Ekonomika, veřejné finance a reformy v Itálii (dokument v AJ)

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Economic Research

For important disclosure information please see end of this document

`

The euro area is still on the alert for Greece. However, Italy could become an even bigger

problem. We therefore analyse Italy’s public finances. Page 2

Investors’ mistrust of Italy is rising10y Italian government bonds, yield spread versus Bunds of corresponding maturity, in basis points, dailydata

0

100

200

300

400

500

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov

Source: Bloomberg, Commerzbank Research

Product Idea Forward Extra in EUR-JPY: The combination of still positive real yields in

Japan and the on-going sovereign debt crisis in Europe should make the yen a more attractiveproposition than the euro in the coming months. EUR-JPY short positions therefore remain

attractive. Page 5

Outlook for week of 7 November to 11 November

Economic data: German industrial production looks set to have taken a sharp plunge in

September compared with August, offsetting the good results recorded in July and August,

Page 6

Bond market: We still see Bund yields testing new lows before the end of the year. 0

FX market: Only one thing seems certain at the moment: volatility combined with risk aversion

will remain high. Page 11

Equity market: Despite the persistent debt crisis in Europe and the higher number of profit

warnings by mid and small caps, the DAX companies are likely to register double-digit profit

growth once again in the third quarter of this year. Page 12

research.commerzbank.com

Week in Focus

Italy: The real stumbling block

04 November 2011

Chief Economist

Dr Jörg Krämer +49 69 136 23650

[email protected]

Managing Editor

Peter Dixon+44 20 7475 [email protected]



2 research.commerzbank.com 04 November 2011

Italy: The real stumbling block

Politicians no longer rule out the possibility of a disorderly Greek default. Consequently,

pressure on Italy is mounting since it is finding increasing difficulties in securing market

funding. Our analysis suggests that Italy can reduce its debt mountain over the comingyears. But until investors have faith in Italy's efforts, the economy will continue to rely on

foreign support to fund its debt.

The debt burden is weighing heavily …

Italian public debt by the end of 2011 is expected to reach 119.4% of GDP (chart 1). This will put

Italy only behind Greece as the most heavily indebted euro zone economy. Indeed, since the

beginning of monetary union, the budgetary position has tended to deteriorate. The decline in

the deficit from the late-1990s was not the result of fiscal consolidation but was due entirely to

lower interest rates which reduced debt servicing costs (chart 2). In the mid-1990s, the average

annual interest rate on Italian debt was around 9.3% but by 2010 this had fallen to 3.7%. But the

era of cheap money is over for Italy. Today, bond investors require a yield of 6.3% on 10-year

securities, which is almost 450 bps above German levels, and without ECB purchases Italian

yields would be even higher.

… but it is not intolerable

If interest rates were to remain around 6% for a prolonged period, Italy would require a primary

surplus (i.e. a surplus excluding interest payments) of around 4% of GDP simply to stabilise the

debt-to-GDP ratio at 120% (chart 3, page 3). This is based on the assumption that Italian

nominal GDP grows at a rate of 2¼% per year. However, investors are unlikely to be satisfied

with a stable debt ratio and in the wake of the crisis appear no longer willing to tolerate a ratio

above 100%. In order to reduce the debt by 2030 to just 90% of GDP, Italy will have to generate

a primary surplus of 5¼% of GDP (based on the same GDP assumptions); currently the primary

balance is around zero. In order to generate a surplus of more than 5% would require a major

effort, but it is by no means impossible, as a look at past trends shows – in the period from 1995

to 1999, the primary surplus averaged 5.2%.

Consolidation measures must be implemented

Berlusconi has promised to reduce the budget deficit from 3.9% of GDP this year to zero by

2013. This probably requires a primary surplus of 4%. The government is relying on tax

increases to achieve this.1

However a deterioration in economic conditions could mean that this

target will be difficult to achieve. But the government has also announced additional measures if

the economy were to prove weaker than expected, although no concrete measures have yet

been announced. We look for the economy to slide into recession during winter 2011-12

CHART 1: Italian debt burden likely to peak in 2011Public debt as percent of GDP, forecast for 2011

CHART 2: Italy: Deficit declines due to low interest ratesPercent of GDP

60

70

80

90

100

110

120

130

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

-15

-10

-5

0

5

10

15

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009

Deficit Primary surplus Interest payments

Source: Eurostat, Commerzbank Research Source: Eurostat, Commerzbank Research

1 See also Economic Briefing , "Italy Update: Savings manoeuvre ready to roll", 13 September, 2011.

Christoph WeilTel. +49 69 136 24041

Dr Ulrike Rondorf Tel. +49 69 136 45814



04 November 2011 research.commerzbank.com 3

and that the economy will register a 0.2% decline in GDP during 2012 on average. Whilst our

expectations lie well below those of the government, there is a risk that even our forecast could

prove optimistic.

And structural reforms are necessary

But in the long-term, such savings are not enough to restore sustainable balance to public

finances. The Italian economy must improve its competitiveness (chart 4), not least becauseother euro zone countries and the ECB are pushing for structural reforms. At last week's EU

summit, Silvio Berlusconi put forward an action plan providing specific dates (see box, page 4).

This reads like the response to an OECD report on Italy in which one critical point is laid out after

another with the suggested improvements. Whilst this is positive per se, many of the reform

plans remain vague, particularly in areas such as reducing red tape; administrative and judicial

reform and the liberalization of various sectors of the economy. The most prominent, and well-

defined, measure is the reform of the pension system which was agreed with Umberto Bossi,

chairman of the Northern League party, shortly before the summit. This plans to raise the

retirement age for both men and women to 67.2

Also very promising, although less prominent, is

the reform to the wage settlement process which has already been adopted and which makes it

easier for companies to deviate from collective agreements. In addition, the Cabinet has decided to

integrate a debt brake into the constitution and abolish provinces as administrative areas.But the political situation remains a major obstacle to the reform process. Changes to the

constitution require a two-thirds majority in parliament, which would require a large majority of the

opposition to vote in favour. It is also uncertain whether measures which require a simple majority

will also make it through parliament. The cabinet is planning to submit a large part of the reform

project to a vote on 15 November. But for some time now, Berlusconi has managed to pass laws in

parliament only with the help of confidence motions. With calls for the government's resignation

growing louder, it will be difficult to pass the reforms in this manner. A broad-based transitional

government could accelerate the reforms but we reckon the prospect of new elections is slender at

this stage.

In summary, we certainly believe there is a good chance that Italy will be able to get its deficit

problem under control. But this will take time. Investors will want to see reform measures bearing

some fruit before they will be willing to allow Italy to borrow at reasonably low rates. Thus Italy willbe forced to refinance its outstanding debt only with the help of international capital. This in turn

requires in the short-term that the ECB will be forced to continue buying Italian bonds in order to

prevent a sharper rise in yields. In the medium-term, these purchases will likely be taken over by

the EFSF. But if the crisis were to escalate, additional instruments such as the purchase of

government bonds on the primary market would have to be implemented.

CHART 3: Growth and interest rates will be decisiveCombinations of primary balance, % of GDP (y-axis) and interestrates (x-axis) required to maintain debt ratio at 119% of GDP(assuming nominal GDP growth of 2¼%)

CHART 4: The Italian economy has clearly lostcompetitivenessUnit labour costs, whole economy, 2000=100

0

1

2

3

4

5

6

7

4 5 6 7 8

primary balance average 1995-1999

primary balance average 1999-2010

85

95

105

115

125

135

145

1999 2001 2003 2005 2007 2009 2011

GER ESP ITA

Source: Commerzbank Research Source: EU Commission, Commerzbank Research

2 See also Economic Briefing, "Italy update: Pension reform in return for resignation" 26 October 2011.




Reform Agenda (Timetable):

-Pension reform: The most concrete and prominent measure is the pension reform, on which

Berlusconi and the Head of the Northern League, Umberto Bossi, reached last-minute agreement

ahead of the EU summit. Under the programme, the retirement age for men and women is to be raised

to 67 (resolution expected shortly).

- Infrastructure: The government aims to increase spending in the south to boost growth potential in the

region (15 November); a list of infrastructure projects is to be concluded (within 10 weeks), fiscal

incentives for private co-financing investors.

- Educational system: The independence and competition of schools and universities are to

strengthened (end-2011).

- Labour market reform: Berlusconi‘s letter pledges to introduce measures to fight dualism, to raise the

participation rate of young Italians and women: Juveniles are to integrated in the regular labour

market, part-time employment and jobs in rural areas are to promoted (end-2011); greater flexibility of

working hours (harmonised regulations for all regions – March 2011). Protection against dismissal for

permanent contracts is to be relaxed, particularly in times of economic distress; measures are to beimplemented to fight pseudo self-employment (May 2012).

- Market liberalisation: The regulation of the insurance sector, the utility sector (e.g. gas market) and the

service sector is to be reduced, market-entry barriers for specific professions are to be loosened

(minimum standard rates, for instance for lawyers, already no longer exist). In the public sector,

competition is to be strengthened with regard to water supply (in three months), waste disposal (in six

months), public transport (in nine months) and pharmacies (in twelve months). In this case, it has

already been agreed to open market access and launch privatisations.

- Reduction of bureaucracy: Documentary requirements for companies shall be simplified,

administrative lead times are to be trimmed (within the next six months). The position in the Ease of

Doing Business indicator will be advanced (3 years). The government plans to support the

experimental establishment of special economic zones with “zero bureaucracy” in 2013.

- Innovations: Risk capital will be subject to tax breaks to promote mergers. It is envisaged to provide

funds for R&D in medium-sized companies.

-Public administration: Civil servants will have the duty to ensure full flexibility (every civil servant has to

be prepared to assume flexible tasks, short-time work is to be allowed and every function is subject to

review; in addition, the number of senior civil servants is to be reduced (end-2012). Further

constitutional reforms are either envisaged or already under way: amendments to passive and active

electoral law and the reduction of MPs.

- Privatisation: By selling state property, the Italian government aims to raise EUR 5 bn p.a. over the

next three years. The revenues will be used for infrastructure projects or deleveraging (no new project

until 30 November 2011)

- Legal reform: The duration of civil suits is to be trimmed by 20 percent. The project will be supported

through the creation of a national database, which is to be finished by 30 April 2012.

- Debt ceiling: The constitutional reform is to follow the example of Germany and Spain (end-June 2012

– amendments to the constitution take at least three months in Italy).




Product idea: Forward Extra in EUR-JPY

Ineffective JPY intervention offers opportunities

The Japanese Ministry of Finance and the BoJ have intervened to weaken the yen but the

effect of this intervention is unlikely to persist. The combination of still positive real

yields in Japan and the on-going sovereign debt crisis in Europe should make the yen a

more attractive proposition than the euro in the coming months. EUR-JPY short positionstherefore remain attractive.

The Ministry of Finance and the Japanese central bank intervened in the FX market this week.

This was the third time this year that the Japanese Ministry of Finance has intervened in order to

weaken the JPY. EUR-JPY jumped from levels around 107 to levels around 111. But within two

days the effect on EUR-JPY had already vanished – a movement which was also due to events

in the euro zone sovereign debt crisis which weighed significantly on the euro. Even though

Japanese Finance Minister Jun Azumi declared that he will continue to intervene until he is

satisfied, we do not expect to see persistent JPY weakness as a result of interventions.

In order to credibly weaken the yen, the Minister of Finance would have to fundamentally change

his leaning against the wind strategy and clearly communicate such a move. His Swiss

colleagues have demonstrated how to do it. When announcing the intention to defend a lower threshold in EUR-CHF, the SNB left no doubt about its determination to defend the new line in

the sand with unlimited quantities of foreign currency purchases. However, we do not envisage

MoF and BoJ as being prepared to change their strategy. Central bank interventions aimed at

weakening the domestic currency via foreign currency purchases typically result in an increase

in the monetary base – and thus inflationary pressure. The key difference between the SNB’s

credibility and the BoJ’s lack thereof lies in the ability to cope with this inflationary pressure. In

this context, the SNB has no need to worry: the sharp appreciation of the CHF had led to

deflationary risks for the Swiss economy. An increase in the monetary base was therefore

unproblematic. Quite the opposite is true for the BoJ: even though the Japanese economy is

suffering from decades of deflationary pressure the Ministry of Finance is worried about any

increase in inflation expectations as this would lead to a rise in state financing costs via higher

inflation premiums on JGBs. Against the background of a debt-to-GDP ratio in excess of 200%,

the marginal effect of an increase in inflation expectations would be enormous and highly

undesirable from the MoF’s point of view.

As the market is aware of the fact that this dilemma is effectively tying the authorities’ hands with

respect to the necessary intervention volumes, it seems unlikely that the intervention will

succeed in sustainably weakening the JPY. On the contrary: We expect EUR-JPY to edge lower

and therefore recommend a Forward Extra.

Product idea: Forward Extra

Spot (calculated): 107.00

Strike (Worst Case): 106.30

Trigger: 100.00

Nominal amount: EUR 1 M

Duration: 3 months

Trigger style: American (for the entire duration)

Price: Zero cost

The forward extra is a chance-oriented alternative to a conventional FX forward transaction. Itcombines a predefined hedging price (worst case) with the possibility to benefit from an adverseexchange rate movement, i.e. a EUR depreciation/JPY appreciation, up to a certain limit

(American-style trigger).

Tel. +49 (0) 69 136 41250Ulrich Leuchtmann

Tel. +49 69 136 23393




Preview – The week of November 7th

to November 11th

Time Region Indicator Period Forecast Survey Last

Monday, 7 November 2011

• 11:00 GER Industrial production Sep mom, sayoy, wda

-3.54.5

0.1 -1.07.7

EUR: Euro finance ministers meet in Brussels

Tuesday, 8 November 2011

7:00 GER Exports Sep mom, sa -2.5 0.2 3.59:30 GBR Industrial production Sep mom, sa

yoy-0.2-1.0

0.1-0.8

0.2-1.0

Trade balance Sep £bn, sa -2.0 – -1.8

• EUR: ECOFIN council

Wednesday, 9 November 2011

2:00 CHN CPI Oct yoy 5.5 5.4 6.1Industrial production Oct yoy 13.5 14.0 13.8

23:50 JPN Machinery Orders Sep mom, sa

yoy-7.011.0

-6.911.4

11.02.1

Thursday, 10 November 2011

6:30 FRA CPI Oct mom, sayoy

0.22.3

– -0.12.2

CPI excl. tobacco Oct 122.73 – 122.5

• 12:00 GBR BoE interest rate decision Nov % 0.50 0.50 0.50

13:30 USA Trade balance Sep $bn, sa -48.0 -46.0 -45.613:30 Initial claims 29 Oct. k, sa 390 – 397

Friday, 11 November 2011

14:55 USA Consumer sentiment (University of Michigan),preliminary

Nov sa 62.0 60.0 60.9

Source: Bloomberg, Commerzbank Economic Research

*Time GMT(add 1 hour for CET, subtract 5 hours for EST), # = Possible release; mom/qoq/yoy: change to previous period in percent, AR = annual rate, sa =

seasonal adjusted, wda = working days adjusted; • = data of highest importance for markets.




Economic data preview:German industry: Sharp downturn in September

German industrial production looks set to have taken a sharp plunge in September

versus the previous month, offsetting the good results recorded in July and August,

which were due to the fact that some companies did not shut down their plants for the

holidays. In the months ahead, the decline in unfilled orders is likely to increasinglyweigh on production.

Leading indicators are on the descent and most economists have substantially lowered their

growth outlook for the German economy. So far, “hard” data on industrial production has not

pointed to a slowdown or, worse yet, a sharp contraction. This is set to change. Next Monday,

September manufacturing output data is due for release. We expect a massive drop of 3.5% vs.

August (consensus: 0.1%), as the strong results recorded in July and August were primarily

owed to special effects.

Firstly, summer holidays in North Rhine-Westphalia, a major federal state, were extremely late

this year, which boosted production in July and is now likely to have weighed on output in

September. Secondly, high production levels in July and August are likely to be the main reason

why many companies, particularly in the automotive industry, did not shut down their plants for

the holidays. Hence, automotive production did not decline in August, as usual, resulting in a

markedly higher seasonally-adjusted figure. In September, production looks set to have

normalised, as suggested by the Automobile Association's production figures, which indicate that

car production in September was markedly lower.

Despite the expected minus figure in September, third-quarter industrial production is likely to

have risen by some 2% compared with the second quarter (chart 5). This, however, merely

pushes the downturn from the third to the fourth quarter. On the back of this special effect,

industrial production thus looks set to decline in the final quarter of the year. On top of that, order

intake has slowed, which should increasingly leave its negative imprint on production: Compared

with order intake, current production appears much too high (chart 6). Against this backdrop, we

suggest that fourth-quarter GDP will at best stagnate.

USA: Higher trade deficit in September

With the data calendar virtually blank, the US September trade balance should be an item of

particular interest next week. In our view, the deficit is likely to have increased by USD 2.4bn to

USD 48 bn (consensus USD 46.0 bn), which would correspond to the level assumed by the

statisticians in their US growth estimate for the third quarter. If the deficit were to turn out higher

(or lower), this in itself would point to a downward (upward) revision to the previously reported

growth rate of 2.5%.

CHART 5: Germany – Sharp downturn in September Industrial production, real, seasonally-adjusted, index 2005=100,monthly data and quarterly averages, as of September forecast

CHART 6: Germany – Slimmer order booksIndustrial production, real, seasonally-adjusted, index 2005=100, andtrend based on order intake in recent months

95

100

105

110

115

120

2010 Q2 Q3 Q4 2011 Q2 Q3 Q4

85

90

95

100

105

110

115120

2007 2008 2009 2010 2011

production trend

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

Dr Ulrike Rondorf Tel. +49 69 136 45814




Central Bank Watch (1)

Fed

CHART 7: Expected Federal Funds Rate (USD)

0,0

0,2

0,4

0,6

0,8

1,0

current Dez 11 Mrz 12 Jun 12 Sep 12 Dez 12

03.11.11 27.10.11 Commerzbank

Overnight Index Swaps

TABLE 1: Consensus forecast Fed funds rate Q4 11 Q2 12 Q4 12

Consensus 0.25 0.25 0.25

High 0.25 1.25 2.25

Low 0.25 0.25 0.25

Commerzbank 0.25 0.25 0.25

As expected, the Fed passed no new measures at its 1 and 2

November meeting. In the press conference after the

meeting, Fed Chairman Bernanke presented the FOMC

members’ updated economic projections. They assume that

the unemployment rate will remain elevated at between 6.8%

and 7.7% even by 2014. Against the backdrop of forecasts

for a persistently low inflation rate, this calls for an even more

accommodative policy. All the signs are that Bernanke would

like to do more but still has to convince the FOMC. He may

decide to wait until next year, when three avowed hawks

from the regional Federal Reserve Banks will lose their

voting rights in the context of annual rotation. The FOMC’s

new composition shows that only one hawk – Jeffrey Lacker

from the Richmond Fed – will follow them. Apart from this,

economic data and external risks such as the crisis in the

euro zone will determine the exact timing of QE3. Weassume that the Fed will pass further expansionary

measures in the coming months. Purchases of mortgage

backed bonds would be an option, as Bernanke emphasised

at the press conference.

Bernd Weidensteiner

+49 69 136 24527


ECB

CHART 8: Expected ECB minimum bid rate (EUR)

0,0

0,5

1,0

1,5

2,0


03.11.11 27.10.11 Commerzbank

Overnight Index Swaps

At its November meeting, the ECB Council surprisingly

decided to cut the refi rate by 25 basis points to 1.25%,

whereas we believed a cut in December was more likely.

Evidently, the ECB adopted our view that the euro area

economy is heading towards a recession earlier than we

thought. New ECB president Draghi mentioned a significant

downward revision of the bank’s growth forecast being the

key reason for the ECB cutting rates now. Draghi said that the

bank now expects a "mild recession", which would be in line

with our own forecast. Draghi has clearly left the door open

for a further rate cut, saying that the ECB never pre-commits.

We expect the ECB to cut rates by another 25 basis points to

1.0%. Regarding the SMP, ahead of the meeting there hadbeen strong speculation that Draghi might send a softer

message, for example by saying that the ECB is determined

to continue its unconventional measures. However, his

message was even somewhat more hawkish than that of his

predecessor Trichet. Whereas Trichet only emphasised that

the SMP was “ongoing”, Draghi stressed several times that

the programme is “temporary” and “limited”, and that the ECB

is not a lender of last resort. That said, it remains an open

question whether Draghi's words will be followed by similar

deeds. We continue to harbour doubts on that score.

Dr Michael Schubert+49 69 136 23700

TABLE 2: Consensus forecasts ECB minimum bid rate

Q4 11 Q2 12 Q4 12

Consensus 1.25 1.00 1.00

High 1.25 1.25 1.25

Low 1.00 0.75 0.75

Commerzbank 1.25 1.00 1.00

Source: Reuters, Commerzbank Research




Central Bank Watch (2)

BoE

CHART 9: Expected interest rate for 3-month funds (GBP)

0,5

1,0

1,5

2,0


03.11.11 27.10.11 CommerzbankFutures

Next week's MPC meeting takes place against a backdrop of

deteriorating international sentiment which will pose risks to

the UK economic outlook. This will be reflected in the BoE'snew economic forecast, which will be available to the MPC

and which will be publicly released on 16 November, and is

likely to show a significant downgrade to 2012 growth

prospects. The MPC will be concerned about the drying up of

liquidity, which is being reflected in higher Libor spreads, but

after having already implemented a new round of asset

purchases in October, there is little prospect of policy

changes at next week's meeting. However, ongoing

weakness in the data over the winter will raise the prospect

of additional QE sometime early in 2012.

Peter Dixon

+44 20 7475 1808 Source: Bloomberg, Commerzbank Research

BoJ

CHART 10: Expected interest rate for 3-month funds (JPY)

0,0

0,2

0,4

0,6

0,8

1,0


03.11.11 27.10.11 Commerzbank

Futures

Following the orders of the Japanese finance ministry, the

BoJ intervened in the FX market on Monday to curb the

appreciation of the yen. However, as regards the target level

for the yen, Finance Minister Azumi did not draw a clear line,

stating that “we will continue to intervene until we are

satisfied”. Although the volume of the yen sales should have

exceeded that of the previous two interventions this year,

there is a strong likelihood that USD-JPY may soon come

under renewed pressure. The central bank is of the same

opinion. Just two days after the interventions, BoJ member Sayuri Shirai warned that the safe-haven effect might push

the yen up even further, should the euro-zone debt crisis

intensify and investors become more risk adverse.

Dr Christoph Balz

+49 69 136 24889 Source: Bloomberg, Commerzbank Research

RBNZ (New Zealand)

CHART 11: Expected interest rate for 3-month funds (NZD)

2.5

3.0

3.5

4.0

4.5

aktuell Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

03.11.11 27.10.11 Commerzbank

Futures

At its recent meeting at the end of October, the Reserve

Bank of New Zealand (RBNZ) made it clear that it is not

considering rate cuts. As long as global financial market

turbulence and the global slowdown have only a limited

effect on the domestic economy, a rate cut cannot be justified. This holds all the more because the RBNZ delivered

a “pre-emptive” rate cut of 50 basis points after the

Christchurch earthquake in March, leaving it in a position to

remain on hold for some time to come. Moreover, the central

bank held to its view that the expected impetus from

reconstruction following the earthquake will eventually call for

higher interest rates. We expect that the RBNZ will hold the

Official Cash Rate for a longer-than-envisaged period. Next

year, however, it will have to move at a faster pace to tighten

monetary policy.

Antje Präfcke

+49 69 136 43834





Bond market preview:Endgame for Greece? Periphery still under pressure!

The Greek situation is keeping the bond markets in limbo. The scenario of an exit from

the euro may become more tangible if Greece were to dismiss the conditions of the new

bailout package. However the motivation for a referendum appears to have waned

although risk aversion should remain high. The spreads of the peripheral countries over Bunds look set to remain elevated despite ongoing ECB bond buying, and we still see

Bund yields testing new lows before the end of the year.

TABLE 3: Weekly outlook for yields and curve

Bunds US Treasuries

Yield (10 years) Volatile sideways Falling

Curve (10 – 2 years) Flatter Flatter

Source: Commerzbank Research

The relief that followed the euro summit was short-lived, amounting to a re-run of market

movements after previous summits. After a brief period of relief, reality set in once the details

had been examined. Moreover, dramatic developments in Greece have kept the bond markets in

limbo (chart 12). Now that European governments have turned up the pressure on Greece, the

scenario of a Greek exit from the euro in the event of a negative referendum or a rejection of the

bailout conditions may have come a step closer. Thus, risk aversion is likely to remain high for

the time being and will tend to increase risk premia for peripheral government bonds – despite

ongoing buying by the ECB. The moderate recovery of Bund yields in the last few days is likely

to prove a mere blip in a more significant counter-movement following the summit resolutions.

We are sticking to our view that Bund yields will test new lows before the end of the year.

In the coming days, though, the bond market is likely to respond nervously to headlines from

Greece and may trade with big swings in either direction. The meeting of euro zone finance

ministers on Monday evening could shape sentiment for the week, as the latest round of

important macroeconomic data is over for the time being, following today’s US labour market

report. Next week will see few market moving economic indicators.

For the primary market too, there is little activity in the pipeline for next week. Only the

Netherlands, Austria and Finland are about to launch new issues, with demand for AAA-rated

papers of those countries expected to remain high. The peripheral countries (Italy and Spain) are

taking a break, though issues have been announced for the week after and are a reminder that

Italy in particular is in permanent need of funding.

On the other hand, excitement could be provided by the EFSF issue, due in the course of the

next two weeks with a term of ten years and a volume of € 3bn for the ongoing Irish bailout

package. This week’s attempted launch was aborted after market sentiment was hit by the

uncertain situation in Greece. Uncertainty over the debt crisis and the leverage models of the

EFSF have recently caused spreads relative to Bunds to increase significantly (chart 13).

CHART 12: Periphery remains under pressureYields of ten-year government bonds, in percent

CHART 13: EFSF funding well above BundsTen-year EFSF and Bund yields, in percent

4.5

5.0

5.5

6.0

6.5

May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11

Spanien Italien

1.5

2.0

2.5

3.0

3.5

4.0

Jul-11 Aug-11 Sep-11 Oct-11 Nov-11

EFSF 3.375% Jul21 Bund 3.25% Jul21

Source: Bloomberg, Commerzbank Research Source: Bloomberg, Commerzbank Research

Momentum outlookfor Bund future7 – 11 November

Economy →

Inflation →

Monetary policy ↑

Trend ↑

Supply →

Risk aversion ↑→

Rainer GuntermannTel. +49 136 87506




FX market preview:

Enormous event risk

The markets are unable to take a breather. As soon as one event is over (EU summit) the

next commotion in the form of political turmoil in Greece appears on the horizon. In the

end, only one thing seems certain at the moment: volatility, combined with risk aversion,

will remain high. First of all, this means that the risk for the euro remains on thedownside. Secondly the Bank of Japan’s job will remain difficult.

TABLE 4: Expected weekly trading ranges

Range Bias Range Bias

EUR-USD 1.3500-1.4200 EUR-GBP 0.8500-0.8850

EUR-JPY 103.00-110.00 GBP-USD 1.5600-1.6200

USD-JPY 75.50-79.50 EUR-CHF 1.2001-1.2500

Source: Commerzbank Research

There is no rest for the FX markets. As soon as the EU summit, which produced with a decision

on the second rescue package for Greece, was is over there was is more upheaval. The Greek

government wanted to carry out a referendum on the rescue package. In the meantime, this idea

has been dropped, after the euro zone countries stopped the sixth aid payment for the time

being. However, Prime Minister Papandreou will hold a confidence vote in the Parliament today.

The outcome is unclear. Anyhow, the situation remains uncertain at the moment. Currently, only

one thing seems clear: volatilities and uncertainty on the markets will remain high. A

comprehensive solution to the debt crisis is still not in sight. Even a Greek exit from the euro

zone is in principle not excluded any longer. As a result we see little hope of falling exchange

rate volatilities (chart 14). In view of the event risks, we expect the euro to remain under

pressure.

As risk aversion is likely to remain elevated over the coming days, safe havens like the yen are

expected to be in demand on the FX market. That makes the Bank of Japan’s (BoJ) job more

difficult following intervention to curb the strength of the yen. It did achieve temporary success

(chart 15) but as it is intervening only sporadically, pursuing a policy of leaning against the wind

rather than drawing a line in the sand like the SNB (and fighting the yen strength with all means),

the appreciation pressure on the yen is likely to continue – particular in view of the uncertainty on

the markets (see product idea on page 5).

CHART 14: Volatility unlikely to ease much

EUR-USD implied 1 month ATM volatility, percent

CHART 15: USD-JPY shoots up following BoJ intervention

USD-JPY spot rate, 10 minute data

7

9

11

13

15

17

Jan-11 Apr-11 Jul-11 Oct-11

75.00

76.00

77.00

78.00

79.00

80.00

00-Jan-00 05-Oct-11 11-Oct-11 18-Oct-11 25-Oct-11 31-Oct-11

Source: EBS Source: Bloomberg

Tel. +49 (0) 69 136 41250Antje Praefcke

Tel. +49 69 136 43834




Equity market preview:Good reporting season for Q3, but earnings momentum to slow further

Despite the persistent debt crisis in Europe and the higher number of profit warnings by

mid and small caps, DAX companies are likely to register two-digit profit growth once

again in the third quarter of this year. In absolute terms, DAX profits will continue toapproach the record quarterly levels seen in the last few years. Nevertheless, the

earnings momentum is likely to slow further, as we expect a marked cooling of economic

activity in the euro area in particular. TABLE 5: Outperformance of the S&P 500 continues

Earnings 11e Performance (%) since Index points Growth (%) P/E ratio 11e

Index 30/09 30/06 31/12 current 31.12 current 31.12 current 31.12

DAX 30 5,835 6.0 -20.9 -15.6 629 635 -2.3 11.4 9.3 10.9

MDAX 8,730 4.7 -20.1 -13.8 763 729 20.2 25.7 11.4 13.9

Euro Stoxx 50 2,260 3.7 -20.7 -19.1 266 294 1.9 12.3 8.5 9.5

S&P 500 1,218 7.7 -7.8 -3.1 97 95 15.7 13.3 12.6 13.3

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

Now that 44% of all DAX companies have released their figures, we expect the DAX 30

companies to register earnings growth of more than 30% year-on-year in the third quarter

(chart 16). This implies a major pick-up from the earnings growth rate in the preceding quarter

(Q2 2011: -10%). However, the overall figure should be taken with a grain of salt, as a basis

effect and the extraordinary result of Volkswagen are major contributors to this. Nevertheless, in

absolute terms, DAX profits will continue to approach the record quarterly levels seen in the last

few years. With a forecast aggregate profit of roughly €25 bn for all DAX companies in Q3,

profits look set to exceed the best Q3 results since 2003 by almost 10%, but remain 10% below

the all-time record level seen in Q1 2011.

Our forecast for DAX companies’ sales growth in the third quarter is currently roughly -5% year-

on-year. This result is largely due to changes in the consolidation rules of some DAX companies(for example the deconsolidation of the US business at Deutsche Telekom). Adjusted for these

effects, sales growth should be in the (positive) one-digit area.

Despite our favourable expectations for the third quarter, we still believe that the earnings

momentum of DAX companies will continue to slow, as the impact of the favourable basis effect

will diminish and we expect a further, pronounced, cooling in economic activity in the euro area

in particular.

CHART 16: DAX index: strong earnings growth in the third quarter DAX: year-on-year earnings and sales growth, in % DAX: Quarterly Earnings and Sales Growth

47,0437,03

-1,19

8,12

21,3111,31

52,28

13,37

-15,09 -18,37

-32,05-37,74

-7,52

76,36

33,83

56,32

29,21

-10,42

30,46

94,63

-49,63-60

-40

-20

0

20

40

60

80

100

120

Q 1 / 0 6

Q 2 / 0 6

Q 3 / 0 6

Q 4 / 0 6

Q 1 / 0 7

Q 2 / 0 7

Q 3 / 0 7

Q 4 / 0 7

Q 1 / 0 8

Q 2 / 0 8

Q 3 / 0 8

Q 4 / 0 8

Q 1 / 0 9

Q 2 / 0 9

Q 3 / 0 9

Q 4 / 0 9

Q 1 / 1 0

Q 2 /

1 0

Q 3 /

1 0

Q 4 / 1 0

Q 1 / 1 1

Q 2 /

1 1

Q 3 /

1 1

-14

-9

-4

1

6

11

16

21

26

31

Earnings Growth y-o-y in % (lhs)

Sales Growth y-o-y in % (rhs)

n.m.n.m.

Source: Bloomberg, Commerzbank

Markus Wallner Tel. +49 69 136 21747




Commerzbank Forecasts

TABLE 6: Growth and inflation

Real GDP (%) Inflation rate (%)

2010 2011 2012 2010 2011 2012

USA 3.0 1.7 2.0 1.6 3.2 2.0

Canada 3.2 2.3 2.0 1.8 2.8 1.8Japan 4.0 -0.5 2.3 -0.7 0.0 0.5Australia 2.7 2.0 3.8 2.8 3.3 3.0Euro area 1.7 1.6 0.0 1.6 2.6 1.6

-Germany 3.7 3.0 0.8 1.1 2.4 1.8-France 1.4 1.5 0.0 1.5 2.0 1.8-Italy 1.2 0.6 -0.2 1.5 2.4 1.5-Spain -0.1 0.7 0.3 1.8 3.0 1.5

United Kingdom 1.8 1.0 1.2 3.3 4.4 2.8Sweden 5.4 4.2 1.5 1.2 3.0 2.3Switzerland 2.6 2.0 0.5 0.7 0.6 1.0Norway 0.3 1.0 1.5 2.4 1.6 1.8

•The biggest economic risk isan escalation of the sovereigndebt crisis in the euro zone.

• We expect a recession in theeuro area during winter 2011/12. Unemployment willrise again.

• The US economy is likely toavoid a recession.

• Weak growth will act todampen inflation.

TABLE 7: Interest rates (end-of-quarter)

03.11.11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12USA

Federal funds rate 0.25 0.25 0.25 0.25 0.25 0.25

3-months Libor 0.44 0.55 0.50 0.40 0.45 0.45

2 years* 0.24 0.20 0.25 0.30 0.30 0.30

5 years* 0.92 0.90 1.00 1.10 1.20 1.30

10 years* 2.05 1.80 2.00 2.20 2.60 2.90

Spread 10-2 years 181 160 175 190 230 260

Swap-Spread 10 years 16 25 25 20 20 20

Euro area

Minimum bid rate 1.25 1.25 1.00 1.00 1.00 1.00

3-months Euribor 1.58 1.20 1.10 1.25 1.20 1.15

2 years* 0.40 0.30 0.40 0.50 0.60 0.60

5 years* 1.03 0.75 0.90 1.10 1.20 1.3010 years* 1.90 1.60 1.70 1.90 2.20 2.40

Spread 10-2 years 151 130 130 140 160 180

Swap-Spread 10 years 64 90 80 60 50 45

United Kingdom

Bank Rate 0.50 0.50 0.50 0.50 0.50 0.50

3-months Libor 0.99 0.90 0.85 0.80 0.80 0.95

2 years* 0.54 0.45 0.55 0.75 0.85 0.95

10 years* 2.36 2.15 2.40 2.70 3.10 3.15

Japan

Over night rate 0.10 0.10 0.10 0.10 0.10 0.10

3-months Libor 0.19 0.20 0.20 0.20 0.20 0.20

2 years* 0.14 0.10 0.20 0.20 0.20 0.20

10 years* 1.00 0.90 1.10 1.20 1.25 1.25

• The structural low-yieldenvironment remains in place.10-year Bund yields should hitnew lows by year-end. Sincethe US economy looksstronger, the interest rateadvantage of Treasuries is setto increase.

• Against the background of animminent euro area recession,and with the sovereign debtcrisis unresolved, the ECB isexpected to ease monetary

policy once again. It will rather cut the key rate than merelythe deposit rate.

• Interest rate hikes are off theagenda in the larger industrialized countries for along time.

• The euro zone yield spreadsseem set to remain on anelevated level. However, theECB should succeed to keep10-y yields in Italy and Spainbelow 6.25%.

TABLE 8: Exchange rates (end-of-quarter)

03.11.11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12

EUR/USD 1.38 1.33 1.33 1.32 1.31 1.30USD/JPY 78 77 77 82 82 83GBP/USD 1.60 1.55 1.56 1.57 1.58 1.59EUR/JPY 107 102 102 108 107 108EUR/CHF 1.21 1.21 1.21 1.21 1.23 1.25EUR/GBP 0.86 0.86 0.85 0.84 0.83 0.82EUR/SEK 9.06 9.20 9.15 9.10 9.00 8.95EUR/NOK 7.73 7.85 7.80 7.75 7.65 7.65AUD/USD 1.04 0.98 0.98 0.99 1.00 1.03NZD/USD 0.79 0.78 0.78 0.79 0.80 0.82

USD/CAD 1.01 1.03 1.02 1.00 0.99 0.97

• The rate differential widens tothe favour of the USD.

• The debt crisis remains anissue and tends to weigh onthe euro since confidenceremains subdued.

• Markets could start toquestion more and more thecredibility of the ECB due toits bond purchases, puttingthe euro under pressure.

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




Research contacts (E-Mail: [email protected])

Chief Economist

Dr Jörg Krämer +49 69 136 23650

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This document has been created and published by the Corporates & Markets division of Commerzbank AG, Frankfurt/Main or Commerzbank’s branch officesmentioned in the document. Commerzbank Corporates & Markets is the investment banking division of Commerzbank, integrating research, debt, equities, interestrates 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 reportare 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 account of the specific circumstances of any recipient. The information contained herein does notconstitute 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 mentioned in this document and will not form the basis or a part of any contract or commitment whatsoever.

The information in this document is based on 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. The opinions and estimates contained hereinreflect the current judgement of the author(s) on the data of this document and are subject to change without notice. The opinions do not necessarily correspond tothe opinions of Commerzbank. Commerzbank does not have an obligation to update, modify or amend this document or to otherwise notify a reader thereof in theevent that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

The past performance of financial instruments is not indicative of future results. No assurance can be given that any opinion described herein would yield favourableinvestment results. Any forecasts 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 byCommerzbank or by other sources relied upon in the document were inapposite.

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Ekonomika, veřejné finance a reformy v Itálii (dokument v AJ)

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