October 17th 2014 “From Extraordinary to Ordinary” That is how my US colleague describes the Fed’s turnaround in her weekly outlook. The US central bank is returning to a more ordinary monetary policy and, in doing so, putting an end to a period of extraordinary low volatility (at least in a long-term comparison). In contrast, the European Central Bank is continuing its extraordinary policy and feeling its way towards quantitative easing. The more so as inflation expectations of market participants – that are one of the major indicators for the Central Bank – are in free fall after the latest deterioration of growth figures coming from both sides of the Atlantic. A fact, that puts the ECB under pressure towards a European styled QE. The likelihood of QE has risen, but we still stick to our base case scenario: Growth figures overall don’t indicate a recession, not to say a deflationary scenario. What we have seen at equity markets during the last few days seems to be primarily driven by the fact that markets were too complacent before and relied too much on Central Bank’s liquidity. Looking forward, investors should get used to the fact that volatility will return. That is a piece of bad news for investors who quickly need liquidity. Those, however, who can deal with higher volatility should continue to put their money into a broadly diversified mix of assets. Publications Historical lessons from Federal Reserve rate-hike cycles Conventional wisdom seems to suggest that a tightening of monetary policy should weigh on financial markets in general and risky assets in particular. The good news is that this assumption is not corroborated by historical evidence. Read more in Martin Hochstein’s latest white paper. The case of emerging market currencies The case for emerging market currencies. With emerging market currencies being markedly more attractive than two years ago, Stefan Hofrichter and Martin Hochstein come to the conclusion that it is beneficial to build up exposure to emerging market assets in the current environment. “Equities should receive support from technicals during the coming week. According to the relative-strength indices, key markets are clearly oversold by now. Higher volatility is a Chart of the week: Relative Strength Index clearly good sign as well. In the past, a higher VIX (the benchmark index for volatility) often pointed to a significant upswing.” What does this mean for the coming week? Two well-known drivers should play a major role: the reporting season and economic data. While the European reporting season has not really started yet, its US counterpart is picking up speed. During the past week, US companies whose market capitalisation is equivalent to 20% of the Source: Datastream, Allianz GI Global Capital Markets & Thematic Research , data as of October 2014 aggregate capitalisation of the S&P 500 presented their figures for Q3. This market capitalization ratio will rise to 33% during the coming week. By the end of the week, 329 companies – or 66% of the companies in the broad market index – will have announced their figures. In subsequent weeks, the number of US company reports will decline again, and attention will shift towards Europe. Fears that the five-year uptrend in US corporate earnings might not continue as before are quite understandable, particularly since the US dollar is appreciating. Fortunately, analysts have already revised their expectations downwards, which is why a deluge of negative surprises is unlikely. In fact, about 67% of the results released so far surprised to the upside. German producer prices will be the first economic data to be released on Monday. On Tuesday, Chinese industrial output and GDP figures and US existing home sales figures will be announced. On Wednesday, we will get the minutes of the Bank of England, and on Thursday, the Markit PMIs for the euro area. The Chicago Fed PMI and the US leading index as well as the HSBC PMI for China will be released on that day, too. And on Friday, the GfK consumer climate index for Germany, US new home sales and British GDP figures for Q3 will be announced. Equities should receive support from technicals during the coming week. According to the relative-strength indices, key markets are clearly oversold by now (see our chart of the week). In such a situation, sentiment often changes. However, that is certainly not exceptional. Quite the contrary: markets depend on people’s moods. Higher volatility might be seen as a good sign as well. In the past, a higher VIX (the benchmark index for volatility) often pointed to a significant upswing. Wishing you extraordinary investments Hans-Jörg Naumer Hans-Jörg Naumer Global Head of Global Capital Markets & Thematic Research Follow us on Twitter and be up to date with our latest research. Upcoming Political Events 2014 October: 23.-24. Oct. 26. Oct. 26. Oct 28-29. Oct November: Nov Nov Nov 01. Nov 04. Nov 04. Nov 06. Nov 06.-07. Nov 12. Nov 15.-16. Nov 19. Nov European Council Meeting Prospective release of AQR and EU bank stress test results New elections Ukraine (announced) FOMC meeting 18. Chinese Party Congress General election Lebanon Spain: Catalonia independence consultation New European Commission taking office US midterm elections Launch of Single Supervisory Mechanism (SSM) ECB Governing Council Meeting Eurogroup and ECOFIN Meetings BoE inflation report & press conference G20 Leaders Summit ECB Governing Council Meeting  Overview political events 2014 Global Capital Markets & Thematic Research goes MP3, iPod & Blackberry:  to our publications  to our twitter feed  to our podcasts FridayMail Calendar Week 43: Monday • Euro-Zone:  ECB Current Account (Aug) (18.7bn EUR)  Eurozone Current Account (Aug) (32.3bn EUR) • Germany:  PPI (Oct) (-0.1% m/m) • UK:  Rightmove House Prices (Oct) (+0.9% m/m) Reports: Apple, SAP, Philips Tuesday • Euro-Zone:  Government Debt/GDP Ratio (2013) (92.6%) • US:  Existing Home Sales (Sep) expt. +0.9% m/m (-1.8%) • China:  Industrial Production (Sep) +7.5% y/y (+6.5%)  GDP sa (Sep) +1.8% q/q(+2.0%) Reports: Coca Cola, Yahoo  Markit Services PMI (55.7)  Markit Composite PMI (54.1) • US:  Chicago Fed National Activity Index (Sep) (-0.21)  Initial Jobless Claims (CW42)  Continuing Claims (CW41)  FHFA House Price index (Aug) (+0.1% m/m)  Markit Manufacturing PMI (Oct) 57.5 (57.5)  Bloomberg Consumer Comfort  Leading Index (Sep) +0.7% m/m (+0.2%)  Kansas City Fed Manufacturing Activity (Oct) (6) • UK:  Retail Sales ex Auto (Sep) +0.2%m/m) • Japan:  Markit Manufacturing PMI (Oct) (51.7) • China:  HSBC Manufacturing PMI (Oct) (50.2) Payment Redemptions: France (8.8bn EUR) Reports: Amazon, 3M, Microsoft, General Motors, Nokia, Daimler Friday Wednesday • Germany: • US:  GfK Consumer Confidence (Nov) (8.3) • US:  New Home Sales (Sep) -5.8% m/m (+18.0%) • UK:  GDP (3Q) (+0.9% q/q)  MBA mortgage applications (CW41)  CPI (Sep) 0.0% m/m (-0.2% m/m)  CPI (Sep) (+1.7% y/y) • UK:  Bank of England Minutes • Japan:  Trade Balance (Sep) (-949.7bn JPY) Reports: Boeing, AT&T, Iberdrola Thursday • Euro-Zone:  Markit Manufacturing PMI (Oct) (50.3)  Markit Services PMI (Oct) (52.4)  Markit Composite (Oct) (52.0)  Consumer Confidence (Oct) (-11.4) • Germany:  Markit Manufacturing PMI (Oct) (51.7) The hypothetical performance and simulations shown are for illustrative purposes only and do not represent actual performance; they are not a reliable indicator for future results. Back-testings and hypothetical or simulated performance data has many inherent limitations only some of which are described as follows: Investors should not assume that they will experience a performance similar to the back-testings, hypothetical or simulated performance shown. Material differences between back-testings, hypothetical or simulated performance results and actual results subsequently achieved by any investment strategy are possible. 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