The House View:Politics take centre stage

Research Deutsche Bank The House View Politics take centre stage DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 057/04/2016 18 October 2016 Distributed on: 18/10/2016 04:10:00 GMT Research Deutsche Bank The House View – 18 October 2016 thehouseview@list.db.com http://houseview.research.db.com Month in Review 2 Reuters, 1st October 2016 FX Street, 7th October 2016 MarketWatch, 6th October 2016 Daily Mail, 5th October 2016 Seeking Alpha, 5th October 2016 IMF, 4th October 2016 Bloomberg, 29th September 2016 Bloomberg, 7th October 2016 Bloomberg, 7th October 2016 WSJ, 7th October 2016 WSJ, 5th October 2016 CNN, 7th October 2016 FT, 9th October 2016 Fortune, 21st September 2016 The Guardian 2nd October 2016 WSJ, 5th October 2016 The Week, 13th October 2016 The Local, 12h October 2016 Research Deutsche Bank The House View – 18 October 2016 thehouseview@list.db.com http://houseview.research.db.com The political calendar is filled with risk events over the next year. The US elections in a few weeks are likely to yield a Clinton win and continued gridlock. Spain continues without a government, but an end to the impasse could be nearing. In Italy, however, the risk is rising that December’s Senate referendum will be rejected. In this case, new elections, though unlikely, cannot be ruled out. Anti-EU parties might also make gains in next year’s German and French elections. In the UK, the government’s hard-line rhetoric and an uncompromising EU stance are paving the way for a hard Brexit. On the macro front, global growth remains sluggish, although there have been some signs of improvement. US growth is expected to pick up slightly but the eurozone is yet to feel the full impact of Brexit. Importantly, political headwinds prevent necessary structural reforms and limit meaningful fiscal stimulus programmes. Meanwhile, there has been a chorus of calls for such responses from central bankers, as incremental monetary easing is increasingly seen as less effective and even counterproductive. We expect the ECB to extend its QE programme this year, but the Fed is eager to raise rates before year-end, and the BoJ has taken measures to stem the decline in long-end yields. The ongoing policy rethink informs our market views. The sell-off in rates should be sustained, and possibly extended next year. In FX, we are bullish the yen and the dollar post election, and bearish the euro and sterling. We are cautious on US and European equities. EM assets have performed well on the back of material inflows, but we expect a short-term pause in these dynamics ahead of key risk events. David Folkerts-Landau, Group Chief Economist 3 The House View, 18 October 2016 – Politics take centre stage 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 Editors: Marcos Arana, Aditya Bhave, Matthew Luzzetti, Rajni Thakur Table of contents Introduction 4-boxes Total returns Macro update Global growth Outlook for US, Europe, and China Monetary policy A new framework? Outlook for ECB, BoJ and Fed Politics US election Brexit European political risk Markets Summary of market views Recent market drivers FX, rates, EM, credit and equity views Research Deutsche Bank The House View – 18 October 2016 thehouseview@list.db.com http://houseview.research.db.com Fed: November hike almost fully ruled out; expect hike in December, and very cautious cycle thereafter ECB: easing bias. 9-12 month QE extension in Dec.; further deposit rate cuts unlikely. Taper talk unfounded BoJ: introduced 10Y yield target. Additional easing could involve rate cuts, but substantial cuts unlikely BoE: aggressive easing post-Brexit may be premature. Expect further rate cut around year-end if data weaken PBoC: return to easing in H1-2017 EM: easing bias in Asia, CEEMEA (ex- South Africa). LatAm picture less uniform Sluggish global growth outlook. 2016 at 3.0%, slowest pace post-crisis, rising modestly into 2017 to 3.4% US growth subdued and well below recent years’ trend. 2016 at 1.3%, half the rate in 2015. Growth should rise moderately in coming quarters Downbeat view on eurozone recovery. Growth resilient in 2016 at 1.6%, but set to slow in 2017 as Brexit adds to existing downside risks EM outlook similarly subdued, but signs of bottoming across several major economies. Expect some acceleration next year in LatAm and CEEMEA Politics: taking centre stage, political uncertainty high over next 12 months. US election unlikely to have substantial impact on macro or markets Policy rethink: increasing recognition of reduced impact of additional monetary easing, but little to expect from fiscal stimulus, structural reforms Brexit: hard Brexit increa