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Economic Research
Week in Focus
9 January 2015
Greece: Answers to the main questions
There are many questions surrounding the current situation in Greece What is likely to
happen politically in the coming weeks? Will the elections delay ECB government bond
purchases? Is the government about to run out of money? How likely is a second haircut?
Will Grexit happen? We give some answers to the main questions on investors’ minds at
present.
Page 2
The Week in Focus in 100 seconds
Please follow this link for a video summary.
Greek election: SYRIZA is in the lead
Share in votes according to polls
38
36
34
32
30
28
26
24
22
20
1–3
Dec
8–9
Dec
9–10 11–12 11–14 10–17 17–18 19–21 20–23 26–28 29–30 03-Jan
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Dec
Nea Dimokratia (N.D.)
SYRIZA
Source: Polls by Pro-Olympic Circles, Voice, Palmos Analysis, Interview, Rass, PaMak; Commerzbank Research
Forecast changes: At our monthly forecast meeting, we have lowered our oil price forecast.
The price of Brent oil should mark new lows in the spring and climb towards 75 dollars
(previously: 85) in the second half of the year amid increasingly unprofitable US shale oil
production. We have reduced our inflation forecast for 2015 accordingly. For the euro zone,
we now expect a negative inflation rate of -0.1% (previously: +0.1%). This fuels speculation
that the ECB will loosen monetary policy further and we therefore predict more weakness for
EUR-USD (year-end: 1.12; previously 1.15).
Page 15
Product Idea: Knock-into forward EUR-NOK. Uncertainty surrounding the oil price trend
and its impact on the Norwegian economy and monetary policy are putting depreciation
pressure on the NOK. We recommend a knock-into forward to NOK sellers to hedge against
this risk.
Page 5
Outlook for the week of 12 to 16 January 2015
Economic data: The US data releases due in the week ahead should underpin the
economic recovery. However, we can expect weak December figures for retail sales and
industrial production although the underlying trends remain positive.
Page 8
Bond market: Ongoing €QE speculation and uncertainty surrounding Greece should keep
Bunds supported over the coming weeks and we expect new yield lows. Peripherals, on the
other hand, are likely to remain under pressure.
Page 11
FX market: The euro is currently trading like a commodity currency since the oil price
decline runs the risk of triggering long-term euro zone deflation, which might prompt ECB
expansion measures beyond those already priced in.
Page 12
Equity market: Equities are likely to perform relatively well in 2015, primarily as a result of
attractive dividend yields but also due to decent earnings growth.
Page 13
Commodity market: We look for the collapse in the oil price to level out next week, partly
due to the fact that the EIA is likely to trim its expectations for US oil output.
Page 14
For important disclosure information please see page 17.
research.commerzbank.com / Bloomberg: CBKR / Research APP available
Chief economist
Dr Jörg Krämer
+49 69 136 23650
[email protected]
Editor:
Peter Dixon
+44 20 7475 4806
[email protected]
Economic Research | Week in Focus
Greece: Answers to the main questions
Dr Jörg Krämer
Tel. +49 69 136 23650
Christoph Weil
Tel. +49 69 136 24041
There are many questions surrounding the current situation in Greece: What is likely to
happen politically in the coming weeks? Will the elections delay ECB government bond
purchases? Is the Greek government about to run out of money? How likely is a second
haircut? Will Grexit happen? We give some answers to the main questions on investors’
minds at present.
How long will the political uncertainty last?
As the Greek election campaign reaches fever pitch, all eyes are on the opinion polls. The final
ones will be published on 23 January, just two days before the election (Table 1). Even so, the
outcome of the election remains uncertain. For one thing, polls have not proven very reliable in
the past. Furthermore, it is unclear whether the small parties will gain the 3% of the vote required
for them to enter parliament (Table 2, page 3).
What is relatively certain though is that no party will achieve an absolute majority of
parliamentary seats. In the days after the election, the Greek President will call on the leader of
the largest party to form a coalition. The pressure will be intense as he has only three days to do
so. If he fails to form a government, the President can transfer the mandate to another party
leader. If no government is formed, new elections will be held within 30 days, as was the case in
2012. In the best case, Greece would have a new government by mid-February, in the worst
case new elections will be held in mid-March.
On the other hand, there is little risk that Greece will fail to elect a new President; unlike the
failed presidential election in December, the election ultimately cannot fail as in the event of a
third ballot the candidate securing the majority of MPs votes is considered elected.
ECB: Will the Greek problems delay QE?
The Greeks will elect a new parliament on 25 January. Three days before, on 22 January, the
ECB Governing Council will meet. Should it decide – as many expect – in favour of broad-based
government bond purchases (QE), the radical left party SYRIZA could convince Greek voters
that such purchases lower the risk of turmoil if a SYRIZA government were to embark on a
collision course with the EU. It cannot be in the ECB’s interests for SYRIZA to hold such carte
blanche.
To avoid this problem, the ECB Governing Council could postpone the QE decision to a later
date. But one argument against this is that further parliamentary elections in Greece could take
place in mid March if it is not possible to form a new government after the election on 25
January, which implies that the ECB would also not be able to decide on QE at its meeting on 5
March. The ECB will not want to have the timing of its decisions dictated by the vagaries of
Greek politics. The ECB will therefore presumably announce QE on 22 January.
TABLE 1: Key political dates
Date
Event
23 January
Publication of final election polls
25 January
Parliamentary elections
In the days thereafter
President calls upon the winner of election to form a government. The election winner has three
days to do so.
Mid-February
New government or dissolution of parliament and new elections within 30 days.
Extension of the second adjustment program which expires at end-February. The agreement of the
German parliament is needed.
24 February
Latest date for constituent meeting of new parliament
Election of President by the new parliament as soon as it is constituted as a body.
28 February
End of current rescue programme
Mid-March
Should no government coalition be formed: new parliamentary elections
Source: Commerzbank Research
2
9 January 2015
Economic Research | Week in Focus
TABLE 2: Possibly eight parties in the new parliament
Party
Average of all published polls
since 29 December
N.D.
29.3
25.0
SYRIZA
34.5
35.0
PASOK
4.7
2.2
KIDISO
-
4.8
First poll after division of PASOK1)
Votes in per cent
Independent Greeks
3.0
2.5
Golden Dawn
6.4
8.6
DIMAR
0.9
-
KKE
5.7
5.0
Potami
6.0
4.0
1) Survey of Pro-Olympic Circles, Source: Voice, Palmos Analysis, Interview, Rass, PaMak, Commerzbank Research
However, to avoid the impression of a carte blanche for SYRIZA, the ECB could decide that any
losses from the purchase of government bonds will not be allocated to national central banks
according to the capital key, as usual, but that every national central bank would buy the bonds
of its own country at its own risk. The Greek taxpayer would ultimately be liable if bonds bought
under QE were to default. ECB chief economist Praet has called this a feasible solution, which is
significant given that he is seen as belonging to the inner decision-making circle around ECB
president Draghi.
Less likely in our view is the scenario in which the ECB Governing Council solves the problem of
the carte blanche by buying only bonds from countries with a high credit rating. This would
contradict its unstated target of supporting countries with high debt. The proposal not to buy
bonds from countries which are under the supervision of the troika (comprised of the EU, IMF
and ECB), the so-called programme countries, is also unlikely in our opinion as Portugal and
Ireland would then be disadvantaged relative to other countries.
Is the country about to run out of money?
Some observers fear that the Greek state will run out of money if it takes a considerable time to
form a government; as long as no effective government is in power, there is unlikely to be any
fresh financial aid. The last tranche of the EFSF loan (€1.8bn) and the yet-to-be-paid tranche of
the IMF (€3.5bn) will only flow when the Troika has reached agreement with the Greek
government on the 2015 budget and the implementation of further reforms. Before then, euro
finance ministers will have to further extend the rescue programme, due to expire at the end of
February; otherwise the last tranche and the €10bn remaining in the bank rescue fund would be
forfeited.
That said, the Greek state would not go bankrupt in the near term even without the financial aid.
In the first three months of the year expenditures (ex. debt servicing costs) are more or less
covered by current revenues. Greece’s finance minister should be able to scrape together the
funds for the interest payments and repayments (€4.5bn; Chart 1, page 3) that are due in the
first quarter. At the end of September, he still had around €2bn in the till. The rest of the money
can be borrowed on the money market and from Greek banks. If need be, the finance minister
will delay paying current bills to suppliers. Larger debt repayments are then not due until July
(around €3.5bn) and August (around €3bn).
How likely is a further haircut?
Irrespective of the election outcome, a new government will demand further relief from the euro
countries on Greece’s public debt, which currently stands at over 175% of GDP. The
government can refer to assurances made by euro finance ministers to consider further relief if
the budget is running a primary surplus, which is currently the case. It is likely that agreement
will be reached to further extend the maturities of the loans from the EFSF and euro countries,
although these already exceed 30 years on average. Moreover, interest could be reduced –
symbolically – by another few basis points although Greece already does not have to pay
interest on EFSF loans (141bn euros) until 2022. However, euro finance ministers will not agree
to a formal waiver of debt as politicians in creditor countries such as Germany would then have
to explain to their voters that the assistance loans have been lost, contrary to what has always
9 January 2015
3
Economic Research | Week in Focus
been maintained. This would be very unpopular and would strengthen euro sceptic parties such
as AfD (Alternative for Germany).
In the case of private creditors, we believe a second haircut is unlikely (Chart 2). The damage
this would cause would be much higher than the actual savings; private creditors currently only
hold government bonds worth slightly over €36bn (just over 10% of public debt), for which
Greece has to pay an average interest of only 3% until 2020.
Will there be a further rescue programme?
The additional debt relief will probably be a part of a new rescue programme which is likely to
have a three-year term and a volume of €10bn. To this end, the unused funds of the bank rescue
fund will be reallocated. This has the advantage that no new loan assurances will be needed
from euro finance ministers. Furthermore, the creditworthiness of the Greek state will be
strengthened by a so-called Enhanced Conditions Credit Line (ECCL) of the ESM rescue fund.
This presupposes, however, that Greece undertakes to maintain its reform course. In return, a
softer austerity course is likely to be agreed. A lower primary surplus will ensure a slow reduction
of the public debt ratio, but will give the new government more scope with expenditure. And this
is precisely what the SYRIZA leader Tsipras wants.
The residual risk of Grexit
In our base scenario (likelihood of 75%) we expect Greece to remain within the Monetary Union,
even under a government led by SYRIZA. Firstly, Greece will not want to lose the support of the
EU. Secondly, the governments of creditor countries are prepared to reach a compromise with
Greece because they do not want to have to explain to their voters that assistance loans have
been lost in the case that Greece leaves the Monetary Union. That said, the possibility cannot be
ruled out that negotiations on a new rescue programme will break down and Greece will leave
the Monetary Union (likelihood of 25%). If savers in Greece expect an exit, they will immediately
withdraw their euro credit from Greek banks. Without ECB support, banks would very quickly
become illiquid and would have to close their counters. In this case, the only option left for the
Greek state would be to refloat banks swiftly with an own currency. But they could not prevent
the Greek economy from collapse.
CHART 1: Debt service totals 3.6bn euros in Q1
CHART 2: Public creditors hold 80% of Greece’s 322bn
public debt
Repayment and interest payments in € bn
in € bn, grey bars: public creditors
0.8
150
0.7
125
0.6
100
0.5
75
0.4
0.3
50
0.2
25
0.1
0
0.0
EFSF
13
Jan
1 Feb
12
Feb
24 6 Mar 13
Feb
Mar
Source: Bloomberg, IMF, Commerzbank Research
16
Mar
20
Mar
20
Mar
euro
countries
IMF
ECB
PSI &
new
GGBs
T-bills
others
Source: IMF, ESM, Greek Finance Ministry, Bloomberg, Commerzbank
Research
4
9 January 2015
Economic Research | Week in Focus
Product idea: Knock-into forward EUR-NOK
Thu Lan Nguyen
Tel. +49 69 136 82878
Hedging with additional participation in rising prices
The Norwegian krone was strongly hit by the rapid slide in oil prices last month.
Uncertainty surrounding the oil price trend and consequently also the Norwegian
economy and monetary policy pose high depreciation risks for the NOK in the near-term.
We recommend a knock-into forward to NOK sellers to hedge against this risk.
With the petroleum sector generating around one quarter of Norwegian GDP, the slump in oil
prices is a considerable drag on the economy. Although a combination of krone weakness, the
Norges Bank’s surprise rate cut last month and more expansionary fiscal policy have reduced
economic woes, there are several reasons to believe that the Norwegian economy is not yet out
of the danger zone.
Given that – contrary to Norges Bank expectations – the oil price has fallen further since the start
of the year, the central bank is very likely to lower its key rate once again. A rate cut of 25 basis
points over the course of the year is already priced into the market. Yet there is the risk that the
economic outlook might deteriorate in a way that will prompt the Norges Bank to cut its key rate
more aggressively. After all, it is still unclear to what extent the lower oil price will dampen the
mainland economy which has so far benefited from oil sector-driven demand. Moreover, ongoing
low, or even further declines in, oil prices threaten to weigh further on investment in the
Norwegian oil sector than assumed so far. Central bank governor Øystein Olsen has indicated
that it would take a Brent oil price recovery to over USD 70 $/barrel to reduce the pressure on
the central bank. Owing to these economic risks and thus the risk of more aggressive rate cuts
by the Norges Bank we believe the risk of the krone depreciating further remains high near-term.
Medium- to long-term, however, the NOK should strengthen again against the EUR. For one, the
ECB – potentially as soon as at its next meeting – is likely to decide on broad-based government
bond purchases, which will weigh on the EUR. For another, our commodities analysts are
looking for oil prices to recover considerably over the course of the year.
We advise NOK sellers to hedge against another strong near-term krone depreciation through a
knock-into forward which also allows for a certain participation in any appreciation of the krone.
Product idea: European knock-into forward with ratio for an exporter in EUR-NOK
Spot rate (example)
9.0400
Hedging rate (worst case)
9.1000
Lower barrier (knock-in)
8.5500
Hedging nominal
EUR 100,000
Leverage ratio
1:2
Term
6 months
Costs
Zero cost
The European knock-into forward guarantees a fixed hedging rate of 9.10 (worst case). If
EUR-NOK trades above the worst case at the expiry date, settlement will take place at this
rate. If, at the expiry date, the fixing trades between the worst case and the knock-in (8.55),
the investor may participate in favourable spot performance or potentially refrain from the
currency exchange. If, at maturity, EUR-NOK touches or falls below the knock-in rate
(8.55), a leveraged foreign currency sale will take place at the worst case rate (9.10).
9 January 2015
5
Economic Research | Week in Focus
Major publications from 5 – 8 January 2015
Economic Insight: Will Grexit happen?
The likelihood of Greece exiting the Monetary Union has increased. However, a government led by
the radical leftish party SYRIZA is not certain. Furthermore, after gruelling negotiations, it will still be in
the interests of both Greece and EMU countries to reach a compromise. Greece could then still get
help and the EMU countries would not have to explain to their voters that the assistance loans have
been lost. We rate the likelihood of Greece leaving the Monetary Union at less than 25%. more
Economic Insight: ECB – Meeting schedule, rotation, minutes, and
what else is new in 2015
At the start of 2015, the ECB Council will likely not only announce broad-based purchases of
government bonds. There will also be several formal changes at the central bank. Probably the most
important of them are that the ECB will only make monetary policy decisions every six weeks and that
there will be a rotation of voting rights on the Council. The latter should cause the doves’ lead on the
Council to shrink to some extent, but without jeopardising their majority. How helpful the written
accounts of the ECB meetings will be may only become clear after the first release in mid-February.
more
Credit Note: EU Banks – Basel attempts to revive trust in RWAs
Late in 2014 the Basel Committee proposed a new methodology for banks to calculate their riskweighted assets (RWAs). The purpose of this step is to remedy existing shortcomings and to
improve confidence in banks’ RWA calculations. The crucial point of the overhaul is the
Standardised Approach banks use to measure their credit exposure aiming to become more risk
sensitive and comparable. A change could have material consequences for banks’ capital
requirements, lending practices and even business strategies. more
Credit Note: Hallo, Servus and welcome, BRRD!
The implementation of the BRRD by 31 December 2014 is another milestone in breaking up the
nexus between banks and their sovereign. Rating agencies now plan to remove or reduce
government support assumptions included in ratings, which could lead to substantial rating
downgrades. However, the aggregate rating impact should be limited due to simultaneous
favourable rating methodology adjustments that work in the opposing direction. more
FX Hotspot: GBP: What does Brexit mean for sterling?
The prospect of the UK leaving the European Union could come into sharp relief later this year.
Should the Conservatives retain power following the general election, they have promised to
hold an in/out referendum on EU membership. Assuming that the UK votes in favour of leaving
the EU, we outline the steps that European companies should take now in order to hedge
sterling exposures. more
FX Hotspot: ARPI² update – Falling oil price continues to unsettle
markets
Compared to last week, the ARPI² rose by 0.5 points. In particular, commodity and money
market risks increased. Falling oil prices due to news about supply increases in Russia and Iraq
continued to unsettle markets. Uncertainty on money market increased due to QE expectations.
more
6
9 January 2015
Economic Research | Week in Focus
Preview – The week of 12 to 16 January 2015
Time
Region Indicator
Period
Forecast
Survey
Last
Monday, 12 January 2015
07:30
FRA
Business confidence (Bank of France)
Dec
97.0
–
97.0
Tuesday, 13 January 2015
09:30
GBR
CPI
Dec
yoy
0.8
0.8
1.0
CPI
CPI ex. Tobacco
Industrial production
Dec
Dec
Nov
yoy
-0.2
125.4
0.4
–
–
0.3
0.3
125.7
0.1
Retail sales
Retail sales excl. autos
Machinery orders
Dec
Dec
Nov
-0.3
-0.4
4.0
-5.7
0.1
0.2
5.0
-6.7
0.7
0.5
-6.4
-4.9
Wednesday, 14 January 2015
07:45
FRA
10:00
EUR
• 13:30
USA
23:50
JPN
mom, sa
yoy
mom, sa
mom, sa
mom
yoy
EUR: European Court of Justice gives non-binding assessment on ECB’s OMT mechanism
US: Federal Reserve releases Beige Book (19:00)
Thursday, 15 January 2015
13:30
USA
15:00
Empire State Index
PPI final demand
Initial claims
Philadelphia Fed Index
Jan
Dec
10 Jan
Jan
sa
mom, sa
sa
sa
5.0
-0.4
290
15.0
5.0
-0.4
–
20.0
-3.58
-0.2
294
24.5
Dec
Dec
Dec
Dec
Dec
Jan.
yoy
yoy
mom, sa
mom, sa
mom, sa
sa
-0.2
0.8
-0.4
0.1
-0.1
95.0
-0.2
0.8
-0.3
0.1
0.0
94.0
-0.2 (p)
0.8 (p)
-0.3
0.1
1.3
93.6
Friday, 16 January 2015
10:00
EUR
13:30
USA
14:15
15:00
HICP, final
HICP excl. food and energy
CPI
CPI excl. food and energy
Industrial production
Consumer confidence (University of Michigan),
preliminary
Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 5 hours for EST; add 1 hour for CET). # = Possible release; mom/qoq/yoy: change
to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; (p) = preliminary; • = data of highest importance for markets
9 January 2015
7
Economic Research | Week in Focus
Dr Christoph Balz
Tel. +49 69 136 24889
Economic data preview:
USA: Gasoline price slide depresses inflation and retail sales
The US data releases due in the week ahead should underpin the economic recovery, but
only at a second glance. The focus will likely be on the slide in gasoline prices, which
dampens the inflation rate and retail sales considerably. In industrial production, a
decline also seems to be on the cards due to special factors. But the underlying trend
remains positive, both in US retail sales and in manufacturing. In the euro zone, we
forecast a slight rise in industrial production.
The collapse of the oil price is reflected in numerous US economic indicators. On a monthly
average, gasoline prices, after adjustment for seasonal factors, fell by 10% in December relative
to November (chart 3). First and foremost, this dampens inflation. In December, consumer prices
probably fell by 0.4% on November (consensus: -0.3%). This would cause the inflation rate to
drop from 1.3% to 0.6%. Excluding energy and food, prices are rising, though. The core inflation
rate presumably rose from 1.7% to 1.8%, mainly because of rents.
It is to be assumed that the gasoline price also had a notable impact on retail sales. On one
hand, its decline lowered the value of sales at the gas pump. As a result, the total sales figure
understates the underlying momentum in retail. On the other hand, consumers had more money
left in their wallets. Accordingly, they probably increased their purchases of other items to some
extent, though this does not apply to automobiles, where manufacturers have already reported a
slight sales decline. But since it follows strong auto sales growth in November, this moderation is
hardly surprising. On balance, we expect retail sales to fall by 0.3% on the month (consensus:
+0.1%).
As for industrial production, a special effect concerning utilities leads us to expect a decline of
0.1% for December compared to the previous month (consensus: 0.0%), which masks the
encouraging underlying trend: An exceptionally cold November was followed by a relatively mild
December (chart 4). For this reason consumers this winter turned on the heating earlier than
usual. Energy production, adjusted for the usual seasonal pattern, therefore rose by 5% in
November and probably came down sharply in December. This weather impact masks the
encouraging underlying trend in industrial production, which would probably have come in higher
in December if not for this temporary special factor.
Euro zone: Slight improvement in industry
Industrial production in the euro zone presumably rose in November by 0.4% (consensus: 0.3%).
Although this is largely a countermovement to the decline in October, the rise in the purchasing
managers’ index in December gives hope that the trend in this sector will point slightly up again
in the next few months.
CHART 3: USA – gasoline price in free fall
Gasoline price, in dollars per gallon, seasonally adjusted according to
consumer price index
4.0
CHART 4: USA – exceptionally cold November followed by
mild December
Deviation of national average temperature from normal level, weekly
figures, in degrees Fahrenheit
8
6
3.8
4
3.6
2
0
3.4
-2
3.2
-4
3.0
-6
-8
2.8
2011
2012
2013
Source: Global Insight, Commerzbank Research
8
2014
Jul
Aug
Sep
Oct
Nov
Dec
Source: Global Insight, Commerzbank Research
9 January 2015
Economic Research | Week in Focus
Central Bank Watch (1)
Fed
As expected, the minutes of the FOMC meeting on 16/17
December confirmed what was already known about
sentiment within the Fed. It turned out that the interpretation
of the new wording, i.e. the Fed being 'patient' in normalising
monetary policy, presented by Janet Yellen at the press
conference is shared by the FOMC members. The
chairwoman had said that the Fed would not hike interest
rates at the ‘next couple of meetings’. This implies that the
earliest possible dates for this step to be taken are the
meetings in April and June. We expect to see the first rate
hike at the June meeting, accompanied by a press
conference where Janet Yellen may comment in detail on the
policy change and remove potential misunderstandings.
Moreover, the minutes illustrate that FOMC members largely
agreed that the labour market improved on a broad basis and
that the slack has been reduced further. Consequently, they
remained confident that the rate of inflation would approach
the 2% target again in the medium term once the temporary
effects of the low oil price peter out. At the same time, FOMC
members stressed that future decisions would depend on
data.
Dr Christoph Balz
+49 69 136 24889
CHART 5: Expected interest rate for 3-month funds (USD)
2,5
2,0
1,5
1,0
0,5
0,0
current
Mrz 15
Jun 15
Sep 15
Dez 15
Mrz 16
Futures
08.01.15
02.01.15
Commerzbank
TABLE 3: Consensus forecasts Fed funds rate
Q1 15
Q2 15
Q4 15
Consensus
0.25
0.25
1.00
High
0.50
0.75
1.75
Low
0.25
0.25
0.25
Commerzbank
0.25
0.50
1.50
Source: Bloomberg, Commerzbank Research
ECB
Comments from ECB officials suggest that the ECB could opt
for government bond purchases (QE) at its next meeting.
ECB Chief Economist Peter Praet said that in an
environment of negative inflation rates and fragile inflation
expectations one cannot simply look through the fall in the oil
price. He pointed out that there is also a risk of growth
pessimism becoming more entrenched. He sees a risk of an
“economic vicious cycle”. Regarding the two contingencies
for further monetary policy action – that the measures taken
so far have not had the intended effect and that the inflation
outlook has deteriorated – he said: “Now we have a little bit
of both”. The ECB will reassess this early in 2015. Generally,
asset purchases in impaired markets would have a bigger
effect in this context than purchases of bonds with AAA
rating, he added. Buying bank bonds could raise concerns,
given the ECB’s role of supervisor, but theoretically, the
central bank could also buy indices where it has no control of
the composition.
For ECB President Draghi the risk of the central bank not
fulfilling its mandate is higher than it was six months ago.
The ECB is therefore making technical preparations “to alter
the size, pace and composition of our measures in early
2015, should it become necessary to further address risks of
a too prolonged period of low inflation”.
Dr Christoph Balz
+49 69 136 24889
9 January 2015
CHART 6: Expected interest rate for 3-month funds (EUR)
1,0
0,8
0,6
0,4
0,2
0,0
current Mrz 15
Futures
Jun 15
08.01.15
Sep 15
02.01.15
Dez 15
Mrz 16
Commerzbank
TABLE 4: Consensus forecasts ECB minimum bid rate
Q1 15
Q2 15
Q4 15
Consensus
0.05
0.05
0.05
High
0.05
0.05
0.05
Low
0.05
0.05
0.05
Commerzbank
0.05
0.05
0.05
Source: Reuters, Bloomberg, Commerzbank Research
9
Economic Research | Week in Focus
Central Bank Watch (2)
Bank of England (BoE)
The first MPC meeting of 2015 produced no changes but the
backdrop against which the UK monetary debate is taking
place has changed over the last month. Most notably, the
inflation picture continues to weaken in the face of falling
crude oil prices. The pump price of motor fuel last month
posted one of its strongest declines in 25 years, which will be
enough to push the December inflation rate (due for release
next week) below 1%. The growth position is also less
robust. Downward revisions to past data now suggest that
the UK will post a growth rate closer to 2.6% in 2014 rather
than the 3% which previously appeared likely, and the PMIs
have shown signs of less dynamic growth at year-end. In this
environment, the position of the two MPC dissenters pushing
for a rate hike looks less tenable, particularly since there is
more spare capacity in the labour market than suggested by
the unemployment rate. Market pricing currently suggests
that the probability of even one 25bps rate hike this year is
little better than a 50-50 shot. Since the MPC is unlikely to
take any risks against the backdrop of low inflation; a weak
euro zone and less momentum in the domestic economy,
this currently looks a reasonable assessment.
CHART 7: Expected interest rate for 3-month funds (GBP)
2,0
1,5
1,0
0,5
0,0
current
Mrz 15
Jun 15
Sep 15
Dez 15
Mrz 16
Futures
08.01.15
02.01.15
Commerzbank
Source: Bloomberg, Commerzbank Research
Peter Dixon
+44 20 7475 4806
SNB (Switzerland)
On 18 December, in a surprise move, the SNB lowered the
deposit rate and the Libor target range in order to push threemonth Libor into negative territory. Its intention was to
mitigate the appreciation pressure on the Swiss franc.
But it did not work. Following temporary gains up to 1.2080,
the euro-franc rate dropped back to 1.2005 at times. We
assume that the SNB resumed currency market interventions
on Tuesday to keep the exchange rate from sliding below
1.20.
We stick to our view that the SNB will defend the 1.20 mark.
For one, a stronger franc would undermine the SNB’s fight
against deflation risks. For another, it would trigger book
losses on the currency reserves accumulated so far, with the
SNB – similar to 2010 – again at risk of being accused of
gambling at the expense of the taxpayer. In hindsight,
however, saying that the surprise rate cut was justified in
order to defend the exchange rate probably was an error –
one that the SNB will have to pay for with higher intervention
volumes going forward.
CHART 8: Expected interest rate for 3-month funds (CHF)
0,6
0,4
0,2
0,0
-0,2
-0,4
-0,6
current
Mrz 15 Jun 15
Futures
08.01.15
Sep 15
02.01.15
Dez 15
Mrz 16
Commerzbank
Source: Bloomberg, Commerzbank Research
Christoph Weil
+49 69 136 24041
10
9 January 2015
Economic Research | Week in Focus
Michael Leister
Tel. +49 69 136 21264
Bond market preview:
The record hunt goes on!
European bond markets keep chasing records. Ongoing €QE speculation and uncertainty
surrounding Greece should keep Bunds supported over the coming weeks and we expect
new yield lows. Peripherals, on the other hand, should remain under pressure as the
likely €QE compromise could raise doubts regarding the effectiveness of the ECB
purchases and issuance activity picks-up markedly.
TABLE 4: Weekly outlook for yields and curves
Bunds
US Treasuries
Yield (10 years)
Moderately lower
Moderately lower
Curve (2 - 10 years)
Moderately flatter
Moderately flatter
Source: Commerzbank Research
Outlook for the Bund
future, 12-16 January
Economy
↓
Inflation
↑
Monetary policy
↑
Trend
↑
Supply
↓
Risk aversion
↑
Bond markets have got off to an excellent start in 2015. Yields in the euro zone, in particular,
marked new record lows: Ten-year Bund yields dropped below 0.45% (chart 9) and the German
yield curve is trading in negative territory up to the 2020 maturity segment. At the same time,
ten-year US Treasuries fell below the psychologically important 2% mark again.
The rapid slide in oil prices, as well as renewed uncertainty over Greece, have been the major
drivers, with the unexpectedly low flash estimate of euro zone inflation in December implying that
the collapse in energy prices will be reflected in consumer prices more quickly than assumed so
far. Combined with the ongoing decline in market-based inflation expectations, the latest
developments provide the €QE proponents around ECB President Draghi and Chief Economist
Praet with further arguments for imminent action, especially with the ECB's Survey of
Professional Forecasters (SPF), due on 20 January, set to reveal a marked fall in survey-based
inflation expectations and therefore likely to support recent market trends. Consequently, we
expect the ECB to vote for government bond purchases on 22 January.
The details of the purchase programme are becoming increasingly important though. To onboard internal critics, Draghi is likely to act solely on the basis of "whatever is politically feasible"
this time around. The most likely compromise would be national central banks buying only their
own domestic government bonds at their own risk. Such dilution is likely to weaken the
effectiveness of €QE, as also illustrated by the significant widening of peripheral yield spreads
this week (chart 10). Ultimately, investors hesitate to further expand their peripheral exposure at
already historically low yield levels – especially with uncertainty surrounding Greece and the
resulting risk of a political accident lingering on.
The latest market dynamics look set to extend next week. Ongoing €QE speculation as well as
uncertainty surrounding Greece should further support Bunds. By contrast, peripherals should
remain under pressure for now, especially since the next few weeks will see heightened primary
market activities as usual at the start of the year.
CHART 9:
Bund yields at new record lows again
CHART 10:
Yield of ten-year Bunds, in percent p.a.
Peripheral countries under pressure
Yield pick-up of ten-year Spanish government bonds versus Bunds, in
basis points
1.4
240
1.3
1.2
215
1.1
190
1.0
0.9
165
0.8
140
0.7
0.6
115
0.5
0.4
Jul-14
Aug-14 Sep-14 Oct-14
Source: Bloomberg, Commerzbank Research
9 January 2015
Nov-14 Dec-14
Jan-15
90
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Source: Bloomberg, Commerzbank Research
11
Economic Research | Week in Focus
Ulrich Leuchtmann
Tel. +49 69 136 23393
FX market preview:
Why the euro is trading like a commodity currency
With falling oil prices weighing on EUR-USD, the euro is currently trading like a
commodity currency. The reason is that the oil price decline is seen as potentially
triggering long-term deflation, which might induce the ECB to launch further
expansionary measures beyond those already priced in. We have adjusted our forecast
for EUR-USD to the new oil prices.
TABLE 5: Expected weekly trading ranges
Range
EUR-USD
Tendency
Range
1.1550-1.2000
EUR-GBP
0.7700-0.7950
EUR-JPY
138.00-144.00
GBP-USD
1.4850-1.5300
USD-JPY
117.00-122.00
EUR-CHF
1.2000-1.2060
Tendency
Source: Commerzbank Research
In line with declining oil prices, long-term inflation expectations in the euro area are also on a
downtrend (chart 11). This ought to set the alarm bells ringing at the ECB, as the market is
signalling that the likelihood is increasing of a scenario in which the present oil price decline will
catapult the euro area into a long-term deflation. The ECB believes that it has to act soon in
order to avoid Japan-style conditions. After all, no central bank has a remedy once its economy
has fallen into the deflation trap.
The ECB’s problem is that the announcement of another QE programme (namely, broad-based
purchases of sovereign bonds) is generally expected for January 22, after ECB President Mario
Draghi clearly signalled such a move in a newspaper interview at the beginning of the year.
Despite his indications, however, falling oil prices are still fully weighing on long-term inflation
expectations. Apparently, markets believe that the expected QE programme is unlikely to
substantially alleviate the deflation risks.
Draghi has clearly indicated which effect the ECB aims to achieve, namely an extension of its
balance sheet by around 1 trillion euro. Hence, one might have assumed that the FX marketrelevant benchmarks of the looming programme would be essentially public and should have
been priced into EUR exchange rates. With deflation risks mounting against the backdrop of
lower oil prices, there is a risk that the ECB might loosen its policy even further than expected, if
oil prices continue to decline or if a recovery is not in sight. At present, the euro is consequently
highly sensitive to falling oil prices and has dropped below the levels we expected for the
beginning of the year. We have therefore lowered our EUR-USD forecast trajectory, particularly
for the upcoming months (chart 12).
CHART 11:
Falling oil prices are weighing on long-term
inflation expectations
CHART 12: Forecast revision: EUR weakness to come
earlier
Market expectations of average inflation in the euro area between
2020 and 2025 (5Y×5Yof inflation swaps, ex tobacco); oil price: Brent
in euro per barrel
EUR-USD: historical comparison, our previous and new forecast up
until year-end 2016
90
1.5
80
1.4
1.9%
70
1.3
1.8%
60
1.2
50
1.1
40
1.0
2012
2.2%
2.1%
2.0%
1.7%
1.6%
1.5%
Apr-14
Jun-14
Aug-14
inflation exp. (lhs)
Oct-14
Source: Bloomberg, Commerzbank Research
12
Dec-14
oil price (in €, rhs)
2013
EURUSD
2014
2015
old
2016
new
Source: EBS, Commerzbank Research
9 January 2015
Economic Research | Week in Focus
Ulrich Urbahn
Tel. +49 69 136 41842
Equity Market preview:
Corporate earnings to rise globally by 4-5% in 2015
We see a number of reasons why equities should continue performing well in 2015: Many
businesses will probably pay higher dividends. We forecast a relatively attractive global
dividend yield of 3 percent. Also, global corporate earnings should rise by 4 to 5 percent.
This increase would support the equity market.
In the new year, the environment remains favourable for equities. Our equity strategists expect
the dividends of DAX companies in 2014 to rise by more than 12% on the previous year. In all,
the 30 largest listed German companies should distribute more than €30bn in dividends – the
estimate for the Allianz dividend alone amounts to €3.185bn for 2014. As for developed markets
equities, the benchmark MSCI World, for example, offers a dividend yield of 3 percent.
Moreover, increasingly widespread share buyback programmes and M&A activities should
support equity markets. Equities are thus still (and despite the rapid rise over recent years)
attractive compared to other asset classes such as bonds.
We regard the macroeconomic framework as moderately positive. The global economy looks set
to grow in 2015 at a similar pace to last year. Our economists forecast 3.2% growth, up from
3.1% in 2014, which is mainly attributable to stronger momentum in the US. Historical
experience suggests that global GDP growth of 3.2% correlates with nominal earnings growth of
around 5% (chart 13). But since prices are rising more slowly than in past years with comparable
economic growth, our forecast for global earnings growth is for a somewhat more conservative
4-5%. Earnings are thus likely to rise, though less than the consensus expects (+8.3%), and so
earnings expectations for the financial year 2015 will probably be revised further down in the
coming months (chart 14). So, is the glass half full or half empty? We view the moderate
earnings growth that seems to be on the cards as positive. Should the weakness in the oil
market continue, there is, furthermore, potential to the upside for our earnings forecast,
especially for businesses in the consumer sector, which will likely profit from the second-round
effects of the low oil price. Given the shareholder-friendly policy of many businesses and the lack
of alternative investments, we therefore maintain our positive view on equities.
CHART 13: 3.2% global economic growth suggests 5%
global earnings growth for 2015, …
CHART 14: … and so negative earnings revisions look set
to continue
Simple correlation between global real GDP growth and global
nominal earnings growth (historical correlation since 1980)
Consensus earnings estimates for the MSCI World, in index points
40
135
30
130
20
125
10
120
0
115
-10
110
2015E
-20
105
-30
100
+8.3%
2012
2013
2014
-40
0
1
2
3
4
5
Source: Datastream, Thomson Reuters I/B/E/S, IMF, Commerzbank Research
9 January 2015
2014
2015
Source: Datastream, Thomson Reuters I/B/E/S, Commerzbank Research
13
Economic Research | Week in Focus
Barbara Lambrecht
Tel. +49 69 136 22295
Commodities market preview:
The oil market should take a breather
The plunge on the oil market is expected to slow in the coming week; the US Energy
Information Administration should trim its expectations of future US oil production.
Sentiment on base metal markets risks remaining gloomy despite China’s rising metal
imports. The wheat price could recover, though, if not only the quality of winter wheat is
disappointing but also US acreage.
TABLE 6: Trends in important commodities
Per cent change
8 Jan.
1 week
1 month
Tendency Commodity specific events
1 year short-term
Brent (USD a barrel)
50.1
-10.6
-22.6
-52.2
EIA (13th), OPEC (15th), IEA (16th)
Copper (USD a ton)
6135
-2.6
-4.2
-16.5
China: Trade balance Dec (13th)
Gold (USD a troy ounce)
1206
1.7
0.2
-1.7
Wheat (USD a bushel)
5.77
-2.1
-3.5
-2.0
Estimate US winter wheat acreage (12th)
Source: Bloomberg, Commerzbank Research
The nosedive on the oil market continued at the start of the new year. In the first few days, the
price of Brent dropped by 10% to 50 USD per barrel. Further price discounts by Saudi Arabia
and a rising supply in Russian and Iraq at the end of the year weighed on prices. Once more, it
is a question of when the price slump will curb supply. The three energy agencies publish their
monthly reports next week. The most interesting will be the outlook of the US Energy Information
Administration, which presents its first forecasts for 2016. In the past few months, the EIA has
already markedly reduced its expectations for US production in 2015. In October, it was still
expecting supply to be expanded by 700,000 barrels per day in the course of the year, while two
months later, this had been trimmed to 260,000 barrels per day (chart 15). In 2016, supply
should show a stronger reaction to the lower prices. Should the EIA hold out the prospect of
stagnating or even falling US supply next year, this should lend support to prices, especially as
demand should rise at a sharper rate than in the present year, partly because of the stimulus for
the overall economy given by the price slump. We therefore expect the oil market to take a
breather next week, especially as China’s oil imports should have risen sharply as buyers
wanted to take advantage of the low prices. That said, we still fear further setbacks in the weeks
ahead, not least amid an adjustment of high speculative net long positions, and we have
therefore reduced our Brent price forecast from 67 to 50 USD per barrel in the first half of the
year. However, against the backdrop of lower oversupply in the medium term, we expect prices
to pick up considerably in the second half of the year.
Base metal prices have also fallen as the new year gets underway. China’s trade data should
give little impetus, although copper imports are likely to have posted a strong rise again. Indeed,
the link seems to be a reverse one: the lower the price, the higher the imports (chart 16). We
expect higher copper prices in the medium term.
CHART 15: EIA first more optimistic, then more pessimistic
Estimate of US monthly oil production, million barrels per day
CHART 16: China’s import pull rises due to lower prices of
late
Thousand tons, USD per tonne
9.8
9.7
9.6
9.5
9.4
9.3
9.2
9.1
9.0
8.9
600
500
7000
400
8000
300
9000
200
Jan 15
Apr 15
Dec-14
Source: EIA, Commerzbank Research
14
6000
Jul 15
Oct-14
Oct 15
Jan-14
100
Jan-10
10000
Jan-11
Jan-12
Copper imports, l
Jan-13
Jan-14
Copper price, r
Source: Chinese customs authorities, LME, Bloomberg, Commerzbank Research
9 January 2015
Economic Research | Week in Focus
Commerzbank forecasts
TABLE 7: Growth and inflation
Real GDP (%)
USA
Canada
Inflation rate (%)
2014
2015
2016
2014
2015
2.4
2.9
2.8
1.6
0.2
2016
2.0
2.4
2.5
2.5
2.0
1.0
2.0
Japan
0.3
1.0
1.5
2.7
0.7
0.7
Euro area
0.8
0.8
1.0
0.4
-0.1
1.2
- Germany
1.5
1.1
1.5
0.9
0.7
2.4
- France
0.4
0.5
0.7
0.5
-0.1
0.7
- Italy
-0.3
0.1
0.5
0.2
-0.4
0.7
- Spain
1.4
2.3
2.3
-0.1
-0.7
0.5
- Portugal
1.0
1.5
2.0
-0.4
-0.9
0.5
- Ireland
5.2
3.5
3.5
0.4
0.3
1.4
- Greece
0.0
1.0
2.0
2.5
-1.2
-1.5
United Kingdom
2.6
2.4
2.4
1.5
0.8
1.6
Switzerland
1.9
1.7
1.6
0.0
-0.6
0.5
China
7.3
6.5
6.5
2.3
2.0
2.0
India
5.8
6.2
6.2
6.5
6.2
6.0
Brazil
0.3
0.9
2.3
6.3
6.5
6.0
Russia
0.6
-3.7
1.6
7.8
11.3
7.2
World
3.1
3.2
3.5
• The ultra-expansionary Fed policy is boosting
the US economy. At the same time, fiscal
policy is at least no longer a headwind. We
expect US growth to markedly accelerate.
• Growth in China is decelerating on decreasing
house prices and gradual policy adjustment.
• The recovery in the euro zone will only
continue at a slow pace. GDP growth will
remain markedly lower than that of the USA.
• EMU has survived the sovereign debt crisis,
but is gradually evolving into an “Italian-style
monetary union”.
• Despite its current weakness, the German
economy looks set to continue outperforming
the rest of the euro area – partly because ECB
target rates are much too low for Germany.
• High unemployment in most countries is
keeping inflation low for the time being. In the
long term, however, inflation is likely to rise, as
central banks have given up some of their
independence.
• •We cut our GDP forecast for Russia on lower
oil prices and continued sanctions.
TABLE 8: Interest rates (end-of-quarter)
08.01.2015
Q1 15
Q2 15
Q3 15
Q4 15
Q1 16
Federal funds rate
0.25
0.25
0.50
1.00
1.50
2.00
3-months Libor
0.25
0.30
0.75
1.25
1.75
2.15
2 years*
0.63
0.90
1.30
1.80
2.25
2.65
5 years*
1.50
2.20
2.60
2.90
3.10
3.30
10 years*
1.98
2.50
2.75
2.90
3.05
3.20
Spread 10-2 years
136
160
145
110
80
55
Swap-Spread 10 years
12
10
10
15
15
15
USA
Euro area
Minimum bid rate
0.05
0.05
0.05
0.05
0.05
0.05
3-months Euribor
0.07
0.10
0.10
0.10
0.10
0.10
2 years*
-0.11
-0.10
-0.10
-0.05
-0.05
-0.05
5 years*
0.00
0.10
0.15
0.15
0.20
0.20
10 years*
0.49
0.70
0.80
0.90
1.00
1.10
Spread 10-2 years
60
80
90
95
105
115
Swap-Spread 10 years
27
25
30
35
35
35
United Kingdom
Bank Rate
0.50
0.50
0.50
0.50
0.75
0.75
3-months Libor
0.56
0.60
0.60
0.80
0.85
1.00
2 years*
0.43
0.65
0.80
1.00
1.20
1.35
10 years*
1.63
2.30
2.50
2.70
2.70
2.80
• Fed interest rate hikes are on the cards from
2015Q2, due to a continuously decreasing US
unemployment rate and the expectation that
inflation will gradually rise once the oil price
has stabilised.
• Since the Eurosystem balance sheet will
probably not expand as expected by the
central bank, and as inflation expectations are
likely to fall further, we expect the ECB to
announce broad-based government bond
purchases during the first half of 2015.
• 10y Bund yields are likely to stabilise around
1% later this year when the Fed
communication changes but mark new record
lows when the ECB announces QE in 2015.
Thereafter, yields should rise gradually. The
structurally low interest rate environment
remains intact.
• The focus on the Fed’s lift-off will put upward
pressure on US$ rates. A return to 3% for 10y
USTs is only on the cards for end-2015,
though. The curve is in for a textbook-style
flattening via the short-end in the coming
quarters.
• Risk premiums of peripheral government
bonds are set to decline further.
TABLE 9: Exchange rates (end-of-quarter)
08.01.2015
Q1 15
Q2 15
Q3 15
Q4 15
Q1 16
EUR/USD
1.18
1.16
1.14
1.12
1.12
1.11
USD/JPY
120
117
120
122
125
127
EUR/CHF
1.2010
1.2010
1.2020
1.2040
1.2050
1.2050
EUR/GBP
0.79
0.78
0.77
0.76
0.77
0.77
EUR/SEK
9.39
9.20
9.10
9.00
9.10
9.15
EUR/NOK
9.09
9.50
9.60
9.40
9.30
9.20
EUR/PLN
4.30
4.24
4.15
4.12
4.10
4.05
EUR/HUF
318
310
315
317
317
318
EUR/CZK
27.89
27.50
27.40
27.40
27.20
27.00
AUD/USD
0.81
0.82
0.81
0.79
0.77
0.78
NZD/USD
0.78
0.75
0.73
0.71
0.70
0.69
USD/CAD
USD/CNY
1.18
1.19
1.21
1.20
1.19
1.19
6.21
6.22
6.22
6.17
6.13
6.08
• USD should further profit from the
expectations
of
Fed
interest
rate
normalization. Current USD rates have not
priced in the speed of rate hikes that we
expect.
• The discussion about an ECB QE programme
will not put much pressure onto the euro for
the time being because the overall volume of
ECB liquidity measures is already known.
• CEE currencies are benefiting from a dovish
ECB backdrop, meaning central banks have
room to cut rates further. HUF remains the
more vulnerable currency, while PLN and
RON trade range-bound, and EUR/CZK
continues to float above the 27.0 floor set by
the CNB.
Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries. Bunds. Gilts. JGBs
9 January 2015
15
Economic Research | Week in Focus
Research contacts (E-Mail: [email protected])
Chief Economist
Dr Jörg Krämer
+49 69 136 23650
Economic Research
Interest Rate & Credit Research FX Strategy
Commodity Research
Dr Jörg Krämer (Head)
+49 69 136 23650
Christoph Rieger (Head)
+49 69 136 87664
Ulrich Leuchtmann (Head)
+49 69 136 23393
Eugen Weinberg (Head)
+49 69 136 43417
Dr Ralph Solveen (Deputy Head; Germany)
+49 69 136 22322
Alexander Aldinger
+49 69 136 89004
Lutz Karpowitz
+49 69 136 42152
Daniel Briesemann
+49 69 136 29158
Elisabeth Andreae (Scandinavia. Australia)
+49 69 136 24052
Rainer Guntermann
+49 69 136 87506
Peter Kinsella
+44 20 7475 3959
Carsten Fritsch
+49 69 136 21006
Dr Christoph Balz (USA. Fed)
+49 69 136 24889
Peggy Jäger
+49 69 136 87508
Thu-Lan Nguyen
+49 69 136 82878
Dr Michaela Kuhl
+49 69 136 29363
Peter Dixon (UK. BoE). London
+44 20 7475 4806
Markus Koch
+49 69 136 87685
Esther Reichelt
+49 69 136 41505
Barbara Lambrecht
+49 69 136 22295
Dr Michael Schubert (ECB)
+49 69 136 23700
Michael Leister
+49 69 136 21264
Dr Michael Schubert (Quant)
+49 69 136 23700
Equity Markets Strategy
Eckart Tuchtfeld (German economic policy)
+49 69 136 23888
David Schnautz
+1 212 895 1993
Cross Asset Strategy
Dr Marco Wagner (Germany. France. Italy)
+49 69 136 84335
Benjamin Schröder
+49 69 136 87622
Bernd Weidensteiner (USA. Fed)
+49 69 136 24527
Dr Patrick Kohlmann
(Head Non-Financials)
+49 69 136 22411
Christoph Weil (Euro area)
+49 69 136 24041
Emerging Markets
Dr Simon Quijano-Evans (Head)
+44 20 7475 9200
Dr Bernd Meyer (Head)
+49 69 136 87788
Ted Packmohr
(Head Covered Bonds and
Financials)
+49 69 136 87571
Christoph Dolleschal
(Deputy Head Research)
+49 69 136 21255
Andreas Hürkamp
+49 69 136 45925
Markus Wallner
+49 69 136 21747
Technical Analysis
Achim Matzke (Head)
+49 69 136 29138
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