Economic Research

For important disclosure information please see page 18. research.commerzbank.com / Bloomberg: CBKR / Research APP available

According to the World Bank's most recent Doing Business Report, the quality of Germany as a business location has barely changed. But that is precisely the problem; while we are seeing a standstill in Germany, other EU countries are making progress with reforms – including countries in the euro periphery. Against all other EU countries, Germany as a business location has slipped to the middle of the rankings. Portugal has moved into the top third although Italy and Greece remain unattractive as a business location. Page 2

Doing Business: Germany only mid-ranked Distance to a hypothetical top ranking business location inside the EU, in per cent, 2014

0

510

1520

25

3035

4045

50

DK IE UK SE FI LT NE EE PT LV DE AT BE FR SI PL ES LU CY BG GR HU IT SK CZ RO

Source: World Bank Doing Business Indicator, Commerzbank Research

Council meeting: ECB set to sit tight. If survey-based inflation expectations fall further, the pressure for additional ECB monetary easing will increase further. That said, ECB Council members have signalled a waiting stance at least for next Thursday. Page 5

Product Idea: Structured Products – 30y Multitranche offering 4%. We advise long-term investors with minimum return requirements to sell optionality by buying a 30y callable multitranche with a 4.01% coupon. Page 6

Outlook for the week of 3 November to 7 November 2014 Economic data: We expect that next week’s release of labour market and ISM index data to strengthen hopes of a decent US GDP growth rate in the final quarter of 2014. In Germany, order intakes and industrial production are set to surprise to the upside. Page 9

Bond market: A combination of restraint at the ECB Council meeting and US data releases due in the week ahead are likely to dampen the currently bullish market sentiment. Page 12

FX market: As the FX market is increasingly pricing in a normalisation of US monetary policy, the dollar will gain further support. However, the main highlight of the FX market’s week will be the ECB meeting on Thursday. Page 13

Equity market: The Q3 reporting season is a rather mixed bag, with MDAX results somewhat more convincing than for DAX companies. These mixed results will not provide any support for the German equity market. Page 14

Commodity market: Saudi Arabia could help to settle oil prices if the country does not further lower the official selling price for December crude oil which would help to calm fears of a “price war” within OPEC. Page 15

Week in Focus Doing Business: The German eagle is losing its strength

Chief economist Dr. Jörg Krämer +49 69 136 23650 joerg.kraemer@commerzbank.com Editor: Peter Dixon +44 20 7475 4806 peter.dixon@commerzbank.com

31 Oktober 2014

The Week in Focus in 100 seconds Please follow this link for a video summary.

2 31 October 2014

Economic Research | Week in Focus

Doing Business: The German eagle is losing strength According to the World Bank's most recent Doing Business Report, the quality of Germany as a business location has barely changed. But that is precisely the problem; while we are seeing a standstill in Germany, other EU countries are making progress with reforms – including countries in the euro periphery. Against all other EU countries, Germany as a business location has slipped to the middle of the rankings. Portugal has moved into the top third and Italy and Greece remain unattractive as a business location, despite reforms.

Germany slips – and is now only in the middle of the rankings The general perception is that Germany remains a role model to aspire to in the international competition of business locations. Legal security, good infrastructure and a high level of product market competition are some of the attributes Germany is associated with. However, the World Bank's Doing Business Report1, published on Wednesday, offers a sobering assessment. The report measures the location quality from the perspective of small and medium-sized enterprises and it shows that the picture in Germany is deteriorating.

Since the outbreak of the financial crisis, Germany has steadily fallen back compared to the best business locations within the EU. To illustrate this, we have calculated for all World Bank indicators how far Germany deviates from the results of the best EU country in each category. We have then standardised and averaged these deviations.2 Accordingly, Germany’s average lag to a hypothetical top location in the EU this year is 33.9%, compared to 32.3% last year and 25.8% in 2009. Germany therefore only occupies a mid-ranking position as a business location (cover picture) – behind Latvia and Portugal – and is the country that has fallen back most since the outbreak of the sovereign debt crisis (Chart 1). There are two reasons for this:

• All other countries in the EU have implemented reform since 2009 and considerably increased their quality as a business location (Chart 1). In particular the eastern European countries such as Latvia, Poland and the Czech Republic have done their homework. Euro-zone peripheral countries have also undertaken reform.

• At the same time, we are witnessing a reform standstill in Germany, with some notable areas of deterioration. The costs of starting a business rose last year alone from 4.8% of per capita income to 8.8% – mainly due to higher legal fees. Imports and exports are also more expensive: it now costs 1,015 US dollars to export a container compared to 905 dollars last year and 872 dollars in 2009. In addition, the waiting time for connection to the electricity

CHART 1: Germany in the unusual position of tail ender Distance from hypothetical top location, change between 2014 and 2009 in percentage points

-10

-8

-6

-4

-2

0

2

4

6

LT PL CZ LV SI BG PT GR IT ES AT DK IE NE EE FI RO SE SK HU UK FR BE CY LU DE

Source: World Bank Doing Business Indicator, Commerzbank Research

1 See http://www.doingbusiness.org/ 2 The Doing Business Index consists of ten categories, quantified by a total of 51 sub-indicators. We firstly calculate the difference between the level (w) of each sub-indicator for each country and the best sub-indicator level across all countries (min). We normalize the result (w – min) by dividing it by the difference between the worst level (max) and min: (w – min)/(max – min). We then average the standardised deviations across countries for all sub-indicators and then across all categories. To guarantee the comparability for some years, we only use the 36 sub-indicators from 2009.

Dr Marco WagnerTel. +49 69 136 84335

31 October 2014 3

Economic Research | Week in Focus

network is currently 28 days, compared to 17 days in 2009. Companies meanwhile pay almost 49% of their earnings to the state as tax (compared to almost 45% five years ago) and they need 20 hours longer to fill out their tax declarations.

Germany is cutting off the branch on which it sits Germany is not only falling behind in locational factors, summarised in the Doing Business Report, but also in price competitiveness. The comparatively strong economy and the robust labour market have made it easier for the government to introduce a minimum wage and significantly increase the universal application of collective wage agreements. In future, the Ministry of Labour will be able to make collective agreements applicable to those businesses outside Employers’ Associations if the wage agreements cover less than half of the employees in a sector. This will force German unit labour costs to rise at a much faster rate and will impact on corporate competitive advantage – especially as temporary employment, work contracts and working-time accounts will be restricted. If this trend continues, Germany in five years’ time could even be at the point where France is today.3

France is also sliding down the rankings Although France improved its location quality within the euro zone last year, judging by the Doing Business Report (Chart 2) – for example, it now takes only 4½ days to start a company compared to 6½ days a year ago – the country is in a worse position than it was in 2009 (Chart 1). While access to electricity cost 38.4% of per capita income five years ago, it costs 42.9% today. The tax rate has also risen – 66.6% of profit goes to the tax authorities, compared to 65.8% in 2009 and the tax payment process has become somewhat more complicated. Exports and imports are much more expensive. It now costs 1,335 US dollars to export a container, which is a good 250 dollars more than in 2009.

All in all, reforms so far have been too weak to keep up with those in other countries. France has therefore slipped further behind in comparison to other EU locations (cover picture). The government’s plans for further reform are not convincing and are unlikely to change the situation much. This should also be reflected in lower growth rates in future. We expect that the French economy will expand by only 0.5% in 2015 and by significantly less than 1% in 2016.

Portugal moves up to the top third While France and Germany are hampered by reform lethargy, countries such as Portugal are showing the way. Since the outbreak of the sovereign debt crisis, Portugal has worked its way up from the middle to the top third (cover picture) and has strengthened its quality as a business location by the most of all periphery countries compared to 2009 (Chart 1). It has made particularly rapid progress in terms of starting a business and dealing with construction permits. CHART 2: Greece outperforms, Germany underperforms Distance from a hypothetical top location, change between 2014 and 2013, in percentage point

-2

-1

0

1

2

3

4

GR RO IE AT ES CZ FR IT SE EE SI DK UK PL PT LU SK NE LV BE BG LT HU CY FI DE

Source: World Bank Doing Business Indicator, Commerzbank Research

3 See also “Germany - the next France”, Economic Insight, 3 April 2014.

4 31 October 2014

Economic Research | Week in Focus

Fewer procedural steps, shorter approval procedures and lower costs are making it easier for entrepreneurs to start a business and obtain construction permits. It is now possible to set up a company in only three procedural steps and in an impressive 2½ days – a record time among EU countries. The registration of property has become less bureaucratic and cheaper. It takes less time to fill out tax returns and the tax rate is somewhat lower. Furthermore, goods can be imported and exported one to two days faster. Although freight costs for container exports have risen by almost 100 US dollars, at 780 dollars, this is still lower than in most other EU countries. Such conditions should help to bolster investment and the Portuguese economic recovery should continue, with growth rates of 1½% in 2015 and almost 2% in 2016.

Ireland remains in the lead Ireland has the reputation of attracting businesses with particularly favourable locational conditions. Little bureaucracy, low costs, fast administrative processes, high investor protection and low taxes have lured businesses – particularly banks – in the past and made Ireland a very attractive business location. Although Ireland fell back in the rankings in the first few years after the financial crisis, it has made huge efforts – especially in the past year (Chart 2). With its current reforms, Ireland has further improved its position among the top rankings compared to 2009 (cover picture). Last year, the government streamlined its administration. The processes of starting a business and registering property are now much faster. Obtaining access to electricity now takes 85 days compared to 205 days in 2013 – and is much cheaper. We expect Ireland to post growth rates of around 3% in each of the next two years.

Spain moves from lower third to the middle of the rankings Spain has also made good progress with its reforms, especially last year (Chart 2). Spain’s government has been working to ensure easier conditions for setting up a business. (Chart 2). This now requires only 6 procedural steps compared to 10 last year; furthermore, it takes only 13 days to set up a company, down from 23 days. The registration of purchased land and property is now faster than a year ago. In terms of location quality, Spain has overtaken other countries and moved up from the lower third to the middle range (cover picture). Furthermore, Spain should profit from labour market reforms, which point to growth rates of over 2% in each of the next two years.

Italy and Greece remain unattractive despite reforms In the past few years, Italy and Greece have also improved their quality as business locations (Charts 1 and 2). Reforms in these countries have not been enough, though, to lift these countries out of the lower third. Greece has moved up from fourth last to sixth last in the EU rankings, while Italy has only moved up from second bottom to fourth last (cover picture). Consequently, both countries are still comparatively unattractive as business locations.

There is still much to do to lift these countries out of their economic malaise, even if it currently looks like Italy has discovered its appetite for reform. While some of the reform plans are heading in the right direction, we do not believe this will result in the great breakthrough – reforms will probably be too weak for that.4 And most of the reforms that have been started are still at the parliamentary discussion stage, and could take some time to come to fruition. As a result, the Italian economy is likely to expand by only 0.3% in the coming year and by less than 0.5% in 2016.

4 See also “Reforms in Italy: Still much to do!”, Economic Insight, 28 July 2014.

31 October 2014 5

Economic Research | Week in Focus

Council meeting: ECB set to sit tight

Market-based inflation expectations have fallen again since the last ECB Governing Council meeting. Should survey-based expectations also drop, the pressure for additional measures by the central bank – such as government bond buying – would increase further. That said, ECB Governing Council members have signalled a waiting stance at least for next Thursday.

Rising downside risks for inflation also in SPF survey? At the last press conference, ECB president Draghi made it very clear that in the coming months, inflation expectations will ultimately determine whether the central bank takes further measures. And market-based inflation expectations have indeed fallen again since the last Governing Council meeting (chart 3). The pressure on the ECB to take renewed action would increase further if the latest results of the Survey of Professional Forecasters, which the ECB will have at its disposal at the forthcoming meeting, were also to signal bigger downside risks to inflation. In actual fact, the likelihood according to the SPF of the ECB falling short of its target in the long term has run parallel to (the much more volatile) market-based inflation expectations since the outbreak of the debt crisis in 2010 (chart 3). Consequently, analysts in the survey also believe that the likelihood of falling short of the target has steadily grown. In the last survey in July, the likelihood of the inflation rate being no higher than 1.4% in five years’ time was assessed at around one third.

Corporate bonds: a further possible interim step The latest media reports confirm that the ECB is ready to act; unspecified representatives of the central bank have hinted that the ECB is thinking about buying corporate bonds. A decision is not to be expected at the meeting next week though. According to one source, the ECB could decide in December to begin purchases in the first quarter of 2015. Other sources are more cautious: this is merely a “test balloon”, a concrete proposal has not been discussed and there is no time plan. Like ourselves, other central bank representatives argue that the buying volume of corporate bonds would be too low and the ECB Governing Council is therefore likely to decide ultimately for broad-based government bond purchases. According to the sources, a first decision could be made at the meeting on 22 January as the ECB first wants to await the outcome of the second TLTRO and needs a first appraisal of ABS purchases. The latest statements by ECB Governing Council members also point to a waiting stance at the coming meeting: ECB vice president Constancio had said that the purchase of corporate bonds was “not on the table”; the ECB first wanted to assess the effect of measures so far. ECB Governing Council members Coene and Nowotny stressed that there had been no discussion so far on possible purchases. Nowotny spoke out in favour of a steady-hand policy. Markets should thus not expect fresh measures at every other meeting. CHART 3: Euro zone: Do surveys confirm growing downside risks? Five-year inflation-linked forward swap rate in five years, likelihood according to SPF that the inflation ratewill be below 1.5% in five years (inverted scale!)

1.7

1.9

2.1

2.3

2.5

2.7

2.9

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

5

10

15

20

25

30

35

40

market expectation (lhs) Likelihood (inflation < 1.5%) (rhs)

Source: Source: ECB, Bloomberg, Commerzbank Research

Dr Michael Schubert+49 69 136 23700

6 31 October 2014

Economic Research | Week in Focus

Structured Products: 30y Multitranche offering 4%+ Our medication: A 4.01% fixed coupon amid historically low yields

Ultra-long Euro IRS are trapped at historically low levels. To enhance life insurers’ provisions, the Bundesbank suggests a higher ‘net return’ strategy. With German banks passing the ECB’s stress test, uncertainty with regard to solvency has been largely removed. We advise long-term investors with minimum return requirements to sell optionality through buying a 30y callable multitranche with a 4.01% coupon. The issuer bank may tender five sub-tranches at its discretion.

Despite higher volatility recently in swap markets, the low-yield environment in the euro area persists. Specifically, ultra-long swaps fail to show any signs of higher rates. In this context, note that recent Bundesbank research reveals that a considerable share of German life insurers is facing a serious risk of default by 2023. Apart from retaining profits and/or raising capital, the recommended medication is to increase ‘net return’ – even though this will entail greater risks. With enhanced provisions, insurers may better deliver on policyholders’ minimum return guarantees.

Regarding issuers’ solvency, the latest ECB stress test/AQR outcomes have considerably reduced uncertainty. Consequently the attractiveness of long-term fixed income structures issued by German banks has improved.

To this end we recommend buying a 30y single callable multitranche offering a fixed-rate coupon of 4.01% p.a. This product particularly serves investors targeting minimum return levels (due to a need to match defined benefits) and with known long-term re-investment needs. The call option on the bond leads to a 167 bp coupon pick-up relative to an equivalent non-callable, fixed-rate note. The structure’s coupons may be enhanced further through selling additional optionality. Specifically the issuer has the right for up to five taps (‘sub-tranches’) after 6,7,8,9 and 10 years. In contrast to the main tranche, the sub-tranches feature the same size and coupon, but are not callable. All tranches will mature in 2044.

To get a better handle on the mechanics, note that additional tranches will only be issued when it is beneficial to the issuer. This would be the case when market rates for a matched new issue are higher than the multitranches’ coupon i.e. above 4.01%. If such a scenario unfolds, investors would incur a disadvantage compared to investing at the then-prevailing market rates.

Nevertheless, in a scenario of ongoing low IRS and only moderate volatility in longer maturities, investors profit from the large fixed-rate coupon. Recalling adverse scenarios, the sub-tranches will most likely not be issued and the main tranche may be called in 2024. In a nutshell, investors may still match at least part of their yield targets through selling optionality. Effectively this works as a hedge against a sustained low-yield environment.

30-year callable Multitranche with a 4.01% coupon Issuer: A- (average) Type: Registered Minimum Lot: € 1m Maturity: 2044 (for all tranches) Coupon: 4.01% Possible sequence of tranches: The issuer has the right to issue up to five additional sub-tranches,

one per year, after 6,7,8,9 and 10 years. Call right: The issuer has a single call right on the main tranche after 10 years Mother tranche: € 10m Daughters: € 10m (each) Payment: Annual , in arrears Basis: Annual, 30/360

Markus KochTel. +49 69 136 87685

31 October 2014 7

Major publications from 23 – 30 October 2014 Credit Note: EU Banks - Relief and questions after stress test results With the publication of the stress test results it has become clear that fewer than eight banks are actually left with the need to improve their capital, by a total that is unlikely to exceed €5bn. While this result clearly ranges below market expectations, market participants can be expected to become more critical of banks that only passed by an unexpectedly narrow margin. Overall, however, the spread impact should be limited. more

Cross Asset Feature: Update - Small eurozone countries Markit announced it will lower the size threshold for sovereign bonds for the iBoxx € benchmark indices from €2bn to €1bn effective from 31 October 2014. The upcoming change will have two main implications: 1) Countries that are already members of the iBoxx family have bonds outstanding that will now be included, too. 2) Bonds issued by Slovenia and Latvia will become part of iBoxx, triggering a first appearance of these countries. We outline the impact of the change on the various iBoxx indices and on the issuers concerned. more

Economic Insight: Maybe the world can export itself out of trouble Currently, we hear the n-th replay of that tired old song: not every country can export itself out of stagnation. Therefore, better stop trying, boost government spending and blame the Germans for their oh-so-dangerous foreign trade surplus. We beg to differ and demonstrate some of the many holes in this line of reasoning. more

EM Briefing: Brazil - Dilma Rousseff re-elected President Dilma Rousseff has been re-elected president for a second four-year term. Given widespread discontent with the status-quo, quickly providing a credible plan of action will be of paramount importance in order to avoid further downgrades and the possible loss of the country’s investment grade rating. more

Commodity Spotlight Energy: Paradigm shift on the oil market Even with geopolitical unrest on several fronts, the oil price has fallen almost constantly in the last four months and is currently trading close to a 4-year low. This could indicate a paradigm shift on the oil market. OPEC countries obviously want to defend their market shares and appear to be ready to do so even at the cost of a price war. We have therefore cut our Brent price forecast for 2015 to an annual average of USD 85 per barrel. more

Commodity Spotlight Energy: Weak European gas demand dampens price Although gas spot prices have risen lately, they are still much lower than a year ago. We also anticipate little upward price potential in the long term. For although demand for gas in Europe is likely to have bottomed out this year, the growth potential is limited. more

FX Hotspot: SEK - Ways out of the ECB’s QE trap Riksbank cut its key rate to zero and has thus reached the end of the line as far as conventional monetary policy is concerned. In the following note we describe what measures it could now take to ease its monetary policy further should this become necessary. In the end it is likely to refrain from unconventional measures though and will accept SEK appreciation against the EUR. more

8 31 October 2014

Economic Research | Week in Focus

Preview – The week of 3 to 7 November 2014 Time Region Indicator Period Forecast Survey Last

Saturday, 1 November 2014

1:00 CHN PMI, manufacturing Oct sa 51.0 51.2 51.1

Monday, 3 November 2014 8:15 SPA PMI, manufacturing Oct sa 52.5 – 52.6 8:45 ITA PMI, manufacturing Oct sa 50.5 – 50.7 9:00 EUR PMI, manufacturing, final Oct sa 50.7 50.7 50.7 (p) 9:30 GBR PMI, manufacturing Oct sa 52.0 52.0 51.6

• 15:00 USA ISM index (manufacturing) Oct sa 56.3 56.5 56.6 # Auto sales Oct SAAR, mn 16.4 16.6 16.34

Tuesday, 4 November 2014

3:30 AUD RBA interest rate decision % 2.50 2.50 2.50 13:30 USA Trade balance Sep $bn, sa -40.0 -40.0 -41.1 15:00 Industrial order intake Sep mom -1.0 -0.2 -10.1USA: Congressional elections

Wednesday, 5 November 2014 9:00 EUR PMI, services, final Oct 52.4 52.4 52.4 (p) 9:30 GBR PMI, services Oct 58.0 58.5 58.7 13:15 USA ADP employment change Oct mom, k, sa 230 211 213 15:00 ISM index (non-manufacturing) Oct sa 58.3 58.0 58.6

Thursday, 6 November 2014 • 7:00 GER Industrial order intake Sep mom, sa 2.5 2.0 -5.7 9:30 GBR Industrial production Sep mom, sa 0.1 0.4 0.0 12:00 GBR BoE interest rate decision % 0.50 0.50 0.50• 12:45 EUR ECB interest rate decision % 0.05 0.05 0.05 13:30 USA Initial claims Nov 1 k, sa 285 – 287

Friday, 7 November 2014 7:00 GER Exports Sep mom, sa 5.0 – -5.8 Industrial production Sep mom 2.4 1.8 -4.0

7:45 Industrial production Sep mom yoy 0.0 – 0.0

• 13:30 USA Non-farm payrolls Oct mom, k, sa 230 225 248 Unemployment rate Oct %, sa 5.9 5.9 5.9Source: Bloomberg. Commerzbank Economic Research; *Time GMT (subtract 5 hours for EST. add 1 hour for CET). # = Possible release; mom/qoq/yoy: change to previous period in percent. AR = annual rate. sa = seasonal adjusted. wda = working days adjusted; • = data of highest importance for markets

31 October 2014 9

Economic Research | Week in Focus

Economic data preview: USA: All’s well that ends well?

Should the US economy follow up strong growth in the second and third quarters (4.6% and 3.5%) with another above-average quarter, the weak start to the year (-2.1%) will probably be forgotten once and for all. We expect next week’s first indicators for October to strengthen hopes of a decent final quarter. With the employment report and ISM index, two of the most-watched US indicators are due out next week. They will also give a first picture of how the US economy has started the fourth quarter. In the case of the labour market, it is noticeable how stable the recovery has been so far. The number of jobs in the private sector has been rising by about 2%, year-on-year, since mid-2011 (Chart 4). This corresponds to the pace at the peak of the upswing between 2001 and 2007. Private employment only rose faster in the 1990s, but this was due to technology bubble. The current increase in employment is not being fuelled by market distortions and is fairly substantial, although the number of jobs in the overall economy is not rising at quite such a sharp rate, as the public sector has only recently started to recruit additional staff again.

Yet it is enough to push down unemployment; jobs are being created at a faster pace than people are entering the labour market. The total population is growing by less than 1% a year. The employable percentage is growing at an even slower pace as the sizeable baby boom generation is now retiring. Consequently, the unemployment rate is falling steadily and, at less than 6%, is close to the level the Federal Reserve regards as the ‘natural’ long term rate (Chart 5).

We expect that little has changed in this trend in October. Unemployment has probably risen by 230,000, which is roughly the average of the past three months (consensus 225,000). As the unemployment rate dropped surprisingly sharply in September, we expect the labour market to take a breather in October and predict an unchanged rate of 5.9% (consensus 5.9%).

US industry is still one of the main drivers of the economic recovery. We expect this to be reflected in another above-average ISM index, although the level is likely to have dropped marginally from 56.6 to 56.3 (consensus: 56.5) in line with on balance slightly weaker regional indicators.

Germany: Orders pick up, but not enough The late summer holidays in most German federal states pushed orders down in August. There should be a counter-movement in September. We anticipate a gain versus the previous month of 2.5% (consensus: 2.0%). The effect of the holidays should also have had a positive impact on industrial production, especially the automotive sector. Industrial production probably rose in September by 2.4% (consensus: 1.8%) on the previous month. Yet even these upwardly distorted figures would not be enough to end the downtrend in orders and industrial production.

CHART 4: USA – Stable rise in employment private-sector employment, year-on-year change in per cent

CHART 5: USA – Full employment will soon be reached Unemployment rate, long-term level according to estimates of FOMC members

-6-5-4-3-2-101234

1991 1994 1997 2000 2003 2006 2009 2012

4

5

6

7

8

9

10

2009 2010 2011 2012 2013 2014

Source: Global Insight, Commerzbank Research Source: Global Insight, Commerzbank Research

Dr Christoph BalzTel. +49 69 136 24889

10 31 October 2014

Economic Research | Week in Focus

Central Bank Watch (1) Fed

CHART 6: Expected interest rate for 3-month funds (USD)

0,0

0,5

1,0

1,5

2,0

current Dez 14 Mrz 15 Jun 15 Sep 15 Dez 15

30.10.14 23.10.14 CommerzbankFutures

TABLE 1: Consensus forecasts Fed funds rate

Q4 14 Q2 15 Q4 15

Consensus 0,25 0,25 1,00

High 0,25 1,00 2,00

Low 0,25 0,25 0,25

Commerzbank 0,25 0,50 1,50

The Fed terminated QE3 at its meeting on 28/29 October as expected. For the time being, the US central bank will continue to invest the proceeds from maturing bonds in securities. In this way the Fed will prevent a contraction in its asset portfolio. And finally, the Fed confirmed the key rate corridor at between 0.00% and 0.25%.

With its statement, the Fed gave a clear signal that the next step on the way back to normal will be a rate hike. The Fed put the decline in market-based inflation expectations into perspective and reiterated its view that the risk of a too-low inflation rate had slightly diminished. Moreover, the Fed now views the labour market more positively.

The Fed again voiced its expectation that it will keep interest rates at current levels near zero “for a considerable time”. But it is also clear that not the calendar but economic data will determine the timing of the first rate move. And this step could occur sooner than anticipated if the data turns out better than expected. Since the Fed did not even mention a resumption of asset purchases as an option, a rate move will probably occur around the middle of 2015. We see our forecast to this effect confirmed.

Bernd Weidensteiner+49 69 136 24527

Source: Bloomberg, Commerzbank Research

ECB CHART 7: Expected interest rate for 3-month funds (EUR)

0,0

0,2

0,4

0,6

0,8

1,0

current Dez 14 Mrz 15 Jun 15 Sep 15 Dez 15

30.10.14 23.10.14 Commerzbank

Futures

TABLE 2: Consensus forecasts ECB minimum bid rate

Q4 14 Q2 15 Q4 15

Consensus 0,05 0,05 0,05

High 0,05 0,05 0,05

Low 0,05 0,05 0,05

Commerzbank 0,05 0,05 0,05

Regarding the issue of further monetary measures, ECB Board Member Praet noted that it had eased monetary policy in June and September. However, some observers doubt that these will suffice to achieve the intended significant expansion of central bank balance sheet. "The debate on additional measures is still ahead of us," Praet said.

ECB Executive Board member Lautenschläger confirmed her view that government bond purchases should be introduced only as a last resort to combat deflation: "I am critical of major bond purchases ... because the balance between costs and benefits is currently negative."

According to council member Noyer, the ECB would "not accept passively" an inflation target. However he noted that purchases of government bonds would be difficult because of the greater fragmentation of the bond markets in the euro area than in the US.

ECB Governing Council member Hansson spoke out against government bond purchases "in the coming months". The recent ECB measures were "fairly extensive," argued Hansson. The Governing Council now needs time - "maybe until next spring" - in order to estimate their impact.”

Dr Michael Schubert

+49 69 136 23700

Source: Reuters, Bloomberg, Commerzbank Research

31 October 2014 11

Economic Research | Week in Focus

Central Bank Watch (2) Bank of England (BoE)

CHART 8: Expected interest rate for 3-month funds (GBP)

0,0

0,5

1,0

1,5

2,0

current Dez 14 Mrz 15 Jun 15 Sep 15 Dez 15

30.10.14 23.10.14 CommerzbankFutures

Source: Bloomberg, Commerzbank Research

The majority view of the MPC was encapsulated in a speech this week by Deputy Governor Cunliffe who noted that the absence of wage inflation at the same time as unemployment was falling sharply was a puzzle, and that "Understanding why that has happened and how long it will persist is … now key to deciding policy." He also pointed out that despite the recent squeeze on real wages, there is little evidence that workers are demanding higher wages now that the economy is looking stronger. This in turn "implies that we can afford to maintain the current degree of monetary stimulus for a longer period than previously thought." Any chance that the MPC will adjust policy at next week's meeting is thus pretty close to zero. The Committee will be given a preview of the BoE's staff forecast which will be publicly unveiled in two weeks' time along with the Inflation Report. Whilst the BoE's attention in recent months has largely focused on the real economy, we suspect that it may well switch towards inflation in the months ahead. With commodity prices unlikely to make much of a contribution to price pressure in the near-term, inflation is likely to continue running below the BoE's 2% target for some time to come, which makes the case for a rate hike even more difficult.

Peter Dixon+44 20 7475 4806

RBA (Australia) CHART 9: Expected interest rate for 3-month funds (AUD)

2,0

2,5

3,0

3,5

4,0

current Dez 14 Mrz 15 Jun 15 Sep 15 Dez 15

30.10.14 23.10.14 CommerzbankFutures

Source: Bloomberg, Commerzbank Research

Australian data in October was a mixed bag. Business sentiment has blurred moderately, which suggests that investment activity ought to remain lacklustre. Consumer demand is modest, only residential construction is booming. Moreover, the inflation rate has edged down markedly. In the third quarter, it posted a rate of 2.3%, thus slipping back into the lower half of the RBA’s target corridor. Currently, labour market data are showing statistical flaws. Following changes in data collection, the Bureau of Statistics saw problems with seasonal adjustment. In this respect, the RBA is poking around in the dark.

On balance, the RBA’s economic concerns, which were already evidenced in the minutes of its October meeting, should have intensified. The catalysts were the weaker dynamics in key export markets, particularly China, declining commodity prices and the AUD, which remains too strong from the perspective of the RBA, thus failing to support the economy as would normally be expected in a phase of falling commodity prices. As long as global interest rates remain at low levels, no improvement is to be expected on this front. Against this backdrop, we expect the RBA to leave the target for the cash rate unchanged at 2.5%. Its stance is likely to remain neutral.

Elisabeth Andreae+49 69 136 24052

12 31 October 2014

Economic Research | Week in Focus

Bond market preview: How strong will the headwind for Bunds from the US bond market become?

Apart from some rhetoric that has already been priced in, the ECB will continue to practice restraint at its Council meeting in November, whilst the US data releases due in the week ahead should combine to sour the currently bullish market sentiment. For this reason we would sell ten-year US Treasuries versus Bunds and furthermore recommend a tactical duration short position in Bunds.

TABLE 3: Weekly outlook for yields and curves Bunds US Treasuries

Yield (10 years) Higher Higher

Curve (2 - 10 years) Neutral Flatter

Source: Commerzbank Research

Following the surprisingly hawkish Fed statement, the US$ government bond and swap curves have flattened massively from the short end. The market is now looking to next week’s ECB Council meeting (see page 5) and data releases from Germany and (especially) the US. The successful start of the covered bond purchase programme, together with the current slight upward correction in break-even inflation, should alleviate the pressure on the ECB to announce further steps before the recent QE measures take effect. At the end of the day, this meeting is unlikely to produce market relevant stimuli because, apart from some priced-in rhetoric, the ECB Council members will probably continue to exercise restraint. On a medium-term perspective, however, the pressure will increase noticeably, should survey-based inflation expectations also continue to decline (Chart 10).

Another above-average ISM index and the US employment report for October will suggest that the US economy continued to grow at a solid rate in the final quarter of 2014, which will be a burden on the US Treasury market. We would use the current market rally from the recent yield highs as an opportunity for selling ten-year US Treasuries versus Bunds with the same maturity. Below 0.9%, we recommend a tactical duration short position in Bunds, because for the coming week we forecast event risks that will weigh on the bond market on balance. We expect ten-year Bund yields to re-test the 0.9% mark (Chart 11) and see ten-year Treasury yields returning to the range of 2.35% to 2.45%.

CHART 10: Significant downside risks to survey-based inflation expectations in the next SPF € 5y5y inflation swap forward (5d MA) and SPF 5y ahead inflation expectations in %

CHART 11: Facts to take the helm at the start of the month Yields of ten-year Bunds and US Treasuries in percent

0

5

10

15

20

25

30

35

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

2.1

2.2

2.3

2.4

2.5

2.6

2.7

Jul 14 Aug 14 Sep 14 Oct 140.7

0.8

0.9

1.0

1.1

1.2

1.3

1.4

Treasuries (LS) Bunds (RS)

Source: Global Insight, Commerzbank Research Source: Bloomberg, Commerzbank Research

Outlook for the Bund future, 3 – 7 November Economy ↓

Inflation ↑

Monetary policy →

Trend →

Supply →

Risk aversion →

Markus KochTel. +49 69 136 87685

31 October 2014 13

Economic Research | Week in Focus

FX market preview: After the Fed is before the ECB

The era of unconventional monetary policy in the US has come to an end. The FX market is increasingly pricing in a normalisation of US monetary policy. The BoE on the other hand is trying to back-paddle cautiously which is affecting sterling. However, the main highlight of the FX market’s week will be the ECB meeting on Thursday. The euro remains under pressure.

TABLE 4: Expected weekly trading range

Range Bias Range Bias

EUR-USD 1.2375-1.2750 EUR-GBP 0.7775-0.7950

EUR-JPY 137.00-142.00 GBP-USD 1.5800-1.6150

USD-JPY 108.50-113.50 EUR-CHF 1.2000-1.2120

Source: Commerzbank Research

October has been an eventful month for EUR-USD (Chart 12). Speculation the Fed might postpone the normalisation of its monetary policy because of fears about global economic weakness and an excessively strong dollar, had supported the currency pair. For the time being the Fed has dispelled such fears. The ECB is probably grateful that EUR-USD is likely to resume its downtrend following the FOMC report. Now that US central bankers have made it clear that they will stick to their normalisation schedule, FX investors’ attention is focussing on Europe.

On Thursday both the ECB and the Bank of England are due to take their monetary policy decision. The FX market expects both central banks to leave their monetary policies unchanged. However, as always the devil will be in the detail. In the United Kingdom, current data suggests that the recovery is slowing down. The fall in inflation provides scope for the BoE to postpone a first rate hike. If the BoE also refers to the moderate data developments , sterling will continue to struggle. However, particularly against the euro, the pound is in a strong position. The market expects further expansionary ECB measures in the coming months as long-term inflation expectations are no longer firmly anchored (Chart 13). The only question is what exactly these will look like. This means the FX market will listen very carefully to what ECB President Mario Draghi has to say. Following rumours about the purchase of corporate bonds the market might be disappointed should the ECB assume a wait and see approach. However, that is likely only to temporarily slow the downtrend in EUR-USD.

CHART 12: EUR-USD is once again trading at the levels seen in early October EUR-USD spot, daily data

CHART 13: In the absence of a notable improvement on the inflation front the euro remains under pressure 5x5 inflation expectations based on inflation swaps, euro zone consumer price index (excluding tobacco)

1.2451.2501.2551.2601.2651.2701.2751.2801.2851.290

01 Oct 08 Oct 15 Oct 22 Oct 29 Oct

1.7

1.8

1.9

2.0

2.1

2.2

2.3

Jan-14 Mar-14 May-14 Jul-14 Sep-14

Source: Bloomberg, Commerzbank Research Source: Commerzbank Research

Esther ReicheltTel. +49 69 136 41505

14 31 October 2014

Economic Research | Week in Focus

Equity market preview: Q3 reporting season: DAX companies off to a weak start

The Q3 reporting season is gaining momentum. Some 31% of DAX companies and 26% of MDAX companies have now presented their reports. The results are a rather mixed bag, with the MDAX companies somewhat more convincing than the DAX companies. From today’s vantage point, currency losses exerted much less of a drag on company results in Q3 than in the preceding quarters thanks to the weaker euro. These mixed results will hardly support the German equity market.

TABLE 5: DAX index slowly recovering Earnings 2014E

Performance (%) since Index points Growth (%) P/E 2014E

Index 30/09 30/06 31/12 Current 31/12 Current 31/12 Current 31/12

DAX 30 9,083 -4.1 -7.6 -4.9 707.7 731.1 1.9 11.6 12.8 13.1

MDAX 15,765 -1.4 -6.3 -4.9 933.7 994.2 27.0 41.6 16.9 16.7

Euro Stoxx 50 3,022 -6.3 -6.4 -2.8 221.8 242.3 4.7 12.1 13.6 12.8

S&P 500 1,982 0.5 1.1 7.3 116.6 119.3 7.5 9.9 17.0 15.5

Source: Commerzbank Corporates & Markets, I/B/E/S

The reporting season for Q3 is picking up momentum. Some 31% of the companies in the DAX and 26% of MDAX companies have now presented their reports, with the results turning out very mixed (table 4): • DAX: Up to now, 44% of companies exceeded our expectations, 23% were in line and 33%

of the results fell short of our expectations. This results distribution for Q3 is currently well below that of the previous year and also remains below the average of the last eight quarters.

• MDAX: To date, 38% of companies exceeded our expectations, 31% were in line and 31% of the results fell short. This distribution is above that of last year, but remains below the average of the last eight quarters.

We find the Q3 results of MDAX companies somewhat more convincing than the figures presented by DAX companies. Thanks to the weaker euro, the results in Q3 presented up to now were far less affected by negative currency losses than in the preceding quarters. The mixed results are unlikely to offer broad-based support for the German equity market at present.

CHART 14: Q3 results of MDAX companies have been more convincing so far Distribution of quarterly results for Q3 in %

DAX: Reporting DistributionAbove Change y-o-y In Line Change y-o-y Below Change y-o-y

Quarter Expectations in %pts Expectations in %pts Expectations in %ptsQ3 2014 44,4% -0,4 22,2% -19,2 33,3% 19,5Q2 2014 24,1% -17,2 51,7% 13,8 24,1% 3,4Q1 2014 34,5% -10,3 41,4% 10,3 24,1% 0,0Q4 2013 31,0% -10,3 41,4% -3,4 27,6% 13,8Q3 2013 44,8% 0,0 41,4% 17,2 13,8% -17,2Q2 2013 41,4% 37,9% 20,7%Q1 2013 44,8% 31,0% 24,1%Q4 2012 41,4% 44,8% 13,8%Q3 2012 44,8% 24,1% 31,0%Avg. 38,4% 39,2% 22,4%MDAX: Reporting Distribution

Above Change y-o-y In Line Change y-o-y Below Change y-o-yQuarter Expectations in %pts Expectations in %pts Expectations in %pts

Q3 2014 38,5% 16,5 30,8% -17,2 30,8% 0,8Q2 2014 26,0% -12,0 52,0% 14,0 22,0% -2,0Q1 2014 40,0% 10,0 46,0% 12,0 14,0% -22,0Q4 2013 32,0% 0,0 52,0% -2,0 16,0% 2,0Q3 2013 22,0% -18,0 48,0% 16,0 30,0% 2,0Q2 2013 38,0% 38,0% 24,0%Q1 2013 30,0% 34,0% 36,0%Q4 2012 32,0% 54,0% 14,0%Q3 2012 40,0% 32,0% 28,0%Avg. 32,5% 44,5% 23,0%

Source: Company data, Commerzbank Research

Markus WallnerTel. +49 69 136 21747

31 October 2014 15

Economic Research | Week in Focus

Commodities market preview: Certainly uncertain

US dollar strength still stands in the way of a sustained recovery in commodity prices. That said, the data on the purchasing managers’ indices from China and the USA next week could lead to a stabilisation of prices. On the oil market, Saudi Arabia could help to settle prices if it does not further lower the official selling prices for its crude oil for December which will thus calm fears of a “price war” within OPEC. TABLE 6: Tendencies in important commodities

Per cent change Tendency Commodity specific events

30 Oct. 1 week 1 month 1 year short-term

Brent (USD per barrel) 84.8 0.3 -12.5 -21.4 Official selling price (OSP) from Saudi Arabia

Copper (USD per ton) 6682 2.0 -0.6 -6.8 ISM USA, PMI China

Gold (USD per troy ounce) 1240 0.1 1.3 -7.0

Source: Bloomberg, Commerzbank Research

Oil prices have recovered somewhat recently after several weeks of huge selling pressure. The market has clearly already “priced in” negative expectations relating to oversupply on the oil market. Whether OPEC members will agree on a large enough production cut at their meeting at the end of November to restore market balance is questionable though. An indication of this could come from Saudi Arabia’s official selling prices, due to be published next week. Compared to international reference prices, Saudi Arabia has recently offered its crude oil at prices last seen in December 2008 (Chart 15). This has helped to fuel speculation about a “price war” within OPEC. We are sceptical about a sustained price recovery in Brent above 90 USD per barrel and expect prices to stabilise at around 85 USD per barrel in the coming months.

Base metal prices are rising and falling almost in line with the expectations of the purchasing managers and fluctuations in market sentiment about China (Chart 16). While the consensus already expects the economic recovery to continue, if the purchasing managers’ indices are stronger, contrary to expectations, we could see a temporary covering of short sales and sharper price rises given the very negative sentiment for base metals.

Not even robust gold import data from China could “protect” precious metal prices from the stronger US dollar. Even if a renewed breakthrough of the psychologically important 1200 USD per troy ounce mark and possibly also a renewed test of the four-year low at around 1200 USD per ounce are likely, gold should gain support from strong Asian demand and speculation of a possible victory by the supporters of the Swiss gold referendum. At the end of November, the people of Switzerland vote on whether the Swiss National Bank has to hold a minimum 20% of its currency reserves in gold in future, which would force the SNB to buy substantial quantities of gold.

CHART 15: Saudi Arabia has markedly cut prices of lateSpread of Saudi Aramco Arab Light vs Platts Oman/Dubai for Asia, in USD per barrel

CHART 16: China PMI paralleled by industrial metal prices CSI 300 China equity index, LME industrial metal prices; index 1/1/2011 = 100

-2

-1

0

1

2

3

4

5

2001 2003 2005 2007 2009 2011 2013

65707580859095

100105110

2011 2012 2013 2014

Equity index LMEX

Source: Bloomberg, Commerzbank Research Source: Hong Kong Statistical Office, Commerzbank Research

Eugen WeinbergTel. +49 69 136 43417

16 31 October 2014

Economic Research | Week in Focus

Commerzbank forecasts TABLE 7: Growth and inflation Real GDP (%) Inflation rate (%) 2013 2014 2015 2013 2014 2015 USA 2.2 2.2 2.9 1.5 1.7 1.8 Canada 2.0 2.3 2.5 0.9 2.1 2.0 Japan 1.5 1.0 1.3 0.4 2.8 1.5 Euro area -0.4 0.7 0.8 1.4 0.6 1.0 - Germany 0.1 1.3 1.3 1.5 1.1 2.1 - France 0.4 0.3 0.5 0.9 0.6 0.7 - Italy -1.7 -0.2 0.3 1.2 0.4 0.6 - Spain -1.2 1.4 2.3 1.4 0.0 0.5 - Portugal -1.4 1.0 1.5 0.3 -0.2 0.8 - Ireland 0.2 5.2 3.1 0.5 0.6 1.4 - Greece -4.2 1.0 2.0 -0.9 -1.3 0.5 United Kingdom 1.7 3.0 2.6 2.6 1.6 1.9 Switzerland 2.0 1.7 1.8 -0.2 0.0 0.5 China 7.7 7.3 6.5 2.6 2.3 2.5 India 4.7 5.8 6.2 6.3 6.5 6.2 Brazil 2.5 0.3 0.9 6.2 6.3 6.5 Russia 1.3 0.3 0.9 6.8 7.3 6.5

World 2.9 3.1 3.4

• The ultra-expansionary policy of the Fed is boosting the US economy. At the same time, fiscal policy is at least no longer a headwind. We therefore expect US growth to markedly accelerate.

• Growth in China decelerates further, also due to decreasing house prices.

• The recovery in the euro zone will only continue at a slow pace. GDP growth will remain lower than that of the USA.

• EMU has survived the sovereign debt crisis, but is gradually evolving into an “Italian-style monetary union”.

• Despite its current weakness, the German economy looks set to continue outperforming the rest of the euro area – partly because ECB target rates are much too low for Germany.

• High unemployment in most countries is keeping inflation low for the time being. In the long term, however, inflation is likely to rise, as central banks have given up some of their independence.

TABLE 8: Interest rates (end-of-quarter) 30.10.2014 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15

USA

Federal funds rate 0.25 0.25 0.25 0.50 1.00 1.50

3-months Libor 0.23 0.25 0.30 0.80 1.35 1.90

2 years* 0.48 0.70 0.90 1.20 1.60 2.00

5 years* 1.59 2.10 2.40 2.70 2.95 3.20

10 years* 2.29 2.70 2.90 3.10 3.30 3.50

Spread 10-2 years 181 200 200 190 170 150

Swap-Spread 10 years 15 10 10 10 15 15

Euro area

Minimum bid rate 0.05 0.05 0.05 0.05 0.05 0.05

3-months Euribor 0.09 0.05 0.05 0.05 0.05 0.05

2 years* -0.05 -0.10 -0.10 -0.10 -0.05 0.00

5 years* 0.14 0.25 0.20 0.25 0.35 0.40

10 years* 0.84 1.10 0.80 1.00 1.20 1.35

Spread 10-2 years 89 120 90 110 125 135

Swap-Spread 10 years 23 15 25 30 35 35

United Kingdom

Bank Rate 0.50 0.50 0.75 0.75 1.00 1.25

3-months Libor 0.56 0.80 0.90 1.05 1.25 1.40

2 years* 0.61 1.00 1.25 1.30 1.35 1.55

10 years* 2.21 2.60 2.85 3.05 3.20 3.35

• The Fed has ended its QE3 programme. Interest rate hikes are on the cards from 2015Q2, due to a continuously decreasing US unemployment rate and gradually rising inflation.

• Due to the deteriorating growth outlook and increasing downside risks for inflation we expect the ECB to announce QE within the next 12 months.

• 10y Bund yields are likely to stabilise around 1% later this year when the Fed communication changes but mark new record lows when the ECB announces QE in 2015. Thereafter, yields should rise gradually. The structurally low interest rate environment remains intact.

• The focus on the Fed’s lift-off will put upward pressure on US$ rates. A return to 3% for 10y USTs is only on the cards for 2015, though. The curve is in for a textbook-style flattening via the short-end in the coming quarters.

• Risk premiums of peripheral government bonds are set to decline further.

TABLE 9: Exchange rates (end-of-quarter) 30.10.2014 Q4 14 Q1 15 Q2 15 Q3 15 Q4 15 EUR/USD 1.26 1.25 1.22 1.19 1.17 1.15 USD/JPY 109 110 113 116 118 120 EUR/CHF 1.21 1.21 1.21 1.21 1.21 1.21 EUR/GBP 0.79 0.77 0.76 0.75 0.74 0.73 EUR/SEK 9.27 9.10 9.00 8.95 8.90 8.90 EUR/NOK 8.46 8.05 7.80 7.70 7.70 7.65 EUR/PLN 4.22 4.15 4.10 4.08 4.06 4.05 EUR/HUF 309 312 310 309 308 306 EUR/CZK 27.73 27.50 27.30 27.00 27.00 26.90 AUD/USD 0.88 0.87 0.85 0.83 0.81 0.80 NZD/USD 0.78 0.77 0.75 0.73 0.71 0.70 USD/CAD 1.12 1.13 1.15 1.16 1.17 1.18 USD/CNY 6.12 6.10 6.05 6.00 5.95 5.95

• USD should further profit from the expectations of Fed interest rate normalization. Current USD rates have not priced in the speed of rate hikes that we expect.

• The high yielding G10 currencies should particularly suffer from US rate hikes.

• EUR will remain under pressure due to increasing likelihood of an ECB QE program. ECB wants a weaker EUR and is active in achieving this goal.

• CEE currencies are generally benefiting from the dovish ECB backdrop, meaning central banks have room to cut rates further. HUF, PLN and RON should trade range-bound, while EUR/CZK will float above the 27.0 floor set by the CNB.

Source: Bloomberg. Commerzbank Economic Research; bold change on last week; * Treasuries, Bunds, Gilts, JGBs

31 October 2014 17

Economic Research | Week in Focus

Research contacts (E-Mail: firstname.surname@commerzbank.com)

Chief Economist Dr Jörg Krämer

+49 69 136 23650 Economic Research Interest Rate & Credit Research FX Strategy Commodity Research Dr Jörg Krämer (Head) +49 69 136 23650 Dr Ralph Solveen (Deputy Head; Germany) +49 69 136 22322 Elisabeth Andreae (Scandinavia, Australia) +49 69 136 24052 Dr Christoph Balz (USA, Fed) +49 69 136 24889 Peter Dixon (UK, BoE), London +44 20 7475 4806 Dr Michael Schubert (ECB) +49 69 136 23700 Eckart Tuchtfeld (German economic policy) +49 69 136 23888 Dr Marco Wagner (Germany, France, Italy) +49 69 136 84335 Bernd Weidensteiner (USA, Fed) +49 69 136 24527 Christoph Weil (Euro area) +49 69 136 24041

Emerging Markets Simon Quijano-Evans (Head) +44 20 7475 9200

Christoph Rieger (Head) +49 69 136 87664 Alexander Aldinger +49 69 136 89004 Rainer Guntermann +49 69 136 87506 Peggy Jäger +49 69 136 87508 Markus Koch +49 69 136 87685 Michael Leister +49 69 136 21264 David Schnautz +1 212 895 1993 Benjamin Schröder +49 69 136 87622 Dr Patrick Kohlmann (Head Non-Financials) +49 69 136 22411 Ted Packmohr (Head Covered Bonds and Financials) +49 69 136 87571

Ulrich Leuchtmann (Head) +49 69 136 23393 Lutz Karpowitz +49 69 136 42152 Peter Kinsella +44 20 7475 3959 Thu-Lan Nguyen +49 69 136 82878 Esther Reichelt +49 69 136 41505 Dr Michael Schubert (Quant) +49 69 136 23700

Cross Asset Strategy

Dr Bernd Meyer (Head) +49 69 136 87788

Eugen Weinberg (Head) +49 69 136 43417 Daniel Briesemann +49 69 136 29158 Carsten Fritsch +49 69 136 21006 Dr Michaela Kuhl +49 69 136 29363 Barbara Lambrecht +49 69 136 22295

Equity Markets Strategy Christoph Dolleschal (Deputy Head Research) +49 69 136 21255 Gunnar Hamann +49 69 136 29440 Andreas Hürkamp +49 69 136 45925 Markus Wallner +49 69 136 21747

Technical Analysis

Achim Matzke (Head) +49 69 136 29138

Other publications (examples) Economic Research:

Commodity Research:

Interest Rate & Credit Research:

FX Strategy:

Equity Markets Strategy:

Emerging Markets:

Cross Asset:

Economic Briefing (up-to-date comment on main indicators and events) Economic Insight (detailed analysis of selected topics) Economic and Market Monitor (chart book presenting our monthly global view)

Commodity Daily (up-to-date comment on commodities markets) Commodity Spotlight (weekly analysis of commodities markets and forecasts)

Ahead of the Curve (flagship publication with analysis and trading strategy for global bond markets European Sunrise (daily comment and trading strategy for euro area bond markets) Rates Radar (ad-hoc topics and trading ideas for bond markets) Covered Bonds Weekly (weekly analysis of the covered bonds markets) Credit Morning Breeze (daily overview on European credit market) Credit Note (trading recommendations for institutional investors)

Daily Currency Briefing (daily comment and forecasts for FX markets) Hot Spots (in-depth analysis of FX market topics) FX Alpha (monthly analyses, models, and trading strategies for FX markets)

Weekly Equity Monitor (weekly outlook on equity markets and quarterly company reports) Monthly Equity Monitor (monthly outlook on earnings, valuation, and sentiment on equity markets) Digging in Deutschland (thematic research focusing on the German equity market)

EM Week Ahead (weekly preview on events of upcoming week) EM Briefing (up-to-date comment of important indicators and events) EM Outlook (quarterly flagship publication with EM economic analysis and strategy recommendation)

Cross Asset Monitor (weekly market overview, incl. sentiment and risk indicators) Cross Asset Outlook (monthly analysis of global financial markets and tactical asset allocation) Cross Asset Feature (special reports on cross-asset themes)

To receive these publications, please ask your Commerzbank contact.

18 31 October 2014

Economic Research | Week in Focus

This document has been created and published by the Corporates & Markets division of Commerzbank AG, Frankfurt/Main or Commerzbank’s branch offices mentioned in the document. Commerzbank Corporates & Markets is the investment banking division of Commerzbank, integrating research, debt, equities, interest rates and foreign exchange. The author(s) of this report, certify that (a) the views expressed in this report accurately reflect their personal views; and (b) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views expressed by them contained in this document. The analyst(s) named on this report are not registered / qualified as research analysts with FINRA and are not subject to NASD Rule 2711. Disclaimer This document is for information purposes only and does not take into account specific circumstances of any recipient. The information contained herein does not constitute the provision of investment advice. It is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the financial instruments and/or securities mentioned in this document and will not form the basis or a part of any contract or commitment whatsoever. Investors should seek independent professional advice and draw their own conclusions regarding suitability of any transaction including the economic benefits, risks, legal, regulatory, credit, accounting and tax implications. The information in this document is based on public data obtained from sources believed by Commerzbank to be reliable and in good faith, but no representations, guarantees or warranties are made by Commerzbank with regard to accuracy, completeness or suitability of the data. Commerzbank has not performed any independent review or due diligence of publicly available information regarding an unaffiliated reference asset or index. The opinions and estimates contained herein reflect the current judgement of the author(s) on the date of this document and are subject to change without notice. The opinions do not necessarily correspond to the opinions of Commerzbank. Commerzbank does not have an obligation to update, modify or amend this document or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. This communication may contain trading ideas where Commerzbank may trade in such financial instruments with customers or other counterparties. Any prices provided herein (other than those that are identified as being historical) are indicative only, and do not represent firm quotes as to either size or price. The past performance of financial instruments is not indicative of future results. No assurance can be given that any financial instrument or issuer described herein would yield favourable investment results. Any forecasts or price targets shown for companies and/or securities discussed in this document may not be achieved due to multiple risk factors including without limitation market volatility, sector volatility, corporate actions, the unavailability of complete and accurate information and/or the subsequent transpiration that underlying assumptions made by Commerzbank or by other sources relied upon in the document were inapposite. Commerzbank and or its affiliates may act as a market maker in the instrument(s) and or its derivative that has been mentioned in our research reports. Employees of Commerzbank and or its affiliates may provide written or oral commentary, including trading strategies, to our clients and business units that may be contrary to the opinions conveyed in this research report. Commerzbank may perform or seek to perform investment banking services for issuers mentioned in research reports. Neither Commerzbank nor any of its respective directors, officers or employees accepts any responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this document. Commerzbank may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Commerzbank endorses, recommends or approves any material on the linked page or accessible from it. Commerzbank does not accept responsibility whatsoever for any such material, nor for any consequences of its use. This document is for the use of the addressees only and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose, without the prior, written consent of Commerzbank. 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. By accepting this document, a recipient hereof agrees to be bound by the foregoing limitations. Additional notes to readers in the following countries: Germany: Commerzbank AG is registered in the Commercial Register at Amtsgericht Frankfurt under the number HRB 32000. Commerzbank AG is supervised by the German regulator Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin), Marie-Curie-Strasse 24-28, 60439 Frankfurt am Main, Germany. United Kingdom: This document has been issued or approved for issue in the UK by Commerzbank AG London Branch. Commerzbank AG, London Branch is authorised by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details on the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request. This document is directed exclusively to eligible counterparties and professional clients. It is not directed to retail clients. No persons other than an eligible counterparty or a professional client should read or rely on any information in this document. Commerzbank AG, London Branch does not deal for or advise or otherwise offer any investment services to retail clients. United States: This document has been approved for distribution in the US under applicable US law by Commerz Markets LLC (‘Commerz Markets’), a wholly owned subsidiary of Commerzbank AG and a US registered broker-dealer. Any securities transaction by US persons must be effected with Commerz Markets, and transaction in swaps with Commerzbank AG. Under applicable US law; information regarding clients of Commerz Markets may be distributed to other companies within the Commerzbank group. This research report is intended for distribution in the United States solely to “institutional investors” and “major U.S. institutional investors,” as defined in Rule 15a-6 under the Securities Exchange Act of 1934. Commerz Markets is a member of FINRA and SIPC. Commerzbank AG is a provisionally registered swap dealer with the CFTC. Canada: The information contained herein is not, and under no circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, solicitation of an offer to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or territory of Canada in which such offer or sale is made. Under no circumstances is the information contained herein to be construed as investment advice in any province or territory of Canada and is not tailored to the needs of the recipient. In Canada, the information contained herein is intended solely for distribution to Permitted Clients (as such term is defined in National Instrument 31-103) with whom Commerz Markets LLC deals pursuant to the international dealer exemption. To the extent that the information contained herein references securities of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities may not be conducted through Commerz Markets LLC. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed upon these materials, the information contained herein or the merits of the securities described herein and any representation to the contrary is an offence. European Economic Area: Where this document has been produced by a legal entity outside of the EEA, the document has been re-issued by Commerzbank AG, London Branch for distribution into the EEA. Singapore: This document is furnished in Singapore by Commerzbank AG, Singapore branch. It may only be received in Singapore by an institutional investor as defined in section 4A of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”) pursuant to section 274 of the SFA. Hong Kong: This document is furnished in Hong Kong by Commerzbank AG, Hong Kong Branch, and may only be received in Hong Kong by ‘professional investors’ within the meaning of Schedule 1 of the Securities and Futures Ordinance (Cap.571) of Hong Kong and any rules made there under. Japan: Commerzbank AG, Tokyo Branch is responsible for the distribution of Research in Japan. Commerzbank AG, Tokyo Branch is regulated by the Japanese Financial Services Agency (FSA). Australia: Commerzbank AG does not hold an Australian financial services licence. This document is being distributed in Australia to wholesale customers pursuant to an Australian financial services licence exemption for Commerzbank AG under Class Order 04/1313. Commerzbank AG is regulated by Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) under the laws of Germany which differ from Australian laws. © Commerzbank AG 2014. All rights reserved. Version 9.17 Commerzbank Corporates & Markets Frankfurt Commerzbank AG

London Commerzbank AG, London Branch

New York Commerz Markets LLC

Singapore Branch Commerzbank AG

Hong Kong Branch Commerzbank AG

DLZ - Gebäude 2, Händlerhaus Mainzer Landstraße 153 60327 Frankfurt

PO BOX 52715 30 Gresham Street London, EC2P 2XY

225 Liberty Street, 32nd floor New York, NY 10281 - 1050

71, Robinson Road, #12-01 Singapore 068895

29/F, Two IFC 8 Finance Street Central Hong Kong

Tel: + 49 69 136 21200 Tel: + 44 207 623 8000 Tel: + 1 212 703 4000 Tel: +65 631 10000 Tel: +852 3988 0988