EFTA01469207.pdf

Deutsche Bank Markets Research Global Economics Date 1 July 2014 Early Morning Reid Macro Strategy I'll be honest and say that yesterday's EMR was a bit of a daze. I had a belated party for my 40th on Saturday and spent virtually the entire Friday night awake with my builders trying to put a house back together that has been owned by the builders for 8 months. I had 15 people there until 4am Friday night with 3 of them working non-stop until the first guests arrived at 230pm. Never have I been so stressed and tired. So all day Sunday and Monday morning were a bit of a daze. Sadly I'm now back living with builders again as they finish things off after the party. It was blissful for the few hours we were apart. At least we've moved out of the kitchen where we were living and sleeping for nearly 5 months before last week. Hopefully by the time the second half of the year ends I'll never have to see a builder again. Anyway, the second half has now begun for markets and in our H1/02/ June performance review today we show that most assets have had a positive year so far. So much so that if the year eventually goes to penalties it will end up being a very poor second half showing in line with many of England's in recent years!! We briefly review the numbers at the end but all the data and charts are in the pdf of this document. Its pretty rare to have almost all main global assets in positive territory this far into a year. Central bank liquidity continues to drive markets in our opinion which has helped this synchronised uplift in valuations. However we can't help sensing that there's less joy over these returns than might be expected. Investors are worried about valuations in numerous assets and worried that the Fed might become more hawkish soon. There's little chance of the ECB following suit anytime soon though and European Government bonds have had a very good 2014 so far. Over the last month we've again highlighted how many European Government bond markets have hit multi-century, all time yield lows. Well yesterday it was the turn of the Dutch 10 year yield to go through it's all time low again. The Dutch series is where we have our longest history of any government bond EFTA01469207 market with data going back to 1517 spanning almost half a millennia. The graph is in the pdf today and further shows just how unique the current situation is. The level of uncertainty about how this all ends must by definition be very high given this. So as we start H2, Asian markets are trading with a stronger tone this morning helped by a solid start to the global manufacturing PMIs. The official Chinese manufacturing PMI printed at 51.0, in line with consensus and at a six month high. The final HSBC Chinese manufacturing PMI came in at 50.7, slightly below the flash reading of 50.8, but this is also the highest print of the year. The PMIs for other Asian bellwethers including Indonesia and Taiwan were also up on a month-to-month basis. The Nikkei (+1.2%) is the clear outperformer today, on decent volumes and despite a drop in the Japanese 02 tankan manufacturing index to 12 from 17 previously and 15 expected. The capex component of the Tankan survey was above expectations however (+7.4% vs 6.0%) expected, which is strongest rate of growth since 2007. This has helped USDJPY (+0.1%) today. Outside of Japan, activity has been subdued with Hong Kong markets shut for July 1st holidays. The Indonesian Jim Reid Strategist (+44) 20 754-72943 [email protected] Anthony Ip, CFA Strategist (+61) 2 8258-3668 [email protected] Market Data Index ITX Crossover ITX Europe 125 CDX 125 CDX HY - pts S&P 500 Brent Oil^ Gold^ 10 yr Treasury^ ITX Sen Fin ITX Sub Fin CDX EM ITX Japan ITX Australia ITX Asia XJ Euro NonSov Euro Corp Euro BBB Sterling NonGilt Sterling Corp EFTA01469208 Sterling BBB WTI Oil^ Dollar Index" EUR/USD^ DJ Stoxx 600 NIKKEI Hang Seng VIX Nick Burns, CFA Strategist (+44) 20 754-71970 [email protected] Close 242 62 59 Change +3 +1 +1 108.66 1960 112.55 1327 2.52 68 103 237 68 85 105 69.15 103 133.94 115 139 176 105.65 79.82 1.369 342 15332 23191 11.57 -0.154 -0.04% -0.66% +0.83% -1 bp +2 +3 EFTA01469209 +4 -1 +2 unch unch unch +1 unch unch unch -0.09% -0.27% +0.31% -0.03% +1.12% 0% +0.31 ^ - Change from previous day's 05.30 GMT to 05:30 GMT. Levels as of 05:30 London time. European and US CDS indices above refer to 'old' off the run series Upcoming Events Release ISM manufacturing (June) Construction spending (May) Unit motor vehicle sales (June) DB 55.0 +0.5% 16.4M Prey 55.4 +0.2% 16.7M Con 55.8 +0.5% 16.3M Topical DB Publications World Outlook - The calm before the storm, 25 June 2014 FX Daily - The single most important question for policymakers, 24 June 2014 European Staffing - Later than it seems, 25 June 2014 European Equity Strategy - The return of the stock alpha, 20 Jun 2014 Focus Europe - Down but not out , 20 Jun 2014 Deutsche Bank AG/London DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) EFTA01469210 148/04/2014. EFTA01469211 1 July 2014 Early Morning Reid: Macro Strategy rupiah is poised to record its strongest three-day rally in about fourth months — spurred by comments last week from the Bank of Indonesia that the country's trade balance returned to surplus in May. The AUDUSD is also poised for a solid gain (+0.25%) after the RBA maintained its neutral tone in today's policy meeting. The last trading day of 1H14 failed to bring with it any volatility associated with month-end and half-end portfolio rebalancing. Indeed, yesterday's S&P 500 volumes were about half that compared to the last trading day of 1H13. Adding to that, the S&P 500 closed virtually unchanged at -0.04%, and for the record the last time we saw a gain or loss of more than 1% in the index was April 16th. One theme to note though was the continued underperformance of European banks across the equity and credit spectrum. Yesterday's underperformance was sparked by a 17% fall in the stock of Banco Espirito Santo which is Portugal's largest bank. The price action was dictated by reports that regulators were concerned over corporate governance between the bank and other related companies and there were also reports that Luxembourg justice authorities had launched an investigation into one of the bank's holding companies (Reuters). Portuguese securities regulator banned naked short selling on the bank's stock for one day. The news weighed on Portuguese bond yields which added 8bp, and also on European banking stocks in general (-0.75% vs Stoxx 600 -0.09%). Peripheral bank credit traded about 3-5bp wider yesterday - and the European senior financials index (+2bp) underperformed Main (+1.375bp). The two credit indices were trading flat to each other in the middle of June but the recent underperformance of banks has pushed the basis back to nearly 6bp. We still think its likely that Fin Senior will trade through Main in H2 though. Across the Atlantic, there was focus on the Chicago PMI and home sales data, following which treasury yields spiked up briefly before retracing the move to be largely unchanged on the day. The US Chicago PMI was slightly below expectations 62.6 (vs 63.0 expected) and also below last month's 65.5. Still, our economists note that the PMI was consistent with a large snapback in growth in 02, and they noted the three-month to June average was 63.7 which is the highest since the three months to April 2011. The other regional activity indicator, the Dallas Fed manufacturing outlook rose to 11.4 (vs 8.5 expected and 8.0 prior). Pending home sales rose 6.1% MoM (1.5% expected) which benefited US homebuilders on the equity side (+1.5% yesterday). In terms of Fed speak, the SF Fed's Williams commented that a first rate hike in 2H15 will be appropriate, but he also reiterated that it may be optimal for the Fed to let inflation run above target in order to balance the Fed's dual mandate. Perhaps one of the key themes of 1H14 was the surging M&A activity globally. EFTA01469212 With 1H14 books closed, the final M&A tally was $2.2trillion according to Bloomberg which is a YoY increase of 77%. By region, leading the way was the resurgence of corporate activity in Europe (+109% YoY), though this was coming off a low base, followed closely by North America (+79%). In terms of industry the biggest pickup in activity came in pharma (+677%) and healthcare (+140%). One reason for the surge in M&A has been the accommodative capital markets. We saw an example of that yesterday with a jumbo bond deal from Oracle who priced $10bn in bonds (the second largest USD offering in the year-to-date according to Bloomberg) to fund the purchase of Micros Systems. The deal was sufficiently large to drag other TMT bonds several basis points wider on the day. Looking at some of the geopolitical headlines, Ukrainian President Poroshenko said late on Tuesday that we would end the cease-fire with pro-Russian rebels and vowed to intensify military operations in the country's east. However the president also made some concessions including guaranteeing Russianlanguage rights and more regional autonomy. Russia also offered some concessions yesterday including allowing Ukrainian and international observers in its own border posts along the border with Ukraine. In Iraq, semiPage 2 Deutsche Bank AG/London EFTA01469213 1 July 2014 Early Morning Reid: Macro Strategy autonomous Kurds plan a referendum for independence according to a regional government spokeperson (Reuters). The Kurds plan to keep control of the Kirkuk oil fields. There are some mixed headlines elsewhere in China. Firstly China's banking regulator announced a small change in the way that Loan-to-deposit ratios are calculated which our banking analysts think will reduce the system regulatory LDR ratio by 410bp based on end 2013 data. Our analysts think that this will pave the way for more relaxation of Chinese bank liquidity requirements. Secondly, the latest Macau gaming numbers were reported which showed June casino revenues fell 3.7% YoY in June. This is the first drop since 2009 but some are attributing this to the effects of the World Cup. Turning to the day ahead, the rest of the global manufacturing PMIs/ISMs will be released starting with the final PMIs for Europe. The US manufacturing ISM is expected to show a small bump up to 55.9 (vs 55.4 in May) which would mark a six month high. DB is expecting a print of 55.0. Other highlights on the US data docket are May construction spending and the IBD/TIPP economic optimism index. YTD performance review In YTD terms, of the main indices we track the FTSE-MIB (+14.5%) and the IBEX (+12.8%) have been the star performers. Spanish, Portuguese and Italian bonds have not been far behind. Interestingly commodities make up quite a few of the other top ten places (with the CRB index, Gold, Silver and Oil returning between 7-11%), but also 2 of the worst 3 with Wheat and Copper both down more than 6%. Also negative was Chinese equities (-1.5%) after disappointing growth in H1 which may explain some part of the weakness for certain commodities. The Nikkei (-6.1%) was the only other asset lower YTD in our sample. Apart from these four all the other assets saw a positive 2014 total return. Credit has put in a good performance in 2014 so far with most major indices returning between 4-7% which is impressive in the low yield, spread environment. low For the full numbers for the year, Q2 and June see the charts and tables in today's pdf. We also show the YTD numbers all converted to dollars. Happy H2! Figure 1: Netherlands 10yr Government Bond Yields 0% 5% 10% 15% 20% 25% 30% Source: Deutsche Bank, GFD EFTA01469214 Netherlands 10yr 15171547157716071637166716971727175717871817184718771907193719671997 Deutsche Bank AG/London Page 3 EFTA01469215 1 July 2014 Early Morning Reid: Macro Strategy Figure 2: Total Return Performance of Major Global Financial Assets — June 2014 -15% -10% -5% 0% 5% 10% 15% Corp Bond Govt Bond Equity EM Equity EM Bond Commodity FX Source: Deutsche Bank, Bloomberg Finance LLP, Mark-it Figure 3: Total Return Performance of Major Global Financial Assets — 02 2014 -25% -20% -15% -10% -5% 0% 5% 10% 15% Corp Bond Govt Bond Equity EM Equity EM Bond Commodity FX Source: Deutsche Bank, Bloomberg Finance LLP, Mark-it Page 4 Deutsche Bank AG/London Micex (Russia) IBEX 35 Silver Gold Hang Seng MSCI EM Equities Silver Bovespa Copper S&P 500 Brent DJStoxx 600 EM Bond US WTI Oil BTPs US Fin Sub Gold FTSE 100 EFTA01469216 Spanish bonds EU Sovereign US IG Non-Fin DAX EU Fin Sub US IG Corp EU IG Non-Fin GBP/USD Shanghai Comp US HY Nikkei EU HY Bunds EU Fin Sen US Fin Sen JPY/USD Treasury CRB Index Gilt FTSE-MIB EUR/USD DJStoxx 600 Banks Portugal General Greece Athex Corn Wheat Micex (Russia) Bovespa Nikkei Brent MSCI EM Equities US WTI Oil GBP/USD S&P 500 Copper Shanghai Comp IBEX 35 BTPs Hang Seng Spanish bonds EU Sovereign US HY CRB Index EU IG Non-Fin EM Bond EU HY Bunds US Fin Sub EU Fin Sub EU Fin Sen JPY/USD EFTA01469217 EUR/USD US Fin Sen US IG Corp US IG Non-Fin Treasury DJStoxx 600 Gilt Greece Athex DAX FTSE-MIB FTSE 100 Portugal General DJStoxx 600 Banks Corn Wheat EFTA01469218 1 July 2014 Early Morning Reid: Macro Strategy Figure 4: Total Return Performance of Major Global Financial Assets — YTD 2014 -10% -5% 0% 5% 10% 15% 20% Corp Bond Govt Bond Equity EM Equity EM Bond Commodity FX Source: Deutsche Bank, Bloomberg Finance LLP, Mark-it Figure 5: Total Return Performance of Major Global Financial Assets — YTD 2014 (in USD) -10% -5% 0% 5% 10% 15% 20% Corp Bond Govt Bond Equity EM Equity EM Bond Commodity FX Source: Deutsche Bank, Bloomberg Finance LLP, Mark-it Deutsche Bank AG/London Page 5 FTSE-MIB IBEX 35 Bovespa Gold CRB Index Spanish bonds Portugal General BTPs Silver S&P 500 US WTI Oil Gilt US Fin Sub EU Sovereign US IG Non-Fin DJStoxx 600 MSCI EM Equities EU Fin Sub US IG Corp EFTA01469219 EM Bond FTSE 100 US HY EU HY EU IG Non-Fin Bunds Greece Athex JPY/USD US Fin Sen EU Fin Sen Brent GBP/USD Treasury DAX Hang Seng DJStoxx 600 Banks Corn EUR/USD Nikkei Shanghai Comp Micex (Russia) Copper Wheat FTSE-MIB IBEX 35 Gold CRB Index Spanish bonds Portugal General BTPs Silver S&P 500 US WTI Oil EU Sovereign US Fin Sub DJStoxx 600 EU Fin Sub US IG Non-Fin MSCI EM Equities US IG Corp EM Bond US HY EU HY EU IG Non-Fin Bunds Greece Athex EU Fin Sen JPY/USD US Fin Sen Brent Gilt EFTA01469220 GBP/USD Bovespa Treasury DAX FTSE 100 Hang Seng DJStoxx 600 Banks Corn EUR/USD Micex (Russia) Shanghai Comp Nikkei Copper Wheat EFTA01469221 1 July 2014 Early Morning Reid: Macro Strategy Assets Credit Figure 6: Total Return Performance of Major Global Financial Assets Currency Instruments Corp EUR Non-Fin Fin Sen Fin Sub HY GBP Corp Non-Fin Fin Sen Fin Sub HY USD Corp Non-Fin Fin Sen Fin Sub HY Governments EUR Sovereign Bunds OAT BTPs Equity GBP USD EUR EUR EUR GBP USD USD HKD JPY EUR EUR EUR EUR EUR EM Equities CNY BRL INR RUB EM Bonds USD Spanish bonds EFTA01469222 Gilt Treasury DJ Stoxx 600 DJ Stoxx 600 Banks DAX FTSE 100 S&P 500 S&P 500 Financials Hang Seng Nikkei Greece Athex Portugal General Irish Overall FTSEMIB IBEX 35 Shanghai Composite Bovespa Nifty Micex (Russia) USD MSCI EM EM Bond All EM Bond Asia EM Bond Latam EM Bond EEMEA Commodity USD EM Corp Bond All CRB Index Copper US WTI Oil Brent WTI Sugar Silver Corn Wheat DM FX N/A Gold (spot) DXY Index EUR/USD EUR/JPY JPY/USD GBP/USD GBP/EUR AUD/USD CAD/USD Note: Shaded column shows returns re-based in USD Source: Deutsche Bank, Bloomberg Finance LLP, Mark-it Jan 14 1.4% 1.5% 1.1% EFTA01469223 1.7% 0.6% 2.0% 1.9% 2.3% 1.9% 1.2% 1.6% 2.0% 1.0% 1.2% 0.5% 2.2% 2.2% 2.0% 2.1% 2.8% 2.1% 1.6% -1.6% 1.4% -2.6% -3.5% -3.5% -3.6% -5.5% -8.4% 1.3% 2.5% 2.5% 2.4% 0.7% -3.9% -7.5% -3.2% -3.3% -6.6% -3.5% -0.7% -2.8% -6.3% -0.1% 1.1% -5.9% -0.9% -4.0% -5.2% -1.5% 2.8% -8.2% 3.2% EFTA01469224 1.6% -1.9% -4.9% 3.2% -0.7% 1.2% -1.8% -4.5% Feb 14 Mar 14 0.6% 0.6% 0.4% 1.3% 1.6% 0.5% 0.5% 0.3% 0.8% 1.4% 1.1% 1.2% 0.9% 1.6% 2.2% 0.7% 0.1% 0.2% 1.7% 1.2% 0.1% 0.3% 5.0% 3.4% 4.1% 5.1% 4.6% 3.1% 3.7% -0.4% 11.3% 7.9% 11.7% 5.3% 2.0% 1.1% -1.1% 3.1% -0.7% 3.3% 2.6% 2.0% EFTA01469225 1.9% 3.8% 2.0% 6.7% 1.3% 5.2% 3.2% 5.9% 10.7% 5.4% 7.8% 6.6% -2.0% 2.3% 2.1% 0.3% 1.9% -0.5% 1.9% 0.6% 0.4% 0.4% 0.4% 0.6% 0.7% -0.1% -0.2% -0.1% 0.0% 0.9% 0.1% 0.1% -0.1% 0.4% 0.1% 0.9% 0.4% 0.7% 1.4% 1.7% 0.1% -0.3% -0.7% -0.6% -1.4% -2.6% 0.8% 3.2% -2.6% 0.7% 1.9% EFTA01469226 3.9% -3.3% 6.1% 2.5% -1.1% 7.1% 6.9% -5.2% 3.1% 2.7% 2.3% 3.7% 2.4% 0.5% 0.7% -6.6% -1.0% -0.5% 7.9% -6.8% 9.7% 16.4% -3.2% 0.5% -0.2% 1.2% -1.4% -0.5% -0.3% 3.8% 0.1% Apr 14 May 14 0.9% 0.9% 0.8% 1.4% 1.0% 1.3% 1.3% 0.9% 1.7% 0.8% 1.1% 1.3% 0.7% 1.2% 0.7% 1.0% 0.6% 0.9% 1.2% EFTA01469227 1.1% 0.7% 0.6% 1.6% 0.4% 0.5% 3.1% 0.7% -1.5% 0.0% -3.5% -7.8% -0.7% -1.7% 0.5% 1.6% -0.3% 2.4% -0.1% -4.6% 0.4% 0.8% 0.1% 1.5% 1.1% 0.7% 1.6% 0.1% -1.8% 0.0% -3.0% -2.9% 2.4% 2.3% 0.6% -0.8% 0.7% -0.3% 1.0% 1.3% 0.6% 0.2% 0.8% 0.9% 1.0% 0.8% 0.9% 0.7% 1.4% 1.6% 1.0% EFTA01469228 1.1% 1.0% 1.5% 1.7% 1.2% 1.7% 0.9% 1.0% 1.0% 1.2% 0.7% 0.8% 0.9% 1.1% 2.7% 1.9% 3.5% 1.4% 2.3% 1.4% 5.4% 2.3% -0.5% -1.1% 0.1% 0.8% 3.8% 0.8% -0.8% 8.2% 9.6% 3.5% 2.4% 2.1% 3.2% 2.1% 2.4% -1.3% 3.1% 3.0% 1.6% 0.8% -2.0% -9.4% -12.0% -3.2% 1.1% -1.7% -2.1% 0.4% -0.7% EFTA01469229 1.0% 0.2% 1.1% Jun 14 0.6% 0.7% 0.5% 0.5% 0.6% -0.3% -0.4% -0.4% 0.0% 0.6% 0.1% 0.1% 0.2% 0.5% 0.9% 1.1% 0.6% 1.0% 1.5% 1.3% -0.5% -0.2% -0.5% -5.0% -1.1% -1.2% 2.1% 2.4% 1.3% 3.7% -0.7% -3.4% -4.0% -1.2% 1.7% 2.0% 3.8% 5.7% 4.2% 2.7% 0.7% 0.1% 0.8% 1.1% 0.7% 0.9% 2.1% EFTA01469230 2.6% 3.4% -4.4% 11.8% -8.9% -10.0% 6.2% -0.7% 0.4% 0.0% 0.4% 2.1% 1.7% 1.3% 1.6% Q1 14 2.3% 2.4% 1.9% 3.6% 2.9% 2.4% 2.2% 2.5% 2.7% 3.5% 2.8% 3.3% 1.7% 3.2% 2.8% 3.8% 2.7% 2.9% 5.2% 5.9% 2.3% 1.6% 2.6% 4.2% 0.0% -1.2% 1.8% 2.6% -4.5% -8.2% 14.9% 14.9% 10.7% 14.4% 5.3% EFTA01469231 -3.9% -2.1% 6.7% -9.0% -0.5% 1.7% 3.6% 2.7% -0.4% 2.5% 8.7% -10.9% 3.2% -1.4% 8.3% 1.6% 19.0% 15.2% 6.5% 0.1% 0.2% -1.8% 2.0% 0.6% 0.5% 3.9% -3.9% Q2 14 2.5% 2.7% 2.0% 2.8% 2.3% 2.3% 2.5% 1.5% 2.8% 2.5% 2.7% 3.0% 2.0% 3.4% 2.5% 3.0% 2.2% 3.1% 3.4% 3.3% 1.1% 1.6% 3.9% EFTA01469232 -2.8% 2.9% 3.3% 5.2% 2.3% 6.8% 2.3% -8.8% -5.1% -5.6% 0.1% 7.2% 2.5% 5.5% 14.2% 9.1% 6.7% 3.9% 2.4% 5.6% 4.4% 3.9% 1.2% 5.4% 3.7% 5.0% -6.5% 6.4% -15.5% -19.0% 3.4% -0.4% -0.6% -2.4% 1.9% 2.7% 3.3% 1.8% 3.6% 4.9% 5.2% 4.0% 6.5% 5.3% 4.7% 4.7% 4.0% 5.6% 6.1% 5.6% 6.4% EFTA01469233 3.8% 6.7% 5.3% 7.0% 5.0% 6.1% 8.9% 9.3% 3.5% 3.2% 6.6% 1.3% 2.9% 2.1% 7.1% 5.0% 2.0% -6.1% 4.8% 9.0% 4.5% 14.5% 12.8% -1.5% 3.2% 21.8% -0.7% 6.1% 5.6% 6.1% 8.5% 4.0% 6.5% 10.0% -6.1% 7.1% 3.6% 1.3% 8.0% 0.5% -6.7% 10.1% -0.3% -0.4% -4.1% 3.9% 3.3% 3.8% 5.8% -0.4% YTD YTD (USD) EFTA01469234 4.5% 4.8% 3.6% 6.1% 4.9% 8.2% 8.2% 7.4% 9.1% 9.6% 5.6% 6.4% 3.8% 6.7% 5.3% 6.6% 4.6% 5.7% 8.5% 8.9% 6.9% 3.2% 6.2% 0.9% 2.6% 5.4% 7.1% 5.0% 2.0% -2.4% 4.4% 8.6% 4.1% 14.1% 12.4% -3.9% 10.2% 25.5% -3.9% 6.1% 5.6% 6.1% 8.5% 4.0% 6.5% 10.0% -6.1% 7.1% 3.6% 1.3% 8.0% EFTA01469235 0.5% -6.7% 10.1% Page 6 Deutsche Bank AG/London EFTA01469236 1 July 2014 Early Morning Reid: Macro Strategy Appendix 1 Important Disclosures Additional information available upon request For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Jim Reid/Nick Burns/Anthony Ip Deutsche Bank AG/London Page 7 EFTA01469237 1 July 2014 Early Morning Reid: Macro Strategy Regulatory Disclosures 1. Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2. Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com. 3. 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United Arab Emirates: Deutsche Bank AG in the Dubai International Financial Centre (registered no. 00045) is regulated by the Dubai Financial Services Authority. Deutsche Bank AG - DIFC Branch may only undertake the financial services activities that fall within the scope of its existing DFSA license. Principal place of business in the DIFC: Dubai International Financial Centre, The Gate Village, Building 5, PO Box 504902, Dubai, U.A.E. This information has been distributed by Deutsche Bank AG. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. Risks to Fixed Income Positions Macroeconomic fluctuations often account for most of the risks associated EFTA01469239 with exposures to instruments that promise to pay fixed or variable interest rates. For an investor that is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a Page 8 Deutsche Bank AG/London EFTA01469240 1 July 2014 Early Morning Reid: Macro Strategy loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates - these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which the coupons to be received are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements. Deutsche Bank AG/London Page 9 EFTA01469241 David Folkerts-Landau Group Chief Economist Member of the Group Executive Committee Guy Ashton Global Chief Operating Officer Research Michael Spencer Regional Head Asia Pacific Research International Locations Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phillip Streets Sydney, NSW 2000 Australia Tel: (61) 2 8258 1234 Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EQ United Kingdom Tel: (44) 20 7545 8000 Deutsche Bank AG Grote Gallusstra@e 10-14 60272 Frankfurt am Main Germany Tel: (49) 69 910 00 Deutsche Bank Securities Inc 60 Wall Street New York, NY 10005 United States of America Tel: (1) 212 250 2500 Deutsche Bank AG Filiale Hongkong International Commerce Centre, 1 Austin Road West,Kowloon, Hong Kong Tel: (852) 2203 8888 Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6770 Marcel Cassard Global Head FICC Research & Global Macro Economics Ralf Hoffmann Regional Head Deutsche Bank Research, Germany Richard Smith and Steve Pollard EFTA01469242 Co-Global Heads Equity Research Andreas Neubauer Regional Head Equity Research, Germany Steve Pollard Regional Head Americas Research Global Disclaimer The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). 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