Deutsche Bank

Research

The House View

Snapshot

Macro views

World

United States

Eurozone

China

Global growth of 3.0 per cent in 2016, the slowest pace post crisis yet only modestly below 2015. Risks
are tilted to the downside given overall level of macro uncertainty in Europe, China and the US.
Growth is expected to rebound to 3.3 per cent in 2017, led by an acceleration in EM, while growth in
DM economies is expected to remain flat.
US economy losing momentum as weak GDP has been driven by declining productivity. Growth
expected to be 1.3 per cent in 2016, compared to 2.6 per cent in 2015.
Consumer spending has rebounded but is currently the only engine of growth. This sector, along with
housing, should anchor improved growth by year-end as drags from inventories, trade and capex fade.
Weak external demand, due to dollar strength and subdued global growth, and weak business
investment (especially but not limited to energy capex), will weigh on the economy through year-end.
Recent discourse has focused on the decline in potential growth and the neutral real short-term rate.
The labour market remains strong as it nears full employment. Inflation has stabilized slightly short of
the Feds target: Housing inflation is strong but healthcare and core goods inflation are weak.
Europe is cyclically challenged, structurally vulnerable and packed with political event risk. We have
marked down our expectations for eurozone growth into 2017, as Brexit shock adds to pre-existing
downside risks from high political uncertainty, a less supportive fiscal stance and the risk of rising oil
prices. But risks remain tilted to the downside: although we expect bank lending to the economy to
expand, bank stress could challenge this view and weigh further on growth.
Financial conditions have in general been robust to the Brexit shock. However, trade could be a
headwind to eurozone growth due to weak demand from the UK and the appreciation of the euro not
only vis-a-vis the pound but also on a trade-weighted basis.
The political agenda remains charged for the next 12-18 months, pointing to little progress on structural
reform and eurozone integration. As a result, the economy will be vulnerable to shocks and reliant on
monetary stimulus. Long-term structural issues remain unaddressed and will weigh on growth.
Economic momentum is slowing as the countrys policy stance has shifted from aggressive easing to
neutral. Growth of 6.7 per cent yoy in the first half of the year was stronger than expected, but should
decelerate in the second half to below 6.5 per cent, which should prompt a new round of policy easing.
Softening growth prospects are being led mostly by domestic factors, especially a cooling property
market and weak private investment.
We expect the gradual structural deceleration to continue, but risks are tilted to the downside. Risk of a
sharp slowdown (a hard landing) has risen, amid mounting concerns of unsustainable debt.

Growth outlook remains sluggish, but there are signs of bottoming across several large economies, and
growth differentials vs. DM are increasing mildly. Political dynamics have improved in LatAm, but they
remain challenging in some other countries.
EM benefited from the recovery in commodity prices, a subdued dollar amid an outlook for a shallow
Fed hiking cycle and low DM yields which led to improved sentiment and inflows into EM assets.
Emerging Markets Private deleveraging still has a long way to go with still-elevated levels of corporate and household
debt. Most sovereigns are not a concern, given higher reserves, lower debt, stronger current accounts,
and cheaper and more flexible currencies. Subdued credit risks, with few exceptions, may suffice to
continue to attract foreign capital.

Monetary
Policy

Key risks

Fed: expect December hike but August jobs report crucial. Recent rhetoric has kept September in play.
ECB: easing bias; expect 9-12 month QE extension. No rate cuts as they would further pressure banks.
Bank of Japan: easing bias but only modest further easing expected: one more rate cut by year-end.
Bank of England: eased aggressively post-Brexit with a comprehensive package (i.e., rate cut, cheap
bank funding, and sovereign and corporate QE). One more rate cut expected by year-end.
Peoples Bank of China: expect return to policy easing in H2 with two RRR cuts and one rate cut.
EM: easing bias in Asia, CEEMEA (with South Africa and Russia on hold for now) contrasts with a
delayed easing cycle in Brazil and tightening bias in Mexico and Colombia

[email protected]
[email protected]

China stress, either from substantially weaker growth or simply fears thereof.
Sharp market correction / volatility, triggered by a reassessment of Fed hiking cycle, China uncertainty.
Shock to growth in Europe, e.g., larger negative macro impact from Brexit or deepening of bank stress.
Corporate credit crisis, wave of defaults as rising dollar hurts EM corporates and US HY.
[email protected]
[email protected]

[email protected]
31 August 2016
http://houseview.research.db.com

Deutsche Bank AG/London

The views expressed above accurately reflect the personal views of the authors. The authors have not and will not receive any
compensation for providing a specific recommendation or view. Investors should consider this report as only a single factor in
making their investment decision. Prices are current as of the end of the previous trading session unless otherwise indicated
and are sourced from local exchanges via Reuters, Bloomberg and other vendors.
FOR OTHER IMPORTANT DISCLOSURES PLEASE VISIT HTTP://GM.DB.COM MCI (P) 057/04/2016.

The House View: Snapshot (Continued)

31 August 2016

Key themes

Market views

Policy rethink: focus shifting away from monetary policy to fiscal policy as principal lever of support for
economic growth, as the former is reaching its limits. While this shift is welcome, the boost to global
growth from the most probable fiscal packages (in Japan, the US, the eurozone, the UK, Canada and
EM) is unlikely to be a game changer.
Italian banks: European banks have unresolved asset quality issues on their balance sheets, but are
struggling to raise capital (internally or externally) given slow growth, negative interest rates and market
pressure. Italian banks under most scrutiny given the combination of large NPLs and political
uncertainty. Political constraints mean a systemic solution is unlikely in Italy, let alone Europe; expect
instead de minimis solution for the most affected large Italian bank(s).
Brexit: expect several years of uncertainty regarding future UK-EU relationship, which will weigh on
growth. See scope for a workable compromise that would have UK keep material preferential access to
the single market while gaining some control over immigration.
Political risk: policy uncertainty to remain high over next 12-18 months, with Italian referendum and US
election in Q4 2016, followed in 2017 by Dutch, French and German elections. Domestic politics to
influence policy and foreign stance. Expect no adverse results, but risks will linger.
Cautious risk view after the recent rally, with no upside expected in US and European equities through
year-end. Market has so far been complacent about potential macro risks (e.g., Fed rate hikes, China FX
depreciation, Brexit).

Rates

US: scope for curve to flatten. Short-end rates to be driven by near-term Fed policy, while demand from
Europe and Japan, and lower terminal fed funds rate estimates, to continue to weigh on long-end rates.
Europe: Bunds to remain range bound in the near term. The markets are expected to continue to price
additional QE via a search for yield.

FX

Equities

Cautious following recent rally; see no upside through year-end in US and modest downside in Europe.
Earnings growth to remain sluggish, as renewed dollar strength, low interest rates, and possible oil
weakness weigh on US stocks, while macro risks in Europe are tilted to the downside.
Brexit, US presidential election limit multiple expansion. Europe equities to underperform US.

Credit

Europe: ECB bond buying to keep European credit well bid.

US: credit continues to perform well, with HY noticeably outperforming IG in recent weeks. However,
we still favour higher-quality credit (i.e., IG over HY).

EM

EM assets have rallied, helped by some evidence of a bottoming in activity, tame volatility, lower core
yields and inflows amid a search for yield. Extremely accommodative monetary policy environment to
continue supporting EM.
Flows into EM credit have been particularly strong.
Increased correlation with US equities and election noise are important risks. This applies to EMFX,
where we see pricing aligned with DXY and US equities.

Dollar strength to resume as market prices more Fed rate hikes.

Sterling: Brexit adds to already weak fundamentals; uncertainty to hurt inbound FDI.
Euro to grind lower, as market re-prices Fed rate hikes and dovish ECB encourages large outflows.
Yen to remain supported by resilient real rates on low inflation expectations.

Key macro and markets forecasts

GDP growth (%)
Global
US
Eurozone
Germany
Japan
UK
China

2014
3.3
2.4
0.9
1.6
-0.1
3.1
7.3

Central Bank policy rate (%)

2015 2016F 2017F
3.2
3.0
3.3
2.6
1.3
1.7
1.6
1.6
1.1
1.7
1.9
1.0
0.6
0.5
0.9
2.2
1.7
0.9
6.9
6.6
6.5

Current Q4-16F Q4-17F Q4-18F

#N/A
#N/A
#N/A
#N/A
US
0.38
0.63
1.13
1.63
Eurozone
0.00
0.00
0.00
0.00
#N/A
#N/A
#N/A
#N/A
Japan
-0.10
-0.20
-0.20
-0.20
UK
0.25
0.10
0.10
0.10
China
1.50
1.25
1.25
1.00

Key market metrics

Current Q4-16F Q4-17F Q4-18F
US 10Y yield (%)
EUR 10Y yield (%)
EUR/USD
USD/JPY
S&P 500
Stoxx 600
Oil WTI (USD/bbl)
Oil Brent (USD/bbl)

1.57
-0.07
1.116
103.4
2,169
344
44.7
47.0

1.25
-0.05
1.05
94
2,150
325
48
50

1.25
0.30
0.90
94
2,350
345
55
57

1.50
0.60
1.00
92
#N/A
#N/A
#N/A
#N/A

Current prices as of 31-Aug-2016

DB_TheHouseView_Snapshot_2016-08-31_1472678331497

Page 2 of 2