The UniCredit Macro & Markets Weeklyapp.unicreditbank.si/Dokumenti/PREGLEDI_FINANCNIH_TRGOV/... ·...

4/8/2016

The UniCredit Macro & Markets

Weekly

Economics & FI/FX Research No. 10 Credit Research 8 April 2016 Equity Research Cross Asset Research

Risk-off returns

With a fairly light data calendar this week, focus was mostly on the FOMC minutes. The committee appears to have been deeply divided on the risks to the US economic outlook and inflation expectations, as well as the appropriate policy response. In markets, risk-off prevailed, with equities down and core-periphery spreads widening. In the FX space, the JPY remained well bid while Brexit worries continued to weigh on the GBP.

– Macro: Next week, we expect the BoE to continue to sit on its hands, walking a thin line between acknowledging the improvement in financial conditions and the heightened uncertainty over the EU referendum. Data-wise, eurozone industrial production is set for a technical correction in February, while Chinese 1Q16 GDP should dispel fears of a hard landing (at least for now). The investor community will look closely at the IMF Spring Meetings.

– FI: A light data calendar should leave investors focusing on the main risk events that lie ahead. In this context, a quick recovery of core-periphery spreads appears unlikely. Bunds should stay supported due to risk aversion, ECB buying (second week of increased QE purchases) and very high redemptions (EUR 35bn) from core countries.

– FX: We currently see high levels of implied GBP volatility as consistent with the referendum risk premium. EUR-USD is likely to stay stable – for now – as the FOMC remains divided.

– Equities: The S&P 500 is trading close to the upper end of the trading range that has been in place since 2014. High valuations, weak earnings growth, fading impulses from a rebound in commodity prices and rising political uncertainty make a decline into the summer months likely. This would be in line with the expected weakness in eurozone equities.

– Credit: Primary-market activity saw an exceptionally weak start to the year because of high volatility. In IG, undersupply had already been eliminated by the time the ECB announced the CSPP, but HY issuance is, and will remain, significantly below historical averages because of competition from bank loan funding due to the TLTRO II.

Editor: Dr. Thomas Strobel, Economist (UniCredit Bank)

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8 April 2016

Macro & Markets Weekly

UniCredit Research page 2 See last pages for disclaimer.

Trades Recommendations

FI Type

Trade

Opened on

Entry level

Actual

Target

Stop loss

P&L (bp)

Rationale

Curve trade Long BTP Mar47 vs. Dec25 (vs swap)

4-Feb-16 65 67 45 75 -2 The 10-30Y BTP has widened on supply pressure. Investors should increase their focus on the curve relative shape to search for pick-up opportunities. And the 10/30Y BTP is considerably steeper than other EMU curves.

Cross country & curve

10-30Y Box AT-GE (RAGB Jun44 vs

Oct25 & DBR Jul44 vs. Aug25)

5-Feb-16 7 11 0 12 -5 Austria has underperformed Bunds in the recent weeks of volatility, especially at the 30Y. After the launch of the new 30Y and new 10Y from Austria, there curve shape should start to normalize

Relative value

Long BTP Feb17, 6m forward

22-Feb-16 0.39 0.21 0.00 0.25 18 The short end of Italian curve has been under pressure while financing rates are extremely low.

Curve trade Short OAT Apr26 vs Apr21 e Apr60

11-Mar-16 -53 -55 -30 -65 -1 The barbell has richened and convexity is attractive at the moment

Curve trade Short BTP May21 vs. BTP Feb18 &

Aug46

11-Mar-16 -160 -156 -140 -175 4 The barbell has richened and convexity is attractive at the moment

P/L open trades 13.1 P/L closed trades 3.1 P/L total 16.2

FX Currency pair

Position

Instrument

Opened on

Entry level

Actual

Target (strike)

Stop loss

Expiry

P&L spot (%)

Rationale

AUD-CAD Short Spot 8-Jan-16 0.9867 0.9872 0.9000 1.0170 - -0.05 Currency misaligned with terms of trade

EUR-SEK Short 50%

Spot 15-Mar-16 9.2617 9.2695 9.0000 9.3900 - -0.05 Krona is significantly undervalued

USD-SEK Short 50%

Spot 15-Mar-16 8.3339 8.1531 8.0400 8.4800 - 1.11 Krona is significantly undervalued

NOK basket (NOK vs. 50% USD & 50% EUR)

Long Spot 11-Feb-16 100.00 102.88 105.00 97.50 - 2.88 Too much monetary policy easing priced-in for the Norwegian economy (with above target inflation). NOK still significantly undervalued.

P/L open trades 3.89 P/L closed trades -11.69 P/L total -7.80

Risky Assets Type

Trade

Opened on

Entry level

Actual

Target

Stop loss

P&L (bp)

Rationale

Credit long Long iTraxx FinSen 12-Feb-16 133 90 160 +280 Closed. Target reached. Credit long Buy AALLN 2.5%

Apr 2021 19-Feb-16 850 596

450 1000 +1105 Anglo’s gross debt and net debt (partly) were reduced via a

successful bond tender offer (as tender prices were up to 10% below par). The tender was a signal to investors that management is confident it will achieve positive cash flows this year and that it will execute disposals in the near term.

Credit long Buy CoCo (AT1) 26-Feb-16 10% 8.8% 6-7% 14% +578 The selloff in CoCos (AT1) is overdone. Within banks’ capital structure, CoCos are the sweet spot and are more attractive than equities.

Equity relative value

Long STOXX Europe 600 Construction & Materials vs. Benchmark

26-Feb-16 1,1118 1,1414 n.m. 1,0951* +266 Construction & Materials was expected to outperform due to solid sector earnings development vs. negative earnings revision trend in the benchmark STOXX Europe 600.

Equity relative value

Long STOXX Europe 600 Technology vs. Benchmark

26-Feb-16 0,9861 1,0002 n.m. 0,9515* +143 Technology was expected to outperform due to solid sector earnings development vs. negative earnings revision trend in the benchmark STOXX Europe 600.

Short equities

Short Euro STOXX 50

04-Mar-16 3028 2896 2850 3110 +435 The index showed a strong rebound over a short period and has achieved important resistance. A move in the direction of recent lows seems likely. The target is intraday; stop loss is closing price.

Credit P/L reflects spread change, duration, carry and roll-down. Source: Bloomberg, UniCredit Research *Stop/loss 5% below the previous high since starting the position; n.m. = not meaningful

8 April 2016



Macro overview

BoE preview Daniel Vernazza, Ph.D. (UniCredit Bank London) +44 207 826-7805 [email protected] MPC judged outlook was little changed in March

On Thursday, 14 April, the Bank of England (BoE) announces its monetary policy decision and simultaneously publishes the minutes of its meeting ending on 13 April. It’s almost a given that the Committee will again vote unanimously to maintain the Bank Rate at 0.5%. The focus will be on the minutes, which we expect to walk a thin line between acknowledging the improvement in financial conditions and heightened uncertainty over the EU referendum, as was the case in March.

In the minutes of the MPC’s March meeting, the Committee judged that the outlook for domestic activity was “little changed” from the time of the February forecast round. On the one hand, the Committee said the easing in UK financial conditions would support growth and prices. But, offsetting that, the Committee said, “There appears to be increased uncertainty surrounding the forthcoming referendum on UK membership of the European Union. That uncertainty is likely to have been a significant driver of the decline in sterling. It may also delay some spending decisions and depress growth of aggregate demand in the near term”.

Better financial conditions offset by referendum uncertainty The UK economy is slowing

The news of the month is more of the same. The UK yield curve has shifted down and sterling has fallen a little further (the effective sterling index has depreciated 1.7% since the MPC’s last meeting, and is down 11% since its peak in early August). Equally, uncertainty over the UK referendum on EU membership remains high, with an increase in the implied volatility of sterling around the 23 June referendum.

The news on the data front was similarly unmoving. UK economic growth in 4Q15 was surprisingly revised up 0.1pp, but the imbalances in the UK economy had grown with the current account deficit reaching a record high of 7%. More timely surveys suggest the UK economy is slowing: most recently, the UK services PMI rose in March but remains below its long-run average and both expectations and new orders had eased further.

Expect first hike in November, based on UK staying in EU

To sum up, the BoE MPC will be very cautious between here and the referendum on 23 June. The fall in sterling will start to push up on import prices and consumer price inflation, but with headline inflation well below the 2% target at just 0.3% yoy, it gives the Committee the breathing space to sit back and wait for the referendum result. If the UK votes to remain in the EU, as we expect, then UK economic activity is likely to pick up in the second half of the year and we expect the first hike in November.

FINANCIAL CONDITIONS HAVE EASED REFERENDUM UNCERTAINTY HAS INCREASED

Source: Bloomberg, UniCredit Research

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8 April 2016



Major events and data releases of the week

EMU

Industrial production set for a technical correction

Wed, 13 Apr, 11:00 CET UniCredit Consensus Last IP, % mom Feb -0.7 -0.5 2.1

■ We expect industrial production to show a 0.7% mom correction in February, a partial reversal of the exceptionally (and unsustainably) strong January reading.

■ Thanks to the solid entry into the quarter, industrial output should do reasonably well in 1Q16, despite headwinds from weak global trade and financial market uncertainty.

■ After easing in January and February, the manufacturing PMI re-accelerated slightly in March. However, at 51.6, it signals that the industrial recovery remains moderate.

Italy

Industrial production to edge down in February

Mon, 11 Apr, 10:00 CET UniCredit Consensus Last IP, % mom Feb -1.0 -0.5 1.9

■ After the very strong data in January, a technical correction appears very likely. Therefore, we expect industrial production to decline by 1.0% mom in February.

■ Beyond monthly volatility, this will bring three-month-average IP growth in line with the subdued performance observed in the second half of 2015.

■ Business surveys through March continued to hint at expansion in factory activity, although slowing. Thus, even with the February decline, we see factory activity achieving moderate growth in the first quarter of the year.

UK

CPI inflation to accelerate on Easter effect

Tue, 12 Apr, 10:30 CET UniCredit Consensus Last CPI, % yoy Mar 0.4 0.4 0.3 Core-CPI, % yoy Mar 1.4 1.3 1.2

■ We expect headline inflation to rise 0.1pp to 0.4% yoy in March, largely because of a rise in air and sea fares related to the earlier timing of Easter.

■ Petrol and diesel prices rose less between February and March this year compared to the same period in 2015. This will subtract almost 0.1pp from headline inflation.

■ The remaining five of the big 6 UK energy companies all cut their household gas prices by around 5% in March. However, most of the cuts didn’t come until after the collection period for CPI.


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8 April 2016



US

Retail sales to edge up in March

Wed, 13 Apr, 14:30 CET UniCredit Consensus Last Retail Sales, % Mar 0.1 0.1 -0.1

■ US retail sales likely rose 0.1% in March, reversing the loss seen in February.

■ The auto sector was a drag, as automakers reported a 5% decline in unit car sales between February and March.

■ Higher gasoline prices, on the other hand, should have lifted nominal sales at gas stations.

■ Finally, sales in the core group (ex cars, gasoline and building material) should have improved, after merely stagnating in February.

Stable inflation rates

Thu, 14 Apr, 14:30 CET UniCredit Consensus Last CPI, % mom Mar 0.2 0.2 -0.2 Core-CPI, % mom Mar 0.2 0.2 0.3

■ The US consumer price index probably rose 0.2% in March, after declining by the same amount in February. As a result, the headline inflation rate should stabilize at 1.0% yoy.

■ Gasoline prices jumped by more than 8% during the month, but as seasonal factors expect a sharp rise at the beginning of the driving season, the seasonally-adjusted increase was a much more muted 1½%.

■ The CPI ex food & energy probably was up 0.2%, leaving the core inflation rate at an unchanged 2.3% yoy.

Another decline in industrial production

Fri, 15 Apr, 15:15 CET UniCredit Consensus Last IP, % mom Mar -0.4 -0.1 -0.5

■ Industrial production likely contracted by 0.4% in March, after having dropped by 0.5% in February. It would be the sixth decline over the past seven months.

■ Manufacturing output was probably down 0.2%, the first monthly decline since last November.

■ In addition, mining output likely continued to fall, while mild temperatures further reduced electricity demand for heating units and thus utilities output.


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CPI, % mom

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8 April 2016



China

GDP growth probably rose to 6.9% yoy in 1Q16

Fri, 15 Apr, 4:00 CET UniCredit Consensus Last Real GDP, % yoy 1Q16 6.9 6.7 6.8

■ We expect real GDP growth to rise to 6.9% in 1Q16, up from 6.8% in the final quarter of last year.

■ Proxies for economic activity in China, including our proprietary GDP tracker and the Caixin composite PMI (see chart), signal a stabilization or even an uptick in growth around the turn of the year.

■ A rise in the headline growth rate is also supported by a positive base effect thanks to a weak 1Q15. On its own it will add around 0.3pp to the year-on-year growth rate.

Source: Bloomberg, UniCredit Research Dr. Harm Bandholz, CFA, Chief US Economist (UniCredit Bank New York) Dr. Loredana Federico, Economist (UniCredit Bank Milan) Marco Valli, Chief Eurozone Economist (UniCredit Bank Milan) Daniel Vernazza, Ph.D., Lead UK Economist (UniCredit Bank London)

8 April 2016



FI Strategy Light data calendar to leave investor focus on risk events

Dr. Luca Cazzulani, Deputy Head of FI Strategy (UniCredit Bank Milan) +39 02 8862-0640 [email protected]

■ A light data calendar next week should leave investors focusing on the main risk events that lie ahead. In this context, a quick recovery of core-periphery spreads appears unlikely. Bunds should stay supported due to risk aversion, ECB buying (second week in which the increase in QE is at work) and very high redemptions (EUR 35bn) from core countries.

■ In the US, the rise in inflation expectations has occurred at the expense of real yields, which have fallen to “only” 0.1%. The decline in real yields stands at odds with the recent stream of US data, and is the result of expansionary monetary policy worldwide and a deterioration in risk appetite that is keeping nominal yields subdued globally.

A risk-off week: EMU equities down – banks especially and Bund yields below 0.1%

Uncertainty has been on the rise again this week. Equities have been under pressure as have core-periphery spreads. Demand for Bunds has been solid: the 10Y Bund yield briefly touched 0.08% before rebounding somewhat. Next week, demand conditions for Bunds are likely to remain good, with the ECB set to buy around EUR 3.5bn (second week in which the increase in QE is at work) and abundant redemptions (EUR 15bn from Germany and additional EUR 20bn from Finland and the Netherlands). Barring an improvement in risk appetite, this should be supportive for more curve flattening on the German curve. Other core countries are likely to stay supported as well.

Pressure on core-periphery spreads

The periphery has been under pressure: Italy and Spain have widened circa 15bp vs. Germany, and Portugal a larger 50bp (here the underperformance was related to supply pressure). The periphery widening was mostly due to a deterioration in risk appetite, as also suggested by the increased (negative) correlation between yields and equity markets. Demand at the Spanish auction was weak. Upcoming supply from Italy next week should contribute to keep spreads under pressure, although there are some EUR 16bn of redemptions. Developments and newsflow regarding the Italian banking sector are likely to remain a key driver for risk appetite. With the Greek saga continuing to play in the background and several other sources of uncertainty (including a potential Brexit), a meaningful re-tightening of core-periphery spreads appears unlikely in the short term. Moreover, we expect spread volatility to be high in the coming months.

Next week: some support to risk appetite may come from China

Datawise, the calendar does not look particularly inspiring. EMU industrial production should show a decline in February, but the data are not particularly informative after most national data have already been released.

10Y BUND YIELD: AS STRETCHED AS IN APRIL 2015? UK BREXIT HARDLY PRICED-IN IN CORE-PERIPHERY SPREADS

All series are standardized


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8 April 2016



The final release for eurozone March inflation is unlikely to be a market mover, although risks – for the headline - are tilted towards a small upward revision of the preliminary reading (-0.1%).

Inflation figures will be published for the US but, while we expect headline inflation at 1.1% yoy (core +2.2% yoy), it is unlikely that this will move expectations regarding the Fed after the recent remarks by Fed Chair Janet Yellen. In the UK, we expect the BoE to take a prudent stance ahead of the June referendum. A moderate support to risk appetite should come from China, where the release of the 1Q GDP (on Friday) should dispel, at least for now, concerns of a hard landing, but be aware of the IMF spring meeting (14-16 Apr) that is likely to stress the many risks to global growth.

US: real yields diverge from economic data…

In the US, real yields have continued to decline: 10Y TIPS have reached 0.10%. Two things are worth noting. The first one is that the decline in real yields stands totally at odds with the improvement in economic data. The left chart shows the path of the US 10Y real yield along with the Bloomberg surprise index. The two series were pretty much correlated in the second part of last year, while since early 2016 they have moved in opposite directions. There are several factors behind this. First, the combination of increasing inflation expectations and very expansionary monetary policy at a global level (which contributes to keep nominal yields stable) has pushed down real yields. Second, the Fed has become somewhat less driven by domestic data, while increasing its focus on international factors. This must also have weakened the relationship between data and US yields. Third, investors may be skeptical about the stability and strength of the economic recovery in the US – we would disagree: we expect a good level of growth in the US (2.2%) coupled with 1.3% inflation. The level of real yields in the US looks too stretched to us, although in the near term a correction looks unlikely.

…with a negative correlation between real yields and inflation expectations moving sharply negative

The second point to highlight is the negative correlation between real yields and inflation expectations in the US. Nominal yields are roughly unchanged compared to mid-February, meaning that all of the increase in inflation expectations has happened via a reduction in real yields. The empirical correlation between real yields and BE inflation is moderately negative (-18% on weekly changes since January 2000), while in the last 3 months it has been -60%, and at an abnormally high level.

US REAL YIELDS DIVERGE FROM ECONOMIC SURPRISES CORRELATION REAL YIELD VS. INFLATION EXPECTATIONS

3-months rolling correlation


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8 April 2016



FX strategy GBP implied volatility to stay elevated until voting day

Kathrin Goretzki, CFA FX Strategy (UniCredit Bank London) +44 20 7826-6076 [email protected] Kiran Kowshik EM FX Strategy (UniCredit Bank London) +44 20 7826-6080 [email protected] EUR-USD is stable at higher levels

■ We see currently high levels of GBP volatility as consistent with the referendum risk premium. EUR-USD is likely to stay stable – for now – as the FOMC remains divided.

■ A strong March fixed-asset investment (FAI) print for China would maintain our constructive view towards EM commodity FX, despite some recent weakness. The TRY should lag due to political factors. We have turned more neutral regarding PLN after its recent rally.

EUR-USD has remained stable after its recent rise to around 1.14. The trade-weighted (TW) EUR is now up 2.6% YTD, and the DXY dollar index is down 4.0% YTD: as we have highlighted earlier, we see this development as the start of a bigger correction of EUR-USD back in line with fundamentals. An unchanged core CPI rate of 2.3% next week would confirm our view that the Fed should hike rates in June, with risks skewed towards a later hike (markets are being more cautious in their expectations). However, a far more aggressive hiking cycle than we anticipate would be needed to justify the USD’s current levels. A June hike would thus not call into question the USD’s ongoing correction. We expect the great USD correction to continue over the course of this year.

High GBP volatility is not an exaggeration

We see currently high levels of GBP volatility (see left chart) as consistent with the risks surrounding the UK’s referendum on EU membership. The BoE is waiting for the referendum result and will be very cautious between here and 23 June. Thus, we do not expect next week’s MPC meeting to have any major market impact. Sterling will continue to face significant headwinds until the referendum is out of the way. However, assuming the UK votes to stay in the EU, we are positive regarding the GBP in 2H16.

Inflation data releases from the Nordic countries will be closely watched

The release of inflation data from Norway will be closely watched as a further acceleration of price dynamics would reduce the likelihood of a further cut by Norges Bank; the central bank projects that inflation will remain close to 3% over the course of this year. Sweden saw inflation rebound slightly to 0.4% last month after a spike of 0.8% in January. If positive dynamics remain in place, the Riksbank might adopt a more-relaxed stance towards the currency.

Short-term risks for AUD are to the downside

Next week’s employment report from Australia may provide important signals for the AUD. If it shows a continuation of the slowdown seen in the past two months, the encouraging labor-market dynamics seen last year could be called into question. Together with the recent sizeable appreciation of the TW AUD, which the RBA has so far linked to higher commodity prices, this could ring some alarm bells and the RBA could become more dovish. We remain constructive on the AUD in the long term but see some downside risks in the near term.

GBP-USD VOLATILITY SURGES ON BREXIT WORRIES STRONG INCREASE IN NEW ZEALAND IMMIGRATION


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Net permanent and long-term immigration as a share of NZ labor forceworking-age population%

8 April 2016



RBNZ may ease less than markets currently anticipate

If the upcoming CPI release from New Zealand confirms the drop in inflation to 0.1% seen in the last quarter, markets would likely see it as a confirmation of RBNZ easing expectations, which are currently at an 80% probability for two 25bp cuts over the next 12 months. However, as the RBNZ’s deputy governor, Geoff Bascand, highlighted this week, some of the weakness in inflation can be explained by the higher productive capacity of the economy as a result of rapid growth in the labor force (see right chart on the previous page). With the RBNZ’s labor-market-utilization index suggesting slightly “greater labour market tightness than usual”, the RBNZ may be more relaxed about low inflation levels than markets currently anticipate.

BoC to leave rates unchanged The BoC will likely leave rates unchanged at its upcoming meeting. Positive labor market developments have been waning in recent months (the 8 April release was still unpublished at the time of writing). We remain positive on the CAD: First, the currency is still sizably undervalued against the dollar. Second, room for cutting rates is relatively limited compared to the RBA and RBNZ. That said, a sluggish employment dynamic makes it likely that USD-CAD will correct at a slower pace over the course of this year.

Strong China construction FAI would be supportive of EM FX

Ahead of the 17 April Doha meeting of oil producers, EM commodity currencies could react to comments by Saudi Arabia that it may not participate in any measures to freeze production unless Iran also participates. However, we would also place a lot of importance on China’s March FAI figures (Friday). The combined data for January-February showed a strong rebound in construction investment, following almost two years of declines. This part of FAI was important for past commodity dynamics (see left chart). Should the March reading indicate continued strength, it would support our assumption that the EM commodity currency rally can continue. On a 3M view, we think a number of EM currencies should be bought on dips versus the USD rather than sold on rallies for all the reasons highlighted in our recently published FX Perspectives – “EM FX: why the rally has further to run”.

February external balance figures for CEEMEA are due

A firmer-than-expected trade balance from Turkey suggests the C/A balance will hold at recently narrower levels. With non-resident purchases of equity and debt still moving at a fast clip (see right chart), TRY has held firm despite the CBRT’s unexpectedly cutting the overnight lending rate recently. Focus will shift to who will replace CBRT governor Erdem Başçı, whose term ends on 19 April. We still think that Turkey faces negative idiosyncratic risks and should continue to lag behind other EM currencies. We will also keep an eye on February current account data for Poland. Given the acceleration and broadening of the selling seen by investors (from investment funds to insurance funds), we would view a weaker reading as negative, as it would suggest flow support is declining. PLN-HUF has rallied sharply on diverging policy expectations, but after the recent move, the risk that PLN-HUF will move lower has increased.

CHINA CONSTRUCTION IMPORTANT FOR EM COMMODITY FX TURKEY: PACE OF PORTFOLIO INFLOWS REMAINS STRONG

Source: Bloomberg, China National Bureau of Statistics, CBRT, UniCredit Research

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China FAI real estate yoy

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R^2 of regression of GSCI commodity index yoy on FAI yoy (2010-16) =56% for real estate component vs. 13% for headline

-4-3-2-101234567

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Net debt transactions

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Net portfolio inflow ex repo instruments (all series are 4W rolling sums, USD bn)

https://www.research.unicredit.eu/DocsKey/fxfistrategy_docs_2016_153130.ashx?M=D&R=31386331

8 April 2016



Equity Strategy

S&P 500: weaker within the broad sideways trend Dr. Tammo Greetfeld, Equity Strategist (UniCredit Bank) +49 89 378-18361 [email protected]

■ The S&P 500 trend is an important driver for the eurozone market. Past experience shows that the eurozone can decouple on the positive side if the US market rises or is stable. However, the more pronounced a decline is, the less likely a decoupling becomes.

■ Expected US GDP growth of slightly above 2% is supportive. On the other hand, the equity market valuation is very high in historical terms and earnings growth is weak. We expect the S&P 500 to continue to follow the broad sideways trend that has been in place since 2014.

■ The S&P 500 has rebounded strongly from February lows and is currently trading close to the upper end of the sideways range (since 2014). In our view, the index will decline as we enter the summer months, which would be in line with the expected weakness in eurozone equities.

US equity market In this article we discuss the outlook for the S&P 500 and its implication for the eurozone stock market. The further trend of the US equity market is among the key factors that will shape the trend in the eurozone equity market in the coming months.

Earnings growth is weak The earnings growth for the S&P 500 has weakened significantly in recent quarters. The left chart shows the 12M forward index earnings for the S&P 500 and the net number of companies with positive sales revisions for the respective current year (FY1 in the IBES definition). Weaker international growth and past USD-strength have contributed to negative revisions trends. Low oil prices have hit sales and earnings in the energy sector. Negative sales revisions can be compensated to some extent by cost savings (to limit the adverse effect on earnings), however, of course not indefinitely. Looking forward, the expected end of USD strength should alleviate the burden from the exchange rate on earnings.

S&P 500: sideways We expect the S&P 500 to continue the follow the broad sideways range established in 2014/15. Our economists (and consensus) expect US GDP to grow slightly above 2% (annual average). This is, generally speaking, supportive for the equity market. However, one has to take into account that the valuation is currently very high in historical terms. The right chart shows the P/E and the consensus GDP estimates (12M forward). Periods of expected growth acceleration or deceleration often go hand in hand with valuation changes.

S&P 500: SALES REVISIONS AND INDEX EARNINGS S&P 500 P/E AND GDP GROWTH

Source: Thomson Datastream, UniCredit Research

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8 April 2016



High valuation, low earnings growth and the index being close to strong resistance levels (previous highs) make it unlikely that the market can break out on the upside due to a lack of strong enough positive impulses. A meaningful short-term acceleration of GDP and earnings growth is unlikely. If one looks at the Shiller P/E (valuation based on the average earnings of the last 10 years), then the valuation is even higher at around 26 – a level that is rarely exceeded. Besides this, in periods of Fed tightening, valuation is more likely to decline (left chart).

How will investors perceive the Fed’s policy options?

Monetary policy and, how it is received by investors, will continue to be a key factor for the S&P 500 trend. The Fed recently changed to a more cautious rhetoric and the equity market took comfort from it. The market currently expects only one interest rate hike this year, we think that two or three are more likely. In this context, they point out that (core) inflation has accelerated recently and could surprise on the upside in combination with robust economic data, especially from the labor market. These factors together may force the Fed to change its rhetoric again. The equity market is moving on a narrow path with regard to how the combination of growth and monetary policy outlook is perceived by investors. Currently the perception of a mild dimming of the growth outlook being ultimately addressed by supportive monetary policy is the dominant opinion (rather than growth threats and lack of remaining effective policy options being an imminent risk).

Risks The S&P 500 is the leading equity market globally and its trend is an important driver for the eurozone market. Experience of past cycles shows that the eurozone market can decouple on the positive side if the US market rises or is stable. However, the more pronounced a decline on the US market is, the less likely a decoupling becomes. We think that the S&P 500 is likely to decline in coming weeks/months. The uncertainty regarding the policy of the next US president is an additional burden that may amplify as July draws closer (nomination of the candidates at the Democratic and Republican party conventions).

Euro STOXX 50 outlook The Euro STOXX 50 transitioned into a sideways movement in recent weeks and has now started a renewed decline. We reiterate our view expressed here in recent weeks that we expect the equity market to move towards the February lows in coming weeks/months (a test of this year’s lows). A rise in commodity prices as a potential driver for the rebound is fading now (a factor also weighing on the S&P 500). The upcoming reporting season is unlikely to deliver positive impulses given the decline in leading indicators in 1Q16 (looking at 1Q16 earnings and outlook together). Should the S&P 500 decline in coming weeks/months, as we expect, then this would increase the likelihood of our scenario for the eurozone market materializing. A decline in the Euro STOXX 50 would be part of a broader stabilization of equity markets in search of a solid base, followed by a recovery after the summer.

FED TIGHTENING AND P/E S&P 500 AND EURO STOXX 50


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8 April 2016



Credit Strategy Corporate bond supply in times of CSPP and TLTRO II

Dr. Philip Gisdakis, Head of Credit & Cross Asset Strategy (UniCredit Bank) +49 89 378-13228 [email protected]

■ Primary-market activity saw an exceptionally weak start into the year because of high volatility.

■ While, in investment grade, undersupply had already been eliminated by the time the ECB announced its CSPP, HY issuance volumes have remained significantly below historical averages and will likely remain below these averages for the rest of the year because of competition from bank-loan funding (due to a renewed TLTRO II).

Primary-market activity saw an exceptionally weak start to the year because of high volatility

Primary-market activity, i.e. the issuance of new corporate bonds, was the area most impacted by the heavy volatility at the beginning of the year. January is usually characterized by the strong issuance of new bonds. This year was an exception and was one of the dullest starts to a year in terms of corporate bond supply. However, in the investment-grade non-financials segment, undersupply in January was compensated for later on. However, as our data show, the surprise announcement by the ECB on 10 March was not a key driver of this development, as – with the exception of Anhäuser Busch – most of the catch up occurred ahead of the ECB meeting. This article attempts to shed some light on the dynamics at play in non-financial markets (investment grade as well as high yield) so far this year. It also offers some ideas about the potential future implications of the ECB’s announcement, i.e. from the CSPP and the TLTRO II (targeted longer-term refinancing operations).

The following analysis is based on data from Bond Radar. We focused on EUR-denominated bonds issued by Western European, non-financial companies. We split the analysis between investment grade and high yield. Note that, by referring to Bond Radar (instead of issuance in the iBoxx universe), we were able to achieve a broader sample of issuance activity – the iBoxx only includes benchmark-sized fixed-rate bonds (in IG, this is EUR 500mn and, in HY, it is EUR 150mn) and leaves out all other bonds. Moreover, we aggregated the supply data in weeks, starting with the second week (for this year, it was 4 January 2016). In order to allow this year’s issuance to be viewed from a historic perspective, we also compiled average weekly issuance volumes for 2010-15.

YTD ISSUANCE VOLUMES IN NON-FINANCIAL INVESTMENT GRADE VS. CREDIT SPREADS

IG issuance activity by week: 2016 YTD vs. avg. activity for 2010-15 YTD spreads for IG non-fins (senior) vs. avg. 2010-15

Source: Bond Radar, iBoxx, UniCredit Research

In investment grade, undersupply had been already eliminated by the time the ECB announced CSPP…

As the left chart above shows, issuance activity in the first four to five weeks of the year, trailed historic averages significantly. On a cumulated basis, issuance volumes in the IG non-financial universe amount to EUR 15bn in the first four weeks of active trading (which usually starts in the second calendar week).

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8 April 2016



This year, it was only EUR 3.25bn, which came exclusively from Daimler’s bonds on 5 January. According to data from Bond Radar, the next IG-rated, EUR-denominated bond came to the market at the beginning of February. The reason for this lull was the high uncertainties in markets, which made it very difficult for the parties involved to price bonds accurately. This is confirmed by the right chart above, which compares this year’s spread time series with the average for 2010-15. However, as soon as spread widening calmed down, issuance activity picked up. Issuance activity in weeks 9 (starting 22 February) and 10 (29 February) far exceeded average historical volumes. These two strong weeks offset almost all previous undersupply. The spike in issuance volumes in the week following the ECB’s announcement was due to a six-tranche bond issuance by Anheuser-Busch, which, with a total volume of EUR 13.25bn, was aimed at financing last year’s takeover of SABMiller.

…but HY issuance is, and will remain, significantly below historical averages because of the competition from bank loan funding (due to the TLTRO II)

In the high-yield universe, the start of the year was as dull for primary markets as it was for IG due to high spread volatility (see charts below). However, a major difference is that undersupply related to the average volumes over the past five years has not yet been offset. Moreover, in HY, the post-ECB increase in issuance volumes was more pronounced that it was in IG. In numbers, YTD HY issuance amounts to only EUR 6bn, which is only one-third of the average supply volume over comparable periods from the past five years. Moreover, as detailed below, we also expect HY supply volumes this year to trail expectations because of the impact of TLTRO II.

YTD ISSUANCE VOLUMES IN NON-FINANCIAL HIGH YIELD VS. CREDIT SPREADS

HY issuance activity by week: 2016 YTD vs. avg. activity for 2010-15 YTD spreads for HY non-fins (senior) vs. avg. 2010-15

Source: Bond Radar, iBoxx, UniCredit Research

Conclusion When the new bonds from Anheuser-Busch are removed from the equation (which were expected anyway), the announcement of the CSPP by the ECB did not have a very strong impact on primary-market activity by IG-rated companies. Most undersupply in January had already been made up for in late February and early March, i.e. ahead of the ECB’s announcement. In HY, on the other hand, the post-ECB-announcement increase was more pronounced, as the ECB’s focus on credit easing helped improve investor demand for risky assets. Going forward, however, the second component of the ECB’s announcement, TLTRO II, will most probably weigh on HY issuance activity, as competition from bank loan supply (which incentivizes banks to grow their loan books in order to qualify for negative funding rates in ECB operations) makes bank loans a more-attractive financing option for SMEs than HY bonds. For HY bond markets, the corresponding lack of supply will be a technically supportive factor.

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8 April 2016



Major data releases and economic events of the week ahead Date Time UniCredit Consensus 9-15 Apr 2016 (CET) Country Indicator/Event Period estimates (Bloomberg) Previous Sat, 09 Apr US Wyoming Democratic Caucus Mon, 11 Apr 3:30 CH Consumer Price Index, CPI (% yoy) Mar 2.4 2.3 9:00 CZ Consumer Price Index, CPI (% yoy) Mar 0.5 0.4 0.5 9:00 SZ Total Sight Deposits Average for Week Apr 8 483761 10:00 NO Consumer Price Index, CPI (% yoy) Mar 3.2 3.1 3.1 10:00 IT Industrial Production (% mom) Feb -1.0 -0.5 1.9 14:00 PL Consumer Price Index, CPI (% yoy) Mar F -0.9 -0.9 15:25 US Fed's Dudley Speaks on Community Development in New York 19:00 US Fed's Kaplan Speaks in Ruston, Louisiana Tue, 12 Apr Spring Meeting of the IMF and the World Bank Group 8:00 GE Harmonized CPI (% yoy) Mar F 0.1 0.1 0.1 8:00 GE Consumer Price Index, CPI (national, % yoy) Mar F 0.3 0.3 0.3 9:30 SW Underlying Inflation Rate CPIF (% yoy) Mar 1.3 1.4 1.1 9:30 SW Consumer Price Index (% yoy) Mar 0.5 0.7 0.4 10:30 UK Core CPI (% yoy) Mar 1.4 1.3 1.2 10:30 UK Consumer Price Index, CPI (% yoy) Mar 0.4 0.4 0.3 12:00 PO Consumer Price Index, CPI (% yoy) Mar 0.4 14:30 US Import Prices (% mom) Mar 1.0 -0.3 15:00 Press Briefing: World Economic Outlook 15:00 US Fed's Harker Speaks on Economic Outlook in Philadelphia 20:00 US Federal Budget (USD bn) Mar -88.5 -192.6 21:00 US Fed's Williams Speaks in San Francisco 22:00 US Fed's Lacker Speaks in Wilmington, North Carolina Wed, 13 Apr 8:45 FR Consumer Price Index, CPI (% yoy) Mar F -0.2 -0.2 9:00 SP Core CPI (% yoy) Mar 1.0 9:00 SP Harmonized CPI (% yoy) Mar F -1.0 -1.0 -1.0 10:00 NE ECB's Knot in Dutch Parliament to Discuss ECB Monetary Policy 11:00 EMU Industrial Production (% mom) Feb -0.7 -0.5 2.1 14:30 US Retail Sales (% mom) Mar 0.1 0.1 -0.1 16:00 CA Bank of Canada Rate Decision (%) Apr 13 0.50 0.50 0.50 16:00 US Business Inventories (% mom) Feb 0.1 0.1 20:00 US U.S. Federal Reserve Releases Beige Book Thu, 14 Apr 1:01 UK House Prices (RICS, balance) Mar 50.0 3:30 AU Employment (net change in thousands mom sa) Mar 18.5 0.3 3:30 AU Unemployment Rate (% sa) Mar 5.9 5.8 10:00 IT CPI incl. tobacco (% yoy) Mar F -0.2 -0.3 -0.3 11:00 EMU Core CPI (% yoy) Mar F 1.0 1.0 1.0 11:00 EMU Consumer price index, CPI (% yoy) Mar F -0.1 -0.1 -0.1 13:00 UK Bank of England Repo Rate (%) Apr 14 0.50 0.50 0.50 14:30 US Initial Jobless Claims (thousands) Apr 9 267 14:30 US Core CPI (ex food & energy, % mom) Mar 0.2 0.2 0.3 14:30 US Consumer Price Index, CPI (% mom) Mar 0.2 0.2 -0.2 16:00 US Fed's Powell Appears Before Senate Banking Committee 16:00 US Fed's Lockhart Speaks in Chicago Fri, 15 Apr 4:00 CH Industrial Production (% yoy) Mar 6.0 5.9 4:00 CH Real GDP (% yoy) 1Q 6.9 6.7 6.8 6:30 JP Industrial Production (% yoy) Feb F -1.5 14:30 US NY Fed Empire State Manufacturing Survey Apr 2 0.6 15:15 US Capacity Utilization (%) Mar 76.2 75.3 75.4 15:15 US Industrial Production (% mom) Mar -0.4 -0.1 -0.5 16:00 US University of Michigan Consumer Confidence Apr 92.5 92.0 91.0 18:30 US Fed's Evans Speaks on Economy and Policy in Washington 22:00 US Net Long-term Capital Inflows (TIC, USD bn) Feb -12.0

*Asterisked releases are scheduled on or after the date shown; sa = seasonal adjusted, nsa = not seasonally adjusted, wda = working day adjusted, F = final release, S = second release, P = preliminary release Source: UniCredit Research

8 April 2016



UniCredit economic forecasts Real GDP (% yoy) Consumer prices (% yoy) Budget balance (% of GDP) 2015 2016 2017 2015 2016 2017 2015 2016 2017 Industrialized countries USA 2.4 2.2 2.4 0.1 1.3 2.4 -3.8 -3.6 -3.3 Euro Area 1.5 1.7 1.6 0.0 0.2 1.3 -2.1 -1.9 -1.8

Germany 1.7* 1.8* 1.4* 0.2 0.6 1.7 0.5 0.0 0.0 France 1.1 1.4 1.3 0.0 0.2 1.2 -3.5 -3.4 -2.9 Italy 0.6 1.2 1.2 0.1 0.1 1.2 -2.6 -2.4 -1.4 Spain 3.2 2.9 2.4 -0.6 -0.1 1.2 -4.8 -3.5 -2.6 Austria 0.9 1.5 1.5 0.9 1.4 1.9 -1.2 -1.7 -1.3 Greece -0.3 -0.5 2.2 -1.0 0.8 1.1 -7.6** -3.2 -2.5 Portugal 1.5 1.4 1.5 0.5 1.0 1.2 -4.4 -2.8 -2.4

UK 2.3 1.9 2.1 0.0 0.7 2.1 -4.0 -3.2 -2.3 Switzerland 0.9 1.5 1.8 -1.1 -0.4 0.7 -0.2 0.0 0.1 Sweden 3.8 3.7 2.9 0.0 0.5 1.5 -1.0 -0.5 -0.2 Norway 1.1 1.2 2.0 2.2 2.9 2.4 7.5 7.0 7.0 Japan 0.5 0.9 0.6 0.8 0.4 1.8 -6.0 -6.1 -5.0 Developing countries Central & Eastern Europe

Russia -3.7 -2.5 1.2 15.6 8.7 7.2 -2.6 -4.3 -3.1 Poland 3.6 3.7 3.8 -0.9 -0.4 2.1 -2.5 -3.3 -3.5 Czech Republic 4.3 2.2 3.0 0.3 0.7 2.2 -1.5 -1.5 -1.7 Hungary 2.9 2.7 2.6 -0.1 0.4 3.0 -2.0 -2.0 -1.6 Turkey 3.8 3.3 3.4 7.7 8.4 8.1 -1.5 -2.5 -2.7

Emerging Asia China 6.9 6.5 6.2 1.7 1.9 2.2 -1.9 -3.0 -3.2

Real GDP (% qoq sa) 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 US (annualized) 1.0 2.2 2.7 2.6 2.5 2.3 2.3 2.3 2.3 Euro Area 0.3 0.5 0.5 0.4 0.4 0.4 0.4 0.3 0.3

Germany 0.3 0.6 0.5 0.4 0.4 0.4 0.4 0.3 0.3 France 0.3 0.4 0.4 0.4 0.3 0.4 0.3 0.3 0.3 Italy 0.1 0.4 0.4 0.3 0.3 0.3 0.3 0.2 0.2 Spain 0.8 0.8 0.7 0.6 0.6 0.6 0.6 0.5 0.5 Austria 0.2 0.5 0.5 0.4 0.4 0.4 0.3 0.3 0.3

UK 0.6 0.4 0.4 0.5 0.5 0.5 0.5 0.6 0.6 Switzerland 0.4 0.4 0.5 0.5 0.5 0.4 0.4 0.4 0.4 Sweden 1.3 0.8 0.8 0.7 0.7 0.7 0.9 0.5 0.5 Norway 0.1 0.4 0.5 0.4 0.4 0.5 0.5 0.5 0.6 Russia -0.7 -1.2 -1.3 -0.6 -0.1 -0.5 -1.2 -0.9 0.2 Poland (%yoy) 3.9 3.3 3.7 3.9 3.8 3.7 3.1 3.8 4.3 Czech Republic 0.0 0.4 0.5 1.4 0.7 0.6 0.6 0.7 0.7 Hungary 1.0 0.6 0.7 0.7 0.6 0.7 0.7 0.7 0.7 Turkey 1.0 1.5 1.4 1.3 0.4 0.3 1.0 1.4 1.2

Consumer prices (% yoy) 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 US 0.4 1.1 1.1 1.3 1.7 2.4 2.4 2.5 2.5

Core rate (ex food & energy) 2.0 2.3 2.2 2.2 2.3 2.2 2.4 2.5 2.5 Euro Area 0.2 0.0 -0.1 0.2 0.6 1.1 1.2 1.3 1.5

Core rate (ex food & energy) 1.0 1.0 1.0 1.0 1.0 1.1 1.1 1.1 1.2 Germany 0.3 0.2 0.5 0.7 1.0 1.6 1.6 1.7 1.9 France 0.1 0.0 -0.1 0.3 0.6 1.1 1.2 1.2 1.3 Italy 0.2 -0.1 -0.1 0.1 0.4 0.9 1.2 1.3 1.4 Spain -0.5 -0.6 -0.5 0.1 0.6 1.1 1.0 1.2 1.4 Austria 0.7 1.0 1.1 1.4 1.9 2.2 2.1 1.9 1.6

UK 0.1 0.4 0.6 0.9 1.1 1.8 2.1 2.3 2.3 Switzerland -1.4 -1.0 -0.6 0.0 0.2 0.4 0.6 0.8 1.0 Sweden 0.1 0.6 0.6 0.6 0.7 1.1 1.3 1.6 1.8 Norway 2.5 3.1 3.1 2.5 2.7 1.6 2.3 2.7 2.8 Russia, eop 9.6 16.2 15.8 15.8 14.5 8.6 8.5 8.5 7.8 Poland, eop -0.6 -0.8 -0.8 -0.4 0.3 1.8 2.1 2.2 2.3 Czech Republic 0.1 0.5 0.3 0.7 1.3 2.0 2.1 2.4 2.2 Hungary, eop 0.9 -0.1 -0.6 0.9 1.8 3.0 3.1 2.7 2.7 Turkey, eop 8.2 9.1 8.0 8.3 8.2 8.9 8.3 8.1 7.2

*non-wda figures. Adjusted for working days: 1.4% (2015), 1.7% (2016) and 1.6% (2017) Source: UniCredit Research **Forecasts on Greek public finances do not include the impact of the forthcoming recapitalization of the Greek banking sector

8 April 2016



UniCredit FI forecasts INTEREST RATE AND YIELD FORECASTS (%)

Current 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 EMU Repo rate 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Depo -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 -0.40 3M EUR -0.25 -0.25 -0.25 -0.25 -0.25 -0.25 -0.25 -0.25

2Y Schatz -0.51 -0.45 -0.40 -0.40 -0.30 -0.15 0.05 0.10 5Y Obl -0.39 -0.30 -0.25 -0.20 0.10 0.30 0.55 0.63 10Y Bund 0.09 0.45 0.60 0.75 1.05 1.35 1.45 1.55 fwd 0.13 0.16 0.18 0.21 0.24 0.26 0.29 30Y Bund 0.75 1.20 1.30 1.45 1.70 1.95 2.00 2.05 2/10 60 90 100 115 135 150 140 145 2/5/10 -35 -30 -35 -37 -28 -30 -20 -20 10/30 66 75 70 70 65 60 55 50

2Y EUR swap -0.16 -0.10 0.00 0.00 0.05 0.20 0.35 0.40 5Y EUR swap -0.01 0.10 0.15 0.21 0.45 0.65 0.85 0.93 10Y EUR swap 0.49 0.85 1.00 1.15 1.40 1.70 1.75 1.85 US FedFunds 0.50 0.75 1.00 1.25 1.50 1.75 1.75 2.00 3M Libor 0.63 1.00 1.15 1.40 1.65 1.90 1.90 2.15 2Y UST 0.70 1.25 1.60 1.80 2.05 2.30 2.35 2.40 5Y UST 1.15 1.90 2.15 2.40 2.55 2.65 2.70 2.75 10Y UST 1.70 2.30 2.50 2.60 2.80 2.95 2.95 2.95

fwd 1.78 1.83 1.87 1.91 1.94 1.98 2.02 30Y UST 2.53 2.95 3.10 3.15 3.30 3.45 3.40 3.40 2/10 100 105 90 80 75 65 60 55 2/5/10 -10 13 10 20 12 2 5 8 10/30 83 65 60 55 50 50 45 45 2Y USD swap 0.86 1.35 1.75 1.95 2.25 2.50 2.60 2.65 10Y USD swap 1.59 2.25 2.50 2.60 2.85 3.00 3.05 3.05 UK Key rate 0.50 0.50 0.50 0.75 1.00 1.25 1.50 1.75

10Y Gilt 1.33 2.00 2.20 2.30 2.60 2.85 2.90 2.95 fwd 1.39 1.44 1.49 1.54 1.59 1.64 1.69

Spreads Current 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 10Y UST-Bund 161 185 190 185 175 160 150 140 10Y UST-Gilt 37 30 30 30 20 10 5 0 10Y Gilt-Bund 124 155 160 155 155 150 145 140 10Y BTP-Bund 130 100 80 70 65 65 60 60 10Y EUR swap-Bund 40 40 40 40 35 35 30 30 10Y USD swap-UST -13 -5 0 0 5 5 10 10


8 April 2016



UniCredit FX forecasts EUR Current 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 3M 6M 12M BEER* Deviation** G10 EUR-USD 1.14 1.07 1.09 1.12 1.14 1.16 1.17 1.18 1.08 1.10 1.15 1.20 -5.0%

EUR-CHF 1.09 1.12 1.14 1.16 1.17 1.19 1.20 1.21 1.13 1.15 1.18 1.21 -9.9% EUR-GBP 0.81 0.75 0.75 0.75 0.75 0.75 0.75 0.74 0.75 0.75 0.75 0.71 14.1% EUR-JPY 124 119 119 121 121 122 122 122 119 120 122 115 7.8% EUR-NOK 9.44 9.00 8.95 8.90 8.80 8.70 8.60 8.50 8.98 8.93 8.77 7.24 30.4% EUR-SEK 9.28 9.20 9.18 9.15 9.12 9.00 8.95 8.90 9.19 9.17 9.08 7.21 28.7% EUR-AUD 1.51 1.47 1.47 1.49 1.50 1.51 1.52 1.55 1.47 1.48 1.51 1.76 -14.2% EUR-NZD 1.68 1.57 1.58 1.60 1.63 1.63 1.63 1.62 1.57 1.59 1.64 1.71 -1.8% EUR-CAD 1.49 1.43 1.42 1.40 1.38 1.38 1.38 1.38 1.43 1.41 1.38 1.42 4.9% EUR-TWI 95.1 92.3 93.3 94.8 95.7 96.7 97.3 97.8 92.6 93.8 96 CEEMEA & CHINA EUR-PLN 4.29 4.26 4.23 4.20 4.16 4.14 4.12 4.12 4.25 4.22 4.15 3.93 9.2% EUR-HUF 312 315 318 320 312 317 322 325 313 315 313 313 -0.3% EUR-CZK 27.0 27.1 27.1 27.1 27.1 26.7 26.5 26.5 27.1 27.1 27.0 29.3 -7.8% EUR-TRY 3.26 3.17 3.30 3.47 3.58 3.62 3.65 3.78 3.19 3.37 3.61 EUR-RUB 76.6 77.5 78.8 80.2 80.8 81.1 81.8 80.8 77.9 79.4 80.6 EUR-RON 4.47 4.49 4.46 4.49 4.45 4.44 4.45 4.44 4.49 4.47 4.44 EUR-CNY 7.37 7.17 7.36 7.62 7.84 8.07 8.23 8.38 7.26 7.45 7.95

USD Current 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 3M 6M 12M BEER* Deviation** G10 EUR-USD 1.14 1.07 1.09 1.12 1.14 1.16 1.17 1.18 1.08 1.10 1.15 1.20 -5.0%

USD-CHF 0.96 1.05 1.05 1.04 1.03 1.03 1.03 1.03 1.05 1.05 1.03 1.01 -5.0% GBP-USD 1.41 1.42 1.46 1.50 1.52 1.55 1.57 1.60 1.43 1.47 1.53 1.70 -17.1% USD-JPY 109 111 109 108 106 105 104 103 110 109 106 95.5 14.1% USD-NOK 8.29 8.41 8.21 7.95 7.72 7.50 7.35 7.20 8.34 8.12 7.63 6.02 37.7% USD-SEK 8.15 8.60 8.42 8.17 8.00 7.76 7.65 7.54 8.54 8.34 7.90 5.99 36.1% AUD-USD 0.76 0.73 0.74 0.75 0.76 0.77 0.77 0.76 0.73 0.74 0.76 0.68 11.8% NZD-USD 0.68 0.68 0.69 0.70 0.70 0.71 0.72 0.73 0.68 0.69 0.70 0.70 -2.9% USD-CAD 1.31 1.34 1.30 1.25 1.21 1.19 1.18 1.17 1.33 1.28 1.20 1.18 11.0% USTW$ 90.1 93 91.2 89.1 87.4 86.2 85.4 84.7 92.4 90.5 87 83.1 8.4% USD-DXY 94.5 98.8 96.9 94.5 92.7 91.2 90.4 89.5 98.2 96.1 92.2 CEEMEA & CHINA USD-PLN 3.77 3.98 3.88 3.75 3.65 3.57 3.52 3.49 3.94 3.84 3.61 3.27 15.3% USD-HUF 274 294 292 286 274 273 275 275 290 286 272 260 5.4% USD-CZK 23.7 25.3 24.9 24.2 23.8 23.0 22.6 22.5 25.1 24.6 23.5 24.4 -2.9% USD-TRY 2.86 2.96 3.03 3.10 3.14 3.12 3.12 3.20 2.95 3.06 3.14 USD-RUB 67.3 72.4 72.3 71.6 70.9 69.9 70.0 68.5 72.1 72.2 70.1 USD-RON 3.93 4.20 4.09 4.01 3.90 3.83 3.80 3.76 4.16 4.06 3.86 USD-CNY 6.48 6.70 6.75 6.80 6.88 6.96 7.03 7.10 6.72 6.77 6.91

Forecasts are end-of-quarter / end-of-month forecasts. *BEER values are fair value estimates based on our Behavioural Equilibrium Exchange Rate model ''BEER by UniCredit''(see FX Special, 3 March 2016) **Deviation between current value of the exchange rate and the fair value estimate Source: Bloomberg, UniCredit Research

https://www.research.unicredit.eu/DocsKey/fxfistrategy_docs_2016_152739.ashx?EXT=pdf&KEY=KZGTuQCn4lsvclJnUgseVJ1YeU3c7Y14ZUHLz6X0yPKd7vm3w7zrag==

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UniCredit risky assets forecasts COMMODITY, EQUITY AND CREDIT FORECASTS

Current 2Q16 3Q16 4Q16 Mid Year Year-End Oil Brent. USD/bbl. 40.14 35 40 40 -- -- Equities* Euro STOXX 50 2896 o - + 3,500** DAX 9605 o - + 10,800 FTSE MIB 17045 o - + 23,000** Credit* iBoxx Non-Financials 82 o o - 85 100

iBoxx Financials Sen 65 o o - 60 65 iBoxx High Yield NFI 455 o o - 400 450

*For equities and credit we state expected quarterly developments. **Under review for down revision but still to a level higher than the present one. ++ strong positive performance, + positive performance, o flat performance, - negative performance, -- strong negative performance


8 April 2016



Related research CHIEF ECONOMIST’S COMMENT » Sunday Wrap - 3 April 2016

ECONOMICS » Economics Flash - German new orders: weak headline number largely caused by a drop in bulk orders - 5 April 2016 » UK: Services PMI up in March, but activity is slowing - Economics Flash - 5 April 2016 » Economics Flash - German IP: a positive message, despite negative numbers - 6 April 2016 » Economics Flash - Minutes reveal a deeply divided FOMC - 6 April 2016 » France: High volatility in industrial production at the start of the year - Economics Flash - 8 April 2016 » UK: Manufacturing and exports slump amid heightened uncertainty - Economics Flash - 8 April 2016

FI STRATEGY » Weekly supply preview: Lively activity at the extra-long end - Primary Market Focus - 4 April 2016 » BTP Relative Value Monitor - 5 April 2016 » Rates Perspectives - CCTs: more value with the floors - 7 April 2016

FX STRATEGY » FX Perspectives - EM FX: why the rally has further to run - 7 April 2016

CREDIT AND EQUITY STRATEGY » Credit Derivatives Analytics – Index client positioning - 06 April 2016 » Credit Perspectives - Balancing emerging European and European High Yield credit - 08 April 2016

FINANCIALS CREDIT RESEARCH » Green Bonds - The Chartbook (1Q16) - 04 April 2016 » Bank & Insurance Watch - April 2016 - 06 April 2016 » Sector Report RAS - Overview of risk weights under Basel II and CRR - 07 April 2016 » Covered Bond & Agency Monitor - 7 April 2016 - English version - Changed text and added two missing figures on page 1 and 3 - 07 April 2016 » Credit Comment - Nord/LB reports solid FY15 results, still impacted by shipping - 07 April 2016

CORPORATE CREDIT RESEARCH » CEE Corporate Quarterly - Blossoming opportunities - 04 April 2016 » Credit Flash (HY/Autos): CNH Industrial – Stabilization not before 2017 expected (Sell) - 06 April 2016 » Credit Flash (HG/Consumer): Walgreens Boots Alliance (WBA) – Strong 2Q15/16 trend (Marketweight) - 06 April 2016 » Credit Flash (HY/Autos): Faurecia – Switch from EOFP 6/22 into MSSIN 7/21 - 07 April 2016

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UniCredit Research page 21

Disclaimer Our recommendations are based on information obtained from, or are based upon public information sources that we consider to be reliable but for the completeness and accuracy of which we assume no liability. All estimates and opinions included in the report represent the independent judgment of the analysts as of the date of the issue. This report may contain links to websites of third parties, the content of which is not controlled by UniCredit Bank. No liability is assumed for the content of these third-party websites. We reserve the right to modify the views expressed herein at any time without notice. Moreover, we reserve the right not to update this information or to discontinue it altogether without notice. 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POTENTIAL CONFLICTS OF INTERESTS Daimler 3; General Electric 3; Key 1a: UniCredit Bank AG and/or any related legal person owns at least 2% of the capital stock of the analyzed company. Key 1b: The analyzed company owns at least 2% of the capital stock of UniCredit Bank AG and/or any related legal person. Key 2: UniCredit Bank AG and/or any related legal person has been lead manager or co-lead manager over the previous 12 months of any publicly disclosed offer of financial instruments of the analyzed company, or in any related derivatives. Key 3: UniCredit Bank AG and/or any related legal person administers the securities issued by the analyzed company on the stock exchange or on the market by quoting bid and ask prices (i.e. acts as a market maker or liquidity provider in the securities of the analyzed company or in any related derivatives). Key 5: The analyzed company and UniCredit Bank AG and/or any related legal person have concluded an agreement on the preparation of analyses. Key 6a: Employees or members of the Board of Directors of UniCredit Bank AG and/or any other employee that works for UniCredit Research (i.e. the joint research department of the UniCredit Group) and/or members of the Group Board (pursuant to relevant domestic law) are members of the Board of Directors of the analyzed company. Members of the Board of Directors of the analyzed company hold office in the Board of Directors of UniCredit Bank AG (pursuant to relevant domestic law). The application of this Key 6a is limited to persons who, although not involved in the preparation of the analysis, had or could reasonably be expected to have access to the analysis prior to its dissemination to customers or the public. Key 6b: The analyst is on the Supervisory Board/Board of Directors of the company they cover.

RECOMMENDATIONS, RATINGS AND EVALUATION METHODOLOGY Company Date Rec. Company Date Rec. Company Date Rec. ABIBB 17/03/2016 Restricted DAIGR 04/02/2016 Marketweight SABLN 15/10/2015 Marketweight ABIBB 29/01/2016 Marketweight DAIGR 29/10/2015 Restricted Overview of our ratings You will find the history of rating regarding recommendation changes as well as an overview of the breakdown in absolute and relative terms of our investment ratings on our website www.disclaimer.unicreditmib.eu/credit-research-rd/Recommendations_CR_e.pdf. Note on the evaluation basis for interest-bearing securities: Recommendations relative to an index: For high grade names the recommendations are relative to the "iBoxx EUR Benchmark" index family, for sub investment grade names the recommendations are relative to the "iBoxx EUR High Yield" index family. Marketweight: We recommend having the same portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is equal to the total return of the index. Overweight: We recommend having a higher portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is greater than the total return of the index. Underweight: We recommend having a lower portfolio exposure in the name as the respective iBoxx index. We expect that the average total return of the instruments of the issuer is less than the total return of the index. Outright recommendations: Hold: We recommend holding the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is equal to the yield. Buy: We recommend buying the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is greater than the yield. Sell: We recommend selling the respective instrument for investors who already have exposure. We expect that the total return of the instruments of the issuer is less than the yield. We employ three further categorizations for interest-bearing securities in our coverage: Restricted: A recommendation and/or financial forecast is not disclosed owing to compliance or other regulatory considerations such as a blackout period or a conflict of interest.

8 April 2016



Coverage in transition: Due to changes in the research team, the disclosure of a recommendation and/or financial information are temporarily suspended. The interest-bearing security remains in the research universe and disclosures of relevant information will be resumed in due course. Not rated: Suspension of coverage. Trading recommendations for fixed-interest securities mostly focus on the credit spread (yield difference between the fixed-interest security and the relevant government bond or swap rate) and on the rating views and methodologies of recognized agencies (S&P, Moody’s, Fitch). Depending on the type of investor, investment ratings may refer to a short period or to a 6 to 9-month horizon. Please note that the provision of securities services may be subject to restrictions in certain jurisdictions. You are required to acquaint yourself with local laws and restrictions on the usage and the availability of any services described herein. The information is not intended for distribution to or use by any person or entity in any jurisdiction where such distribution would be contrary to the applicable law or provisions. If not otherwise stated daily price data refers to pre-day closing levels and iBoxx bond index characteristics refer to the previous month-end index characteristics. Coverage Policy A list of the companies covered by UniCredit Bank is available upon request. Frequency of reports and updates It is intended that each of these companies be covered at least once a year, in the event of key operations and/or changes in the recommendation.

SIGNIFICANT FINANCIAL INTEREST UniCredit Bank AG and/or other related legal persons with them regularly trade shares of the analyzed company. UniCredit Bank AG and/or other related legal persons may hold significant open derivative positions on the stocks of the company which are not delta-neutral. UniCredit Bank AG and/or other related legal persons have a significant financial interest relating to the analyzed company or may have such at any future point of time. Due to the fact that UniCredit Bank AG and/or any related legal person are entitled, subject to applicable law, to perform such actions at any future point in time which may lead to the existence of a significant financial interest, it should be assumed for the purposes of this information that UniCredit Bank AG and/or any related legal person will in fact perform such actions which may lead to the existence of a significant financial interest relating to the analyzed company. Analyses may refer to one or several companies and to the securities issued by them. In some cases, the analyzed companies have actively supplied information for this analysis.

INVESTMENT BANKING TRANSACTIONS The analyzed company and UniCredit Bank AG and/or any related legal person concluded an agreement on services in connection with investment banking transactions in the previous 12 months, in return for which the Bank and/or such related legal person received a consideration or promise of consideration or intends to do so. Due to the fact that UniCredit Bank AG and/or any related legal person are entitled to conclude, subject to applicable law, an agreement on services in connection with investment banking transactions with the analyzed company at any future point in time and may receive a consideration or promise of consideration, it should be assumed for the purposes of this information that UniCredit Bank AG and/or any related legal person will in fact conclude such agreements and will in fact receive such consideration or promise of consideration.

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UniCredit represents that: except for the potential conflicts of interest listed under the heading “Potential Conflicts of Interest” above, UniCredit, its controlled companies, controlling companies or companies under common control (the “UniCredit Group”) are not in a condition that may impact on the impartiality of this report or that may constitute a conflict of interest, including but not limited to the following: (i) the UniCredit Group does not hold material equity interests in the companies that are the object of this report; (ii) the companies that are the object of this report do not hold material equity interests in the UniCredit Group; (iii) the UniCredit Group does not have material financial or commercial interests in the companies or the securities that are the object of this report; (iv) the UniCredit Group is not involved in the acquisition, sale and/or trading of the securities that are the object of this report; and (v) the UniCredit Group does not receive compensation for services rendered to the companies that are the object of this report or to any related parties of such companies. 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This document does not constitute an offer or solicitation to any person to whom it is unlawful to make such an offer or solicitation. Notice to investors in Ivory Coast: The information contained in the present report have been obtained by Unicredit Bank AG from sources believed to be reliable, however, no express or implied representation or warranty is made by Unicredit Bank AG or any other person as to the completeness or accuracy of such information. All opinions and estimates contained in the present report constitute a judgement of Unicredit Bank AG as of the date of the present report and are subject to change without notice. They are provided in good faith but without assuming legal responsibility. This report is not an offer to sell or solicitation of an offer to buy or invest in securities. Past performance is not an indicator of future performance and future returns cannot be guaranteed, and there is a risk of loss of the initial capital invested. 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8 April 2016



Notice to New Zealand investors: This report is intended for distribution only to persons who are “wholesale clients” within the meaning of the Financial Advisers Act 2008 (“FAA”) and by receiving this report you represent and agree that (i) you are a “wholesale client” under the FAA (ii) you will not distribute this report to any other person, including (in particular) any person who is not a “wholesale client” under the FAA. This report does not constitute or form part of, in relation to any of the securities or products covered by this report, either (i) an offer of securities for subscription or sale under the Securities Act 1978 or (ii) an offer of financial products for issue or sale under the Financial Markets Conduct Act 2013. Notice to Omani investors: This communication has been prepared by UniCredit Bank AG. UniCredit Bank AG does not have a registered business presence in Oman and does not undertake banking business or provide financial services in Oman and no advice in relation to, or subscription for, any securities, products or financial services may or will be consummated within Oman. The contents of this communication are for the information purposes of sophisticated clients, who are aware of the risks associated with investments in foreign securities and neither constitutes an offer of securities in Oman as contemplated by the Commercial Companies Law of Oman (Royal Decree 4/74) or the Capital Market Law of Oman (Royal Decree 80/98), nor does it constitute an offer to sell, or the solicitation of any offer to buy non-Omani securities in Oman as contemplated by Article 139 of the Executive Regulations to the Capital Market Law (issued vide CMA Decision 1/2009). This communication has not been approved by and UniCredit Bank AG is not regulated by either the Central Bank of Oman or Oman’s Capital Market Authority. Notice to Pakistani investors: Investment information, comments and recommendations stated herein are not within the scope of investment advisory activities as defined in sub-section I, Section 2 of the Securities and Exchange Ordinance, 1969 of Pakistan. Investment advisory services are provided in accordance with a contract of engagement on investment advisory services concluded with brokerage houses, portfolio management companies, non-deposit banks and the clients. The distribution of this report is intended only for informational purposes for the use of professional investors and the information and opinions contained herein, or any part of it shall not form the basis of, or be relied on in connection with or act as an inducement to enter into, any contract or commitment whatsoever. Notice to Polish Investors: This document is intended solely for professional clients as defined in Art. 3.39b of the Trading in Financial Instruments Act of 29 July 2005 (as amended). The publisher and distributor of the document certifies that it has acted with due care and diligence in preparing it, however, assumes no liability for its completeness and accuracy. This document is not an advertisement. It should not be used in substitution for the exercise of independent judgment. Notice to Serbian investors: This analysis is only for distribution to professional clients (profesionalni klijenti) as defined in article 172 of the Law on Capital Markets. Notice to UK investors: This communication is directed only at clients of UniCredit Bank who (i) have professional experience in matters relating to investments or (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations, etc.”) of the United Kingdom Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or (iii) to whom it may otherwise lawfully be communicated (all such persons together being referred to as “relevant persons”). This communication must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates is available only to relevant persons and will be engaged in only with relevant persons. CR e 8

8 April 2016



UniCredit Research* Erik F. Nielsen Group Chief Economist Global Head of CIB Research +44 207 826-1765 [email protected]

Dr. Ingo Heimig Head of Research Operations +49 89 378-13952 [email protected]

Cross Asset Research

Economics & FI/FX Research European Economics Marco Valli, Chief Eurozone Economist +39 02 8862-0537 [email protected]

Dr. Andreas Rees, Chief German Economist +49 69 2717-2074 [email protected] Stefan Bruckbauer, Chief Austrian Economist +43 50505-41951 [email protected] Tullia Bucco, Economist +39 02 8862-0532 [email protected] Edoardo Campanella, Economist +39 02 8862-0522 [email protected]

Dr. Loredana Federico, Economist +39 02 8862-0534 [email protected] Dr. Tobias Rühl, Economist +49 89 378-12560 [email protected] Chiara Silvestre, Economist [email protected] Dr. Thomas Strobel, Economist +49 89 378-13013 [email protected] Daniel Vernazza, Ph.D., Lead UK Economist +44 207 826-7805 [email protected]

US Economics Dr. Harm Bandholz, CFA, Chief US Economist +1 212 672-5957 [email protected]

EEMEA Economics & FI/FX Strategy Lubomir Mitov, Chief CEE Economist +44 207 826-1772 [email protected] Dan Bucşa, Economist +44 207 826-7954 [email protected] Dumitru Vicol, Economist +44 207 826-6081 [email protected]

Global FI Strategy Michael Rottmann, Head, FI Strategy +49 89 378-15121 [email protected] Dr. Luca Cazzulani, Deputy Head, FI Strategy +39 02 8862-0640 [email protected]

Chiara Cremonesi, FI Strategy +44 207 826-1771 [email protected] Alessandro Giongo, FI Strategy +39 02 8862-0538 [email protected] Elia Lattuga, FI Strategy +44 207 826-1642 [email protected] Kornelius Purps, FI Strategy +49 89 378-12753 [email protected] Herbert Stocker, Technical Analysis +49 89 378-14305 [email protected]

Global FX Strategy Dr. Vasileios Gkionakis, Global Head, FX Strategy +44 207 826-7951 [email protected] Kathrin Goretzki, CFA, FX Strategy +44 207 826-6076 [email protected] Kiran Kowshik, EM FX Strategy +44 207 826-6080 [email protected]

Roberto Mialich, FX Strategy +39 02 8862-0658 [email protected]

Cross Asset Strategy Dr. Philip Gisdakis, Head +49 89 378-13228 [email protected] Marino Bucher, Technical Analysis +49 89 378-18148 [email protected] Dr. Tammo Greetfeld, Equity Strategy +49 89 378-18361 [email protected] Jochen Hitzfeld, Commodity Strategy +49 89 378-18709 [email protected]

Christian Stocker, CEFA, Equity Strategy +49 89 378-18603 [email protected]

Credit Strategy & Structured Credit Research Dr. Philip Gisdakis, Head Credit Strategy +49 89 378-13228 [email protected]

Dr. Christian Weber, CFA, Deputy Head Credit Strategy +49 89 378-12250 [email protected] Dr. Tim Brunne Quantitative Credit Strategy +49 89 378-13521 [email protected]

Holger Kapitza Credit Strategy & Structured Credit +49 89 378-28745 [email protected] Dr. Stefan Kolek EEMEA Corporate Credits & Strategy +49 89 378-12495 [email protected]

Manuel Trojovsky Credit Strategy & Structured Credit +49 89 378-14145 [email protected]

Publication Address

UniCredit Research Corporate & Investment Banking UniCredit Bank AG Arabellastrasse 12 D-81925 Munich [email protected]

Bloomberg UCGR Internet www.research.unicredit.eu

*UniCredit Research is the joint research department of UniCredit Bank AG (UniCredit Bank), UniCredit Bank AG London Branch (UniCredit Bank London), UniCredit Bank AG Milan Branch (UniCredit Bank Milan), UniCredit Bank New York (UniCredit Bank NY), UniCredit Bulbank, Zagrebačka banka d.d., UniCredit Bank Czech Republic and Slovakia, Bank Pekao, ZAO UniCredit Bank Russia (UniCredit Russia), UniCredit Bank Romania. XA 30

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