landesbank baden-württemberg - lbbw am · landesbank baden-württemberg | a lot of movement since...

Landesbank Baden-Württemberg

Capital Markets Compass December 2016.

Macro | Rates | Credits | Equities

Brexit, Trump, "no" vote in Italy – What else could shock

the markets?

Landesbank Baden-Württemberg |

Agenda.

Introductory note…………………………….……………………………………………………………………………….... 3

Overview..................................................................................................................................................... 5

Special topic: Italy says no to constitutional reforms - potential consequences........................................... 11

Macroeconomics and interest rates…………………..………………………….................................................... 22

Credits........................................................................................................................................................ 45

Equities……………………..………………………………………………………………............................................. 56

Forecasts and asset allocation………….………….………………………………………………………………………... 67

Appendix ………………………………………..…………………………................................................………….... 75

06/12/2016 | Capital Markets Compass December 2016. Macro | Rates | Credits | Equities


Introductory note


Dear Reader,

A turbulent year is drawing to a close. There have been three major electoral results this year which could hardly have been predicted, namely the Brexit vote, the election of Donald Trump and a rejection of Renzi's reform plans in Italy. During this same period, however, we have also learned that financial markets do not by any means always exaggerate. Where some had predicted the end of the Western world, or at least the end of the EU, the consequences were merely calculated calmly in the markets. The results do not seem to have led to any lasting jitters among investors. Price losses after the Brexit vote had been offset within a week; in the case of Trump's election, the trend turned around the very same day, while the "no" vote in Italy was even followed by a small price rally. Meanwhile, forex and bond markets are currently more focused on monetary-policy issues. The signs seem to indicate that the Fed will raise interest rates on 14 December, and then twice more in 2017. The ECB has put together a package of measures that only looks at first glance like a slow exit from unconventional monetary policy. In fact, the monetary policy remains (at least) as expansionary as before. The market has responded very volatile to the ECB's decisions. It took a little while for the opinion that it was a dovish programme.

Next year, there are likely to be further political upsets. Elections take place next year in France and Germany, while Donald Trump will take up office in the US. Let us therefore take advantage of the wind-down which the turn of the year usually brings. We will definitely need to feel well rested in the New Year, since we will need stamina and above all strong nerves. As usual, our Capital Markets Compass will accompany you next year. In view of the festive season, however, our next issue will not come out until the second Tuesday of January.

Yours, Uwe Burkert

Head of Research Uwe Burkert Chief Economist + 49 / (0) 7 11/ 1 27 – 734 62 [email protected]


Agenda.


Overview..................................................................................................................................................... 5



Credits........................................................................................................................................................ 45

Equities……………………..………………………………………………………………............................................. 56


Appendix ………………………………………..…………………………................................................………….... 75



What is moving the markets in December?


After Renzi's resignation, it remains to be seen whether early elections are called or whether there will be a transition government until the spring of 2018.

We definitely expect a hike in the Fed funds rate of 25 bp on 14 December. The market-implied probability stands at 100%.

Head of Strategy Research Dr. Markus Herrmann Managing Director + 49 711 127–42293 [email protected]

Group Head Strategy Rolf Schäffer, CIIA Executive Director +49 711 127–76580 [email protected]

Overview


Our topics in December.

In our special topic, we look at the outcome of the Italian referendum. Italy's electorate has clearly rejected changes in the constitution by 59% to 41%. Prime Minister Renzi has announced his resignation. It remains to be seen whether there will be fresh elections or whether there will be a transition government up to the spring of 2018. A scenario of fresh elections is associated with potential - but in our view unlikely - exit scenarios from the E(M)U. Italy's main problem apart from a high national debt and further weak growth is the restructuring of the banking sector. Renzi's resignation means that a quick solution is now less likely.

In the macroeconomics and interest-rate section, we ask what consequences Donald Trump's presidency might have for the economy and money markets. More debts, higher inflation: Will Trump's election really be a game changer for the US bond market? A Fed rate hike in December is already a fait accompli. In our view, there are likely to be two further rate rises in 2017. Last week's OPEC agreement should moreover ensure that inflation no longer falls further. We also look at the question of whether the EURUSD exchange rate pair is moving towards parity.

As regards credits, all eyes are on the Italian banking sector. In our view, the "no" vote will make the return to health of the Italian banking sector more difficult. Moreover, in the financials segment, we look at Moody's new senior-senior rating category. We still see more risks than opportunities for non-financials from periphery countries.

Trump's election has triggered a sector rotation in the equity market. Bank, pharmaceutical and construction stocks were among the winners. Losers were initially IT and dividend stocks. We present our sector favorites in the context of the LBBW sector model for 2017. We regard a level of 11,500 as realistic for the DAX by the end of 2017. The fundamental conviction of investor is still high and equities are still an attractive choice in relation to fixed income paper.


Overview


A lot of movement since the beginning of November.

US equities and commodities up – gold, EM equities and bonds down.

The performance in November was strongly influenced by the result of the US presidential election.

US equities were the biggest gainers. EM equities lost ground in the wake of Donald Trump's victory.

A marked increase in capital-market yields dampened the entire fixed-income market. None of the bond asset classes we cover posted a positive return in November.

The performance of US treasuries would have been even more negative had forex gains not limited losses.

Gold was the biggest loser, down by over 5%, as rising yields triggered a sell-off mood.

Sources: Thomson Reuters, LBBW Research.

Performance YTD and since the end of October (as at 02/12/2016)


Overview

-15%

-10%

-5%

0%

5%

10%

15%

20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Performance in 2016Performance since end of October * Euro basis ** hard currencies, Euro hedged


This month's chart: "No" to constitutional changes in Italy only led to marginal

reversal in the markets. Equities and euro/USD above Friday's level.


Sources: Bloomberg, LBBW Research

Overview

2960

2980

3000

3020

3040

3060

3080

Euro Stoxx 50 Future - intraday

01.12.16 02.12.16 05.12.16

1,05

1,06

1,07

1,08

EURUSD - intraday

01.12.16 02.12.16 05.12.16

Euro Stoxx 50 Future – intraday EUR/USD – intraday


Key dates in December

Our highlight: ECB Governing Council Meeting on 08 December.


The Fed has clearly signaled that it will go ahead with its first rate hike since December 2015 on 14 December. In this case, keen anticipation in the market is likely to be focused on the accompanying Statement.

Italy has voted: The eagerly anticipated constitutional referendum has ended with a clear rejection and the resignation of Prime Minister Renzi.

The EU Summit is also likely to discuss the outcome of the referendum and its political implications.

Overview

Th Fr Sa Su Mo Tu Wed Th Fr Sa Su Mo Tu Wed Th Fr Sa Su Mo Tu Wed Th Fr Sa Su Mo Tu Wed Th Fr Sa

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

2.12. US: November labor market report

4.12. Constitutional referendum in Italy

4.12. Austria: repeat of presidential election

5.12. Ecofin meeting

8.12. ECB interest-rate decision (new projections, first time for 2019)

9.12. Rating review France (Fitch)

14.12. FOMC meeting

15.12. ECB TLTRO II: third tranche

EU summit of heads of state and government 15./16.12.

CW 51 CW 50 CW 49 CW 52 CW 48


Agenda.


Overview..................................................................................................................................................... 5



Credits........................................................................................................................................................ 45

Equities……………………..………………………………………………………………............................................. 56


Appendix ………………………………………..…………………………................................................………….... 75



Italy's "no" to constitutional reform and potential consequences.

06/12/2016

Special topic

Italian voters have rejected constitutional reform by 59% to 41% in the referendum. Turn-out was around 70%.

Prime Minister Renzi has announced his resignation.

It remains to be seen whether there will be fresh elections or whether there will be a transition government up to the spring of 2018.

A scenario of fresh elections is associated with potential - but in our view unlikely - exit scenarios from the E(M)U.

Italy's main problem apart from a high national debt and further weak growth is the restructuring of the banking sector. Renzi's resignation means that a quick solution is now less likely.

In view of events in Italy, the ECB could delay a decision about whether it carries on with or ends its asset purchase program by March 2017.

Dr. Jens-Oliver Niklasch +49 / (0)711 / 127 – 76371 [email protected]

| Capital Markets Compass December 2016. Macro | Rates | Credits | Equities


Political scenarios after the referendum.

06/12/2016

Italy

Referendum on 4 December:

Renzi loses and goes

technocratic

transition government

Quick election

Reform course continues

10%

M5S

wins

12.5%


In the event of regular

elections on 23 May

2018, M5S wins

20%

Main scenario:

no change

reform

logjam

45%

M5S does not

win a majority

12.5%

M5S position on

eurozone unclear,

Grillo wants

referendum Sources: press, graph © IIF, own estimate of probabilities

Landesbank Baden-Württemberg | 06/12/2016

Although Italy is back on growth track, it is much slower. GDP growth in Q3 was 0.3% q-o-q or 1.0% y-o-y.

However, this growth was driven by state consumption at 0.8% q-o-q, as was already the case in Q1 when growth was supported by state spending.

The growth composition is permanently in conflict with the public purse's long-standing need to reform.

GDP growth y-o-y and economic sentiment

Little movement on the economic front –

Italy only saved from shrinking in Q2 by net exports.

Sources: Thomson Reuters Financial, LBBW Research

Italy


70

80

90

100

110

120

-8

-6

-4

-2

0

2

4

03 04 05 06 07 08 09 10 11 12 13 14 15 16

Italien BIP Y/Y (l.S.) Italien Economic Sentiment (r.S.)Italy GDP Y/Y % Italy Economic Sentiment (rhs)

Landesbank Baden-Württemberg | 06/12/2016 | Capital Markets Compass December 2016. Macro | Rates | Credits | Equities

Italy's huge debt has settled down at around 135% of GDP.

Deficits recently stood at just under 3% of GDP. European Commission forecasts suggest that they are likely to remain at this level in the next few years.

Italy is benefiting from the ECB and Eurosystem's bond purchases. The Eurosystem now holds around 12% of the state's outstanding bonds as part of the PSPP (public sector purchase programme).

In addition, Italy is also extending its fiscal leeway at present with each bond with matures as a result of the ECB's low interest-rate policy.

Debt and deficits as % of GDP

National debt and deficits.

Italy

Sources: Thomson Reuters Financial, LBBW Research

60

70

80

90

100

110

120

130

140-6

-5

-4

-3

-2

-1

02007 2008 2009 2010 2011 2012 2013 2014 2015 2016 (P) 2017(P) 2018 (P)

Schuldenstand in % des BIP Defizit (LINKE SKALA; invertiert)public debt (% of GDP) budget deficit (lhs, inverted)


Since the outbreak of the financial and debt crisis, Italy's banks have been battling against a relentless increase in non-performing loans (NPL). The NPL ratio has risen from under 3% to over 12% with rising unemployment (since the outbreak of the financial crisis, unemployment is up from just over 7% to over 12%), and GDP which was still 8% lower in 2015 than it was in 2007. Loans to companies account for around 70% of these.

Experts estimate the capital requirement of Italy's banks at EUR 30-100bn. One of the reasons for this wide range is that it is unclear how solid the collateral underpinning the loans is.

Non-performing loans as % of the loans of Italian MFIs to private non-financials

The problem facing the banking sector.

Italy

Sources: Thomson Financial Reuters, LBBW

0

2

4

6

8

10

12

14

Jan. 07 Jan. 08 Jan. 09 Jan. 10 Jan. 11 Jan. 12 Jan. 13 Jan. 14 Jan. 15 Jan. 16 Jan. 17


If banks seek state support, the EU regulations on aid must also be taken into account.

These date back to July 2013, i.e. before the BRRD Directive came into force.

Its terms were confirmed by the European Court of Justice in July 2016 - albeit in relation to the legality of the involvement of creditors in support for Slovenian institutions in 2013.

These rules essentially make provision, for example, for the participation of secondary creditors. Retail bonds also exist in the form of subordinated claims.


EBA stress test / Italian banks / EU aid regulations. What is it important to

know?

06/12/2016

Source: Banking Communication of the EU Commission 2013/C216/01 on the application of rules on state aid for banks, LBBW Research. See also Art. 107 AEUV ("Treaty of Lisbon") on the aid to be agreed with the internal

market.

Italy

Point 29: The Commission can only approve the measure if the member country has proved that all the options to restrict such aid to the minimum have been exhausted. A capital creation plan must be presented, which contains any measures to share the burden with shareholders and secondary creditors.

Point 41: Appropriate burden sharing … generally includes contributions from holders of hybrid capital and subordinated debt instruments.

Point 42: The Commission will not seek any contribution from senior creditors as an obligatory element of the burden sharing under the aid regulations.

"Banking Communication" of the EU Commission of July 2013 (2013/C216/01) – extracts of relevant points (abbreviated and summarized)


Liabilities to retail customers – potential future implications in view of the

liability cascade.

Italy

Sources: Moody’s® November 2015 Banking System Outlook Italy of October 2016, Bank of Italy, Consob, Dealogic, LBBW Research

| Capital Markets Compass December 2016. Macro | Rates | Credits | Equities 06/12/2016

Retail bonds are an important funding instrument for Italian banks. From a political point of view, they are a major obstacle in the way of a potential bail-in.

As a result of bail-in debates and fewer tax incentives, however, retail bonds should de facto "disappear" from the market from 2018 onwards at the latest.

The outcome of the constitutional referendum could speed up this trend. Substitution through (secured) deposits is likely thereby.

Deposits and bonds held by private households with banks in Italy in 2015

0

100

200

300

400

500

SubordinatedRetail Bonds

SeniorUnsecured Retail

Bonds

Deposits > 100TEUR

Deposits < 100TEUR


Italy's government bonds came under pressure ahead of the referendum.

In contrast, the outcome of the referendum itself did not lead to much movement.

As regard political uncertainty, we recommend a neutral weighting for Italian bonds.

Spreads look stable at present since the market has reacted calmly after the referendum.

However, if a transition government cannot be formed, then the prospect of fresh elections with an M5S victory could shock the markets. In addition, it is still possible that M5S would be the strongest party if the next elections take place in the spring of 2018.

Yields of 10-year Italian BTPs and spread vs. 10-year Bunds

Government bonds under pressure for weeks; neutral weighting recommended.

Italy

Sources: Thomson Financial Reuters, LBBW Research

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

0.50

0.75

1.00

1.25

1.50

1.75

2.00

2.25

2.50

Jan.16

Feb.16

Mrz.16

Apr.16

Mai.16

Jun.16

Jul.16

Aug.16

Sep.16

Okt.16

Nov.16

Dez.16

Italien BTP 10 Jahre Spread zu Bund 10 JahreItaly 10Y yield spread vs. 10Y Bunds


Italy/ECB

Renzi's resignation and consequences for the markets and economy.

Sources: Thomson Financial Reuters, LBBW Research

The facts:

Renzi resignation

Transition government and fresh election in spring of 2018 or

Early election now.

Italian political establishment powerless for the moment as regards decisions in the E(M)U.

Restructuring of It. banks postponed in view of problem surrounding retail investors/customers.

Speculative attacks on the EMU periphery in bond markets. Spreads rise and ECB activates OMT.

Weak lending: Italy's GDP growth eases up again.

ECB in a quandary: Will it be better to support the euro with a tighter monetary policy or protect the bond market against speculative attacks? In the last few years, the decision always went in favor of the bond markets!

Italy accounts for 15.5% of the EMU's GDP

A much weaker economic trend in such a big country could prompt the ECB to wait.

ECB halts or delays exit (very slow in any case)

from very expansive

monetary policy


The ECB has put together a package of measures that only looks at first glance like a slow exit from unconventional monetary policy. In fact, the monetary policy remains (at least) as expansionary as before. The ECB will therefore continue its current program by March 2017. From April 2017 onwards, the central bank will buy monthly assets for 60 billion euros by December 2017 and thus formally reduce the monthly volume.

In addition, the ECB will reinvest maturities from previous purchases. This means that the gap of 20 billion euros from the old program will be almost closed, perhaps even more. If the situation of the economy or the financial markets requires it, the ECB might even increase its monthly purchase volume again.

In addition, the ECB has decided to relax the parameters of its program. As from January 2017, it will reduce the minimum maturity of the bonds to one year (previously two years). In addition, it (or the Eurosystem 's central banks) will also issue bonds with a yield below the rate of -0.40% if necessary (i.e., to reach the monthly volume).

The key rates remain unchanged. The projections for inflation and growth are little changed. The new projections for 2019 are close to the 2018 projections. On average, the ECB expects GDP growth of 1.7% (2016 and 2017) and 1.6% (2018 and 2019) respectively in 2016 and inflation increasing from 0.2% in 2016 to 1.3% in 2017 and to 1.5% and 1.7% respectively in the two subsequent years.

The market has responded very volatile to the ECB's decisions. It took a little while for the opinion that it was a dovish programme.

At first, investors were surprised by the lower monthly purchase volume. The euro started to rise on the markets and then lost significantly. The yield curve for government bonds has clearly steepened, as the two - year bonds benefited from the purchase notice, while the ten-year bonds, presumably were burdened by the inflationary incentives.

ECB extends asset purchases by the end of 2017 and reduces monthly volume.

ECB


Agenda.


Overview..................................................................................................................................................... 5



Credits........................................................................................................................................................ 45

Equities……………………..………………………………………………………………............................................. 56


Appendix ………………………………………..…………………………................................................………….... 75



Macroeconomics & interest rates


Rate hike by Fed in December a fait accompli.

More debts, higher inflation: Will Trump's election really be a game changer for the US bond market?

Is the EURUSD exchange rate pair moving towards parity?

OPEC agreement should ensure that inflation no longer falls any further.

Elmar Völker

Tel: + 49 711 127–7 63 69 [email protected]

Dirk Chlench Tel: + 49 711 127–7 61 36 [email protected]


Donald Trump before and after the election!

Obamacare "If we don't repeal and replace Obamacare, we will destroy American health care forever."

Paris Climate Deal "Any regulation that's outdated, unnecessary, bad for workers or contrary to the national interest will be scrapped and scrapped completely."

International trade policy (NAFTA) "The worst trade deal in history". "If we cannot negotiate a better deal, then we will pull out"; TPP is a "potential disaster" for the US

Mexico "We recognize and respect the right of any country to build a physical barrier or wall on any of its borders..."

Hillary Clinton "You'd be in jail."

Obamacare "I Googled it, and, I must say, I was surprised (...) There was a lot in it that really made sense, to be honest."

Paris Climate Deal Trump now says he has an "open mind" about the accord!

International trade policy Reiterated in similar vein!

Mexico not reiterated!

Hillary Clinton Trump now wants to "move forward, not backwards. I don't want to hurt the Clintons, I really don't."

Source: kurier.at, Web.de, Tagesschau.de, Gratis-mmorpg.com, CNN.com, LBBW Research

before: after:




The ISM Manufacturing PMI climbed from 51.9 points in October 2016 to 53.2 points in November 2016, a slightly stronger rise than generally expected.

According to the Institute for Supply Management (ISM), most responses to its survey come in towards the end of the month. In other words, potential effects from the election on 8 November should be reflected in the index.

Sources: Thomson Reuters, LBBW Research

Sentiment in manufacturing continued to improve in November.

ISM Manufacturing Index, seasonally-adjusted monthly figures, diffusion index



Long-term inflation expectations exceed Fed's 2% target.


Inflation expectation based on prices for US sovereign linkers, weekly figures (%)




The number of people in employment (survey of companies) rose by 178 thousand in November, and was therefore in line with consensus expectations. However, the results of the ADP survey had suggested it would be more.

Employment growth in the two previous months was revised down by a total 2,000.

Unemployment unexpectedly fell from 4.9% in October to 4.6% in November.

Average hourly wages fell by 0.1% m-o-m in November, against +0.4% m-o-m in October.


US November labor market report something of a riddle.

No. of people in work, m-o-m change in thousands



Federal Reserve: We believe two rate hikes are likely in 2017 – this is now priced

in by the market!


Irrespective of the weak point with hourly wages, the labor market report for November should be no hurdle for the rate hike indicated for the next FOMC meeting on 14 December – that is a fait accompli.

Moreover, our own forecasts are in line with those of the Fed, according to which two rate hikes are likely next year.

Implication for the bond market: In the short term, a rate hike in December 2016 is firmly priced in and will therefore not mean any (additional) price risk; even mid term, market participants are now in step with the Fed's projections.



Benchmark-rate expectations in the market based on futures prices, FOMC projections and LBBW forecast

0,00

0,50

1,00

1,50

0,00

0,50

1,00

1,50

Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18

Fed Funds Effective Rate

market expectation based on Fed funds futures (current)

market expectation prior to the US election

LBBW forecast

median FOMC rate projections (September 2016)


US bond market: what has happened and what's next?


Picture in the US bond market was determined not by the Fed's lift-off begun in December 2015, but rather by economic worries, the Brexit vote and expectations of further QE measures in Europe and Japan.

The 10-year yield even remained below the lowest analyst forecast over wide stretches, and even hit a new all-time low in the summer.

As regards the Fed, the situation now is similar to what it was a year ago (rate rise likely in December). However, recently, worries of a rising US deficit and higher inflation as a result of Donald Trump's policy ushered in a sharp rise in the yield. Turnaround?

Sources: Thomson Reuters, Consensus Economics forecast,

LBBW Research


Yields of 10-year US treasuries and LBBW forecast now and in November 2015


USD bond market: Fed call points to continuation of latest rise in yield – but flatter

than in the past in view of the Fed's cautious rhetoric.



Yield 10-year US treasuries and ideal trend in past phases of change in direction of interest rates


1,25

1,50

1,75

2,00

2,25

2,50

2,75

Jul. 15 Okt. 15 Jan. 16 Apr. 16 Jul. 16 Okt. 16 Jan. 17 Apr. 17

10Y UST

projection based on model development derived from average yield change from 1994, 1999 and2004

expected time of "Re-Lift-Off"


US government bond market: Foreign central banks and state funds reducing

their treasury holdings on major scale.


TIC data ytd show that demand from private investors from overseas for long US treasuries has already fallen significantly since the pro rata net purchase volume up to August was well down y-o-y at USD 65bn.

At the same time, public-sector investors, i.e. central banks and state funds, are continuing their net sales on a major scale: In the first 9 months of the year, net sales amounted to USD 310bn, more than in the whole of 2015!

Demand for treasuries is therefore based almost exclusively on the domestic market – and therefore seems more exposed to a change of sentiment!



Net purchases of long US treasuries by overseas investors; private and public investors (USD bn; 2016: up to and incl. September)

-257

-400

-300

-200

-100

0

100

200

300

400

500

201620152014201320122011

net private purchases of long-term treasuries, full year (in USD bn.; RS)

net official purchases of long-term treasuries, full year (in USD bn.; RS)

total net purchases


USD yield curve: steepness near the historical average – peak figures from the

phases of low interest rates still leave room for quite a bit of potential.


The steepness of the treasury yield curve (10Y-2Y), now at around 130 bp, is near its historical average.

According to fundamental benchmarks, especially in terms of the very negative real key interest rate, the curve is still much too flat.

The peak figures from the current interest rate cycle have ranged from 250 to just under 300 bp. Even with unchanged short-term yields (2Y UST currently at just under 1%), this would imply theoretical potential up to a range of 3.5-4% for the 10Y yields.



Yield differential 10-2Y US Treasury and real key interest rate

-3

-2

-1

0

1

2

3

4

5-50

0

50

100

150

200

250

300

Jan 98 Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16

steepness US Treasury curve (10Y-2Y) real Fed Funds (RS, based on CPI core rate)

average since 1990


USD bond market: if there is really a more fundamental trend reversal going on,

how far can it go?


We still believe it is too early to declare Donald Trump as the major factor triggering a new bearish trend on the bond market.

But if he is, how far might the yield increase go in the next few months?

Reference scenario 1: Taper Tantrum of 2013. The potential for an increase reaches a range of a good 3% for the 10Y yield.

Reference scenario 2: Bear market of 1994 ("Bond Vigilantes"). Incipient interest rate change and the spending behavior of Bill Clinton (later retracted in part) drive up yields by a good 250 bp. The potential for an increase then reaches up to a good 4%.



Yield of 10Y US government bonds and projections based on two historical bear market scenarios

1,25

1,50

1,75

2,00

2,25

2,50

2,75

3,00

3,25

3,50

3,75

4,00

4,25

1,25

1,50

1,75

2,00

2,25

2,50

2,75

3,00

3,25

3,50

3,75

4,00

4,25

Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17

yield development 10Y UST (weekly data)

projection based on Fed Tapering scenario ("Taper Tantrum"; starting point: 22.05.13)

projection based on 1994 bear market ("Bond Vigilantes"; starting point: yield low of Oct. 1993)

Trump is elected US president


The US dollar was firm against the deutschmark for some years after Ronald

Reagan became President thanks to the interest-rate advantage.


Monthly figures



-5,4

-4,6

-3,8

-3,0

-2,2

-1,4

-0,6

0,2

1,0

1,8

2,6

3,4

0,5

0,6

0,7

0,8

0,9

1,0

1,1

1,2

1,3

1,4

1,5

1,6

1980 1985 1990 1995 2000 2005 2010 2015

Reagan Euro in US-Dollar, vor 1999 via DM Renditedifferenz Bund minus T-Note 10-Jahre (rechte Skala)Reagan EURUSD (vs. DEM before 1999) spread vs. 10Y Bunds minus 10Y Treasuries (rhs)


US bond market: Treasury yield has now caught up rise in long-term inflation

expectations.


Solid economic data and speculation regarding the consequences of fiscally expansive and, at the same time, protectionist policies on the part of the new president have caused a visible rise in the long-term inflation expectations of late.

When measured in 10Y inflation swaps, the latter have been near their peak since mid-2015.

Back then, 10-year treasuries still yielded just under 2.5%, i.e. at a current level of around 2.40% the treasury yield has now largely closed the earlier gap.



10-year US Treasury yields and long-term inflation expectations from 10Y inflation swaps

1,40

1,60

1,80

2,00

2,20

2,40

2,60

2,80

1,25

1,50

1,75

2,00

2,25

2,50

2,75

3,00

3,25

Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16

10Y US-Treasury yield 10Y US inflation expectations (RS)


Will the yield pick-up of US Treasuries continue to/once again attract

international investors? Yield pick-up gains again due to steeper US curve!


10Y US treasuries feature a yield pick-up of around 220 bp over Japanese government securities.

After costs for (short-term) currency hedging, the pick-up dwindles significantly, but a significant steepening of the curve would make it noticeably more attractive once again.

A comparison with German Bunds shows a similar picture: The EUR-hedged treasury yield is currently some 20 bp over the 10Y Bund yield.

=> Despite the absolute yield pick-up seen once again for many foreign investors, US Treasuries are not as attractive as they appear to be, but the boost in yields following the election of Trump could pique more interest.

Sources: LBBW Research, Bloomberg

Yield of 10Y Japanese government bonds and JPY-hedged yield of 10Y US government bonds

Yield of 10Y Bunds and EUR-hedged yield of 10Y US government bonds


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JGB 10Y JPY-hedged 10Y UST yield

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Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16

Bund 10Y EUR-hedged 10Y UST yield


Arguments against a continued (strong) yield increase: Trump is more

ambivalent than the reaction so far shows – risks to the emerging markets?


Donald Trump's anti-trade stance is a threat to the economic prospects of a number of emerging markets in particular and the recent yield increase (of US Treasuries) in addition to the stronger dollar (-> global shift in flows of money from the emerging markets to the US) mean additional burdens here.

If Trump goes through with his policies and US yields continue to rise significantly, a crisis situation coming to a head in some emerging markets could weigh massively on the global economy – and ultimately push the trend on the bond market to the cliff via a "flight to quality".



Average yield of USD sovereigns of emerging market according to JPM EMBI Index and spread versus Treasuries


OPEC: unexpected last minute concrete

agreement



Review: OPEC milestones over time.



Brent price (USD/bbl)

OPEC

06/12/2016

27 November 2014 Regular OPEC Meeting: No agreement on production volume.

02 February 2016 Speculation about OPEC + non-OPEC deal

16 February 2016 Doha freeze: Agreement between OPEC+Russia - production limited to current level.

17 April 2016 Fleshing out Doha freeze fails at last minute.

29 September 2016 Algiers-Accord: OPEC agrees to production band of 32.5-33 mbpd.

30 November 2016 OPEC confirms Algiers Accord, cutting production by 1.2 mbpd. and publishes country quotas.


OPEC Meeting on 30 November:

Surprise agreement on country quotas.


OPEC members decided at the meeting of 30 November to cut quotas by 1.2 mbpd. During the press conference, it became clear that the agreement was not just a weak, face-saving exercise about the OPEC's total production, but that concrete country allocations were being announced.

For the time being, the target reduction in production will be spread across all (almost all) shoulders, initially from January to June 2017.

The exceptions are: Indonesia (soon to be ex-member), Iran (even allowed to increase production), Libya and Nigeria (problems at home).

Sources: Bloomberg, Thomson Reuters, OPEC, LBBW Research

OPEC production by country (mbpd)

OPEC

06/12/2016

OPEC Oct

Sec Source

Reference

Production

Adjust-

ment

Production Jan

2017 incl exceptions cut in %

Algerien 1.088 1.089 -50 1.039 1.039 -4,6%

Angola 1586 1751 -87 1673 1673 -5,0%

Ecuador 549 548 -26 522 522 -4,7%

Gabun 202 202 -9 193 193 -4,5%

Indonesien 722 722

Iran 3.690 3.975 90 3.797 3.797 2,3%

Irak 4.561 4.561 -210 4.351 4.351 -4,6%

Kuwait 2.838 2.838 -131 2.707 2.707 -4,6%

Libyen 528 528

Nigeria 1.628 1.628

Qatar 646 648 -30 618 618 -4,6%

Saudi Arabien 10.532 10.544 -486 10.058 10.058 -4,6%

UAE 3.007 3.013 -139 2.874 2.874 -4,6%

Venezuela 2.067 2.067 -95 1.972 1.972 -4,6%

OPEC 14 total 33.644 31.236 -1.173 29.804 32.682

"Production adjustments and levels"


Reduction in OPEC production likely to even out supply and demand in the

market in H1 2017.


Any coordinated action on the part of the OPEC obviously aims to restore the balance between the global oil supply and demand.

A look at quarterly data (source: IEA) is likely to show a surplus of 500,000 barrel/day this quarter, which would rise to over 1 mbpd in Q2 2017 (no-cut scenario) if a more active control of the market fails to take place).

In the cut scenario which now applies since the OPEC decision of Vienna, the market could already slide into deficit in H1 2016 if the production target is slightly overshot.

Market status scenarios (in mbpd.)

OPEC

06/12/2016

Cut-Scenario

Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17

Total Demand 95,5 95,8 96,8 97,0 96,8 96,9 98,1 98,2

Non OPEC Supply 57,0 56,1 56,6 56,8 56,6 57,0 57,4 57,2

OPEC 32,8 33,0 33,5 33,6 33,0 33,1 33,4 33,4

NGL OPEC 6,8 6,9 6,9 7,1 7,0 7,0 7,1 7,1

Total Supply 96,6 96,0 97,0 97,5 96,6 97,1 97,9 97,7

Überschuss/Defizit 1,1 0,2 0,2 0,5 -0,2 0,2 -0,2 -0,5

No-Cut-Scenario

Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17

Total Demand 95,5 95,8 96,8 97,0 96,8 96,9 98,1 98,2

Non OPEC Supply 57,0 56,1 56,6 56,8 56,6 57,0 57,4 57,2

OPEC 32,8 33,0 33,5 33,6 33,7 33,9 34,1 34,3

NGL OPEC 6,8 6,9 6,9 7,1 7,0 7,0 7,1 7,1

Total Supply 96,6 96,0 97,0 97,5 97,3 97,9 98,6 98,6

Überschuss/Defizit 1,1 0,2 0,2 0,5 0,5 1,0 0,5 0,4

NGL = Natural Gas Liquids, italic = own estimates

surplus/deficit

surplus/deficit


Post OPEC deal: US shale oil production already robust and deal likely to

accelerate comeback even more.


The OPEC deal has already sent prices surging with Brent at new ytd high.

Already the recovery in the oil price in Q2 (>USD 40/bbl) was enough to make shale oil extraction more attractive once again. Investment has picked up again, as the rise in the rig count since the end of May illustrates.

Now, with prices at over USD 50/bbl, shale oil extraction is even more attractive, especially since breakeven prices have fallen significantly in the last few years.

In addition, the US President-elect is well-known as a friend of the oil industry which is likely to be promoted under this stewardship, a fact which is supporting supply further.


US oil production and Baker Hughes Oil Rigs USA

OPEC

06/12/2016


Conclusion: Cut in production of 1.2 mbpd supporting prices. US shale

extraction likely to pick up and dampen price rise.



Price of Brent & forecast

OPEC

Pro & cons of increase in price of Brent

+ The oil industry is expected to cut investment in 2016 for the second year in a run and to cap future supply.

+ Global oil demand likely to grow to over 1 mbpd in 2016 and 2017.

+ Fundamental strategy change by Saudi Arabia towards active control. Agreement on country allocations during OPEC Meeting.

Doubts about production discipline of OPEC members.

Higher price likely to accelerate comeback of US shale oil; rig counts have been increasing since end of May.

The new US President-elect, Donald Trump, wants to continue to expand shale oil production and is a firm advocate of fossil energy.

Ø 2015 31.12.2015 Ø H1 2016 Mrz 2016 Jun 2017 Dez 2017

Brent (in USD/Barrel) 55,04 52,95 35,70 41,10 55 55 60

Forecast

Price

History


Money market: OPEC deal will secure inflation expectations on the downside –

further argument in favor of inflation-protected bonds.


The previously very slow rise in long-term inflation expectations in the eurozone has been given a clear boost by the Trump election and OPEC agreement.

The ECB is keeping a close watch on the trend and is likely to welcome the rise (5Y5Y forward inflation expectations at almost 1.7%).

Moreover, the OPEC decision is likely to safeguard inflation expectations against any fresh sharp reversal, and generally opens up further upward potential in the next few months.

This is another argument in favor of overweighting linkers since inflation is set to rise in any case in view of basis effects.



10Y EUR swap rate and long-term inflation expectations from inflation swaps

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Okt 13 Jan 14 Apr 14 Jul 14 Okt 14 Jan 15 Apr 15 Jul 15 Okt 15 Jan 16 Apr 16 Jul 16 Okt 16

inflation expectations Euro area based on 10Y inflation swap 10Y EUR swap rate


Agenda.


Overview..................................................................................................................................................... 5



Credits........................................................................................................................................................ 45

Equities……………………..………………………………………………………………............................................. 56


Appendix ………………………………………..…………………………................................................………….... 75



Credits


Financials:

Moody's® introduces new senior rating category for German banks.

Italian banks post referendum - "No" vote likely to hamper sector's restructuring.

Corporates:

More risks than opportunities lurking in the periphery.

Rolf Schäffer, CIIA

Tel: +49(711)127-76580 [email protected]

Michael Köhler, CEFA Tel: +49(711)127-42664 [email protected]

Christian Götz, CEFA


Thomas Klee, CFA



Sources: LBBW Research, BRRD Directive April 2014 –

Art. 44/48/108. Bail-in tool in the German BRRD Act

("SAG") under Section 90 et seq. BT-Drs. 18/6091 on

the German Resolution Mechanism Act (AbwMechG).

German Banking Act, BaFin August 2016. Change in

the German bank liability hierarchy from January

2017. "no creditor worse-off" principle has direct

implications for hierarchy in the bail-in. * see

exhaustive LBBW In Focus on the issue:"European

Commission presents extensive proposals for

changes" dated 24 November 2016.

"Liability cascade" in Germany.

Germany's Resolution Mechanism Act (AbwicklungsmechanismusG) passed in November 2015 which does not include a grandfather clause has reduced the seniority of senior unsecured paper of German banks in the insolvency hierarchy in relation to the "original BRRD liability cascade".

The change in insolvency hierarchy comes into force in Germany from the beginning of 2017.

Establishment of two senior unsecured categories in the event of insolvency in Germany under Section 46f KWG.

In light of this, Moody's® decided to introduce a new, "senior-senior unsecured bank debt" rating category in mid-November 2016.

In our view, the proposal for an amendment presented by the European Commission in mid-November have no impact on the German liability cascade for the moment.

Credits


Repos, secured transactions

Covered bonds

Secured customer deposits acc. to EinSiG

Receivables from payment systems with maturity < 7 days & interbank loans with < 7 days

Salary and pension receivables

Receivables required for operating business

CET 1 capital

Tier 2 capital

Unsecured customer deposits

Natural persons, micro-enterprises/SMEs (according to KWG Art. 46f (4))

Money market instru-ments

Interbank receivables > 7 days

AT 1 capital

Capital market-tradable senior unsecured (still outstanding) incl. debt certificates

Certain structured debt (KWG Art. 46f (7))

Other unse-cured deposits


What characteristics must a structured debt instrument have in order to be subject to the exemption under Section 46f (7) KWG?

In order to remove uncertainties in this respect, the Bundesbank and BaFin published an interpretation guide at the beginning of August 2016, which was re-formulated around three months later without any material changes.

The interpretation guide lists eight characteristics. We have shown the most important ones together with an example in the following.


"Liability cascade" in Germany. What is meant by a "structured note"?

"Moody's® senior-senior unsecured".

06/12/2016

Sources: BaFin publication of 05 August 2016/07 November 2016 "Interpretation guide on the treatment under insolvency law of certain liabilities pursuant to Section 46f KWG", LBBW Research.

Note: The interpretation guide can be found under

http://www.bafin.de/SharedDocs/Veroeffentlichungen/DE/Fachartikel/2016/fa_160805_Auslegungshilfe_46f.html?nn=7954124

What characteristics does a debt instrument need in order to have a senior ranking in the liability cascade in the future ahead of senior unsecured/debt certificates/registered bonds? (shortened illustration)

Credits

Characteristics of the structured debt Example

instrument acc. to KWG §46f para. 7

Basis of calculation for interest payment "Coupon = number of days on which a reference

includes derivatives interest rate lies within a range"

Basis of calculation for repayment "Repayment at 100 or DAX performance

includes derivatives over time, if higher" (capital guarantee)

Indexed bond "Repayment amount or amount of interest

e.g. "Inflation-linked bonds" are tied to the performance of an index"

Variable interest with additional interest floor, "3-month Euribor, min. 2%, max. 4%"

ceiling and / or range

Interest rate changes between interest-rate types / "Two years fixed coupon, subsequent years interest

periods in line with performance of an index rate depending on the DAX performance"

Variable interest rate depending on reference interest rate "10-year constant maturity swap plus 50 bps"

(i.e. NONE of the reference interest rates Eonia/Libor/Euribor),

which is quoted in a regular and transparent manner

Interest rate changes between stipulated types / "2% fixed in years 1 and 2. Thereafter the debtor

periods according to option right of debtor or creditor or creditor can decide whether interest payment is

2.5% or 3M Euribor + 200 bp"


What "structured" notes are not subject to classification under Section 46f (7) KWG? The BaFin lists 14 examples in answer to this.

In the case of insolvency, notes with these features will therefore be treated like "plain vanilla senior bonds" and will be in a worse position from the beginning of 2017 onwards. In other words: There are no "structures" with these notes in the sense of Section 46f KWG.

Accordingly, contractual termination rights alone do not mean that a note is exempted under Section 46f (7) KWG. In our view, this also requires e.g. that the level of the repayment amount should be contingent upon an uncertain event.


"Liability cascade" in Germany. Which securities are treated as plain vanilla

senior bonds in the case of insolvency? "Moody's® senior unsecured".

06/12/2016

Sources: BaFin publication of 05 August 2016 "Interpretation guide on the treatment under insolvency law of certain liabilities pursuant to Section 46f KWG", LBBW Research

What characteristics must a debt instrument have in order to have a worse seniority in the liability cascade in future? (shortened illustration)

Credits

Characteristics of the structured debt Example

instrument acc. to KWG §46f para. 6

Variable interest rate "3M Euribor +/- 150 bps"

Zero coupon "Issue price 50 EUR, Repayment 100 EUR, 10Y

Maturity, No coupons"

Increase/Decrease fixed interest rates "2% in Y1, 3% in Y2 / 5% in Y1, 4% in Y2"

Inverse Floater "5% - 3-month Euribor"

Interest rate fix, but changes in certain periods "2% fixed rate in Y1 and 2, thereafter 3M Euribor +

150 bps until maturity"

One-sided regular right of termination of debtor without "max. maturity 10Y, issuer has regular right of termination

regular right of termination of creditor after 5Y, repayment amount determined in advance"

Extraordinary right of termination of debtor without "Extraordinary right of termination because of

regular right of termination of creditor importance, e.g. taxable treatment"

Statutory right of termination "Promissory note with regular right of termination of

debtor according to § 489 BGB"

Landesbank Baden-Württemberg | | Capital Markets Compass December 2016. Macro | Rates | Credits | Equities 06/12/2016

Moody's® rating changes of November 2016 for bonds classified as "senior-senior unsecured" – incomplete list of changes

Source: LBBW Research, Moody's® Nov. 2016 "Key considerations in our rating action establishing a new senior debt rating class".

Moody's® rating changes of unsecured senior bank bonds of German issuers.

Under the link

http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_193183

an Excel file can be downloaded which shows the rating changes of individual notes

Based on the BaFin's interpretation guide mentioned above which defines the structured notes of German issuers which in future will rank higher in the liability hierarchy as per Section 46f KWG, Moody's® recently upgraded the ratings of 350 "senior-senior unsecured" bonds by up to two notches.

Since under Section 46f (6, 2) KWG, certain institutions such as KfW, L-Bank, NRW.Bank, Landwirtschaftliche Rentenbank i.a. are exempted from the new arrangement, their rating does not change in their case, there is still only one rating – namely "senior unsecured".

New senior-senior rating Old rating No. of bonds affected

BayernLB A1 A2 78

Commerzbank A2 Baa1 49

Deka Bank Aa2 Aa3 7

Deutsche Bank A3 Baa2 29

DZ Bank Aa1 Aa3 60

HSH Nordbank Baa3 Baa3 59

LBBW Aa3 A1 18

Helaba Aa3 A1 58

UniCredit Bank AG A2 Baa1 7

Selected rating actions by Moody's® on bonds classified as senior-senior unsecured bank debt

Credits


Spread (ASW in bp) - a random sector of notes comparable with SSU (senior-senior unsecured) paper

Sources: Bloomberg, LBBW Research, Moody's® 21 Nov. 2016. Note: random selection of paper halfway comparable with "senior-senior unsecured" bank debt (maturity, size, currency, etc.). SSU = senior-senior unsecured. SU

= senior unsecured.

Spreads senior-senior unsecured bank debt and comparison to "normal" bond.

The spread can be completely different, depending on which SU paper is used for comparison purposes.

-10

-5

0

5

10

15

20

25

30

35

40

45

Jul. 16 Sep. 16 Nov. 16

Helaba SSU 02/2025 quarterly floater Euribor EUR

Helaba SU 02/2026 fix 1,28% EUR

0

5

10

15

20

25

30

35

40

45

Jul. 16 Sep. 16 Nov. 16

DZ Bank SSU 03/2025 floater Euribor + 20 bp EUR

DZ Bank SU 05/2025 fix 1% EUR Private Placement

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30

40

50

60

70

80

Jul. 16 Sep. 16 Nov. 16

Commerzbank SSU 04/2021 floater EUR

Commerzbank SU 03/2021 EUR quarterly Euribor + 95 bp

62

64

66

68

70

72

74

76

78

80

Jul. 16 Sep. 16 Nov. 16

Nord LB SSU 08/23 float Euribor EUR

Nord LB SU 02/23 float Euribor

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Nord LB SSU 04/26 fix to float EUR

Nord LB SU 08/26 float Euribor EUR

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Jul. 16 Sep. 16 Nov. 16

Berlin Hyp SSU 12/2024 float Euribor + 35 bp EUR

Berlin Hyp SU 11/2024 fix 1,3% EUR

Credits


Return on equity Italian banks (%) Corporate sector as % of NPLs

Sources: Thomson Financial, LBBW Research

Italian banks - asset quality and profitability major problems.

A high ratio of NPLs by European standards, not least as a result of a weak economy, is the Achilles heel of Italian banks. Ultimately, this also has an impact in the form of weak profitability. Italy has four times as many bank branches per inhabitant than Germany.

The ECB has already required a number of banks to reduce their NPL holdings. In addition, a corresponding guideline was put out for consultation in September. However, it will not be easy to reduce NPLs, especially since the Atlante II aid fund is too small. Moreover, a functioning market for placing NPLs is virtually non-existent and in the event of corresponding sales at market prices (which could decline further after the referendum), the banks might be burdened with higher loan loss provisions may. Reforms such as shortening the insolvency process will only take effect in the medium term. The "no" vote in the constitutional referendum is likely to hamper the (slow) restructuring of the banking sector.

-15%

-10%

-5%

0%

5%

10%

15%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e

0%

10%

20%

30%

40%

50%

60%

70%

80%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Credits


DE

IT

ES

FR

PT

BE

IRE

NL

GRE

0%

5%

10%

15%

20%

25%

30%

0% 2% 4% 6% 8% 10% 12%

Dom

estic S

overe

ign H

old

ings b

y

Banks /

Nom

inal G

DP (

in %

)

Domestic Sovereign Holdings by Banks / Total Assets Banking System (in %)

The state/bank nexus is very strong especially in Italy.

This is true on both sides – both the banks in their role funding state debts and also in respect of state exposure as measured based on the total assets of the Italian banking system.

Any political turbulence can therefore have a direct impact on the banking sector, and not only through sentiment.

The rejection of constitutional reforms will make the planned capital increases of a number of banks (MPS, UniCredit, Banca Carige) more difficult.

In addition, a disposal of the "good" bits of the four smaller savings banks rescued by the central bank before the end of 2015 is likely to be delayed even further.


Italian banks - nexus with the Italian state.

06/12/2016


Mutual dependence on state and banking system in select EU countries

Banking system increasingly more susceptible to any financial difficulties of the sovereign

Sove

reig

ns'

gro

win

g d

ependence

on

financi

ng v

ia t

he b

ankin

g s

yste

m

Credits


In the last few weeks, banks in the EU periphery states above all have been battling with a loss of confidence which is reflected in higher spreads.

In Italy, the focus of attention is above all on UniCredit (presentation of new strategy plan on 13 Dec.) and MPS which are both planning capital increases. Of the two, however, the latter is the greater worry, as illustrated by poor results in the last EBA stress test in July 2016. Monte dei Paschi is clearly bottom of the list with a CET1 ratio of -2.4% in the adverse scenario. After the "no" vote in the constitutional referendum, a bail-in at MPS is increasingly likely to discussed again as it was in the summer of 2016, even though the debt-to-equity swap has been a success for the moment. In an initial reaction on Monday, MPS' senior CDS rose by up to 30 bp.


Italian banks - a look at the risk premiums.

06/12/2016

Sources: Bloomberg, LBBW Research CDS 5Y senior bonds – median of individual banks in Italy. Note: ML indices (rhs graph) include not only senior bonds but also some subordinated notes, weekly data.

CDS 5Y IT banks vs. overall market ASW cash bonds (ML indices) periphery banks vs. core Europe

0

20

40

60

80

100

120

140

160

180

Jan. 16 Apr. 16 Jul. 16 Okt. 16

Δ ASW-Spread EU-Periphery Financials Core EU Financials

US presidential election Brexit

Credits

1,5

2,0

2,5

3,0

50

100

150

200

250

300

Jan. 16 Mrz. 16 Mai. 16 Jul. 16 Sep. 16 Nov. 16

IT / iTraxx Sen. Fin. (rhs) IT iTraxx Sen Financials


More risks than opportunities with periphery corporates.

Economic worries which had initially flared up again led to an underperformance of periphery corporates at the start of the year.

Over the further course of the year, however, periphery names benefited disproportionately from the ECB's bond-buying programs.

The next six months will see further key events, which could give populists in Europe another boost.

In light of this, we currently see more risks than opportunities for periphery corporates and have therefore recommended underweighting these stocks against core European stocks since mid-November.


EUR corporates periphery vs. non-periphery ASW spread in bp, spread in bp


Greece crisis

VW scandal

Economic concerns

Announcement of the CSPP

Brexit vote

Referendum in Italy

Elections in the

Netherlands

Brexit: activation of article 50

Presidential election in France

?

Credits


Agenda.


Overview..................................................................................................................................................... 5



Credits........................................................................................................................................................ 45

Equities……………………..………………………………………………………………............................................. 56


Appendix ………………………………………..…………………………................................................………….... 75



Equities


11,500 DAX points by the end of 2017 seem realistic.

Fundamental conviction of institutional investors still seems high.

Trump election triggers sector rotation.

Sector favorites in 2017 based on LBBW sector model.

Japanese equity market in rally mode.

Uwe Streich


Wolfgang Albrecht Tel: +49(711)127-73258 [email protected]


Direction and extent of earnings revisions next year key factors for DAX

potential up to end 2017.


The DAX's fundamental potential can be visualized by extrapolating the "profit DAX" up to the end of 2017. Whereas substitution and dividend effects can be anticipated based on earnings and dividend estimates, the direction and extent of forthcoming earnings revisions are still unknown. The latter can therefore only be mapped using scenarios.

For quite some time now, the DAX have been moving solely in the lower half of the valuation bank, i.e. investors have weighted the risks (forthcoming monetary-policy changes, consequences of Brexit vote which are still difficult to predict, political imponderables) higher than the opportunities (2017 and 2018 earnings estimates significantly higher than for 2016).

Source: LBBW Research

DAX and "profit DAX" with error-valuation bands and earnings revision scenarios for 2017

in index points

Equities

7.000

8.000

9.000

10.000

11.000

12.000

13.000

14.000

7.000

8.000

9.000

10.000

11.000

12.000

13.000

14.000

2013 2014 2015 2016 2017 2018

DAX earnings DAX based on median PER

strong upward revisions (+10%) visible upward revisions (+5%)

no revisions typical downward revisions (-6%)

strong downward revisions (-10%) extreme downward revisions (-20%)

max. normal mispricing min. normal mispricing


Medium-term fundamental conviction of institutional investors still high.


The Sentix bias improved gradually between the beginning of July and end of September. The ratio of investors who expected rising DAX prices in the medium term (6M) exceeded the ratio of negative investors by a maximum of over 42 percentage points.

Since then, however, sentiment has eroded again. The overhang of positive investors is currently down to only around 30 percentage points. Private investors are the main driving force behind this decline.

Thanks to the optimism of institutional investors, medium-term fundamental conviction is at a relatively high level. This has to be seen as positive and suggests that a Christmas rally is still possible.


Sentix and DAX

Sentiment

8.200

8.600

9.000

9.400

9.800

10.200

10.600

11.000

11.400

11.800

12.200

12.600

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Jan 2014 Jul 2014 Jan 2015 Jul 2015 Jan 2016 Jul 2016

Sentix DAX 1M Sentix DAX 6M DAX


European sectors 2017: Trump election sparks off sector rotation - construction

in pharmaceuticals in favor – cyclicals and telecoms not the first choice.


The first few weeks after Donald Trump's election to the US presidency have already shown that a change of favorites is on its way for 2017. In 2017, the construction sector is likely to benefit from likely fiscal-policy measures to stimulate the economy both sides of the Atlantic.

Pharmaceutical and energy stocks are among the Trump gainers and are also likely to become favorites in 2017 in view of their defensive properties.

In view of potential protectionist measures by the Trump government, cyclical stocks from the automotive and mechanical engineering sector for example are likely to fall behind.


Sector weighting 2017

Sectors

Rank Sector

Recommended

Weighting

1 Construction +

2 Healthcare +

3 Energy +

4 Media +

5 Utilities +

6 Basic Ressources +

7 Automobiles 0

8 Banks 0

9 Food & Beverage 0

10 Technology 0

11 Retail 0

12 Consumer Goods 0

13 Chemicals -

14 Travel & Leisure -

15 Financial Services -

16 Industrial -

17 Telecommunications -

18 Insurance -


Top 1 construction sector: Fiscal policy likely to boost sector both sides of

Atlantic.


President-elect Trump is committed to renewing the infrastructure in the US. There is a huge amount of catching up to do in this respect.

We expect stabilization in Europe and are optimistic about the future.

In addition, we expect growth impetus, albeit at a slower pace, from the emerging markets, including India.

However, there could be potential for cooling in China in view of significant overheating in construction activities.

In addition, Brexit could dampen the UK construction sector after a time lag.

Companies which generate a high proportion of their revenues in North America (e.g. HeidelbergCement) benefit from a firmer US dollar.

Sources: LBBW Research, data: Eurostat, Thomson

Reuters

Construction industry in Europe (construction volume index)

Sectors

25

50

75

100

125

150

175

200

01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Germany Spain France Eurozone 15 Italy UK


Top 2 pharmaceuticals: good risk-opportunity profile.


The pharmaceutical sector is largely non-cyclical and is therefore regarded as a defensive sector.

Trump election means that laws to cap drug prices will be off the agenda in the US.

Global growth in the pharma market has picked up on the back of many innovations. Annual growth of 4-7% is expected up to 2020.

Fewer negative effects are expected from patent expiries up to 2020 than in the last five years.

High cash flows will allow many/major takeovers and rapid deleveraging.

Pharmaceutical stocks offer not only upside potential but also a high dividend yield.

Sources: LBBW Research, FDA

FDA approvals of new drugs

Sectors


Top 3 energy stocks: Companies emerge stronger from the crisis.


Companies have responded to the fall in the oil price with cost-cutting programs, asset sales and investment cutbacks. In future, this is likely to contribute to an improved earnings and cash-flow trend.

Opportunities for marked increases in earnings in the upstream business should arise from a further recovery of the oil price.

However, refinery margins which were recently falling again could have the opposite effect.

The sector offers and attractive dividend yield of around 6.7%.


Oil price trend and LBBW forecast

Sectors


Energy and commodity stocks show highest earnings growth – automotive

sector has lowest valuation.


Gainers of the Trump election in the construction, energy and basic materials stocks can make a convincing impression with above-average earnings growth. At the same time, they still have acceptable valuations.

Although the pharmaceutical sector and utilities which were recently left behind are not scoring points with high earnings growth, they could be on the verge of a comeback in 2017.

Although the cyclical auto and industrial sectors have low PERs, they could come under fire from a Trump government in view of potential protectionist measures.

Risks outweigh opportunities in the case of European financial stocks. Asset quality and insufficient profitability are the Achilles heel of European banks.


Stoxx Europe 600: PER valuation and 12-m forward earnings growth

Sectors

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

-3 2 7 12 17 22 27 32 37 42 47

PER

Earnings Growth 12M Forward (%)

Automobiles

Travel & Leisure

Chemicals

Construction

Energy

Food & Beverage

Industry

Insurance

Consumer Goods

Healthcare

Telecommunications

Technology

Basic Ressources

Media

Banks

Handel

Financial Services

Utilities


Energy and utility stocks promise highest dividend payouts.


Energy and utility stocks promise the highest dividend yields in view of a sharp fall in share prices. However, further cuts cannot be ruled out, above all for German utilities in view of relatively high regulatory risks.

Financial and telecom stocks are also showing above-average dividend yields; however, there are also risks of cuts in this area on the back of low interest rates and stiff competition.

Among cyclical sectors, construction has shown the highest dividend yield at 3.2% and technology the lowest at 2.4%.


Dividend yield

Sectors

En

erg

y

Uti

liti

es

Tele

com

.

Ban

ks

Insu

ran

ce

Healt

hca

re

Auto

mo

biles

Co

nst

ruct

ion

s

Ch

em

icals

Foo

d &

Bevera

ge

Reta

il

Co

nsu

mer

Go

od

s

Ind

ust

ry

Tech

no

log

y

Basi

c R

eso

urc

es

0%

1%

2%

3%

4%

5%

6%

7%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1

Median

Financials Energy /CommoditiesDefensive Cyclical


Japanese equity market in rally mode.


The Nikkei Index struggled for a long time this year. In spite of an ultra easy monetary policy, economic programs and support measures on the part of the central bank in the equity market, the Japanese leading index could not quite get off the ground. Above all, a firm yen prevented any success.

After the yen weakness triggered since the Trump election, Japan's leading index is now in rally mode. The BoJ's economic program and massive stimulus measures in conjunction with a now weaker yen seem at last to be paying off.

We have raised our Nikkei forecast as per March 2017 to 18,500 points and to 19,000 points as per the end of 2017.


Nikkei 225 and currency evolution

International markets

2014 2015 201695

100

105

110

115

120

125

130000'S

13

14

15

16

17

18

19

20

21

Yen je US-DollarNikkei 225 (rechte Skala)

S o u r c e : T h o m s o n R e u t e r s D a t a s t r e a m

JPYUSD Nikkei 225 (rhs)


Agenda.


Overview..................................................................................................................................................... 5



Credits........................................................................................................................................................ 45

Equities……………………..………………………………………………………………............................................. 56


Appendix ………………………………………..…………………………................................................………….... 75



Forecasts and asset allocation


In spite of Donald Trump's election victory, we have so far mostly stuck to our capital-market forecasts. However, we would envisage adjustment pressure especially of our US treasury forecasts if certain capital-market yield thresholds are crossed.

We see no further potential for the USD after its strong rally. We are sticking to our EUR/USD 1.07 forecast as per the end of 2017.

US equities have become even more expensive after the strong rally. Upside potential is even more rarified in this segment. We see more potential in Europe – especially for German stocks.

After the OPEC agreement to cut production, the oil price has corrected upwards sharply. We have adjusted our forecasts by USD 5 respectively. However, further price rises are likely to be slowed down by an upturn in US shale oil extraction.

Rolf Schäffer, CIIA



Asset allocation: yield risk and recommendations at a glance.

Our diagram contrasts the expected one-year performance from our market and spread forecasts against the risk per asset class. All figures calculated in euro, i.e. including expected exchange-rate movements.

In our view, there is little upside left for US equities after the strong rally. We are pinning our hopes mainly on the DAX.

Commodities have benefited from sharp rise in oil price. However, any further potential is limited in our view.

In the fixed-income segment, we still prefer corporates, even though we no longer expect any tightening of spreads. Our recommendation for senior financials, covered bonds, SSAs and Bunds is unchanged at underweight.


Yield expectation versus risk with LBBW recommendations



Bunds

US Equities

Europe Equities

Commodities

Corporates IG

Euro High Yield

Euro Senior Financials

Euro Covered Bonds

Emerging Markets Equities

DAX

US Treasuries

Euro SSAs

Euro Tier IIEuro Periphery

Corporate Hybrids

-4%

-2%

0%

2%

4%

6%

8%

10%

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24%

Exp

ecte

d P

erfo

rman

ce (

1 y

ear)

Risk (3m losses since 1995 - 5 percent quantile)


Explanatory notes: The table sums up our recommendations on the various risk dimensions of the asset allocation. In particular, we split exposure in relation to currency, price, interest and credit

worthiness risks. . A "+" means that we recommend taking that particular risk; "-" and "0" similarly. The recommendations should be taken as relative within each category. The last column includes explicitly recommended

investment strategies. Month-on-month changes are highlighted.

Asset allocation:

Recommendations at a glance.




Allocation overview (under observation of 6 - 12 months)

Exposure Recommendation Segments Regions Strategies

Duration 0 1-3 years 0 Spain Inflation Linker

- + 4-7 years 0 Italy Synthetic Govies

- 8-10 years - German Bunds Multi-Callables

0 USD bonds

+ Corporate Inv. Grade - Euro periphery synthetic credit products

Credit Spread + Corporate High Yield + Emerging markets debt (make use of positive

0/+ + Corporate Hybrids CDS basis)

- Senior Financials

- Covered Bonds

0 Tier 2

+ Constr., Pharma, Energy, Media + Germany Dividend strategy

Equity - Industries, Insurancies 0 Europe ex Germany Minimum variance

+ 0 Japan

0 Emerging Asia

0 USA

Currencies (vs. Euro) + Currencies with strong + SEK, CZK, PLN Selective

0 economic growth 0 USD, JPY, GBP, NOK

- Politically burdened currencies - ZAR, BRL, TRY

Commodities 0 Precious metals 0 Gold RS Flex

0 - Base metals 0 Silver

0 Energy 0 Brent

Rates

Credit

Equity

Currencies

Commodities


Economy Equity Markets

2015 2016e 2017e Spot 03/31/17 06/30/17 12/31/17

GDP 1.5 1.9 1.5

Inflation 0.3 0.3 1.5

GDP 1.9 1.6 1.3


GDP 2.4 1.5 2.5


GDP 6.8 6.7 6.5


GDP 3.2 3.0 3.3


Interest Rates Currencies and Commodities

Spot 03/31/17 06/30/17 12/31/17 Spot 03/31/17 06/30/17 12/31/17

ECB Key Rate 0.00 0.00 0.00 0.00 US-Dollar per Euro 1.08 1.07 1.07 1.07

Bund 10 Years 0.26 0.50 0.50 0.60 Swiss Franc per Euro 1.08 1.10 1.11 1.12

Fed Funds 0.50 0.75 1.00 1.25 Gold (USD/Troy Ounce) 1177 1250 1300 1350

Treasury 10 Years 2.35 2.30 2.30 2.30 Oil (Brent - USD/Barrel) 54 55 55 60

11 500

Euro Stoxx 50 3 142 3 100 3 100

DAX 10 987 11 000 11 000

World

Germany

Euro Area

USA

China

Dow Jones

3 150

19 00019 550 18 500 18 500

19 000Nikkei 18 765 18 500 18 500

Market forecasts.




Economic and market scenarios

Main scenario 65% (previously: 70 %).

06/12/2016

World economy remains on a moderate growth path. Uncertainty associated with President Trump taking up office quickly dissipates.

ECB likely to stick to its expansive course in view of low inflation, but still prepare for a cautious exit from asset purchases (tapering). GDP growth in 2016 is likely to be 1.6% in the eurozone and 1.9% in Germany. We expect GDP growth of 1.5% in Germany in 2017 and of 1.3% in the eurozone. Consequences of Brexit only dampen economy in the eurozone and Germany to a limited extent in 2016 and 2017.

Company earnings benefiting from stable internal economy and undervalued euro.

Money market rates remain negative; yields rise moderately. The Fed is likely to go for a second rate hike in December 2016. The ECB leaves its benchmark rate at the present level for a lengthy period.

Forecast 31/03/2017 Forecast 30/06/2017 Performance

DAX

EURO STOXX 50

11 000

3 100

11 000

3 100

3M Euribor

10Y Bund

-.30

.50

-.30

.50

Investment

Grade

High yield

-

-

Spread

-

-

Spread

Equities

Interest rates

Credits





Optimistic scenario 15% (previously 10%).

06/12/2016

Rapid upturn in the real economy. Price pressure increases. In the US, the Trump administration carries out debt-funded spending programs ("Reaganomics"), which accelerate the trend.

The Fed hikes rates more than expected; ECB also embarks on a more restrictive monetary policy.

Risks being discussed at present (Brexit, China cooling, flood of migrants, consequences of oil-price slump,…) do not materialize or turn out to be manageable.

In the longer term, a significant rise in company earnings in a generally positive context leads to a sustained rise in share prices above the previous high.

Marked increase in yields in the US and Europe. US dollar much firmer, fall of euro below parity increasingly likely.

US equities get lasting additional push by Trump policies.


DAX

EURO STOXX 50

12 000

3 350

11 500

3 250

3M Euribor

10Y Bund

.25

1.25

.00

1.00

Investment

Grade

High yield

-

-

Spread

-

-

Spread

Equities

Interest rates

Credits





Risk scenario 20%.


Return to calm in the market after Brexit vote proves deceptive. Other Brexit copycats emerge.

Under President Trump, the US policy leans increasingly towards protectionism and trade barriers in the form of tariffs.

Hard EU negotiations with the EU over Brexit hugely increases the economic damage on both sides.

Hard landing in China. Global economy dragged down in its wake. Pressure on emerging market currencies and on commodity prices. Risk aversion in the financial markets increases. Bunds in demand as safe haven. Yields fall to record lows.

Massive slump in corporate earnings. Flight out of equities.

As a result of the flood of migrants, borders in the Schengen Area are closed. Cross-border movement of goods and persons is hampered. Adjustment by companies (renationalization instead of globalization) drags eurozone into recession.


DAX

EURO STOXX 50

8 500

2 300

9 000

2 500

3M Euribor

10Y Bund

-.75

-.50

-.40

-.50

Investment

Grade

High yield

-

-

Spread

-

-

Spread

Equities

Interest rates

Credits



Agenda.


Overview..................................................................................................................................................... 5



Credits........................................................................................................................................................ 45

Equities……………………..………………………………………………………………............................................. 56


Appendix ………………………………………..…………………………................................................………….... 75



Appendix


At a glance: currencies and commodities

Technical analysis

Yield tables

LBBW Research publications

Disclaimer.

Contacts


Forex markets at a glance: major currencies.


Appendix


Exchange

rate

Spot Forecast

Q1 17

Forecast

Q4 17

Recommendation

EURUSD

1.07

1.07

1.07

ECB about to revise its bond purchase program.

Fed likely to raise Fed funds rate by 25 bp in December and to

carry out two further rate hikes in 2017.

EURJPY

121

117

120

"Abenomics" disappointing – consumer spending and investment

weak.

BoJ now even wants direct control of short and long-term yields.

Yen appreciation came to rest at 100 USDJPY mark.

EURGBP

.84

.88

.85

After the vote to leave the EU, there is uncertainty.

Positive surprise from economic data. Fears of a "hard Brexit"

have recently been allayed slightly by political comments.

EURCHF

1.08

1.10

1.12

Franc valuation still fundamental high, recently weaker vs. USD.

Central bank preventing appreciation of the franc through

negative rates and intervention, and weakening the franc at

times.

EURCNY

7.33

7.28

7.28

Still major economic risks; however, government working on

stabilization with number of smaller measures.

CNY has stabilized on a trade-weighted basis.


Forex markets at a glance: minor currencies.


Appendix


Exchange

rate

Spot Forecast

Q1 17

Forecast

Q4 17

Recommendation

EURAUD

1.43

1.46

1.41

Australian economy strongly dependent on trend in China.

Price of coal and iron ore, two important Australian exports, have

risen sharply in the last few months.

EURNOK

8.98

8.90

8.80

Norwegian krone has benefited from recent rise in oil price.

Central bank does not expect further rate cuts.

We regard the value of the CZ crown as fundamentally rather low.

EURSEK

9.81

9.20

8.90

Central bank shows sufficient inclination towards monetary-

policy easing.

We see medium-term appreciation potential since central bank

expects GDP growth of 3.3% in 2016.

EURCZK

27.04

27.00

25.70

CZK fundamentally undervalued and likely to rise long term.

The central bank's minimum exchange rate of EURCZK 27 is to

remain in force probably until mid-2017, if not at least Q2 2017.

EURPLN

4.49

4.40

4.25

GDP growth fell from 3.1% to 2.5% in Q3.

New government in conflict with EU institutions.

PLN valuation rather low after latest depreciation.


Gold: Strong USD and rise in US treasuries dampening gold. ETCs currently on

the sellers' side. Forecasts reduced.


+ Political event risks likely to continue to occupy the markets in the next few months.

+ Inflation expected to rise. Real yields in Germany likely to remain negative in 2017.

+ Increasing loss of confidence by population in policies and institutions.

Physically secured funds currently selling off gold on massive scale.

In spite of lower price, little gold buying at present in India in view of government's attack on dirty money.

Positive sentiment for US economy after Trump election. US equity markets surge.


Gold price & forecast Pro & cons gold price rise

Appendix

06/12/2016

Ø 2015 31.12.2015 Ø H1 2016 Mrz 2016 Jun 2017 Dez 2017

Gold (in USD/Ounce) 1163,88 52,95 35,70 41,10 1250 1300 1350

History Forecast

Price


Commodities at a glance: Brent, gold & co.


Appendix


Commodity Spot Forecast

Q1 17

Forecast

Q4 17

Recommendation

Brent

54

55

60

OPEC agreement lifts prices.

US shale oil activities already showing signs of upturn.

Falling investment paving the way for further price recovery.

Gold

1168

1250

1300

Strong USD and rise in yield dampening price of gold.

Political event risks likely to support gold.

Forecast cut.

Silver

16.57

17.75

18.00

Silver much cheaper on weak gold price.

High investor demand 30%.

Savings measures in the industry ongoing.

Palladium

729

750

800

Palladium like to benefit from diesel ban in big cities.

Rise in demand likely in view of stricter emissions standards.

e-mobility could lead to dwindling demand in the long term.

Copper

5087

5100

5320

Positive economic data from China.

Mining production rising.

Correction after sharp rise in price.


Technical analysis: DAX.


After breaking out of the trend channel which has been in place since April 2015 in the summer of this year, the DAX index moved into a sideways consolidation. Within this trend, it met resistance in the last few weeks on the upper side around the 10,800 mark at around 10,400/50 on the lower side.

So long as the index does not fall for any length of time below the 10,400 mark, we expect a renewed test of the resistance zone and with a break out of this rectangle formation, the index should get the go ahead to the 11,200 mark.

Sustained prices below the 10,400 mark will lead to a test of the 10,200 mark and, with a breach of this price hurdle, in an extreme case to the 9,930 zone.


DAX weekly chart

Appendix


Technical analysis: 10-year yield Germany.


The 10-year yield stabilized significantly in the -20/-16 zone during the period June – September 2016 and left a potential wedge formation on the upside at the end of October. This is a clear technical indicator that the direction of interest rates has begun to change or at least of a likely marked rebound movement.

The 0.40 mark will initially form resistance on the upper side. Overcoming this mark will lead the 10-year yield into a dynamic movement to the 0.70/0.73 within the space of just a few months. The middle BBs offer support.


Germany 10-year yield

Appendix


Technical analysis: EURUSD.


Starting from the December 2015 low at just over the 1.05 mark, which was confirmed via weekly reversal signal, the EURUSD currency pair completed a test of the rectangle top in the months of 08/2015 and 05/2016 and confirmed these price hurdles respectively through the formation of a Pinocchio bar.

The pair fell below the lower BBs in October of this year at just under the 1.09 mark, ushering in a test of the lower rectangle limit and a fresh test of the 1.05 zone. A reversal has not yet formed at present, and consequently, a test of parity cannot be ruled out in the next 2-3 months with a breach of the 1.0450 zone.


EURUSD

Appendix


Yield curves EUR sovereigns.

Yields by rating and maturity.



*Current inflation in the eurozone: 0.6% Where can you

still get 2.0%?

Where is the real yield

negative? *

Appendix

Av e r a ge Yi e l d EUR S ov e r e i gns

0 6 . 12 . 2 0 16 M a t ur i t y i n Ye a r s

Count r y 1 2 3 4 5 6 7 8 9 10 15 2 0 2 5 3 0

Germany -0,80 -0,73 -0,63 -0,51 -0,37 -0,22 -0,06 0,09 0,23 0,35 0,73 0,88 0,98 1,06

France -0,69 -0,61 -0,49 -0,35 -0,18 0,00 0,19 0,39 0,56 0,72 1,17 1,37 1,51 1,65

It aly -0,02 0,21 0,45 0,70 0,96 1,21 1,46 1,68 1,87 2,03 2,50 2,80 3,07 3,08

Spain -0,19 -0,02 0,14 0,32 0,53 0,77 1,01 1,25 1,46 1,63 2,12 2,41 2,65 2,81

Net herlands -0,66 -0,61 -0,53 -0,42 -0,28 -0,13 0,03 0,18 0,33 0,45 0,75 0,86 0,95 1,06

Aust r ia -0,65 -0,58 -0,47 -0,35 -0,20 -0,05 0,11 0,26 0,40 0,53 0,95 1,17 1,30 --

Belgium -0,68 -0,60 -0,49 -0,36 -0,20 -0,02 0,15 0,33 0,48 0,62 1,05 1,24 1,40 1,57

Ireland -0,55 -0,48 -0,36 -0,21 -0,03 0,18 0,38 0,58 0,75 0,90 1,34 -- -- --

Port ugal 0,13 0,78 1,39 1,94 2,44 2,83 3,21 3,48 3,68 3,82 4,23 4,34 4,47 --

Finland -0,65 -0,59 -0,48 -0,35 -0,20 -0,04 0,13 0,29 0,43 0,55 0,92 -- -- --

EUR Swap in % -0,20 -0,16 -0,09 0,00 0,10 0,23 0,36 0,49 0,61 0,70 1,05 1,19 1,25 1,26


Yield curves EUR non-financials.

Interpolated yields by rating and maturity.

Sources: Bloomberg, LBBW Research *(logarithmic interpolation)



still get 2.0%? Where is the real yield

negative? *

Appendix

Av e r a ge Yi e l d* EUR Non- Fi na nc i a l s


Ra t i ng 1 2 3 4 5 6 7 8 9 10

AA -1,42 -0,70 -0,27 0,03 0,26 0,45 0,61 0,75 0,88 0,99

AA- -0,91 -0,34 -0,01 0,23 0,42 0,57 0,69 0,81 0,90 0,99

A+ -0,86 -0,28 0,06 0,30 0,49 0,64 0,77 0,89 0,98 1,07

A -0,55 -0,06 0,23 0,43 0,59 0,72 0,82 0,92 1,00 1,07

A- -0,70 -0,11 0,23 0,47 0,66 0,82 0,95 1,06 1,16 1,25

BBB+ -0,71 -0,07 0,30 0,57 0,77 0,94 1,08 1,20 1,31 1,41

BBB -0,47 0,11 0,46 0,70 0,89 1,04 1,17 1,28 1,38 1,47

BBB- -0,56 0,19 0,63 0,95 1,19 1,39 1,56 1,70 1,83 1,94

BB+ -0,31 0,79 1,43 1,88 2,24 2,53 2,77 2,98 3,17 3,34

BB -0,29 0,86 1,52 2,00 2,37 2,67 2,92 3,14 3,34 3,51

BB- 0,78 1,90 2,55 3,02 3,38 3,67 3,92 4,13 4,32 4,49

B+ 3,40 3,88 4,16 4,36 4,52 4,64 4,75 4,84 4,92 5,00

B 6,45 6,04 5,81 5,64 5,51 5,40 5,31 5,23 5,17 5,10

B- 5,12 5,99 6,50 6,86 7,14 7,36 7,56 7,73 7,87 8,00

EUR Swap in % -0,20 -0,16 -0,09 0,00 0,10 0,23 0,36 0,48 0,61 0,70


Yield curves EUR senior banks.


Sources: Bloomberg, LBBW Research *(logarithmic interpolation)



still get 2.0%?


negative? *

Appendix

Av e r a ge Yi e l d* EUR S e ni or Ba nk s


Ra t i ng 1 2 3 4 5 6 7 8 9 10

AA -0,74 -0,27 0,00 0,20 0,35 0,47 0,58 0,67 0,75 0,82

AA- -0,47 -0,06 0,17 0,34 0,47 0,58 0,67 0,75 0,82 0,88

A+ -0,52 0,00 0,30 0,51 0,68 0,81 0,93 1,02 1,11 1,19

A -0,38 0,04 0,29 0,46 0,60 0,71 0,81 0,89 0,96 1,03

A- -0,72 -0,03 0,38 0,67 0,89 1,07 1,22 1,36 1,47 1,58

BBB+ -0,36 0,26 0,62 0,88 1,08 1,24 1,38 1,50 1,60 1,69

BBB -0,19 0,49 0,89 1,18 1,40 1,58 1,73 1,86 1,98 2,08

BBB- -0,14 0,88 1,48 1,90 2,23 2,50 2,73 2,92 3,10 3,25

EUR Swap in % -0,20 -0,16 -0,09 0,00 0,10 0,23 0,36 0,49 0,61 0,70


Yield curves EUR covered bonds.




Where can you

still get 2.0%?


negative? *

*Current inflation in the eurozone: 0.6%

Appendix

Average Yield

M at urit y in years

C ount ry o f issues Type 1 2 3 4 5 6 7 8 9 10

AUSTRIA Austria Covered - -0,19 -0,14 -0,05 0,07 0,18 0,24 0,40 0,50 0,72

AUSTRALIA Australia Covered - -0,19 -0,13 -0,01 0,14 0,29 0,43 0,51 0,69 0,86

BELGIUM Belgium Covered -0,28 -0,21 -0,17 -0,10 0,05 0,13 0,25 0,41 0,53 0,73

CANADA Canada Covered - -0,20 -0,13 0,00 0,10 0,25 0,41 - - -

DENM ARK Denmark Covered - -0,25 -0,14 -0,06 0,05 0,17 0,37 - - 0,85

FINLAND Finland Covered - -0,29 -0,22 -0,11 -0,02 0,15 0,29 0,42 - -

FRANCE France Covered Legal - -0,29 -0,20 -0,12 0,01 0,11 0,23 0,41 0,55 0,75

FRANCE France Covered SFH -0,31 -0,30 -0,23 -0,14 -0,03 0,12 0,27 0,38 0,52 0,68

FRANCE France Covered Structured - -0,25 - - - - - - - -

GERM ANY Hypothekenpfandbriefe -0,31 -0,27 -0,20 -0,14 -0,04 0,08 0,21 0,33 0,44 0,57

GERM ANY Oeffentliche Pfandbriefe - -0,25 -0,22 -0,15 0,00 0,10 0,19 0,28 0,46 0,55

GERM ANY Other Pfandbriefe - 0,21 -0,01 - - - - - - -

IRELAND M ortgage ACS - -0,11 -0,03 0,07 0,16 0,32 0,46 - - -

ITALY Italy Covered - 0,22 0,02 0,13 0,62 0,63 0,70 1,04 1,19 1,19

LUXEM BOURG Luxembourg Covered - -0,08 - 0,02 - - 0,44 - - -

NETHERLANDS Netherlands Covered - -0,28 -0,19 -0,08 -0,03 0,13 0,30 0,32 - 0,68

NEW ZEALAND New Zealand Covered - -0,14 -0,09 0,10 0,20 0,28 0,52 - - -

NORWAY Norway Covered - -0,24 -0,16 -0,04 0,07 0,19 0,33 - - 0,76

PORTUGAL Portugal Covered - 0,03 0,08 0,25 - 0,77 - - - -

SINGAPORE Singapore Covered - - - - 0,15 - - - - -

SPAIN Single Cedulas Hipotecarias -0,14 -0,02 0,15 0,26 0,33 0,49 0,65 0,82 1,01 1,07

SPAIN Pooled Cedulas Hipotecarias - 0,02 0,13 0,30 0,39 0,62 0,82 - 1,13 -

SWEDEN Sweden Covered - -0,27 -0,23 -0,07 0,02 0,16 0,28 - - 0,75

SWITZERLAND Switzerland Covered - -0,14 -0,08 - 0,12 0,23 - - - -

TURKEY Turkey Covered - - - - 3,26 - - - - -

UK UK Covered - -0,19 -0,10 0,03 0,13 0,29 0,38 0,60 - -


Spread forecasts and default rates.


Appendix

Sources: BofAML, Moody‘s®, Bloomberg, LBBW Research

Current OAS spreads and forecasts

HY default rates and LBBW forecast

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

Europe 12M-trailing default rate Global 12M-trailing default rate

Europ. Avg. since 1999 Global avg. since 1999

Market Overview Forecast

Current

Bund

Spread 31.12.2017

Euro Non-Financial Index 117

Euro Unsubordinated Financial Index 107

Euro High Yield Index 421

Euro Lower Tier 2 Index 210

Euro Pfandbrief Index 46

Euro Covered Bond Index 64

1-10 Year Euro Government Index 54

Euro Quasi-Government Index 47

Emerging Markets Corporate Plus Index 359


LBBW Strategy Research publications at a glance.


Appendix

FITS

Credits

Commodities Weekly

Tech Alert Weekly Technical analysis of equities, currencies and rates

Capital Markets Compass

Corporate Treasury Radar

Technical Market View Global overview of rates, currencies, equity and commodity prices

Strategy Alert

Focus

Commodity Research Fokus

Publications LBBW Strategy Research

Weekly

Trends and analysis of economic data and rates

Current developments and estimates of the credits markets

Overview of the commodity markets

Monthly

Flagship-Publication for institutional investors about economic data, rates-, credit- and stock market developments

Market overview with focus on rates-, currency- and commodity management

Ad-hoc

Short analysis of current market developments

Detailed study of current market topics

Analysis of single commodities

Our publications are easily accessible via Bloomberg with the code "LBBK"

For further ways of accessing our publications, please contact our Research or Sales team at LBBW


Supervisory authorities of LBBW: European Central Bank (ECB), PO box 16 03 19, 60066 Frankfurt am Main and the German Federal Financial Supervisory Authority (BaFin), PO box 1253, 53002 Bonn / PO box 50 01 54, 60391 Frankfurt. This publication is based on generally available sources which we are not able to verify but which we believe to be reliable. Nevertheless, we assume no liability for the accuracy and completeness of this publication. This publication gives our non-binding view of the market and products at the time when it was completed, irrespective of potential own holdings in these products. This report does not replace personal advice. It is only meant for information purposes and does not constitution an offer or an invitation to buy or sell. For any further and more up-to-date inflation about specific investment opportunities and for the purposes of individual advice, please consult your financial adviser. This report is for the use of the addressees only and may not be reproduced, redistributed or passed to any other person or published, in whole or in part, for any purpose, without the prior, written consent of LBBW. The manner of distributing this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves about and to observe such restrictions. This report is not being distributed by LBBW to any person in the United States and LBBW does not intend to solicit any person in the United States. We reserve the right to change our opinions expressed here at any time and without prior notice. We also reserve the right not to update this information or to discontinue it completely with prior notice. Proprietary Rights Notice © 2014, Moody's Analytics, Inc., its licensors and affiliates ("Moody's"). All rights reserved. Moody’s ratings and other information ("Moody's Information") are proprietary to Moody's and/or its licensors and are protected by copyright and other intellectual property rights. Moody’s® information is licensed to Distributor by Moody’s®. MOODY'S INFORMATION MAY NOT BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. Moody's® is a registered trademark. Date of publication: 09.12.2016

Disclaimer.



FX/Commodity Research Dr Frank Schallenberger Group Head FX/Commodity Research + 49 711 127–77436 [email protected] Martin Güth, CQF FX Research + 49 711 127–79603 [email protected] Frank Klumpp, CFA Commodities, Energy + 49 711 127–75894 [email protected] Thorsten Proettel Commodities, Precious Metals + 49 711 127–74478 [email protected] Achim Wittmann Commodities, Base Metals + 49 711 127–73464 [email protected] Martin Siegert Technical Market Research + 49 711 127–76182 [email protected] Holger Frey Technical Market Research + 49 711 127–76184 [email protected]

Portfolio and Products Jochen Korb, CFA Group Head Portfolio and Products + 49 711 127–75251 [email protected] Jürgen Becker Product Services ++ 49 711 127–73952 [email protected] Marco Ryll, CIIA Credit Derivatives, Structured Credit, Corporate and Financial Hybrids + 49 711 127–40015 [email protected] Dr Michael Stein Portfolio Advisory, Credit Derivatives, Quant. Models, ABS + 49 711 127–75269 [email protected]

Strategy Research

Bloomberg: LBBK <go>

Head of Strategy Research Dr Markus Herrmann Managing Director + 49 711 127–42293 [email protected]

Strategy Rolf Schäffer, CIIA Group Head Strategy + 49 711 127–76580 [email protected] Uwe Streich Equity Strategy + 49 711 127–74062 [email protected] Wolfgang Albrecht Equity Strategy + 49 711 127–73258 [email protected] Elmar Völker Rates Strategy + 49 711 127–76369 [email protected] Thomas Klee, CFA Rates Strategy + 49 711 127–41600 [email protected] Michael Köhler, CEFA Credit Strategy + 49 711 127–42664 [email protected] Christian Götz, CEFA Credit Strategy + 49 711 127–74470 [email protected]

Sales Savings Banks & Regional Banks + 49 711 127–7565 Sales Banks & Frequent Borrowers +49 711 127–75670 Sales Asset Manager +49 711 127–75322 Sales Institutionals +49 711 127–75291

Sales Short Term Products +49 711 127–7574 International Sales +49 711 127–78847 Sales Special Funds & Unit Trusts +49 711 127–75358 Sales Equity Products +49 711 127–25333

Sales Capital Markets London +44 20 7826–8175 Sales Corporates +49 711 127–75300 Sales Large Corporates +49 711 127–78709 Sales Key Accounts +49 711 127–75679

Sales RP Bank / Sachsen Bank +49 711 127–27888 Sales Interest/Currency/Commodities Management Savings Banks Customers +49 711 127–7552 Sales Struct. Retail Products +49 711 127–25501

Debt Capital Markets +49 711 127 78746 Corporate Capital Markets +49 711 127–78825

Sales

Contacts

Head of Research Uwe Burkert Group Chief Economist + 49 / (0) 7 11/ 1 27 – 7 34 62 [email protected]

Research

Team Economics Dr Guido Zimmermann Senior Economist + 49 / (0) 7 11/ 1 27 – 7 16 40 [email protected] Dr Jens-Oliver Niklasch Eurozone, ECB + 49 / (0) 7 11/ 1 27 – 7 63 71 [email protected] Julian Trahorsch Eurozone, China + 49 / (0) 7 11/ 1 27 – 7 66 83 [email protected]


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