16 October 2014 Economics Research The UniCredit Weekly Focus Economics, FI/FX & Commodities Research Credit Research Equity Research Cross Asset Research “ No. 124 16 October 2014 The importance of “market power and regulation” ” – Focus: The Royal Swedish Academy of Sciences announced that the French economist Jean Tirole was awarded the Nobel Prize in Economics for his work on market power and regulation. According to the award announcement, Mr. Tirole’s work has provided regulators and competition authorities with “a whole new set of tools". This week’s Weekly Focus looks at Mr. Tirole’s work through the lens of banking regulation, which has been a hot topic recently. – Preview: The preliminary PMIs for October will likely point to an ongoing loss of growth momentum in the eurozone, in line with our expectations of GDP standstill in 4Q (+0.1% qoq). The BoE releases the minutes of its October meeting. We expect the vote in favor of keeping the Bank Rate at 0.5% to remain 7-2 based on insufficient inflationary pressure and the fact that increased downside risks to growth have increased in the last few months. – Review: Eurozone industrial production contracted heavily in August, largely driven by a big setback in Germany. As financial markets are showing their worst performance in a long time, we want to highlight that the world is not coming to an end – quite the contrary! According to the Fed’s Beige Book on the US economy, “reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book.” Even more importantly, “several Districts noted that contacts were generally optimistic about future activity.” On Wednesday, the Italian government approved the Stability Law for 2015, which encompasses a bold set of measures envisaging lower taxation on households and firms, backed, for the main part, by cuts to public spending. Editor: Dr. Martina von Terzi, Economist (UniCredit Bank) 16 October 2014 Economics & FI/FX Research Weekly Focus The Focus of the Week Nobel Prize in Economics: The importance of “market power and regulation” Ŷ Ŷ Ŷ Jean Tirole – for his work on market power and regulation – was to be awarded the Nobel Prize in Economics and we briefly explain the reasons for it. Tirole’s theory applied in practice – in several areas, including banking regulation. Banking regulation has been a hot topic over the last couple of years. We provide a brief summary of recent developments. Introduction The Nobel Memorial Prize in Economic Sciences, established in 1968 and endowed by Sweden's central bank, on the occasion of the bank's 300th anniversary, is an award for outstanding contributions to the field of economics. Although it’s not one of the Nobel Prizes established in the will of Alfred Nobel in 1895, it is identified with them, and prizes are announced with and awarded at the same ceremony. On Monday, 13 October, it was announced that the French economist Jean Tirole was to be awarded the Nobel Prize in Economics for his work on market power and regulation. Not only is he, at age 61, six years younger than the average age of Nobel economics laureates, but he is the first European economist since late 1980s to be awarded this prize (as a single author). Jean Tirole made important theoretical contributions in a number of areas, but most of all he has clarified how to understand and regulate industries with a few powerful firms – exactly the topic high up on the European agenda. According to the award announcement by the Royal Swedish Academy of Sciences, Jean Tirole’s work provides regulators and competition authorities with “a whole new set of tools". This inspired us to look in more detail at the winning piece and the lessons to be learned from it. To regulate or not to regulate? Many industries are dominated by a small number of large firms or a single monopoly. Left unregulated, such markets often produce socially undesirable results - prices higher than those motivated by costs, or unproductive firms that survive by blocking the entry of new and more productive ones. Governments and regulators often use simple rules such as price ceilings for companies with a monopoly and co-operation banns between competitors. Jean Tirole showed, that under some conditions, doing so can do more harm than good. Regulatory decisions with respect to what activities should be conducted as public entities and which should be left in “private hands” are relevant but always difficult. This is true no matter whether applied to infrastructure industries, education, healthcare or banking. In general, there are two difficulties which regulators face. First, most markets are dominated by a few firms that all have an influence on prices, volumes and quality. Oligopoly (as this market status is called), as common as it is, is difficult to study, much more complicated than a single monopoly or perfect competition which traditional economic theory deals with. Strategic planning by oligopolistic companies needs to take into account the likely responses of other market participants. Here, behavioral economics, game theory and contract theory come into interplay. Second, the regulatory authority lacks information about the firm’s costs and the quality of the goods and services it delivers. Asymmetric information provides regulated firms often with a competitive advantage. Time relevance plays a role here as well. Like we all know, regulators are often blamed for reacting too late and too inaccurately. That’s also a reason why regulations are becoming more lengthy and cumbersome. The more the global and complex the world is, the more time consuming it is to agree on the regulatory norms. Did Jean Tirole manage to solve this vicious circle? UniCredit Research page 2 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus To start with, Tirole’s research proved it wrong to look for general principles that would apply to every industry. He showed that price caps for monopolists and prohibiting cooperation between competitors in the same market while permitting the latter for firms in different positions in the value chain can work well in some conditions, while they do more harm than good in others. For example, depending how price ceilings are determined, they might either provide dominate firms with strong motives to reduce costs, but they also may lead to excessive profits. A merger of competitor companies may lead to more rapid innovation but it may also distort competition. Together with his colleague, Jean-Jacques Laffont, he demonstrated how asymmetric information problem can be circumvented by a clear set of production contracts, letting the firms choose out of self-interest. Time-frame for regulation, a long-term contract or a series of short-term contracts, as well as the optimal reward system were also discussed. This theory, applied to a range of issues, was summarized in a book on procurement and regulation, published in 1993, which had a great impact in practice, which the next section will summarize. Tirole’s knowledge applied 1. Modeling the interconnectedness of banks and the case for regulation. Results – while decentralized interbank markets are prone to systemic crises, decentralized interbank markets encourage peer monitoring across banks. This benefit is undermined when governments are expected to bail out failing banks ex post, since an anticipated bailout makes it less worthwhile for a bank to monitor its counterparties ex ante. The paper analyzes various regulatory mechanisms to deal with this problem, and foresees many of the problems that would eventually hit the financial system in the 2008 crisis. 2. Comparison of properties of different clearing and settlement systems, which have been at the forefront of financial regulation in the aftermath of the financial crisis. The analytical framework suggests the possibility of safeguarding the flexibility of interbank mutual overdraft facilities while improving current systems through three measures: 1. a reinterpretation of bilateral debit caps as bilateral credit lines, so as to escape the rigidity of the "double coincidence of wants", 2. the use of a broader definition of mutual overdraft facilities encompassing other forms of short-term lending between banks, and 3. a centralization of the bilateral credit lines and transactions in a gross payment system, so as to allow the central bank to better monitor positions and to avoid being forced to intervene to prevent systemic risk. 3. Consumer interests - in their book, The Prudential Regulation of Banks (1994), Dewatripont and Tirole focused on another problem: many bank lenders, such as depositors, are too small and dispersed to exercise any control over the bank. Thus, the role of regulation is to represent the interests of these lenders, exercising control over banks and mitigating excessive risk-taking by bank managers. Dewatripont and Tirole used a financial-contracting framework to analyze optimal regulation regarding solvency rules, recapitalizations, accounting, and securitization. 4. Collective risk taking - Farhi and Tirole (2012a) showed that financial institutions may, collectively, use too much short-term debt and engage in correlated investment strategies. The reason is that this makes it more likely that a certain bank will be bailed out in case of failure, because other banks will have problems at the same time. Put differently, the choices of leverage and risk taking by different financial institutions are strategic complements, exacerbating the risk of systemic crises. Based on this insight, Farhi and Tirole derived optimal regulatory policies, contrasting interest-rate policies (i.e., lower interest rates in a crisis to facilitate refinancing) and transfer policies (i.e., direct transfers to financial institutions in a crisis). Optimal policies involve ex ante liquidity requirements as well as interest-rate policies, despite the latter having distortionary costs. They also provided a rationale for so-called macro-prudential regulation, where optimal regulatory interventions are based on the status not only of individual financial institutions but also of the financial system as a whole. These insights have important consequences, from banks choosing to correlate their risk exposures to the need for macro-prudential supervision. UniCredit Research page 3 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus 5. Exit from financial crises - Tirole (2012) asked how one may “jump-start” a financial market in a crisis. Crises are typically triggered by adverse news about the value of financial assets, like the negative shock to the perceived value of U.S. mortgage-backed securities in the 2008-09 crisis. Due to adverse selection, small adverse news can completely freeze up the market for financial assets. As a bank has better information about its own assets when it tries to sell assets to finance necessary investments, this may lead other market participants to believe that it has inside information about its assets being of low quality. When the market price of bank assets falls, banks with high-quality assets find selling their assets to finance investments less worthwhile. As a result, the asset market dries up, banks are not able to finance their investments, and the financial system cannot restore its solvency. To counter such developments, many regulators (including the Federal Reserve and the ECB) have intervened in asset markets, offering to buy bank assets. This is costly to taxpayers, however, since banks with low-quality assets have the largest incentive to take advantage of this offer. Tirole derived the optimal policy for dealing with the problem: to buy back the weakest assets, and then provide financing to banks with assets of intermediate quality, while retaining these assets on the firms’ balance sheet. This leaves only the highest quality assets for trade, which restores the functioning of markets. Banking regulation As mentioned above, the effective regulation of financial institutions – and the failure thereof – has been a hot topic high on the political agenda over the last couple of years. This is understandable since highly leveraged and interconnected financial institutions pose a material systemic risk with potentially severe consequences for our societies. Just bear in mind the explosion of public indebtedness, for example, in Ireland as a consequence of bank bailouts, which brought the country’s debt/GDP ratio from the lowest end of the European range towards the upper end in just a few years. Even at this very moment, one of the hottest topics in European markets – the outcome of the Asset Quality Review and the EBA-stress test – are obviously closely related to regulatory initiatives. However, these initiatives have widespread implications beyond financial markets, affecting the real economy and all of our everyday life. In the following, we want to summarize some of the recent key developments in bank regulation and highlight the wider economic consequences. However, this overview has to be very superficial, as financial regulation is anything but simple and which with each additional and necessary layer becomes more and more complex. Regulating a complex market requires complex rules. This is one of the practical conclusions of Jean Tirole’s academic work. The simple rulebook – often demanded by some – is not expedient. This can be confirmed by the Basel rulebooks. The first Basel (Basel I) published at the end of the 1980s had 60 pages in total. Basel II, which was finally published in 2004 had already 350 pages, while the new Basel III framework (which is an extension to Basel II) has already 500 pages. Moreover, there was also the quick crisis response called Basel II.5 in 2009. The two key quantities that are subject to regulation in the financial industry are capital and liquidity, in order to safeguard leveraged financial intermediaries to withstand a downturn and have sufficient liquidity to satisfy discretionary cash outflows. One of the key concepts in order to quantify capital requirements in banks – Risk-Weighted Assets (RWA) – was already established in the Basel I framework in 1988. The rules required banks to hold a minimum capital buffer of 8% of RWA and provided some definitions regarding the quality of the eligible capital. The next level – Basel II – established a new regime with three pillars: minimum capital requirement, supervisory review and disclosure. Moreover, the capital requirements covered not only credit risk via RWAs (the key focus of Basel I), but also market and operational risks. Moreover, it also provided more detailed rules regarding the derivation of the risk-weights. This rating-based approach (if implemented by using external credit ratings) is one of the (only) two areas in financial markets where official rules refer to ratings from credit rating agencies. The other area is the eligibility criteria for collateral in the ECB’s open market operations. UniCredit Research page 4 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus The Basel reform package from 2009 (a.k.a. Basel II.5) added, among other things, enhanced securitization rules (which had severe implications for the ABS market and are now partly seen a bit more critical, as the ECB aims to revive the securitization market with its recently announced ABS purchasing program), new criteria for hybrid capital instruments, stronger capital requirements for trading books and rules for bank remuneration policies. Last but not least, Basel III brought quantitative and qualitative requirements for eligible capital (resulting in the recent CoCo/AT1 issuance wave by banks), established additional capital buffers (including a buffer for systemically relevant banks), implemented liquidity and leverage ratios and introduced the credit-value adjustment (CVA) in order to cope with counterparty risk in derivative positions. For a more detailed summary, please refer to the summary table on Basel II provided by the BIS. The chart 1 below shows the timeline for the capital requirements as a consequence of the new Basel III framework up until 2019, when the final requirements need to be implemented. On top of the Core-Tier 1 (CT1) requirement of 8%, there will be a capital conservation buffer of 2.5%, a countercyclical buffer (0-2.5%) and a systemic buffer of up to 5%. See also link for more details regarding the phase-in arrangements. CHART 1: TIMELINE FOR THE DEVELOPMENT OF CAPITAL REQUIREMENTS 18.0% 16.0% 14.0% 12.0% Systematic buffers (CET1) Countercyclical buffer (CET1) Capital conservation buffer (CET1) Tier-2 Additional Tier-1 Common equity Tier-1 5% 3.75% 2.5% 2.5% 1.875% 10.0% 1.25% 0.625% 0.625% 8.0% 1.25% 1.25% 1.875% 2.5% 2% 2% 2% 2% 2% 1.5% 1.5% 1.5% 1.5% 1.5% 4% 4.5% 4.5% 4.5% 4.5% 4.5% 2014 2015 2016 2017 2018 2019 2.5% 6.0% 1.5% 4.0% 2.0% 0.0% Source: CRR, UniCredit Research In addition to these increasing capital requirements, the timeline of upcoming regulatory milestones includes the results of the AQR/stress test (due on 26 October) followed by the fully operational Single Supervisory Mechanism (SSM) in early November and the Single Resolution Mechanism (SRM) at the beginning of next year implemented in the Bank Recovery and Resolution Directive (BRRD). Note that next year’s BRRD introduction still excludes the senior bail-in tool, which will only become effective at the beginning of 2016. Moreover, the leverage ratio should be introduced by 2018 (at the latest). SSM and SRM are two of the three pillars of the Banking Union. The third pillar is a supranational Deposit Guarantee Scheme, which is currently being debated, and for which no date has been fixed. If this looks already like an ambitious agenda, also the changes that have already been implemented non-the-least on the capital side were challenging. Before the Lehman crisis, CT1 ratios of banks were in the area of 4-5%. This compares to an average level of 16% for a selection of the largest European banks. Moreover, focusing on the even stricter definition of Common-Equity Tier1 (CET1) capital, the same selection shows a ratio of 12%. This means that, for larger banks, capital buffers increased 2-3 times over a period of slightly more than five years (and even more so when focusing on CET1). This was a substantial deleveraging effort on the banking side. UniCredit Research page 5 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus However, this deleveraging effort did not come without a price tag, also for the real economy. As the additional capital requirements in the countries hit by the financial crisis and the subsequent sovereign debt crisis were particularly high, those banking systems were very restrictive in terms of credit supply to the real economy. Moreover, as the sovereign debt crisis resulted in a renationalization of financial markets, the lack of credit availability could not be offset by cross border lending from more robust institutions in the less troubled countries. This resulted in an insufficient credit supply, in particular to the SME sector, for example in Spain and Italy, which aggravated the economic implications. Since the SME sector forms the backbone of these economies, unemployment skyrocketed as companies that were no longer able to refinance daily operations went out of business. This fragmentation of the European financial system, which was a result of a domestic focus of national supervisors, even impacted the monetary transmission channel of the ECB. To address these issues, the European Banking Union was set up, for which we will see the first two pillars (SSM and SRM) to go live over the next couple of weeks. And as we have outlined above, more initiatives are scheduled over the next few years. Among them, there is one buzz word that will be crucial in particular for financial investors, namely the Fundamental Review of the Trading Book (a.k.a. FRTB). In it, authorities will provide more detailed rules for capital requirements in banks’ trading books – and certainly, the requirements will be increased. However, the efforts of the last few years already are bearing fruit. By significantly strengthening capital and liquidity buffers, our banking system is much more robust to systemic risks. This could already be confirmed in price action in bank bonds over the course of the year, which was filled with headlines that would several years ago most probably have resulted in a major spread blowout, such as the Russian-Ukrainian conflict, the selloff in EM and HY debt or the developments surrounding Hypo Alpe Adria or Banco Espirito Santo. Besides some short-term spread volatility, nothing really dramatic happened in the overall bank debt market. The intended mechanisms to isolate troubled banks and to keep the banking system robust with respect to external shocks are working. Concluding remarks There are no general principles which apply to every industry. The world is complex and as such requires complex rules. Simple regulation doesn’t exist. Thanks to Jean Tirole’s thorough and carefully research examining peculiarities of different markets and applying new analytical methods in economics, we know more about how to regulate effectively and efficiently for the benefit of all citizens. He managed to give his sophisticated theoretical contributions great practical significance. For that reason, he surely deserves his award, which will be presented on 10 December. Dr. Martina von Terzi, Economist (UniCredit Bank) +49 89 3781 3013 [email protected] Dr. Philip Gisdakis Strategist (UniCredit Bank) +49 89 37813228 [email protected] Links and further reading: 1. The official website of the Royal Swedish Academy of Sciences, http://kva.se and http://nobelprize.org 2. Scientific background: http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2014/advanced-economicsciences2014.pdf 3. Popular science background: http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2014/popular-economicsciences2014.pdf 4. http://mitpress.mit.edu/books/prudential-regulation-banks 5. International regulatory framework for banks (Basel III): http://www.bis.org/bcbs/basel3.htm 6. Rochet, J-C. and J. Tirole (1996a). Interbank lending and systemic risk. Journal of Money, Credit and Banking 28, 733-762. 7. Rochet, J-C. and J. Tirole (1996b). Controlling risk in payment systems. Journal of Money, Credit and Banking 28, 832-862. 8. Tirole, J. (2012). Overcoming adverse selection: How public intervention can restore market functioning. American Economic Review 102, 29-59. UniCredit Research page 6 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus ANNEX Year Laureate Country Rationale / Analysis / Contribution 1969 Frisch, Tinbergen NO, NL dynamic models, analysis of economic process 1970 Samuelson US static and dynamic economic theory 1971 Kuznets US economic growth 1972 Hicks, Arrow UK, US general economic equilibrium theory, welfare theory 1973 Leontief US input-output method 1974 Myrdal, Hayek SE, UK money and economic fluctuations, economic, social and institutional interdependence 1975 Kantorovich, Koopmans RU, US optimum allocation of resources 1976 Friedman US consumption analysis, monetary history and theory; stabilization policy 1977 Ohlin, Meade SE, UK theory of international trade and capital movements 1978 Somin US decision-making process within economic organizations 1979 Schultz, Lewis US, UK economic development research - developing countries 1980 Klein US econometric models, economic fluctuations policies 1981 Tobin US financial markets - expenditure decisions, employment, production and prices 1982 Stigler US industrial structures, functioning of markets and causes, public regulation 1983 Debreu FR rigorous reformulation of the theory of general equilibrium 1984 Stone UK development of systems of national accounts 1985 Modigliani IT saving and financial markets 1986 Buchanan US economic and political decision-making - contractual and constitutional bases 1987 Solow US theory of economic growth 1988 Allais FR theory of markets and efficient utilization of resources 1989 Haavelmo NO probability theory foundations of econometrics, simultaneous economic structures 1990 Markowitz, Miller, Sharpe US financial economics 1991 Coase UK transaction costs and property rights 1992 Becker US human behaviour and interaction, including non-market behaviour 1993 Fogel, North US applied economic theory, quantitative methods 1994 Harsanyi, Nash, Selten US, DE theory of non-cooperative games - analysis of equilibria 1995 Lucas US rational expectations, macroeconomic analysis, economic policy 1996 Mirrlees, Vickrey UK, US economic theory of incentives under asymmetric information 1997 Merton, Scholes US new method to determine the value of derivatives 1998 Sen IN welfare economics 1999 Mundell CA monetary and fiscal policy under different FX regimes, optimum currency areas 2000 Heckman, McFadden US selective samples and discrete choices 2001 Akerlof, Spence, Stiglitz US markets with asymmetric information 2002 Kahneman, Smith US decision-making under uncertainty, alternative market mechanisms 2003 Engle, Granger US, UK time series with time-varying volatility (ARCH) and common trends (cointegration) 2004 Kydland, Prescott NO, US dynamic macroeconomics, business cycles theory 2005 Aumann, Schelling IL, US game theory - conflict and cooperation 2006 Phelps US intertemporal tradeoffs in macroeconomic policy 2007 Hurwicz, Maskin, Myerson US design theory 2008 Krugman US trade patterns and location of economic activity 2009 Ostrom, Williamson US economic governance - the commons and boundaries of the firm 2010 Diamon, Mortensen, Pissarides US, CY markets with search frictions 2011 Sargent, Sims empirical research on cause and effect in the macroeconomy US 2012 Roth, Shapley US theory of stable allocations, practice of market design 2013 Fama, Hansen, Shiller US empirical analysis of asset prices 2014 Tirole FR analysis of market power and regulation Source: UniCredit Research UniCredit Research page 7 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus The Week Ahead Eurozone: October PMIs likely pointing towards ongoing loss of growth momentum Next Thursday, the preliminary PMIs for October will likely point to an ongoing loss of growth momentum in the eurozone, in line with our expectations of GDP standstill in 4Q (+0.1% qoq). We see the manufacturing PMI down to 49.9 from 50.3, and the services counterpart to 51.5 from 52.4. Overall, the Composite PMI is expected to ease by 0.7 points to 51.3 – the lowest level since December 2013. On a country level, we expect German manufacturing PMI to recover part of last month's decline and increase slightly to 47.1 in October from 49.9 in September. The main factors weighing on growth remain geopolitical uncertainty, economic sanctions on and by Russia, and weak emerging economies. The initial benefit from EUR depreciation may only partly offset these headwinds. In the last few days, financial market tensions have clearly increased, but it is probably too early to see this reflected in the upcoming PMIs. BoE: MPC minutes to focus on inflation fall and growth headwinds The BoE releases the minutes of its October meeting on Wednesday, 22 October. We expect the vote in favor of keeping the Bank Rate at 0.5% to remain 7-2, with Ian McCafferty and Martin Weale continuing to vote for a 25bp hike. The news of the month would have bolstered the view of most members that there is insufficient inflationary pressure (the governor would have received a pre-release of the fall in inflation to 1.2%) to warrant an immediate hike and that the downside risks to growth have increased in the last few months. Other Major Events & Data Releases ITALY CONSUMERS REMAIN CAUTIOUS ISTAT consumer confidence index 125 Fri, 24 Oct, 12:00 CET ISTAT consumer confidence Total index 120 Total index (smoothed) 115 Ŷ 110 105 100 Ŷ 95 90 85 Oct UniCredit Consensus 101.9 Last 102.0 After broadly stabilizing in September, the ISTAT consumer confidence index should decline in October from 102.0 to 101.9. Consumers are becoming more cautious regarding the economic situation (mainly in terms of prospects), and to a lesser extent their own financial situation. 80 1998 2000 2002 2004 2006 2008 2010 2012 Ŷ 2014 Poor economic growth continues to take its toll on consumer sentiment and this is expected to restrain the recovery in private consumption in 3Q14. Source: Source: Istat, UniCredit Research UniCredit Research page 8 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus UK RETAIL SALES PROBABLY FLAT IN SEPTEMBER % yoy 8.0 ONS retail sales volume Thu, 23 Oct, 10:30 CET Retail sales excl. auto (% mom) BRC like-for-like sales 6.0 Ŷ 4.0 2.0 0.0 Ŷ -2.0 -4.0 -6.0 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 UniCredit 0.0 Sept Consensus Last 0.2 We expect retail sales to be flat in September following a decent run. Sales excluding automotive fuel were up a strong 4.5% yoy in August. Some consolidation is suggested by the BRC like-for-like sales index which fell to -2.1% yoy in September from +1.3% yoy in the previous month. Jan-14 3Q GDP GROWTH LIKELY TO BE STRONG AT 0.7% QOQ 3M/3M contributions to GDP growth, pp 1.2 Services Construction Industrial production Fri, 24 October, 10:30 CET GDP, % qoq Forecasts 1 Ŷ 0.8 0.6 0.4 Ŷ 0.2 0 -0.2 3Q UniCredit 0.7 Consensus Last 0.9 We expect 3Q GDP growth of 0.7% qoq when the ONS releases its preliminary estimate on Friday, 24 October. The risks are skewed towards growth of 0.6% qoq. Growth in 3Q came almost entirely from services, with manufacturing entering a slowdown and construction surprisingly shrinking 3.9% mom in August. -0.4 -0.6 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Source: ONS; BRC; UniCredit Research Dr. Martina von Terzi, Economist (UniCredit Bank) Marco Valli, Chief Eurozone Economist (UniCredit Bank Milan) Chiara Corsa, Economist (UniCredit Bank Milan) Dr. Loredana Federico, Economist (UniCredit Bank Milan) Daniel Vernazza, Ph.D., Economist (UniCredit Bank London) Edoardo Campanella, Economist (UniCredit Bank Milan) UniCredit Research page 9 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus The Week in Retrospect UK: No immediate rate hike as spare capacity closed at a slower rate and inflation fell The UK labor market is continuing to improve. The unemployment rate fell sharply to 6.0% in the three months to August, the lowest level in six years, and regular pay growth rose to 0.9%. However, there are the first signs that the rate at which spare capacity is closing will start to decline. The fall in the more timely jobless claims measure of unemployment was less than expected and significantly less than in August. Although still a sizable drop, it is the smallest monthly decline in jobless claims since April 2013 and suggests the pace of decline in the headline unemployment rate will start to ease. The fall in the unemployment rate has pushed down the medium-term equilibrium unemployment rate but not by much. Indeed, the fall in unemployment was mostly due to a reduction in short-term unemployment – the share of the fall in unemployment accounted for by the long-term unemployed was smaller than it has been over the past year. Average weekly earnings growth excluding bonuses rose to 0.9% yoy in the three months to August from an upward-revised 0.8%. The bottom for pay growth now looks very likely to be behind us and we expect the lagging indicator to pick up from here. Eurozone: IP sharply contracts in August, GDP still on track for growth in 3Q14 Eurozone industrial production contracted by 1.8% mom in August, totally reversing the 0.9% mom increase shown in July. The data breakdown showed that the IP drop was driven by a fall in the production of capital goods by 4.8%, intermediate goods by 0.7% and non-durable consumer goods by 0.2%. The production of durable consumer goods marginally increased by 0.2%, while energy production expanded by 1.2%. From a country perspective, the setback in eurozone IP was largely driven by Germany, where output ex construction was down 4.3% mom, largely due to negative calendar effects. Production in the rest of the eurozone held up much better, with France, Italy and Spain posting flat or slightly positive numbers. In general, the recent loss of growth momentum in the eurozone has been consistent with the latest deterioration of survey indicators. Nevertheless, GDP in 3Q14 remains on track for a re-acceleration (after having stagnated in 2Q14), although the August IP decline indicates downside risks to our 0.3% qoq GDP forecast for 3Q14. US: Beige Book to Financial Markets: Be Happy! As financial markets are showing their worst performance in a long time we wanted to highlight the important message from Main Street that the world is not coming to an end – quite the contrary! According to the Beige Book published on Wednesday, “reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book.” More importantly, “several Districts noted that contacts were generally optimistic about future activity.” The report is based on information collected before October 6. But have there been any fundamental changes over the past several days? We do not think so! Admittedly, this week’s US retail sales report was a bit weaker than expected; but it was the first blip in eight months. We see it as an outlier rather than the beginning of a downward trend. Along the same lines, the Beige Book emphasized that “retailers were relatively optimistic about the remainder of the year.” And why wouldn’t they be? The fundamentals for stronger consumer spending are all in place: The labor market continues to improve solidly, lower oil prices lift households’ purchasing power, and the signs of higher wage gains are mounting. While the Beige Book still characterized wage growth in a number of Districts as “modest”, it highlighted that several Districts “reported upward wage pressure for particular industries and occupations.” UniCredit Research page 10 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus The list is comprehensive and includes skilled labor in construction and manufacturing, as well as upward wage pressure for transportation workers, skilled engineers, managers, IT professionals, and bankers. New York reported that workers were more frequently leaving jobs for higher pay, while St. Louis noted increased turnover of skilled employees, who were switching to higher-paying jobs. In that context, we also wanted to highlight a study, released on Wednesday by the Cleveland Fed. While the researchers admitted the obvious that, “estimates of labor market slack can differ greatly depending on how slack is defined”, they concluded that the “disparate slack estimates are currently close to one another, suggesting the unemployment rate has almost reached its longer-run normal level.” Consequently, we remain confident that the US economy will continue to grow solidly throughout the second half of the year. If anything, the Atlanta Fed’s real time GDP tracker points to some upside risks to our 3Q14 growth estimate of 2.8%. Fed officials seem to share that constructive outlook – despite some concerns about global growth and financial market volatility. According to a report published on Bloomberg, “Fed Chair Janet Yellen voiced confidence in the durability of the US economic expansion in the face of slowing global growth and turbulent financial markets at a closed-door meeting in Washington last weekend.” Fundamentally, the market action seen over the past several days clearly seems overdone. US: industrial production jumped 1.0% in September The Federal Reserve reported on Thursday that US industrial production jumped a strong 1.0% in September, following a slightly downward revised 0.2% decline in August (was -0.1%). It is the largest monthly increase since November 2012. Manufacturing output was up 0.5% (still held back a bit by lower car production), while utilities’ and mining output rose 3.9% and 1.8%, respectively. In a separate report, the Labor Department announced that initial jobless claims declined to 264,000 in the week ending October 11. This, in turn, was the lowest level since April 2000. The less volatile 4W moving average fell to 283,500, which is also the lowest since 2000. As financial markets are seemingly facing a bumpy road, we find it important to highlight these indicators, which support our view of a healthy US economy. Wednesday’s blip in retail sales, which certainly added to the negative mood, was, in our view, merely an outlier. As mentioned above on the Beige Book, the fundamentals for a pick-up in consumption gains all remain in place: The labor market continues to improve solidly, lower oil prices lift households’ purchasing power, and the signs of higher wage gains are clear. The ongoing declines in jobless claims unequivocally corroborate that the improvement of the labor market has not stopped. Italy’s Stability Law: key takeaways On Wednesday, the Italian government approved the Stability Law for 2015. The Stability Law encompasses a bold set of measures envisaging lower taxation on households and firms (worth about EUR 18bn), backed, for the main part, by cuts to public spending (EUR 15bn). The overall size of the measures is larger than generally expected and, in the government projections, will leave the 2015 deficit at just below the 3% mark. Our initial assessment is positive. The Stability Law goes in the direction of tackling some of Italy’s main structural problems – especially the excessive tax pressure where this is most distortionary – and puts money on the table to ensure the labor market reform can bring the desired changes in terms of a shift towards permanent employment and flex security. UniCredit Research page 11 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus The main areas of uncertainty are the lack of concrete details on spending cuts, with a high risk that some of these cuts may be linear – and therefore sub-optimal from an efficiency point of view – and compliance with the SGP. Below are the highlights of the Stability Law: Ŷ Ŷ Ŷ Ŷ Ŷ Ŷ Ŷ Ŷ Ŷ The reduction of taxation for low-income households has been made permanent. This will cost about EUR 10bn on a yearly basis, and is essential to maximize the impact on consumption, reducing the risk that the tax benefit will end up boosting household savings. The exclusion of labor cost from the tax base of IRAP (regional tax on production) is highly welcome. All companies, regardless of their size, are entitled to the benefit, which will be worth EUR 6.5bn a year – the estimated cost for the government is slightly lower, thanks to the positive impact that the measure is expected to have on the economy. This is one of the boldest steps taken in the last several years to reduce the (high) tax wedge that undermines the competitiveness of Italian firms. Firms that will hire people under the “single contract” scheme envisaged by the Jobs Act – i.e. on a permanent basis without the protection of Article 18 for dismissal for economic reasons – will not pay social security contributions for three years. This bold incentive is estimated to cost the government about EUR 2bn a year, but it will be effective only after the Jobs Act is up and running. The government put on the table EUR 1.5bn for the new, more inclusive, system of unemployment benefits envisaged by the Jobs Act. Important details on spending cuts are still missing. For the time being, we know that all level of governments will have to contribute with a 3% reduction of their spending. This raises the probability that the cuts will be, for the most part, linear. The government has penciled in almost EUR 4bn of extra revenues from the fight against tax evasion, although the effective collection of these resources tends to be highly uncertain. The approval of the Stability Law by the EC cannot be taken for granted, mostly because the Italian government decided to increase the 2015 deficit target to 2.9% from 2.2% (thus freeing about EUR 11bn of resources) while postponing the balanced budget (in structural terms) to 2017 from 2015. To take into account the risk of possible opposition from Brussels, the government decided to set aside a “buffer” of about EUR 3.5bn (0.2% of GDP), which we regard as a wise move. In our view, the sound economic structure of the Stability Law, together with the acceleration of the process of structural reforms, creates some room for “indulgence” from the EC. But this is a very close call. The Stability Law also brings about the possibility for workers to have their severance payment (Tfr) being paid in advance, as opposed to when they retire or quit their job. Given that the (retained) severance payment is usually an important source of liquidity for firms, especially SMEs, the framework set up by the government envisages that banks will lend to firms the amount of the severance payment paid out to employees, and in doing so banks will enjoy state guarantee. The impact of the measure on private consumption is likely to be positive, although very difficult to estimate. The increase of the tax rate on pension funds (or second-pillar schemes in general) is negative news, because at the margin it may weaken confidence in private pension schemes and reduce their appeal. Marco Valli, Chief Eurozone Economist (UniCredit Bank Milan) Dr. Harm Bandholz, CFA (UniCredit Bank New York) Edoardo Campanella, Economist (UniCredit Bank Milan) Daniel Vernazza, Ph.D. (UniCredit Bank London) UniCredit Research page 12 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus Major Data Releases & Economic Events To Look At Next Week Date 17–25 Oct 2014 Time (ECB) Fri, 17 Oct Mon, 20 Oct Tue, 21 Oct Wed, 22 Oct Thu, 23 Oct Country Indicator/Event Consensus (Bloomberg) Previous Sep 2.7 -1.9 Period SV Slovenia Sovereign Debt Rating Published by Fitch UniCredit estimates SP Spain Sovereign Debt Rating May Be Published by Moody's 9:45 EC ECB's Constancio Speaks in Frankfurt 12:00 EC Eurostat Release First GDP Estimates After ESA 2010 Adoption 14:00 PL Industrial Production (% yoy) 14:30 US Fed's Yellen Speaks at Boston Fed Conference on Inequality 14:30 US Housing Starts (thousands) Sep 1008 956 14:30 US Building Permits (thousands) Sep 1030 1003 15:55 US University of Michigan Consumer Confidence Oct 84 84.6 0:00 EC EU Foreign Ministers Hold Meeting in Luxembourg 8:00 GE Producer Price Index, PPI (% yoy) Sep -0.8 10:00 EMU Current Account Balance (EUR bn) Aug 18.7 4:00 CH Industrial Production (% yoy) Sep 7.5 4:00 CH Real GDP (% qoq) Q3 7.2 7.5 8:00 16:00 SZ US Exports (real, % mom) Existing Home Sales (mn) Sep Sep 5.1 5.09 -0.7 5.05 14:30 US Core CPI (ex food & energy, % mom) Sep 0.1 0.2 0.01 14:30 US Consumer Price Index, CPI (% mom) Sep 0.1 0 3:35 JP PMI (Nomura) Oct 8:45 FR Business Confidence (manufacturing, INSEE) Oct 96 9:00 FR Services PMI (index) Oct 48.4 9:00 FR Manufacturing PMI (index) Oct 48.8 9:30 9:30 GE GE Services PMI (index) Manufacturing PMI (index) Oct Oct 47.1 55.7 49.9 10:00 EMU Services PMI (index) Oct 51.5 52.4 10:00 EMU Manufacturing PMI (index) Oct 49.9 50.3 10:30 UK Retail Sales (% mom) Sep 0.0 13:00 TR Repo Rate Announcement (%) 16:00 US Leading Indicators (Conference Board, % mom) SP Spain Sovereign Debt Rating Published by Fitch IT Italy Sovereign Debt Rating Published by Fitch LX Luxembourg Sovereign Debt Rating by Moody's Fri, 24 Oct 6.9 -0.2 51.7 0.2 Sep 8.25 8.25 0.7 0.2 GE Germany Sovereign Debt Rating May Be Published by Moody's AS Austria Sovereign Debt Rating May Be Published by Moody's 8:00 GE GfK Consumer Confidence 10:20 EC ECB's Praet Speaks in Milan 10:30 UK Real GDP (% qoq) Q3 0.7 0.9 12:00 IT Consumer Confidence (ISTAT, index) Oct 101.9 102 16:00 US New Home Sales (thousands) Sep Nov 8.3 473 504 *Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted UniCredit Research page 13 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus UniCredit Economic Forecasts 2013 Industrialized countries US Euro area Germany France Italy Spain Austria UK Switzerland Japan Developing countries Central & Eastern Europe Russia Poland Czech Republic Hungary Turkey Emerging Asia China Real GDP (%, yoy) 2014 2015 Consumer Prices (%, yoy) 2013 2014 2015 Budget Balance (% of GDP) 2013 2014 2015 2.2 -0.4 0.2 0.4 -1.9 -1.2 0.2 1.7 1.9 1.5 2.1 0.8 1.5 0.4 -0.2 1.2 0.6 3.0 1.5 1.0 2.7 1.2 1.6 0.8 0.7 1.6 1.6 2.3 1.6 1.5 1.5 1.4 1.5 0.9 1.2 1.5 2.0 2.6 -0.2 0.4 1.8 0.5 1.0 0.6 0.3 0.0 1.7 1.6 0.1 2.8 2.2 1.0 1.6 0.8 0.8 0.6 1.9 2.0 0.2 1.8 -7.3 -3.0 0.2 -4.2 -2.8 -6.7 -1.5 -5.9 0.0 -9.3 -6.4 -2.8 0.0 -4.4 -3.0 -5.6 -2.8 -5.0 -0.1 -8.0 -5.6 -2.6 0.3 -4.3 -3.0 -4.5 -1.5 -4.0 -0.2 -6.7 1.3 1.7 -0.7 0.0 4.0 -0.4 3.0 2.4 0.0 2.9 -0.1 3.2 2.4 0.0 2.0 6.8 0.9 1.4 0.0 7.5 7.4 0.1 0.4 0.0 9.0 6.3 0.9 1.6 0.0 6.5 -0.5 -4.3 -1.3 0.0 -1.5 0.5 5.6 -1.7 0.0 -2.7 -0.7 -3.0 -2.5 0.0 -3.3 7.7 7.1 6.9 2.6 2.3 2.9 -2.1 -2.1 -2.0 Real GDP (% qoq, sa) US (annualized) Euro area Germany France Italy Spain Austria UK Switzerland Japan Russia Poland (% yoy) Czech Republic Hungary Turkey China (%, yoy) 4Q13 3.5 0.3 0.4 0.2 -0.1 0.2 0.4 0.6 0.5 0.0 0.4 2.7 1.1 0.5 0.9 7.7 1Q14 -2.1 0.2 0.7 0.0 0.0 0.4 0.1 0.7 0.4 1.5 0.1 3.4 0.6 1.1 1.8 7.4 2Q14 4.6 0.0 -0.2 0.0 -0.2 0.6 0.2 0.9 0.2 -1.7 0.2 3.3 0.3 0.8 -0.5 7.5 3Q14 2.8 0.3 0.4 0.2 0.1 0.5 0.3 0.6 0.1 0.6 0.0 2.7 0.4 0.4 0.2 7.1 4Q14 2.8 0.1 0.1 0.1 0.0 0.3 0.2 0.6 0.2 0.5 -0.7 2.6 0.4 0.4 0.4 6.9 1Q15 2.5 0.3 0.4 0.2 0.2 0.3 0.4 0.5 0.4 0.5 -0.5 2.6 0.7 0.5 0.6 7.0 2Q15 2.5 0.4 0.6 0.3 0.2 0.4 0.5 0.6 0.6 0.4 -0.2 3.2 0.7 0.5 0.6 6.9 3Q15 2.5 0.4 0.7 0.3 0.3 0.5 0.6 0.5 0.8 0.6 0.0 3.2 0.8 0.6 0.6 6.8 4Q15 2.5 0.5 0.7 0.4 0.4 0.6 0.6 0.5 0.6 -0.8 0.6 3.6 0.7 0.7 0.7 6.8 Consumer Prices (% yoy) US Core rate (ex food & energy) Euro area Core rate (ex food & energy) Germany France Italy Spain Austria UK Switzerland Japan Russia Poland Czech Republic Hungary Turkey China 4Q13 1.2 1.7 0.8 0.8 1.3 0.6 0.7 0.2 1.6 2.1 0.0 1.4 6.4 0.7 1.1 0.7 7.5 2.9 1Q14 1.4 1.6 0.7 0.8 1.2 0.7 0.5 0.0 1.6 1.7 0.0 1.5 6.4 0.6 0.2 0.0 8.0 2.3 2Q14 2.1 1.9 0.6 0.8 1.1 0.6 0.4 0.2 1.8 1.7 0.1 3.6 7.6 0.3 0.2 -0.3 9.4 2.2 3Q14 1.8 1.8 0.3 0.8 0.8 0.4 -0.1 -0.4 1.7 1.4 0.0 3.4 7.7 -0.3 0.6 0.0 9.2 2.0 4Q14 2.0 1.9 0.5 0.9 1.0 0.5 0.2 0.0 1.6 1.4 0.2 3.1 7.9 -0.3 0.8 0.6 9.3 2.9 1Q15 2.2 2.2 0.7 1.1 1.3 0.5 0.2 0.1 1.8 1.5 0.3 3.0 7.7 0.0 1.1 1.6 7.4 3.0 2Q15 2.0 2.1 0.9 1.0 1.4 0.8 0.6 0.5 1.7 1.7 0.1 1.3 6.5 0.7 1.6 2.2 6.5 2.9 3Q15 2.3 2.4 1.0 1.1 1.7 1.0 1.1 0.7 2.0 1.8 0.3 1.2 6.0 1.4 1.8 2.3 5.6 2.8 4Q15 2.5 2.5 1.2 1.2 1.9 1.1 1.2 0.9 2.1 2.0 0.2 2.5 5.4 1.5 1.9 2.9 6.7 2.9 Source: UniCredit Research UniCredit Research page 14 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus UniCredit FI/FX & Commodity Forecasts INTEREST RATE & YIELD FORECAST (%) 2014/15 current end-4Q UniCredit Forward* end-1Q UniCredit Forward* end-2Q UniCredit Forward* end-3Q UniCredit Forward* Euro area Refi Rate 3M Euribor 10Y Bunds 0.05 0.08 0.81 0.05 0.05 1.10 0.05 0.11 0.85 0.05 0.05 1.30 0.05 0.11 0.90 0.05 0.05 1.50 0.05 0.11 0.94 0.05 0.05 1.75 0.05 0.12 0.98 US Fed Funds Target Rate 3M USD Libor 10Y Treasuries 0.25 0.23 2.13 0.25 0.35 2.70 0.25 0.26 2.21 0.25 0.40 3.10 0.25 0.30 2.29 0.50 0.75 3.30 0.40 0.40 2.35 0.75 1.00 3.60 0.65 0.55 2.42 UK Repo Rate 10Y Gilts 0.50 2.07 0.75 2.75 0.50 2.15 1.00 3.20 0.75 2.22 1.25 3.50 0.90 2.28 1.50 3.75 1.15 2.34 Switzerland 3M CHF Libor Target Rate 10Y Swissies 0.00 0.43 0.00 0.70 0.00 0.44 0.00 0.90 0.00 0.46 0.00 1.15 0.00 0.49 0.00 1.40 0.00 0.52 Russia Reference Rate 3M Money Market Rate 8.00 8.29 8.00 9.30 8.25 8.00 9.30 8.15 7.75 9.00 7.95 7.50 8.75 7.55 Poland Reference Rate 3M Money Market Rate 2.00 1.93 2.00 2.20 2.00 2.00 2.22 1.90 2.00 2.24 1.90 2.00 2.28 1.95 Czech Republic Reference Rate 3M Money Market Rate 0.05 0.04 0.05 0.35 0.05 0.05 0.35 0.05 0.05 0.35 0.05 0.05 0.35 0.05 Hungary Reference Rate 3M Money Market Rate 2.10 2.10 2.10 2.15 2.85 2.10 2.22 2.85 2.10 2.32 2.85 2.10 2.40 3.00 Turkey Reference Rate 3M Money Market Rate 8.25 10.60 7.50 8.20 8.00 7.50 8.08 7.90 7.50 8.18 8.25 7.50 8.20 8.35 EXCHANGE RATE FORECASTS 2014/15 EUR-USD EUR-GBP EUR-CHF EUR-JPY EUR-RUB EUR-PLN EUR-CZK EUR-HUF EUR-TRY USD-JPY USD-CHF GBP-USD current 1.28 0.80 1.21 136 52.39 4.23 27.55 308 2.90 106 0.94 1.60 end-4Q UniCredit Forward 1.22 1.28 0.74 0.80 1.22 1.21 137 135 51.06 47.84 4.12 4.20 27.70 27.53 308 311 3.00 3.01 112 101 1.00 0.89 1.65 1.70 end-1Q UniCredit Forward 1.26 1.28 0.75 0.80 1.23 1.21 141 135 52.17 48.74 4.10 4.22 27.60 27.51 315 312 3.07 3.06 112 101 0.98 0.89 1.68 1.70 end-2Q UniCredit Forward 1.30 1.28 0.77 0.81 1.24 1.21 147 135 52.95 49.65 4.15 4.24 27.60 27.49 310 313 3.15 3.12 113 101 0.95 0.89 1.69 1.69 end-3Q UniCredit Forward 1.32 1.28 0.78 0.81 1.26 1.21 152 135 53.66 50.58 4.13 4.26 27.60 27.46 315 314 3.23 3.18 115 101 0.95 0.89 1.70 1.69 end-4Q UniCredit Forward 1225 1240 95 85 end-1Q UniCredit Forward 1250 1246 95 86 end-2Q UniCredit Forward 1250 1246 100 87 end-3Q UniCredit Forward 1275 1247 100 88 COMMODITY PRICE FORECASTS 2014/15 Gold (USD/ tr oz) Oil Price (Brent, USD/b) current 1243 83 *Bloomberg Consensus for central bank rates UniCredit Research Source: UniCredit Research page 15 See last pages for disclaimer. 16 October 2014 Economics & FI/FX Research Weekly Focus Disclaimer Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accuracy of which we assume no liability. 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Notice to UK investors This communication is directed only at clients of UniCredit Bank, UniCredit Bank London, UniCredit Bank Milan, 8QL&UHGLW%XOEDQN=DJUHEDþNDEDQND8QL&UHGLW%DQN&]HFKLD Bank Pekao, UniCredit Russia, UniCredit Slovakia, or UniCredit Tiriac who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. Notice to U.S. investors This report is being furnished to U.S. recipients in reliance on Rule 15a-6 ("Rule 15a-6") under the U.S. Securities Exchange Act of 1934, as amended. Each U.S. recipient of this report represents and agrees, by virtue of its acceptance thereof, that it is such a "major U.S. institutional investor" (as such term is defined in Rule 15a-6) and that it understands the risks involved in executing transactions in such securities. Any U.S. recipient of this report that wishes to discuss or receive additional information regarding any security or issuer mentioned herein, or engage in any transaction to purchase or sell or solicit or offer the purchase or sale of such securities, should contact a registered representative of UniCredit Capital Markets, LLC. Any transaction by U.S. persons (other than a registered U.S. broker-dealer or bank acting in a broker-dealer capacity) must be effected with or through UniCredit Capital Markets. The securities referred to in this report may not be registered under the U.S. Securities Act of 1933, as amended, and the issuer of such securities may not be subject to U.S. reporting and/or other requirements. Available information regarding the issuers of such securities may be limited, and such issuers may not be subject to the same auditing and reporting standards as U.S. issuers. The information contained in this report is intended solely for certain "major U.S. institutional investors" and may not be used or relied upon by any other person for any purpose. Such information is provided for informational purposes only and does not constitute a solicitation to buy or an offer to sell any securities under the Securities Act of 1933, as amended, or under any other U.S. federal or state securities laws, rules or regulations. The investment opportunities discussed in this report may be unsuitable for certain investors depending on their specific investment objectives, risk tolerance and financial position. In jurisdictions where UniCredit Capital Markets is not registered or licensed to trade in securities, commodities or other financial products, transactions may be executed only in accordance with applicable law and legislation, which may vary from jurisdiction to jurisdiction and which may require that a transaction be made in accordance with applicable exemptions from registration or licensing requirements. The information in this publication is based on carefully selected sources believed to be reliable, but UniCredit Capital Markets does not make any representation with respect to its completeness or accuracy. All opinions expressed herein reflect the author’s judgment at the original time of publication, without regard to the date on which you may receive such information, and are subject to change without notice. UniCredit Capital Markets may have issued other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. These publications reflect the different assumptions, views and analytical methods of the analysts who prepared them. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is provided in relation to future performance. UniCredit Capital Markets and any company affiliated with it may, with respect to any securities discussed herein: (a) take a long or short position and buy or sell such securities; (b) act as investment and/or commercial bankers for issuers of such securities; (c) act as market makers for such securities; (d) serve on the board of any issuer of such securities; and (e) act as paid consultant or advisor to any issuer. The information contained herein may include forward-looking statements within the meaning of U.S. federal securities laws that are subject to risks and uncertainties. Factors that could cause a company’s actual results and financial condition to differ from expectations include, without limitation: political uncertainty, changes in general economic conditions that adversely affect the level of demand for the company’s products or services, changes in foreign exchange markets, changes in international and domestic financial markets and in the competitive environment, and other factors relating to the foregoing. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement This document may not be distributed in Canada. EFI e 4 UniCredit Research page 17 16 October 2014 Economics & FI/FX Research Weekly Focus UniCredit Research* Michael Baptista Global Head of CIB Research +44 207 826-1328 [email protected] Dr. Ingo Heimig Head of Research Operations +49 89 378-13952 [email protected] Economics & FI/FX Research Erik F. Nielsen, Global Chief Economist +44 207 826 1765 [email protected] Economics & Commodity Research EEMEA Economics & FI/FX Strategy Global FI Strategy European Economics Marco Valli, Chief Eurozone Economist +39 02 8862-0537 [email protected] Artem Arkhipov, Head, Macroeconomic Analysis and Research, Russia +7 495 258-7258 [email protected] Michael Rottmann, Head, FI Strategy +49 89 378-15121 [email protected] Dr. Andreas Rees, Chief German Economist +49 69 2717-2074 [email protected] Anca Maria Aron, Economist, Romania +40 21 200-1377 [email protected] Stefan Bruckbauer, Chief Austrian Economist +43 50505-41951 [email protected] Anna Bogdyukevich, CFA, Russia +7 495 258-7258 ext. 11-7562 [email protected] Tullia Bucco, Economist +39 02 8862-0532 [email protected] Dan Bucúa, Economist +44 207 826-7954 [email protected] Edoardo Campanella, Economist +39 02 8862-0522 [email protected] Hrvoje Dolenec, Chief Economist, Croatia +385 1 6006 678 [email protected] Chiara Corsa, Economist +39 02 8862-0533 [email protected] ďXERPtU.RUãĖiN&KLHI(FRQRPLVW6ORYDkia +421 2 4950 2427 [email protected] Dr. Loredana Federico, Economist +39 02 8862-0534 [email protected] Catalina Molnar, Chief Economist, Romania +40 21 200-1376 [email protected] Chiara Silvestre, Economist [email protected] Marcin Mrowiec, Chief Economist, Poland +48 22 524-5914 [email protected] Daniel Vernazza, Ph.D., Economist +44 207 826-7805 [email protected] Dr. Martina von Terzi, Economist +49 89 378-13013 [email protected] US Economics Dr. Harm Bandholz, CFA, Chief US Economist +1 212 672-5957 [email protected] Commodity Research Jochen Hitzfeld, Economist +49 89 378-18709 [email protected] Carlos Ortiz, Economist, EEMEA +44 207 826-1228 [email protected] Mihai Patrulescu, Senior Economist, Romania +40 21 200-1378 [email protected] Dr. Luca Cazzulani, Deputy Head, FI Strategy +39 02 8862-0640 [email protected] Chiara Cremonesi, FI Strategy +44 207 826-1771 [email protected] Elia Lattuga, FI Strategy +39 02 8862-0538 [email protected] Kornelius Purps, FI Strategy +49 89 378-12753 [email protected] Herbert Stocker, Technical Analysis +49 89 378-14305 [email protected] Global FX Strategy Dr. Vasileios Gkionakis, Global Head, FX Strategy +44 207 826-7951 [email protected] Armin Mekelburg, FX Strategy +49 89 378-14307 [email protected] Roberto Mialich, FX Strategy +39 02 8862-0658 [email protected] Kristofor Pavlov, Chief Economist, Bulgaria +359 2 9269-390 [email protected] Martin Rea, EM Fixed Income Strategist +44 207 829-6077 [email protected] Pavel Sobisek, Chief Economist, Czech Republic +420 955 960-716 [email protected] Publication Address UniCredit Research Corporate & Investment Banking UniCredit Bank AG Arabellastrasse 12 D-81925 Munich [email protected] Bloomberg UCCR Internet www.research.unicredit.eu *UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit Bank AG London Branch (UniCredit Bank London), UniCredit Bank AG Milan Branch (UniCredit Bank Milan), 8QL&UHGLW%XOEDQN=DJUHEDþNDEDQNDGG8QL&UHGLW%DQN&]HFK5HSXEOLF8QL&UHGLW%DQN&]HFKLD%DQN3HNDR=$28QL&UHGLW%ank Russia (UniCredit Russia), UniCredit Bank Slovakia a.s. (UniCredit Slovakia), UniCredit Tiriac Bank (UniCredit Tiriac). EFI 10 UniCredit Research page 18
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