4-19F Japan1. UK2. China6. India7. EM Asia6. EM CEEMEA1. EM LatAm-0.3- Key market metricsCurrentQ4-17FQ4-18FQ4-19F EM4. 10Y yield (%)2.182.752.962.96 DM2. 10Y yield (%)0.410.60 #N/A#N/A EUR/USD 1.1881.171.201.20 USD/JPY 111116120110 S&P 5002,4962,600 #N/A#N/A Stoxx 600382375 #N/A#N/A Oil WTI (USD/bbl)49.952.052.053.0 Oil Brent (USD/bbl)55.555.055.056.0 Current prices as of 14-Sep-2017 Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com Keep informed with our regular The House View publications at houseview.research.db.com The House View range The House ViewInfographicSpecialSnapshotMacro 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 22 Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com Analyst Certification This report covers more than one security and was contributed to by more than one analyst. The views expressed in this reportaccurately reflect the views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensationfor providing a specific recommendation or view in this compendium report. Marcos Arana / Matthew Luzzetti / Michael Hsueh Attribution The authors wish to acknowledge the contributions made by Avik Chattopadhyay, Baqar Zaidi and Sourav Dasgupta, in the preparation of this report. 23 Appendix 1 Important Disclosures *Other information available upon request PricesarecurrentasoftheendoftheprevioustradingsessionunlessotherwiseindicatedandaresourcedfromlocalexchangesviaReuters, Bloombergandothervendors.OtherinformationissourcedfromDeutscheBank,subjectcompanies,andothersources.Fordisclosures pertainingtorecommendationsorestimatesmadeonsecuritiesotherthantheprimarysubjectofthisresearch,pleaseseethemostrecently publishedcompanyreportorvisitourglobaldisclosurelook-uppageonourwebsiteat http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr . Asidefromwithinthisreport,importantconflictdisclosurescanalsobefoundat https://gm.db.com/equities underthe“DisclosuresLookup”and “Legal”tabs.Investorsarestronglyencouragedtoreviewthisinformationbeforeinvesting. Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 24 AdditionalInformation TheinformationandopinionsinthisreportwerepreparedbyDeutscheBankAGoroneofitsaffiliates(collectively"DeutscheBank").Thoughtheinformationhereinisbelievedtobereliableandhasbeen obtainedfrompublicsourcesbelievedtobereliable,DeutscheBankmakesnorepresentationastoitsaccuracyorcompleteness.Hyperlinkstothird-partywebsitesinthisreportareprovidedforreader convenienceonly.DeutscheBankneitherendorsesthecontentnorisresponsiblefortheaccuracyorsecuritycontrolsofthesewebsites. IfyouusetheservicesofDeutscheBankinconnectionwithapurchaseorsaleofasecuritythatisdiscussedinthisreport,orisincludedordiscussedinanothercommunication(oralorwritten)froma DeutscheBankanalyst,DeutscheBankmayactasprincipalforitsownaccountorasagentforanotherperson. 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Opinions,estimatesandprojectionsconstitutethecurrentjudgmentoftheauthorasofthedateofthisreport.TheydonotnecessarilyreflecttheopinionsofDeutscheBankandaresubjecttochangewithout notice.DeutscheBankprovidesliquidityforbuyersandsellersofsecuritiesissuedbythecompaniesitcovers.DeutscheBankresearchanalystssometimeshaveshorter-termtradeideasthatareconsistentor inconsistentwithDeutscheBank'sexistinglongertermratings.TradeideasforequitiescanbefoundattheSOLARlinkathttp://gm.db.com.ASOLARidearepresentsahighconvictionbeliefbyananalystthat astockwilloutperformorunderperformthemarketand/orsectordelineatedoveratimeframeofnolessthantwoweeks.InadditiontoSOLARideas,theanalystsnamedinthisreportmayfromtimetotime discusswithourclients,DeutscheBanksalespersonsandDeutscheBanktraders,tradingstrategiesorideasthatreferencecatalystsoreventsthatmayhaveanear-termormedium-termimpactonthemarket priceofthesecuritiesdiscussedinthisreport,whichimpactmaybedirectionallycountertotheanalysts'current12-monthviewoftotalreturnorinvestmentreturnasdescribedherein.DeutscheBankhasno obligationtoupdate,modifyoramendthisreportortootherwisenotifyarecipientthereofifanyopinion,forecastorestimatecontainedhereinchangesorsubsequentlybecomesinaccurate.Coverageandthe frequencyofchangesinmarketconditionsandinbothgeneralandcompanyspecificeconomicprospectsmakeitdifficulttoupdateresearchatdefinedintervals.Updatesareatthesolediscretionofthe coverageanalystconcernedoroftheResearchDepartmentManagementandassuchthemajorityofreportsarepublishedatirregularintervals.Thisreportisprovidedforinformationalpurposesonlyand doesnottakeintoaccounttheparticularinvestmentobjectives,financialsituations,orneedsofindividualclients.Itisnotanofferorasolicitationofanoffertobuyorsellanyfinancialinstrumentsorto participateinanyparticulartradingstrategy.Targetpricesareinherentlyimpreciseandaproductoftheanalyst’sjudgment.Thefinancialinstrumentsdiscussedinthisreportmaynotbesuitableforall investorsandinvestorsmustmaketheirowninformedinvestmentdecisions.Pricesandavailabilityoffinancialinstrumentsaresubjecttochangewithoutnoticeandinvestmenttransactionscanleadtolosses asaresultofpricefluctuationsandotherfactors.Ifafinancialinstrumentisdenominatedinacurrencyotherthananinvestor'scurrency,achangeinexchangeratesmayadverselyaffectthe investment.Pastperformanceisnotnecessarilyindicativeoffutureresults.Unlessotherwiseindicated,pricesarecurrentasoftheendoftheprevioustradingsession,andaresourcedfromlocalexchanges viaReuters,Bloombergandothervendors.DataissourcedfromDeutscheBank,subjectcompanies,andinsomecases,otherparties. TheDeutscheBankResearchDepartmentisindependentofotherbusinessareasdivisionsoftheBank.Detailsregardingourorganizationalarrangementsandinformationbarrierswehavetopreventand avoidconflictsofinterestwithrespecttoourresearchisavailableonourwebsiteunderDisclaimerfoundontheLegaltab. Macroeconomicfluctuationsoftenaccountformostoftherisksassociatedwithexposurestoinstrumentsthatpromisetopayfixedorvariableinterestrates.Foraninvestorwhoislongfixedrateinstruments (thusreceivingthesecashflows),increasesininterestratesnaturallyliftthediscountfactorsappliedtotheexpectedcashflowsandthuscausealoss.Thelongerthematurityofacertaincashflowandthe higherthemoveinthediscountfactor,thehigherwillbetheloss.Upsidesurprisesininflation,fiscalfundingneeds,andFXdepreciationratesareamongthemostcommonadversemacroeconomicshocksto receivers.Butcounterpartyexposure,issuercreditworthiness,clientsegmentation,regulation(includingchangesinassetsholdinglimitsfordifferenttypesofinvestors),changesintaxpolicies,currency convertibility(whichmayconstraincurrencyconversion,repatriationofprofitsand/ortheliquidationofpositions),andsettlementissuesrelatedtolocalclearinghousesarealsoimportantriskfactorstobe considered.Thesensitivityoffixedincomeinstrumentstomacroeconomicshocksmaybemitigatedbyindexingthecontractedcashflowstoinflation,toFXdepreciation,ortospecifiedinterestrates–these arecommoninemergingmarkets.Itisimportanttonotethattheindexfixingsmay--byconstruction--lagormis-measuretheactualmoveintheunderlyingvariablestheyareintendedtotrack.Thechoiceof theproperfixing(ormetric)isparticularlyimportantinswapsmarkets,wherefloatingcouponrates(i.e.,couponsindexedtoatypicallyshort-datedinterestratereferenceindex)areexchangedforfixed coupons.ItisalsoimportanttoacknowledgethatfundinginacurrencythatdiffersfromthecurrencyinwhichcouponsaredenominatedcarriesFXrisk.Naturally,optionsonswaps(swaptions)alsobearthe riskstypicaltooptionsinadditiontotherisksrelatedtoratesmovements. Derivativetransactionsinvolvenumerousrisksincluding,amongothers,market,counterpartydefaultandilliquidityrisk.Theappropriatenessorotherwiseoftheseproductsforusebyinvestorsisdependent ontheinvestors'owncircumstancesincludingtheirtaxposition,theirregulatoryenvironmentandthenatureoftheirotherassetsandliabilities,andassuch,investorsshouldtakeexpertlegalandfinancial advicebeforeenteringintoanytransactionsimilartoorinspiredbythecontentsofthispublication.Theriskoflossinfuturestradingandoptions,foreignordomestic,canbesubstantial.Asaresultofthehigh degreeofleverageobtainableinfuturesandoptionstrading,lossesmaybeincurredthataregreaterthantheamountoffundsinitiallydeposited.Tradinginoptionsinvolvesriskandisnotsuitableforall investors.Priortobuyingorsellinganoptioninvestorsmustreviewthe"CharacteristicsandRisksofStandardizedOptions”,athttp://www.optionsclearing.com/about/publications/character-risks.jsp.Ifyou areunabletoaccessthewebsitepleasecontactyourDeutscheBankrepresentativeforacopyofthisimportantdocument. Research Deutsche Bank The House View –18 September 2017 thehouseview@list.db.comhttp://houseview.research.db.com 25 Participantsinforeignexchangetransactionsmayincurrisksarisingfromseveralfactors,includingthefollowing:(i)exchangeratescanbevolatileandaresubjecttolargefluctuations;(ii)thevalueof currenciesmaybeaffectedbynumerousmarketfactors,includingworldandnationaleconomic,politicalandregulatoryevents,eventsinequityanddebtmarketsandchangesininterestrates;and(iii) currenciesmaybesubjecttodevaluationorgovernmentimposedexchangecontrolswhichcouldaffectthevalueofthecurrency.InvestorsinsecuritiessuchasADRs,whosevaluesareaffectedbythe currencyofanunderlyingsecurity,effectivelyassumecurrencyrisk. 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