The House View

Research Deutsche Bank Deutsche Bank Research The House View 23 June 2015 DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 124/04/2015 Research Deutsche Bank thehouseview@list.db.com The House View – 23 June 2015, http://houseview.research.db.com Bloomberg, 18 June 2015 Month in Review 2 WSJ, 11 June 2015 Bloomberg, 11 June 2015 WSJ, 17 June 2015 FT, 17 June 2015 FT, 19 June 2015 WSJ, 10 June 2015 FT, 03 June 2015 FT, 15 June 2015 BBC, 03 June 2015 WSJ, 07 June 2015 BBC, 08 June 2015 WSJ, 22 June 2015 Research Deutsche Bank thehouseview@list.db.com The House View – 23 June 2015, http://houseview.research.db.com The House View – 23 June 2015 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, Simone Baur, Wolf von Rotberg, Rajni Thakur Greece negotiations at last took a turn for the better, leading to a substantial relief rally as the prospect of Grexit diminished. The next step is to get the agreement approved in Greece; while we expect this to be completed in the next few weeks, the process may be noisy and result in a change in government coalition. In a repeat of prior years’ experience, global growth expectations have been marked down following a weak start to the year – but growth momentum is no longer slowing. The cyclical recovery in Europe stands out as the undeniable positive story this year, even if scope for further upside is now limited. In the US, the rebound in macro data confirms that the recovery remains intact and we expect 3% growth in the next few quarters. In China, the structural slowdown in growth continues, but recent fiscal and monetary easing will support short-term growth and the risk of a sharp deceleration has abated. EM more generally continue to disappoint as most major economies fail to gain traction. With uncertainty about the outlook for growth, global central banks have maintained a dovish bias. But central bank divergence will be a key theme in the second half of 2015 with the Fed taking a first step in normalising policy later this year while the ECB and BoJ commitment to easing remains. This macro and monetary policy uncertainty, in a world where trading liquidity has become a concern, has made markets more difficult this year. Markets have retreated or moved without clear direction over recent weeks, with several asset classes including equities and rates giving back earlier year gains. The current market environment is likely to persist, with volatility episodes increasingly likely. However, we don’t expect a material correction across the board given that fundamentals remain positive. In a special section this month, we highlight key research themes and trades that follow from our view of improving global growth and increasingly divergent monetary policies. David Folkerts-Landau, Group Chief Economist 3 Research Deutsche Bank thehouseview@list.db.com The House View – 23 June 2015, http://houseview.research.db.com Fed: first hike still expected in 2015, most likely Sep but likelihood of Dec has risen. Hiking cycle to be gradual; market pricing of hikes remains too conservative ECB: fully committed to QE until inflation target is met. Too early to consider change in tone / communication BoJ: on hold; more easing only if inflation worsens BoE: on hold, first hike in Q2-2016 PBoC: in easing cycle. Expect two further rate cuts in 2015, reducing short-term risk of sharp slowdown EM: easing in Asia contrasts with end of easing / start of tightening cycles in Latin America and CEEMEA Crisis returns to Europe: political risk overshadows the ECB QE. Grexit occurs and spurs significant contagion to other peripheral countries. Slow pace of reforms Sharp market corrections / volatility episodes EM crises, driven by China slowdown, stronger dollar and rising rates China hard landing: sharper contraction of domestic demand due to fiscal drag, weakening property spend Prolonged US slowdown Geopolitical risk: rise in tensions derails world economy Global growth of 3.2%, similar to 2014. EM slowdown offsets Eurozone, Japan recovery. 2016 at 3.8% US growth of 2.2% for 2015 (broadly on par with 2014). Q1 contraction likely to be revised to zero; data have rebounded and fundamentals are solid for growth pick-up into H2-2016 at 3.0% Eurozone growth at 1.4-1.6% in 2015-16. Recovery is robust, though scope for upside surprise is now limited EM growth to slow to 4.3%, rebounding in 2016. Region to continue to disappoint, as major EM economies (except India) fail to gain traction Greece: expect agreement to be reached and approved in coming weeks, no Grexit. Process may be noisy and result in change in Greek government coalition. I