Forex Outlook

Sept. 24, 2016 (Commerzbank AG) – China’s state-owned enterprises – Ways out of zombification?

China’s state-owned enterprises are on a borrowing binge and are depriving private companies of resources. We take a closer look on SOEs and show that central and local government will not loosen their control of these companies significantly for economic reasons alone. Far-reaching reforms of the sector are not to be expected with the result that growth-inhibiting sclerosis is likely to strengthen.

Further topics:

  • Forecast changes: ECB to cut depo rate later On our regular monthly forecast meeting we slightly adjusted the ECB forecast. We now expect the ECB to cut the deposit interest only in March 2017 and not already at the end of 2016. After all, it will take longer until the ECB will revise its projection of rising core inflation down. Thus, the euro is set to appreciate more slowly.
  • Meeting of oil producers – much ado about nothing At the oil producers’ meeting in Algiers next week, there is unlikely to be a voluntary limit on production. We have lowered our price forecast accordingly.

Outlook for the week of 26 to 30 September 2016

  • Economic data: The euro zone’s headline inflation rate is about to gradually increase. In the US, core inflation is slowly drawing nearer to target.
  • Bond market: We expect 10y Bund yields to test the lower boundaries of their well-established sideways range while volatility is grinding lower again.
  • FX market: The central bank decisions of the last few days have led to something of a reshuffle. We have revised several of our exchange rate forecasts.
  • Equity market: We expect the DAX to outperform the S&P 500 as, among other things, auto sales should remain robust and the Brexit vote should have only limited impact on German GDP growth.
  • Commodity market: Oil prices should drop if, as we expect, the meeting of leading oil producers fails to produce any results. Metal prices can be expected to tread water next week.


September 17, 2016 (Commerzbank AG) – Fed – Too late again?

The Fed is likely to sit tight again at its meeting next week, but will hike rates only in December. Next year, it will also act very slowly, risking a bout of asset price inflation. In fact, private households’ assets in relation to their incomes are as high as during the times of the real estate bubble.

Further topics:

  • BoJ: Turning even more negative? While we do not expect any change in monetary policy, in the medium-term another rate cut seems likely. With the BoJ already holding more than one third of Japanese government bonds, increasing bond purchases has its limits.

Outlook for the week of 19 to 23 September 2016

  • Economic data: Euro zone PMIs should have hardly changed versus August indicating that the euro zone economy will pick up only moderately in the final quarter of 2016.
  • Bond market: The spike in bond yields should be a unique opportunity to buy 10y Bunds at a positive yield. Regarding near-term market sentiment, next week’s Bank of Japan policy meeting could be more important than the Fed.
  • FX market: The BoJ is likely to dash hopes of further significant monetary policy easing, thus adding to the downward pressure on USD-JPY. As regards USD exchange rates, the Fed’s long-term forecasts will be crucial.
  • Equity market: We expect the Fed to increase interest rates by 75bp by end-2017, which should be particularly negative for the share prices of German companies with strong interest rate sensitivity due to their higher debt levels.
  • Commodity market: As long as hopes of production caps remain alive ahead of the meeting of oil producers in Algiers in the week after next, the price is unlikely to slide below USD45. The gold price may receive some impetus from higher demand from Asia.

September 10, 2016 (Commerzbank AG) – Secular stagnation?

Many economists believe that poor economic growth is due to structurally weak demand and label it ‘secular stagnation’. Hence, they call for easy monetary and fiscal policy. We illustrate, however, that the sluggish recovery is above all due to slower population growth and hesitant balance-sheet adjustment. This is true, above all, of the euro zone whose economic problems are at risk of becoming chronic, implying that the ECB will be tempted to stick to an easy monetary stance for many more years.

Further topics:

  • Brexit: Where do we stand now? Eleven weeks after the UK Brexit vote we provide an update of the debate.
  • USA: Strong growth in the third quarter While US sentiment indicators have deteriorated of late, the economy is likely to grow by more than 3% in the third quarter.
  • India: Modi has finally delivered

India: Modi has finally delivered

Now that the Upper House has approved a uniform national GST, prime minister Modi has realised his first major reform.

Outlook for the week of 12 September to 16 September 2016

• Economic data: US economic data for August are unlikely to be as good as most July indicators.

• Bond market: Ten-year Bund yields are likely to remain in their tight sideways range of 0.0% to -0.1%.

• FX market: As the market remains sceptical regarding a rapid Fed rate hiking cycle, the upside potential for the dollar remains limited for the time being.

• Equity market: Earnings expectations of German companies are likely to keep rising only slowly in the quarters ahead.

• Commodity market: Speculation about production ceilings at the meeting of major oil producing countries are currently standing in the way of a fall in oil prices.

September 4, 2016 (Commerzbank AG) – ECB Council meeting: Dr Draghi to extend the therapy

Eleven weeks after the Brexit referendum, the ECB should by now have gathered enough information for a reassessment of the situation. It may well lower its projections for growth and core inflation somewhat. In this case, it is also quite possible that the council will decide next week to extend its bond buying programme beyond March 2017. It would then presumably also ease the current restriction which requires it to buy only those bonds with yields above the deposit rate.

Further topics:

Fed: When hawks cackle …

Fed leaders have recently demonstrated that they stand united and key policymakers are trying to keep the option of a rate hike open for September. However, data will remain decisive and today’s employment report should play an important role, but we maintain that December is the most likely time for the next rate hike.

Outlook for the week of 5 to 9 September 2016

• Economic data: German manufacturing is likely to have started the third quarter with a decline in output, and orders in July are unlikely to signal any improvement on the horizon. In the USA, the non-manufacturing PMI probably dipped in August but should continue to signal solid growth in the service sector.

• Bond market: Unless there is a big positive surprise in today’s US payrolls, 10y Bund yields will likely keep trading in a tight -0.1%-0% band, although next week’s ECB QE update may test the upper yield boundary.

• FX market: The US employment report is the key event for FX markets in the days ahead. But given market scepticism regarding the Fed’s medium-term strategy, the dollar is unlikely to react much, even if the report surprises to the upside.

• Equity market: German companies continue to feel the pinch from weaker global growth. In order to maintain or further raise their earnings margins, they can be expected to continue with additional restructuring and to consider take-overs and joint ventures. Investors are advised to overweight companies with stronger earnings momentum.

• Commodity market: Oil prices should retreat a little next week as fresh forecasts by the US Energy Information Administration are likely to fuel concern about renewed market oversupply, although downside is likely to be limited by the upcoming meeting of oil producers at the end of the month

August 27, 2016 (Commerzbank AG) – Merkel: “Yes, we can!” – one year on

A year ago, on 31 August 2015, German Chancellor Merkel made her now famous remark regarding the refugee crisis, which in English compares to President Obama’s “Yes, we can”. On the anniversary of her proclamation, we are analysing the economic impact of the large numbers of refugees. How many have actually reached Germany, and how many family members can be expected to follow? How is integration on the labour market progressing, and what does it mean for Germany’s long-term growth prospects?

Further topics:

US: Investment spending to pick up? US private investments have been falling for three consecutive quarters. However, companies will soon have to start replenishing their inventories, while the dramatic slump in oil investments appears to have bottomed out. Moreover, the residential construction outlook remains favourable.

Outlook for the week of 29 August to 2 September 2016

Economic data: Following two extraordinarily sound US labour market reports, we are looking for slightly weaker – but still solid – data in August.

Bond market: The downtrend in peripheral spreads may pause near-term with next week’s confidence votes in Spain possibly paving the way for more long-end supply, budget and rating jitters on the rise in Portugal and the important referendum in Italy looming in October.

FX market: Both Fed Chair Janet Yellen and BoJ Governor Haruhiko Kuroda are likely to disappoint the markets and thus increase the downward pressure on USD-JPY.

Equity market: In the short-term, the quite optimistic DAX sentiment is a point in favour of stagnating rather than rising share prices.

Commodity market: In our view, only in the gold market is there a good chance of rising prices next week.

August 19, 2016 (Commerzbank AG) – ECB, China, Fed: Where are the risks?

At our monthly forecast meeting we discussed our ECB forecast in some depth. After all, ECB members are beginning to talk about the negative fall-out for banks from their interest-rate policy. Nevertheless, we still envisage a further cut in the deposit rate towards the end of the year, whereby the ECB will no doubt exempt the banks from penalties to some extent. We also reiterated our cautious view of China. One of the main problems here is that Chinese state-owned enterprises are continuing to markedly raise their investment, despite a slump in earnings. Regarding the US, we have lowered our growth forecast for 2016 from 1.8% to 1.5% – yet another reason why the Fed will probably only raise rates towards the end of the year.

Outlook for the week of 22 to 26 August 2016

Economic data: Next week’s forthcoming euro zone PMIs as well as the German ifo business climate should keep moving sideways. Back in July, sentiment indicators showed no reaction to the Brexit vote either.

Bond market: Investors may ponder on any possible surprises by Yellen’s speech due next Friday. Until then, 10y Bund yields look cornered in a tight 0% to -10% band.

FX market: At the end of next week, the central bank elites will convene for their annual meeting in Jackson Hole, Wyoming. Yet we do not expect any USD-positive signals for now and have adjusted some forecasts.

Equity market: Reported Q2 earnings of DAX and MDAX companies surprised on the positive side by and large. This ongoing stabilisation should provide fundamental support to the recovery of the German equity market.

Commodity market: The oil market rally should run out of breath next week. After all, supply currently seems more ample again.

Aug. 17, 2016 (Commerzbank AG) – Will it be Trump?

According to the latest polls Donald Trump’s approval rating has fallen behind that of Hillary Clinton. But analysis of the US electoral system indicates that Mr Trump does stand a chance. Indeed, the presidential election will be decided in some fiercely contested states where the outcomes cannot be predicted with certainty. Less well known candidates may pull crucial votes away from Mr Trump or Mrs Clinton – a factor which cost Democratic contender Al Gore victory in 2000. We also demonstrate why Mr Trump cannot be compared to former Republican US president Ronald Reagan, who at the beginning of the 1980’s rescued the US from a severe economic crisis.

Further topics:

Spain: Breakthrough or third round? The odds that Spain will be able to form a government are on the rise, seven weeks after the second election. Ciudadanos has signalled its conditional willingness to support Rajoy, which puts the onus on the socialists to co-operate. However, a third election within a year remains a possibility.

Outlook for the week of 15 to 19 August 2016

Economic data: In the US, the renewed decline in oil prices will have depressed the July inflation rate. In Germany, the ZEW index has likely recovered which would suggest that the uncertainty among analysts following the Brexit vote did not last very long.

Bond market: The hunt for yield will remain the major theme on European bond markets in the coming week. Bunds should remain in their narrow trading ranges for the time being, with the persistent scarcity discussion offsetting the notable decline in €QE purchases.

FX market: With major central banks silent at the moment, the market is looking at economic data for clues about the Fed’s further interest rate path.

Equity market: The persistent decline in long-term bond yields has both positive and negative side effects. We maintain our strategy of turning bullish on the DAX only during periods when the VDAX is at 25 to 30 and not chase rallies at current levels.

Commodity market: With oil markets likely to lack “major news” next week, the US Department of Energy weekly report should receive increased attention. Any decline in oil inventories will likely drive oil prices higher, especially since speculative net long positions have been significantly reduced.

Aug. 6, 2016 (Commerzbank AG) – Germany – Housing market tensions on the rise

The housing boom in Germany is looking increasingly like a bubble as house prices steadily decouple from the fundamental factors. The driving force is very expansionary ECB monetary policy, which is unlikely to change much in the foreseeable future. That said, mortgage interest rates will probably not drop much further and experience from the US shows that the risk of a sharp correction increases in the medium term against the backdrop of rising prices. In addition the clear increase in construction orders points to higher residential investment. As a result, housing shortages should abate in a number of regions.

Outlook for the week of 8 to 12 August 2016

  • Economic data: Next week the focus will be on US retail sales for July. These should highlight that US consumers are still driving economic growth. In Germany, the release of Q2 GDP should show that the economy expanded at a much slower rate than in the first three months of the year. Page 7
  • Bond market: The impetus from the data and supply will slow markedly next week but markets may remain choppy. ECB QE purchases look set to slow markedly in August as the buffer from front-loading is significantly larger than last year. This should limit the downside in yields near-term while the underlying scarcity still favours SSAs over sovereigns. Page 10
  • FX market: The US dollar has dropped significantly after the disappointing US GDP figures. A solid US labour market report today is unlikely to be enough to reverse this trend; the Fed will probably only increase interest rates further after a long series of decent US data. Page 11
  • Equity market: Flattening yield curves dent the outlook for global equity markets, with the banking sector suffering in particular. But flat yield curves are not a recessionary indicator due to the fact they are distorted by the unprecedented asset buying by central banks. Page 12
  • Commodity market: Oil prices should stabilise next week as weekly US data and the longer-term outlook of energy agencies should dampen fears of further substantial oversupply. The gold price should move sideways, as should most agricultural prices. Page 13

July 31, 2016 (Commerzbank AG) – What’s left of the Brexit shock?

Many economists have sharply lowered their forecasts for Germany and the euro zone after the British vote to leave the EU, being afraid of an uncertainty shock. But there is scant evidence so far of any uncertainty shock in the rest of the EU. Of course, weaker economic growth in the UK, as an important trading partner, will be felt in Germany and across the euro zone but the effect is likely to be much weaker than many forecasts presently assume. We outline the indicators which investors should look out for in the weeks ahead.

Further topics:

BoE Preview: Action stations

After the reduction in banks’ countercyclical capital buffer earlier this month, the MPC is expected to follow up with a cut in Bank Rate and we look for a reduction of 25 bps next week, taking it to 0.25%. But more QE might have to wait. Page 5

Outlook for the week of 1 to 5 August 2016

  • Economic data: The US employment report for July, due out next week, should support the Fed’s stance of leaning cautiously towards higher rates – which should also be vindicated by the release of PMI data. In Germany, orders likely continued their sideways trend. Page 8
  • Bond market: The focus next week will shift to the BoE. The most bullish of easing expectations are unlikely to be fully met but any potential disappointment should not have large negative spillovers into Bunds and US Treasuries. US Treasuries face fundamental headwinds from the ISM index and the labour market report for July. Page 11
  • FX market: After the Fed and BoJ decision the Bank of England meeting will move the FX market next week. A 25bp rate cut is very much expected. Page 12
  • Equity market: The German (nominal) export boom is over as the impact of the marked euro depreciation through to mid-2015 has faded. Corporate earnings growth should remain relatively moderate, which adds to the drag on the German equity market. Page 13
  • Commodity market: Commodity prices are moving in different directions. While gold and platinum prices are climbing, oil prices have been falling for weeks due to higher inventories and US production trends. By contrast gold is being driven by the bond market, which in turn is driving platinum metals which are also benefiting from decent car sales. Page 14

July 24, 2016 (Commerzbank AG) – Understanding the Fed: Four lessons for investors

The Fed will not increase interest rates next week. But after the toing and froing in recent communications, the course ahead is not that clear. We illustrate what lessons are to be learned from the Fed’s tactics. Firstly, we should not read too much into the FOMC statement. Secondly, public remarks by most regional Fed presidents can be safely ignored, the decisive figures are the board members. Third, it all depends on the data and fourth, the Fed only raises interest rates when markets are calm. We still expect a rate hike towards the end of the year.

Further topics:

Turkey: The economy after the attempted coup

Political uncertainty after the failed coup attempt will have economic consequences, and we have further reduced our growth forecasts. Page 5

Outlook for the week of 25 to 29 July 2016

  • Economic data: The euro zone economy probably expanded in Q2 at a considerably slower pace than in the first three months of this year. This will not please the ECB, nor will the renewed decline of the core inflation rate in July. The US economy, in contrast, regained momentum in Q2 after the weak winter half-year. Page 8
  • Bond market: With Fed rate hike speculation having returned and the ECB poised to reassess its QE programme in September, this leaves the long-end of the Bund curve vulnerable. We see scope for the latest steepening of the yield curve to extend. Page 11
  • FX market: In the coming week, the Fed and the Bank of Japan will convene for their policy meetings. These will essentially determine further developments in USD and JPY exchange rates. Page 12
  • Equity market: Even those DAX companies which have considerable UK exposure have seen a sharp price recovery following the Brexit decision. With negative Brexit effects only expected on a medium- to long-term perspective, if at all, the DAX should continue fluctuating around the 10,000 mark in the near-term. Page 13
  • Commodity market: In the absence of new data and ever decreasing activity among market participants in mid-summer, commodity prices are likely to move sideways. Gold prices will continue to be impacted by greater risk appetite among investors. Page 14