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8/3/2019 Ekonomika, veřejné finance a reformy v Itálii (dokument v AJ)
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Economic Research
For important disclosure information please see end of this document
`
The euro area is still on the alert for Greece. However, Italy could become an even bigger
problem. We therefore analyse Italy’s public finances. Page 2
Investors’ mistrust of Italy is rising10y Italian government bonds, yield spread versus Bunds of corresponding maturity, in basis points, dailydata
0
100
200
300
400
500
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov
Source: Bloomberg, Commerzbank Research
Product Idea Forward Extra in EUR-JPY: The combination of still positive real yields in
Japan and the on-going sovereign debt crisis in Europe should make the yen a more attractiveproposition than the euro in the coming months. EUR-JPY short positions therefore remain
attractive. Page 5
Outlook for week of 7 November to 11 November
Economic data: German industrial production looks set to have taken a sharp plunge in
September compared with August, offsetting the good results recorded in July and August,
Page 6
Bond market: We still see Bund yields testing new lows before the end of the year. Page 10
FX market: Only one thing seems certain at the moment: volatility combined with risk aversion
will remain high. Page 11
Equity market: Despite the persistent debt crisis in Europe and the higher number of profit
warnings by mid and small caps, the DAX companies are likely to register double-digit profit
growth once again in the third quarter of this year. Page 12
research.commerzbank.com
Week in Focus
Italy: The real stumbling block
04 November 2011
Chief Economist
Dr Jörg Krämer +49 69 136 23650
Managing Editor
Peter Dixon+44 20 7475 [email protected]
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2 research.commerzbank.com 04 November 2011
Italy: The real stumbling block
Politicians no longer rule out the possibility of a disorderly Greek default. Consequently,
pressure on Italy is mounting since it is finding increasing difficulties in securing market
funding. Our analysis suggests that Italy can reduce its debt mountain over the comingyears. But until investors have faith in Italy's efforts, the economy will continue to rely on
foreign support to fund its debt.
The debt burden is weighing heavily …
Italian public debt by the end of 2011 is expected to reach 119.4% of GDP (chart 1). This will put
Italy only behind Greece as the most heavily indebted euro zone economy. Indeed, since the
beginning of monetary union, the budgetary position has tended to deteriorate. The decline in
the deficit from the late-1990s was not the result of fiscal consolidation but was due entirely to
lower interest rates which reduced debt servicing costs (chart 2). In the mid-1990s, the average
annual interest rate on Italian debt was around 9.3% but by 2010 this had fallen to 3.7%. But the
era of cheap money is over for Italy. Today, bond investors require a yield of 6.3% on 10-year
securities, which is almost 450 bps above German levels, and without ECB purchases Italian
yields would be even higher.
… but it is not intolerable
If interest rates were to remain around 6% for a prolonged period, Italy would require a primary
surplus (i.e. a surplus excluding interest payments) of around 4% of GDP simply to stabilise the
debt-to-GDP ratio at 120% (chart 3, page 3). This is based on the assumption that Italian
nominal GDP grows at a rate of 2¼% per year. However, investors are unlikely to be satisfied
with a stable debt ratio and in the wake of the crisis appear no longer willing to tolerate a ratio
above 100%. In order to reduce the debt by 2030 to just 90% of GDP, Italy will have to generate
a primary surplus of 5¼% of GDP (based on the same GDP assumptions); currently the primary
balance is around zero. In order to generate a surplus of more than 5% would require a major
effort, but it is by no means impossible, as a look at past trends shows – in the period from 1995
to 1999, the primary surplus averaged 5.2%.
Consolidation measures must be implemented
Berlusconi has promised to reduce the budget deficit from 3.9% of GDP this year to zero by
2013. This probably requires a primary surplus of 4%. The government is relying on tax
increases to achieve this.1
However a deterioration in economic conditions could mean that this
target will be difficult to achieve. But the government has also announced additional measures if
the economy were to prove weaker than expected, although no concrete measures have yet
been announced. We look for the economy to slide into recession during winter 2011-12
CHART 1: Italian debt burden likely to peak in 2011Public debt as percent of GDP, forecast for 2011
CHART 2: Italy: Deficit declines due to low interest ratesPercent of GDP
60
70
80
90
100
110
120
130
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
-15
-10
-5
0
5
10
15
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Deficit Primary surplus Interest payments
Source: Eurostat, Commerzbank Research Source: Eurostat, Commerzbank Research
1 See also Economic Briefing , "Italy Update: Savings manoeuvre ready to roll", 13 September, 2011.
Christoph WeilTel. +49 69 136 24041
Dr Ulrike Rondorf Tel. +49 69 136 45814
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04 November 2011 research.commerzbank.com 3
and that the economy will register a 0.2% decline in GDP during 2012 on average. Whilst our
expectations lie well below those of the government, there is a risk that even our forecast could
prove optimistic.
And structural reforms are necessary
But in the long-term, such savings are not enough to restore sustainable balance to public
finances. The Italian economy must improve its competitiveness (chart 4), not least becauseother euro zone countries and the ECB are pushing for structural reforms. At last week's EU
summit, Silvio Berlusconi put forward an action plan providing specific dates (see box, page 4).
This reads like the response to an OECD report on Italy in which one critical point is laid out after
another with the suggested improvements. Whilst this is positive per se, many of the reform
plans remain vague, particularly in areas such as reducing red tape; administrative and judicial
reform and the liberalization of various sectors of the economy. The most prominent, and well-
defined, measure is the reform of the pension system which was agreed with Umberto Bossi,
chairman of the Northern League party, shortly before the summit. This plans to raise the
retirement age for both men and women to 67.2
Also very promising, although less prominent, is
the reform to the wage settlement process which has already been adopted and which makes it
easier for companies to deviate from collective agreements. In addition, the Cabinet has decided to
integrate a debt brake into the constitution and abolish provinces as administrative areas.But the political situation remains a major obstacle to the reform process. Changes to the
constitution require a two-thirds majority in parliament, which would require a large majority of the
opposition to vote in favour. It is also uncertain whether measures which require a simple majority
will also make it through parliament. The cabinet is planning to submit a large part of the reform
project to a vote on 15 November. But for some time now, Berlusconi has managed to pass laws in
parliament only with the help of confidence motions. With calls for the government's resignation
growing louder, it will be difficult to pass the reforms in this manner. A broad-based transitional
government could accelerate the reforms but we reckon the prospect of new elections is slender at
this stage.
In summary, we certainly believe there is a good chance that Italy will be able to get its deficit
problem under control. But this will take time. Investors will want to see reform measures bearing
some fruit before they will be willing to allow Italy to borrow at reasonably low rates. Thus Italy willbe forced to refinance its outstanding debt only with the help of international capital. This in turn
requires in the short-term that the ECB will be forced to continue buying Italian bonds in order to
prevent a sharper rise in yields. In the medium-term, these purchases will likely be taken over by
the EFSF. But if the crisis were to escalate, additional instruments such as the purchase of
government bonds on the primary market would have to be implemented.
CHART 3: Growth and interest rates will be decisiveCombinations of primary balance, % of GDP (y-axis) and interestrates (x-axis) required to maintain debt ratio at 119% of GDP(assuming nominal GDP growth of 2¼%)
CHART 4: The Italian economy has clearly lostcompetitivenessUnit labour costs, whole economy, 2000=100
0
1
2
3
4
5
6
7
4 5 6 7 8
primary balance average 1995-1999
primary balance average 1999-2010
85
95
105
115
125
135
145
1999 2001 2003 2005 2007 2009 2011
GER ESP ITA
Source: Commerzbank Research Source: EU Commission, Commerzbank Research
2 See also Economic Briefing, "Italy update: Pension reform in return for resignation" 26 October 2011.
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4 research.commerzbank.com 04 November 2011
Reform Agenda (Timetable):
-Pension reform: The most concrete and prominent measure is the pension reform, on which
Berlusconi and the Head of the Northern League, Umberto Bossi, reached last-minute agreement
ahead of the EU summit. Under the programme, the retirement age for men and women is to be raised
to 67 (resolution expected shortly).
- Infrastructure: The government aims to increase spending in the south to boost growth potential in the
region (15 November); a list of infrastructure projects is to be concluded (within 10 weeks), fiscal
incentives for private co-financing investors.
- Educational system: The independence and competition of schools and universities are to
strengthened (end-2011).
- Labour market reform: Berlusconi‘s letter pledges to introduce measures to fight dualism, to raise the
participation rate of young Italians and women: Juveniles are to integrated in the regular labour
market, part-time employment and jobs in rural areas are to promoted (end-2011); greater flexibility of
working hours (harmonised regulations for all regions – March 2011). Protection against dismissal for
permanent contracts is to be relaxed, particularly in times of economic distress; measures are to beimplemented to fight pseudo self-employment (May 2012).
- Market liberalisation: The regulation of the insurance sector, the utility sector (e.g. gas market) and the
service sector is to be reduced, market-entry barriers for specific professions are to be loosened
(minimum standard rates, for instance for lawyers, already no longer exist). In the public sector,
competition is to be strengthened with regard to water supply (in three months), waste disposal (in six
months), public transport (in nine months) and pharmacies (in twelve months). In this case, it has
already been agreed to open market access and launch privatisations.
- Reduction of bureaucracy: Documentary requirements for companies shall be simplified,
administrative lead times are to be trimmed (within the next six months). The position in the Ease of
Doing Business indicator will be advanced (3 years). The government plans to support the
experimental establishment of special economic zones with “zero bureaucracy” in 2013.
- Innovations: Risk capital will be subject to tax breaks to promote mergers. It is envisaged to provide
funds for R&D in medium-sized companies.
-Public administration: Civil servants will have the duty to ensure full flexibility (every civil servant has to
be prepared to assume flexible tasks, short-time work is to be allowed and every function is subject to
review; in addition, the number of senior civil servants is to be reduced (end-2012). Further
constitutional reforms are either envisaged or already under way: amendments to passive and active
electoral law and the reduction of MPs.
- Privatisation: By selling state property, the Italian government aims to raise EUR 5 bn p.a. over the
next three years. The revenues will be used for infrastructure projects or deleveraging (no new project
until 30 November 2011)
- Legal reform: The duration of civil suits is to be trimmed by 20 percent. The project will be supported
through the creation of a national database, which is to be finished by 30 April 2012.
- Debt ceiling: The constitutional reform is to follow the example of Germany and Spain (end-June 2012
– amendments to the constitution take at least three months in Italy).
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04 November 2011 research.commerzbank.com 5
Product idea: Forward Extra in EUR-JPY
Ineffective JPY intervention offers opportunities
The Japanese Ministry of Finance and the BoJ have intervened to weaken the yen but the
effect of this intervention is unlikely to persist. The combination of still positive real
yields in Japan and the on-going sovereign debt crisis in Europe should make the yen a
more attractive proposition than the euro in the coming months. EUR-JPY short positionstherefore remain attractive.
The Ministry of Finance and the Japanese central bank intervened in the FX market this week.
This was the third time this year that the Japanese Ministry of Finance has intervened in order to
weaken the JPY. EUR-JPY jumped from levels around 107 to levels around 111. But within two
days the effect on EUR-JPY had already vanished – a movement which was also due to events
in the euro zone sovereign debt crisis which weighed significantly on the euro. Even though
Japanese Finance Minister Jun Azumi declared that he will continue to intervene until he is
satisfied, we do not expect to see persistent JPY weakness as a result of interventions.
In order to credibly weaken the yen, the Minister of Finance would have to fundamentally change
his leaning against the wind strategy and clearly communicate such a move. His Swiss
colleagues have demonstrated how to do it. When announcing the intention to defend a lower threshold in EUR-CHF, the SNB left no doubt about its determination to defend the new line in
the sand with unlimited quantities of foreign currency purchases. However, we do not envisage
MoF and BoJ as being prepared to change their strategy. Central bank interventions aimed at
weakening the domestic currency via foreign currency purchases typically result in an increase
in the monetary base – and thus inflationary pressure. The key difference between the SNB’s
credibility and the BoJ’s lack thereof lies in the ability to cope with this inflationary pressure. In
this context, the SNB has no need to worry: the sharp appreciation of the CHF had led to
deflationary risks for the Swiss economy. An increase in the monetary base was therefore
unproblematic. Quite the opposite is true for the BoJ: even though the Japanese economy is
suffering from decades of deflationary pressure the Ministry of Finance is worried about any
increase in inflation expectations as this would lead to a rise in state financing costs via higher
inflation premiums on JGBs. Against the background of a debt-to-GDP ratio in excess of 200%,
the marginal effect of an increase in inflation expectations would be enormous and highly
undesirable from the MoF’s point of view.
As the market is aware of the fact that this dilemma is effectively tying the authorities’ hands with
respect to the necessary intervention volumes, it seems unlikely that the intervention will
succeed in sustainably weakening the JPY. On the contrary: We expect EUR-JPY to edge lower
and therefore recommend a Forward Extra.
Product idea: Forward Extra
Spot (calculated): 107.00
Strike (Worst Case): 106.30
Trigger: 100.00
Nominal amount: EUR 1 M
Duration: 3 months
Trigger style: American (for the entire duration)
Price: Zero cost
The forward extra is a chance-oriented alternative to a conventional FX forward transaction. Itcombines a predefined hedging price (worst case) with the possibility to benefit from an adverseexchange rate movement, i.e. a EUR depreciation/JPY appreciation, up to a certain limit
(American-style trigger).
Tel. +49 (0) 69 136 41250Ulrich Leuchtmann
Tel. +49 69 136 23393
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6 research.commerzbank.com 04 November 2011
Preview – The week of November 7th
to November 11th
Time Region Indicator Period Forecast Survey Last
Monday, 7 November 2011
• 11:00 GER Industrial production Sep mom, sayoy, wda
-3.54.5
0.1 -1.07.7
EUR: Euro finance ministers meet in Brussels
Tuesday, 8 November 2011
7:00 GER Exports Sep mom, sa -2.5 0.2 3.59:30 GBR Industrial production Sep mom, sa
yoy-0.2-1.0
0.1-0.8
0.2-1.0
Trade balance Sep £bn, sa -2.0 – -1.8
• EUR: ECOFIN council
Wednesday, 9 November 2011
2:00 CHN CPI Oct yoy 5.5 5.4 6.1Industrial production Oct yoy 13.5 14.0 13.8
23:50 JPN Machinery Orders Sep mom, sa
yoy-7.011.0
-6.911.4
11.02.1
Thursday, 10 November 2011
6:30 FRA CPI Oct mom, sayoy
0.22.3
– -0.12.2
CPI excl. tobacco Oct 122.73 – 122.5
• 12:00 GBR BoE interest rate decision Nov % 0.50 0.50 0.50
13:30 USA Trade balance Sep $bn, sa -48.0 -46.0 -45.613:30 Initial claims 29 Oct. k, sa 390 – 397
Friday, 11 November 2011
14:55 USA Consumer sentiment (University of Michigan),preliminary
Nov sa 62.0 60.0 60.9
Source: Bloomberg, Commerzbank Economic Research
*Time GMT(add 1 hour for CET, subtract 5 hours for EST), # = Possible release; mom/qoq/yoy: change to previous period in percent, AR = annual rate, sa =
seasonal adjusted, wda = working days adjusted; • = data of highest importance for markets.
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04 November 2011 research.commerzbank.com 7
Economic data preview:German industry: Sharp downturn in September
German industrial production looks set to have taken a sharp plunge in September
versus the previous month, offsetting the good results recorded in July and August,
which were due to the fact that some companies did not shut down their plants for the
holidays. In the months ahead, the decline in unfilled orders is likely to increasinglyweigh on production.
Leading indicators are on the descent and most economists have substantially lowered their
growth outlook for the German economy. So far, “hard” data on industrial production has not
pointed to a slowdown or, worse yet, a sharp contraction. This is set to change. Next Monday,
September manufacturing output data is due for release. We expect a massive drop of 3.5% vs.
August (consensus: 0.1%), as the strong results recorded in July and August were primarily
owed to special effects.
Firstly, summer holidays in North Rhine-Westphalia, a major federal state, were extremely late
this year, which boosted production in July and is now likely to have weighed on output in
September. Secondly, high production levels in July and August are likely to be the main reason
why many companies, particularly in the automotive industry, did not shut down their plants for
the holidays. Hence, automotive production did not decline in August, as usual, resulting in a
markedly higher seasonally-adjusted figure. In September, production looks set to have
normalised, as suggested by the Automobile Association's production figures, which indicate that
car production in September was markedly lower.
Despite the expected minus figure in September, third-quarter industrial production is likely to
have risen by some 2% compared with the second quarter (chart 5). This, however, merely
pushes the downturn from the third to the fourth quarter. On the back of this special effect,
industrial production thus looks set to decline in the final quarter of the year. On top of that, order
intake has slowed, which should increasingly leave its negative imprint on production: Compared
with order intake, current production appears much too high (chart 6). Against this backdrop, we
suggest that fourth-quarter GDP will at best stagnate.
USA: Higher trade deficit in September
With the data calendar virtually blank, the US September trade balance should be an item of
particular interest next week. In our view, the deficit is likely to have increased by USD 2.4bn to
USD 48 bn (consensus USD 46.0 bn), which would correspond to the level assumed by the
statisticians in their US growth estimate for the third quarter. If the deficit were to turn out higher
(or lower), this in itself would point to a downward (upward) revision to the previously reported
growth rate of 2.5%.
CHART 5: Germany – Sharp downturn in September Industrial production, real, seasonally-adjusted, index 2005=100,monthly data and quarterly averages, as of September forecast
CHART 6: Germany – Slimmer order booksIndustrial production, real, seasonally-adjusted, index 2005=100, andtrend based on order intake in recent months
95
100
105
110
115
120
2010 Q2 Q3 Q4 2011 Q2 Q3 Q4
85
90
95
100
105
110
115120
2007 2008 2009 2010 2011
production trend
Source: Global Insight, Commerzbank Research Source: Global Insight, Commerzbank Research
Dr Ulrike Rondorf Tel. +49 69 136 45814
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8 research.commerzbank.com 04 November 2011
Central Bank Watch (1)
Fed
CHART 7: Expected Federal Funds Rate (USD)
0,0
0,2
0,4
0,6
0,8
1,0
current Dez 11 Mrz 12 Jun 12 Sep 12 Dez 12
03.11.11 27.10.11 Commerzbank
Overnight Index Swaps
TABLE 1: Consensus forecast Fed funds rate Q4 11 Q2 12 Q4 12
Consensus 0.25 0.25 0.25
High 0.25 1.25 2.25
Low 0.25 0.25 0.25
Commerzbank 0.25 0.25 0.25
As expected, the Fed passed no new measures at its 1 and 2
November meeting. In the press conference after the
meeting, Fed Chairman Bernanke presented the FOMC
members’ updated economic projections. They assume that
the unemployment rate will remain elevated at between 6.8%
and 7.7% even by 2014. Against the backdrop of forecasts
for a persistently low inflation rate, this calls for an even more
accommodative policy. All the signs are that Bernanke would
like to do more but still has to convince the FOMC. He may
decide to wait until next year, when three avowed hawks
from the regional Federal Reserve Banks will lose their
voting rights in the context of annual rotation. The FOMC’s
new composition shows that only one hawk – Jeffrey Lacker
from the Richmond Fed – will follow them. Apart from this,
economic data and external risks such as the crisis in the
euro zone will determine the exact timing of QE3. Weassume that the Fed will pass further expansionary
measures in the coming months. Purchases of mortgage
backed bonds would be an option, as Bernanke emphasised
at the press conference.
Bernd Weidensteiner
+49 69 136 24527
Source: Bloomberg, Commerzbank Research
ECB
CHART 8: Expected ECB minimum bid rate (EUR)
0,0
0,5
1,0
1,5
2,0
current Dez 11 Mrz 12 Jun 12 Sep 12 Dez 12
03.11.11 27.10.11 Commerzbank
Overnight Index Swaps
At its November meeting, the ECB Council surprisingly
decided to cut the refi rate by 25 basis points to 1.25%,
whereas we believed a cut in December was more likely.
Evidently, the ECB adopted our view that the euro area
economy is heading towards a recession earlier than we
thought. New ECB president Draghi mentioned a significant
downward revision of the bank’s growth forecast being the
key reason for the ECB cutting rates now. Draghi said that the
bank now expects a "mild recession", which would be in line
with our own forecast. Draghi has clearly left the door open
for a further rate cut, saying that the ECB never pre-commits.
We expect the ECB to cut rates by another 25 basis points to
1.0%. Regarding the SMP, ahead of the meeting there hadbeen strong speculation that Draghi might send a softer
message, for example by saying that the ECB is determined
to continue its unconventional measures. However, his
message was even somewhat more hawkish than that of his
predecessor Trichet. Whereas Trichet only emphasised that
the SMP was “ongoing”, Draghi stressed several times that
the programme is “temporary” and “limited”, and that the ECB
is not a lender of last resort. That said, it remains an open
question whether Draghi's words will be followed by similar
deeds. We continue to harbour doubts on that score.
Dr Michael Schubert+49 69 136 23700
TABLE 2: Consensus forecasts ECB minimum bid rate
Q4 11 Q2 12 Q4 12
Consensus 1.25 1.00 1.00
High 1.25 1.25 1.25
Low 1.00 0.75 0.75
Commerzbank 1.25 1.00 1.00
Source: Reuters, Commerzbank Research
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04 November 2011 research.commerzbank.com 9
Central Bank Watch (2)
BoE
CHART 9: Expected interest rate for 3-month funds (GBP)
0,5
1,0
1,5
2,0
current Dez 11 Mrz 12 Jun 12 Sep 12 Dez 12
03.11.11 27.10.11 CommerzbankFutures
Next week's MPC meeting takes place against a backdrop of
deteriorating international sentiment which will pose risks to
the UK economic outlook. This will be reflected in the BoE'snew economic forecast, which will be available to the MPC
and which will be publicly released on 16 November, and is
likely to show a significant downgrade to 2012 growth
prospects. The MPC will be concerned about the drying up of
liquidity, which is being reflected in higher Libor spreads, but
after having already implemented a new round of asset
purchases in October, there is little prospect of policy
changes at next week's meeting. However, ongoing
weakness in the data over the winter will raise the prospect
of additional QE sometime early in 2012.
Peter Dixon
+44 20 7475 1808 Source: Bloomberg, Commerzbank Research
BoJ
CHART 10: Expected interest rate for 3-month funds (JPY)
0,0
0,2
0,4
0,6
0,8
1,0
current Dez 11 Mrz 12 Jun 12 Sep 12 Dez 12
03.11.11 27.10.11 Commerzbank
Futures
Following the orders of the Japanese finance ministry, the
BoJ intervened in the FX market on Monday to curb the
appreciation of the yen. However, as regards the target level
for the yen, Finance Minister Azumi did not draw a clear line,
stating that “we will continue to intervene until we are
satisfied”. Although the volume of the yen sales should have
exceeded that of the previous two interventions this year,
there is a strong likelihood that USD-JPY may soon come
under renewed pressure. The central bank is of the same
opinion. Just two days after the interventions, BoJ member Sayuri Shirai warned that the safe-haven effect might push
the yen up even further, should the euro-zone debt crisis
intensify and investors become more risk adverse.
Dr Christoph Balz
+49 69 136 24889 Source: Bloomberg, Commerzbank Research
RBNZ (New Zealand)
CHART 11: Expected interest rate for 3-month funds (NZD)
2.5
3.0
3.5
4.0
4.5
aktuell Dec-11 Mar-12 Jun-12 Sep-12 Dec-12
03.11.11 27.10.11 Commerzbank
Futures
At its recent meeting at the end of October, the Reserve
Bank of New Zealand (RBNZ) made it clear that it is not
considering rate cuts. As long as global financial market
turbulence and the global slowdown have only a limited
effect on the domestic economy, a rate cut cannot be justified. This holds all the more because the RBNZ delivered
a “pre-emptive” rate cut of 50 basis points after the
Christchurch earthquake in March, leaving it in a position to
remain on hold for some time to come. Moreover, the central
bank held to its view that the expected impetus from
reconstruction following the earthquake will eventually call for
higher interest rates. We expect that the RBNZ will hold the
Official Cash Rate for a longer-than-envisaged period. Next
year, however, it will have to move at a faster pace to tighten
monetary policy.
Antje Präfcke
+49 69 136 43834
Source: Bloomberg, Commerzbank Research
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10 research.commerzbank.com 04 November 2011
Bond market preview:Endgame for Greece? Periphery still under pressure!
The Greek situation is keeping the bond markets in limbo. The scenario of an exit from
the euro may become more tangible if Greece were to dismiss the conditions of the new
bailout package. However the motivation for a referendum appears to have waned
although risk aversion should remain high. The spreads of the peripheral countries over Bunds look set to remain elevated despite ongoing ECB bond buying, and we still see
Bund yields testing new lows before the end of the year.
TABLE 3: Weekly outlook for yields and curve
Bunds US Treasuries
Yield (10 years) Volatile sideways Falling
Curve (10 – 2 years) Flatter Flatter
Source: Commerzbank Research
The relief that followed the euro summit was short-lived, amounting to a re-run of market
movements after previous summits. After a brief period of relief, reality set in once the details
had been examined. Moreover, dramatic developments in Greece have kept the bond markets in
limbo (chart 12). Now that European governments have turned up the pressure on Greece, the
scenario of a Greek exit from the euro in the event of a negative referendum or a rejection of the
bailout conditions may have come a step closer. Thus, risk aversion is likely to remain high for
the time being and will tend to increase risk premia for peripheral government bonds – despite
ongoing buying by the ECB. The moderate recovery of Bund yields in the last few days is likely
to prove a mere blip in a more significant counter-movement following the summit resolutions.
We are sticking to our view that Bund yields will test new lows before the end of the year.
In the coming days, though, the bond market is likely to respond nervously to headlines from
Greece and may trade with big swings in either direction. The meeting of euro zone finance
ministers on Monday evening could shape sentiment for the week, as the latest round of
important macroeconomic data is over for the time being, following today’s US labour market
report. Next week will see few market moving economic indicators.
For the primary market too, there is little activity in the pipeline for next week. Only the
Netherlands, Austria and Finland are about to launch new issues, with demand for AAA-rated
papers of those countries expected to remain high. The peripheral countries (Italy and Spain) are
taking a break, though issues have been announced for the week after and are a reminder that
Italy in particular is in permanent need of funding.
On the other hand, excitement could be provided by the EFSF issue, due in the course of the
next two weeks with a term of ten years and a volume of € 3bn for the ongoing Irish bailout
package. This week’s attempted launch was aborted after market sentiment was hit by the
uncertain situation in Greece. Uncertainty over the debt crisis and the leverage models of the
EFSF have recently caused spreads relative to Bunds to increase significantly (chart 13).
CHART 12: Periphery remains under pressureYields of ten-year government bonds, in percent
CHART 13: EFSF funding well above BundsTen-year EFSF and Bund yields, in percent
4.5
5.0
5.5
6.0
6.5
May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
Spanien Italien
1.5
2.0
2.5
3.0
3.5
4.0
Jul-11 Aug-11 Sep-11 Oct-11 Nov-11
EFSF 3.375% Jul21 Bund 3.25% Jul21
Source: Bloomberg, Commerzbank Research Source: Bloomberg, Commerzbank Research
Momentum outlookfor Bund future7 – 11 November
Economy →
Inflation →
Monetary policy ↑
Trend ↑
Supply →
Risk aversion ↑→
Rainer GuntermannTel. +49 136 87506
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04 November 2011 research.commerzbank.com 11
FX market preview:
Enormous event risk
The markets are unable to take a breather. As soon as one event is over (EU summit) the
next commotion in the form of political turmoil in Greece appears on the horizon. In the
end, only one thing seems certain at the moment: volatility, combined with risk aversion,
will remain high. First of all, this means that the risk for the euro remains on thedownside. Secondly the Bank of Japan’s job will remain difficult.
TABLE 4: Expected weekly trading ranges
Range Bias Range Bias
EUR-USD 1.3500-1.4200 EUR-GBP 0.8500-0.8850
EUR-JPY 103.00-110.00 GBP-USD 1.5600-1.6200
USD-JPY 75.50-79.50 EUR-CHF 1.2001-1.2500
Source: Commerzbank Research
There is no rest for the FX markets. As soon as the EU summit, which produced with a decision
on the second rescue package for Greece, was is over there was is more upheaval. The Greek
government wanted to carry out a referendum on the rescue package. In the meantime, this idea
has been dropped, after the euro zone countries stopped the sixth aid payment for the time
being. However, Prime Minister Papandreou will hold a confidence vote in the Parliament today.
The outcome is unclear. Anyhow, the situation remains uncertain at the moment. Currently, only
one thing seems clear: volatilities and uncertainty on the markets will remain high. A
comprehensive solution to the debt crisis is still not in sight. Even a Greek exit from the euro
zone is in principle not excluded any longer. As a result we see little hope of falling exchange
rate volatilities (chart 14). In view of the event risks, we expect the euro to remain under
pressure.
As risk aversion is likely to remain elevated over the coming days, safe havens like the yen are
expected to be in demand on the FX market. That makes the Bank of Japan’s (BoJ) job more
difficult following intervention to curb the strength of the yen. It did achieve temporary success
(chart 15) but as it is intervening only sporadically, pursuing a policy of leaning against the wind
rather than drawing a line in the sand like the SNB (and fighting the yen strength with all means),
the appreciation pressure on the yen is likely to continue – particular in view of the uncertainty on
the markets (see product idea on page 5).
CHART 14: Volatility unlikely to ease much
EUR-USD implied 1 month ATM volatility, percent
CHART 15: USD-JPY shoots up following BoJ intervention
USD-JPY spot rate, 10 minute data
7
9
11
13
15
17
Jan-11 Apr-11 Jul-11 Oct-11
75.00
76.00
77.00
78.00
79.00
80.00
00-Jan-00 05-Oct-11 11-Oct-11 18-Oct-11 25-Oct-11 31-Oct-11
Source: EBS Source: Bloomberg
Tel. +49 (0) 69 136 41250Antje Praefcke
Tel. +49 69 136 43834
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12 research.commerzbank.com 04 November 2011
Equity market preview:Good reporting season for Q3, but earnings momentum to slow further
Despite the persistent debt crisis in Europe and the higher number of profit warnings by
mid and small caps, DAX companies are likely to register two-digit profit growth once
again in the third quarter of this year. In absolute terms, DAX profits will continue toapproach the record quarterly levels seen in the last few years. Nevertheless, the
earnings momentum is likely to slow further, as we expect a marked cooling of economic
activity in the euro area in particular. TABLE 5: Outperformance of the S&P 500 continues
Earnings 11e Performance (%) since Index points Growth (%) P/E ratio 11e
Index 30/09 30/06 31/12 current 31.12 current 31.12 current 31.12
DAX 30 5,835 6.0 -20.9 -15.6 629 635 -2.3 11.4 9.3 10.9
MDAX 8,730 4.7 -20.1 -13.8 763 729 20.2 25.7 11.4 13.9
Euro Stoxx 50 2,260 3.7 -20.7 -19.1 266 294 1.9 12.3 8.5 9.5
S&P 500 1,218 7.7 -7.8 -3.1 97 95 15.7 13.3 12.6 13.3
Source: Commerzbank Corporates & Markets, I/B/E/S
Now that 44% of all DAX companies have released their figures, we expect the DAX 30
companies to register earnings growth of more than 30% year-on-year in the third quarter
(chart 16). This implies a major pick-up from the earnings growth rate in the preceding quarter
(Q2 2011: -10%). However, the overall figure should be taken with a grain of salt, as a basis
effect and the extraordinary result of Volkswagen are major contributors to this. Nevertheless, in
absolute terms, DAX profits will continue to approach the record quarterly levels seen in the last
few years. With a forecast aggregate profit of roughly €25 bn for all DAX companies in Q3,
profits look set to exceed the best Q3 results since 2003 by almost 10%, but remain 10% below
the all-time record level seen in Q1 2011.
Our forecast for DAX companies’ sales growth in the third quarter is currently roughly -5% year-
on-year. This result is largely due to changes in the consolidation rules of some DAX companies(for example the deconsolidation of the US business at Deutsche Telekom). Adjusted for these
effects, sales growth should be in the (positive) one-digit area.
Despite our favourable expectations for the third quarter, we still believe that the earnings
momentum of DAX companies will continue to slow, as the impact of the favourable basis effect
will diminish and we expect a further, pronounced, cooling in economic activity in the euro area
in particular.
CHART 16: DAX index: strong earnings growth in the third quarter DAX: year-on-year earnings and sales growth, in % DAX: Quarterly Earnings and Sales Growth
47,0437,03
-1,19
8,12
21,3111,31
52,28
13,37
-15,09 -18,37
-32,05-37,74
-7,52
76,36
33,83
56,32
29,21
-10,42
30,46
94,63
-49,63-60
-40
-20
0
20
40
60
80
100
120
Q 1 / 0 6
Q 2 / 0 6
Q 3 / 0 6
Q 4 / 0 6
Q 1 / 0 7
Q 2 / 0 7
Q 3 / 0 7
Q 4 / 0 7
Q 1 / 0 8
Q 2 / 0 8
Q 3 / 0 8
Q 4 / 0 8
Q 1 / 0 9
Q 2 / 0 9
Q 3 / 0 9
Q 4 / 0 9
Q 1 / 1 0
Q 2 /
1 0
Q 3 /
1 0
Q 4 / 1 0
Q 1 / 1 1
Q 2 /
1 1
Q 3 /
1 1
-14
-9
-4
1
6
11
16
21
26
31
Earnings Growth y-o-y in % (lhs)
Sales Growth y-o-y in % (rhs)
n.m.n.m.
Source: Bloomberg, Commerzbank
Markus Wallner Tel. +49 69 136 21747
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04 November 2011 research.commerzbank.com 13
Commerzbank Forecasts
TABLE 6: Growth and inflation
Real GDP (%) Inflation rate (%)
2010 2011 2012 2010 2011 2012
USA 3.0 1.7 2.0 1.6 3.2 2.0
Canada 3.2 2.3 2.0 1.8 2.8 1.8Japan 4.0 -0.5 2.3 -0.7 0.0 0.5Australia 2.7 2.0 3.8 2.8 3.3 3.0Euro area 1.7 1.6 0.0 1.6 2.6 1.6
-Germany 3.7 3.0 0.8 1.1 2.4 1.8-France 1.4 1.5 0.0 1.5 2.0 1.8-Italy 1.2 0.6 -0.2 1.5 2.4 1.5-Spain -0.1 0.7 0.3 1.8 3.0 1.5
United Kingdom 1.8 1.0 1.2 3.3 4.4 2.8Sweden 5.4 4.2 1.5 1.2 3.0 2.3Switzerland 2.6 2.0 0.5 0.7 0.6 1.0Norway 0.3 1.0 1.5 2.4 1.6 1.8
•The biggest economic risk isan escalation of the sovereigndebt crisis in the euro zone.
• We expect a recession in theeuro area during winter 2011/12. Unemployment willrise again.
• The US economy is likely toavoid a recession.
• Weak growth will act todampen inflation.
TABLE 7: Interest rates (end-of-quarter)
03.11.11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12USA
Federal funds rate 0.25 0.25 0.25 0.25 0.25 0.25
3-months Libor 0.44 0.55 0.50 0.40 0.45 0.45
2 years* 0.24 0.20 0.25 0.30 0.30 0.30
5 years* 0.92 0.90 1.00 1.10 1.20 1.30
10 years* 2.05 1.80 2.00 2.20 2.60 2.90
Spread 10-2 years 181 160 175 190 230 260
Swap-Spread 10 years 16 25 25 20 20 20
Euro area
Minimum bid rate 1.25 1.25 1.00 1.00 1.00 1.00
3-months Euribor 1.58 1.20 1.10 1.25 1.20 1.15
2 years* 0.40 0.30 0.40 0.50 0.60 0.60
5 years* 1.03 0.75 0.90 1.10 1.20 1.3010 years* 1.90 1.60 1.70 1.90 2.20 2.40
Spread 10-2 years 151 130 130 140 160 180
Swap-Spread 10 years 64 90 80 60 50 45
United Kingdom
Bank Rate 0.50 0.50 0.50 0.50 0.50 0.50
3-months Libor 0.99 0.90 0.85 0.80 0.80 0.95
2 years* 0.54 0.45 0.55 0.75 0.85 0.95
10 years* 2.36 2.15 2.40 2.70 3.10 3.15
Japan
Over night rate 0.10 0.10 0.10 0.10 0.10 0.10
3-months Libor 0.19 0.20 0.20 0.20 0.20 0.20
2 years* 0.14 0.10 0.20 0.20 0.20 0.20
10 years* 1.00 0.90 1.10 1.20 1.25 1.25
• The structural low-yieldenvironment remains in place.10-year Bund yields should hitnew lows by year-end. Sincethe US economy looksstronger, the interest rateadvantage of Treasuries is setto increase.
• Against the background of animminent euro area recession,and with the sovereign debtcrisis unresolved, the ECB isexpected to ease monetary
policy once again. It will rather cut the key rate than merelythe deposit rate.
• Interest rate hikes are off theagenda in the larger industrialized countries for along time.
• The euro zone yield spreadsseem set to remain on anelevated level. However, theECB should succeed to keep10-y yields in Italy and Spainbelow 6.25%.
TABLE 8: Exchange rates (end-of-quarter)
03.11.11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12
EUR/USD 1.38 1.33 1.33 1.32 1.31 1.30USD/JPY 78 77 77 82 82 83GBP/USD 1.60 1.55 1.56 1.57 1.58 1.59EUR/JPY 107 102 102 108 107 108EUR/CHF 1.21 1.21 1.21 1.21 1.23 1.25EUR/GBP 0.86 0.86 0.85 0.84 0.83 0.82EUR/SEK 9.06 9.20 9.15 9.10 9.00 8.95EUR/NOK 7.73 7.85 7.80 7.75 7.65 7.65AUD/USD 1.04 0.98 0.98 0.99 1.00 1.03NZD/USD 0.79 0.78 0.78 0.79 0.80 0.82
USD/CAD 1.01 1.03 1.02 1.00 0.99 0.97
• The rate differential widens tothe favour of the USD.
• The debt crisis remains anissue and tends to weigh onthe euro since confidenceremains subdued.
• Markets could start toquestion more and more thecredibility of the ECB due toits bond purchases, puttingthe euro under pressure.
Source: Bloomberg. Commerzbank Economic Research;bold change on last week; * Treasuries, Bunds, Gilts, JGBs
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14 research.commerzbank.com 04 November 2011
Research contacts (E-Mail: [email protected])
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