EUROPE AND GERMANY NEWSLETTER

Jan. 9, 2015

Aureliano Gentilini Head of Research

“Great deeds are usually wrought at great risks.”

– Herodotus (c. 484 BC–425 BC)

EUROPE AND GERMANY NEWSLETTER

MARKETS SHRUG OFF THE ISLAMISTS ATTACK IN PARIS BUOYED BY A ROSIER ECONOMIC SCENARIO IN THE U.S. AND THE HOPED-FOR AGGRESSIVE MOVE FROM THE ECB

Economic growth still remains the greatest

challenge Eurozone has to confront with as well as

the fata morgana of the current decade.

» Markets sell-offs driven at the beginning of the year by the free-fall pattern in oil prices appeared to halt towards the end of the first week of January as positive US job market readings offered some silver lining. At the same time, weak Eurozone macroeconomic data offered hope for an aggressive intervention by the ECB. The ECB is expected to unveil quantitative easing measures as early as in January. The key issues here are when and how, taking into account that any ECB hesitancy to purchase government bonds of peripheral Eurozone countries could undermine confidence in ECB’s commitment to do whatever it takes to save the single currency. » The euro started the year on a shaky footing as it depreciated against the antipodean currencies (the Aussie and the kiwi), and it slid close to a nine-year low against the US dollar as disappointing macro data fueled expectations of a more aggressive move by the ECB at its policy meeting on Jan. 22. Economic growth still remains the greatest challenge Eurozone has to confront with as well as the fata morgana of the current decade. » Also, the specter of a deadlock between the trojka and Athens over austerity policies imposed on Greece and access of Greek banks to ECB funding provided additional reasons to investors to stay away from the euro. According to the Commodity Futures Trading Commission (CFTC) Commitment of Reports data available as of Jan. 8, 2015 market close, large speculators built net-short positions in

the euro FX delta-adjusted options and futures combined to the tune of US dollar 3.21 billion notional value for the two-week period ended Dec. 30. We expect that short net positioning in the euro FX delta-adjusted options and futures combined will continue apace in the short run. » Early consumer price estimates for December appeared to confirm a deflationary pattern for the Eurozone. According to a flash estimate from Eurostat, the Eurozone annual inflation is expected to be -0.2% in December 2014, down from 0.3% in November. The negative rate for the Eurozone annual inflation in December was driven by a decline in energy prices (-6.3%, compared with -2.6% in November), while prices remained stable for food, alcohol & tobacco (0.0%, compared with 0.5% in November) and non-energy industrial goods (0.0%, compared with -0.1% in November). Conversely, an annual increase was expected for services (1.2%, stable compared with November). » Just a day after consumer price data for the Eurozone confirmed the Eurozone slipped into the dangerous territory of deflation, manufacturing data for Germany suffered an unanticipated slump. According to data published by the German Federal Statistical Office (Destatis), price-adjusted new orders in German manufacturing in November 2014 declined a seasonally and working day adjusted 2.4% month on month (following a revised +2.9% in October 2014 compared to one month earlier). Domestic orders decreased at a higher pace (-4.7%), while foreign orders decreased by 0.7%. When the direction of trade in foreign transactions is taken into account, new orders from the euro area rose 2.7% on the previous month, while new orders from other countries declined by 2.6%. Both manufacturers of intermediate goods (-2.3%) and capital goods (-3.1%) recorded decreases in November. Conversely, for consumer goods, an increase in orders of 2.6% was recorded.

EUROPE AND GERMANY NEWSLETTER

» November data confirmed that Germany’s labor market remains healthy, whereas the euro area (EA18) labor market is shaky. In November 2014, roughly 43.1 million persons resident in Germany were in employment according to provisional calculations by Destatis. That was an increase of 417,000 or 1.0% compared with the same month a year earlier. In October 2014, the year-on-year rate of increase came at the same pace of 1.0%. In November 2014, roughly 2.10 million people were unemployed, 25,000 more than a year earlier. Adjusted for seasonal and irregular effects, the number of unemployed persons stood at 2.11 million in November. The adjusted unemployment rate was 5.0% in November 2014, easing from 5.1% in November 2013. According to provisional readings, the number of employed persons increased by 39,000, or 0.1%, month on month in November 2014. Averaging out the readings of the last five years, the increase in the number of persons in employment in November on the respective previous month had been slightly higher (54,000 people). Seasonally adjusted, the number of persons in employment grew slightly by 11,000 in November 2014 compared with the previous month. » According to data published by Eurostat, the euro area (EA18) seasonally-adjusted unemployment rate stood at 11.5% in November 2014, stable compared with October 2014, but down from 11.9% in November 2013. The broader European Union (EU28) unemployment rate came at 10.0% in November 2014, down from 10.1% in October 2014 and from 10.7% in November 2013. Eurostat estimated that 24.423 million persons in the EU28, of whom 18.394 million were in the euro area, were unemployed in November 2014. Compared with the previous month, in November the number of persons unemployed decreased by 19,000 in the EU28, while they increased by 34,000 in the euro area. » German exports data for November pointed to a mixed scenario. According to provisional data

published by Destatis, Germany exported goods to the value of 95.8 billion euros and imported goods to the value of 78.0 billion euros in November 2014. German exports and imports increased by 1.4% and 1.7%, respectively, in November 2014 compared to the same month a year earlier. However, exports and imports showed diverging month-on-month trends on a calendar and seasonally adjusted basis. In fact, while exports declined by 2.1% compared to October 2014, imports rose by 1.5%. The foreign trade balance recorded a surplus of 17.9 billion euros in November 2014. In November 2013, the German current account posted a surplus of 17.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 17.7 billion euros in November 2014. Compared with November 2013, German exports to the Member States of the European Union increased by 4.8%, while imports from those countries rose by 3.2%. Goods to the value of 35.0 billion euros (+2.2% year on year) were exported to the Euro area countries in November 2014, while the value of the goods received from those countries was 35.0 billion euros (+3.1% year on year). In November 2014, goods to the value of 21.1 billion euros (+9.4% year on year) were exported to EU countries non-members of the Eurozone, while the value of goods imported from those countries was 16.4 billion euros (+3.4% year on year). Exports of goods to countries outside the European Union amounted to 39.8 billion euros in November 2014, while imports from those countries amounted to 26.6 billion euros. Compared to the corresponding month a year earlier, in November 2014 exports to countries outside the European Union decreased by 3.0% and imports from those countries by 1.1%.

LIGHT AND SHADOWS – DAX CONSTITUENTS

» According to a notice published by the Shanghai Municipal Commission of Commerce, selected auto dealers registered in Shanghai's free trade zone will be allowed to import and sell cars in China without

EUROPE AND GERMANY NEWSLETTER

the consent of foreign carmakers. Initial concerns about the potential loss of control on prices by automakers in the premium segment were dismissed by Daimler, BMW and Audi, which confirmed that the parallel imports practice will have limited impact on their business in China. In fact, according to rules published by the Shanghai Municipal Commission of Commerce, dealers that will be admitted to the program will be responsible for quality and after-sales service of the imported cars they sell. » The premium brand automaker BMW reported a 9.5% increase in North America sales in December. BMW's subsidiary Rolls-Royce sold 4,063 cars in 2014, thanks to solid demand in the United States. At the same time, BMW agreed to pay 5.1 billion yuan worth of subsidies to its dealers in China to help cover their losses accrued in 2013. » In an interview published on Jan. 6, 2014 by the Wall Street Journal Daimler CEO Zetsche unveiled his plan that aims at overtaking BMW as the world's biggest luxury carmaker by 2020. Most of the Mercedes lineup has been refreshed and Daimler plans to start selling at least 13 all-new models by the end of the decade. At the same time, Daimler has recently unveiled a self-driving concept car at the Consumer Electronics Show in Las Vegas, U.S. Nonetheless, the premium brand has to cope with a slowing growth in China, a difficult situation in Russia as a depreciating ruble create upward pressures on the prices of autos, and a faltering growth in Europe. Also, Brazil economy continues to disappoint. The key question is whether Mercedes will keep pace with the recent strong growth rate in sales. On the positive side, Daimler has announced that has received permission to launch its car-sharing service car2go in Congquing, China. Also, the Mercedes-Benz unit reported a 3% US sales increase for December. » Despite coming below 2012 readings, Germany cars registrations for December 2014 pointed to a

recovering demand. According to figures released at the beginning of January by the VDA industry association, car registrations increased 7% year on year in December. December reading underlined the return of Europe's largest automotive market to annual growth after two years of shrinking sales. Overall car registrations rose to 229,700 autos in December and rose 3% for the overall 2014 to 3.04 million. Recovering demand in Germany resembled a similar trend in Spain and Italy, where annual car sales rose 18.4% and 4.2%, respectively. Conversely, according to figures published by the CCFA auto industry association, annual registrations in France rose only 0.3% for 2014, after declining 6.8% in December. » As announced by Ryanair CEO Michael O’Leary, the budget airline company targets up to 20% German market share, from a current 4%, in the next three to four years. The move aims at eroding Lufthansa market share in its home market, as Mr. O’Leary predicted the German domestic career would fail in its plan to build a low cost business to compete with budget airline companies on lucrative long-haul routes. Shares in Ryanair rose to an all-time high at the beginning of the year after passenger numbers rose for the second month in a row and the budget airline's expanding fleet succeeded in increasing the quota of occupied seats on flights. » As announced by the company at the beginning of the year, the US Food and Drug Administration (FDA) has approved Bayer's gadavist (gadobutrol) injection as the first magnetic resonance contrast agent for pediatric patients less than 2 years of age.

“GREAT DEEDS ARE USUALLY WROUGHT

AT GREAT RISKS.”

– Herodotus (c. 484 BC–425 BC)

EUROPE AND GERMANY NEWSLETTER

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Jan. 9, 2015

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