Economic Research

Week in Focus
DAX: Positive surprise in the second half of the year
Disappointing economic indicators, the unresolved debt crisis in the euro zone and rising interest rates in the emerging markets have combined to generate bearish equity market sentiment. But it is precisely because markets are so pessimistic indeed, overly so that we expect the DAX to reach new all-time highs in the second half of this year. Page 2 German equities: Is the DAX on its way up?
DAX, daily data
7600 7400 7200 7000 6800 6600 6400 Jan-11

24 June 2011

Feb-11

Mrz-11

Apr-11

Mai-11

Jun-11

Source: Bloomberg, Commerzbank Research

Product Idea EUR-USD risk reversal: A better indicator of the sovereign debt crisis than the spot exchange rate are risk reversals. Since we expect the aid package for Athens to be passed, we recommend buying a six-month (25-delta) risk reversal in EUR-USD. Page 5

Outlook for week of 27 June to 1 July

Economic data: Following a massive drop in May, the ISM index for manufacturing looks set to take another plunge in June, possibly even below the level of 50, which would signal a contraction in activity. Page 6 Bond market: We expect that risk premiums on Italian, Spanish and Belgian government bonds will decline in the weeks ahead whilst a reversal in the safe haven effect could produce Page 10 a moderate rise in Bund yields. FX market: All the signs are that there will be a stalemate between the euro and the dollar in the coming days. This implies sideways trading with only slight upside bias in EUR-USD. Page 11 Equity market: The consolidation phase of the DAX that had continued for several months should now come to an end. Page 12

Chief Economist Dr Jrg Krmer

+49 69 136 23650 joerg.kraemer@commerzbank.com

Managing Editor Peter Dixon

+44 20 7475 4806 peter.dixon@commerzbank.com

research.commerzbank.com

For important disclosure information please see end of this document

DAX: Positive surprise in the second half of the year

Andreas Hrkamp Tel. +49 69 136 45925

Disappointing economic indicators, the unresolved debt crisis in the euro zone and rising interest rates in the emerging markets have combined to generate bearish equity market sentiment in the first half of 2011. But it is precisely because markets are overly pessimistic that we expect attractive DAX valuations to boost the index to new all-time highs, around 8,200, in the second half of this year. The first half of 2011 has been disappointing for many equity investors. No convincing resolution has yet been found to the debt crisis in the euro zone, which has resulted in the spread on tenyear Spanish bonds relative to German bonds rising from 170 to 270 basis points in recent weeks. The recovery in the US economy has stalled and the collapse in the manufacturing ISM index from 60.4 to 53.5, in particular, has unsettled many investors. Against a background of rising inflation, the ECB switched direction in its interest rate policy in the first half of the year and central banks in emerging economies such as Brazil, China and India have ratcheted up their key lending rates significantly. In addition, the earthquake and subsequent nuclear catastrophe in Japan in March represented yet another exogenous shock for the world's equity markets.

DAX: three reasons for a new DAX all-time high in 2011

It will probably surprise investors to hear that we are sticking to our optimistic DAX forecast despite this long list of negative trends in the first half of 2011. We have identified three reasons why the DAX will register strong gains in the second half of the year: the impressively strong earnings of DAX companies, the low p/e ratio currently at 10x and the excessive degree of investor pessimism that now pervades the market.

Reason 1: DAX earnings better than expected despite the euro zone crisis
Despite the ongoing debt crisis in the euro zone and the faltering recovery of the US economy, the earnings of DAX companies were surprisingly positive in the first half of the year. In our stock market forecast for 2011, we predicted that the aggregate earnings expectations for DAX companies for the year 2011 would be in the region of 640. But thanks to the impressive Q1 earnings reports, DAX earnings expectations are now already at the significantly higher level of 660 for 2011 (chart 1). DAX 12-month forward earnings expectations, which we use in our valuation models, have thus improved by a further 13 per cent from 640 to 720 since the beginning of the year. The DAX earnings trend is now significantly above the pre-crisis level of 660 that was achieved at the beginning of 2008 (chart 2). CHART 1: DAX earnings expectations are rising
DAX earnings expectations for 2011 and 2012 in index points

CHART 2: DAX earnings trend at an all-time high

DAX earnings expectations (12 months) in index points

800 750 700 650 600 550 500 Jan-10 Apr-10 Jul-10 2011
Source: I/B/E/S, Commerzbank Research

800 700 600 500 400 300 200 100 0 1988 1991 1994 1997 2000 2003 2006 2009
Source: I/B/E/S, Commerzbank Research

Oct-10

Jan-11 Apr-11

2012

research.commerzbank.com

24 June 2011

The reason for this surprisingly positive earnings backdrop for the German equity market is revealed by the OECD's regional leading indicators. The trend for the OECD indicator for the global economy has been consistently upward in the first half of the year thanks to strong growth in Asia, although the indicators for the euro zone and for the US were disappointing (chart 3). Consequently, it is the DAX companies in sectors that have a strong presence in Asia that are underpinning the positive earnings trend. For the German automotive sector, 2011 profit forecasts have been revised upward by 18 per cent since the beginning of the year. For the chemicals sector the upward revision is 19 per cent and for the industrials sector 18 per cent (chart 4). Due to its cyclical structure, the DAX benefits strongly from above-average growth in countries such as Brazil, China, India, Indonesia, Mexico and Russia. Given the continuing expansionary monetary policy in the euro zone and the US, combined with robust growth in the emerging markets, we find the scenario painted by the 'equity bears' of a negative turnaround in the DAX earnings trend after just two years, to be improbable. Over the past 25 years, each period of rising earnings for DAX companies has lasted significantly longer: from 1983 to 1990 (eight years), from 1993 to 2000 (eight years) and from 2003 to 2008 (six years). In the second half of the year we expect growing revenues in Asia to further drive up earnings in the automotive, chemicals and industrials sectors. However, these optimistic earnings expectations for the DAX could be threatened by a scenario in which the OECD leading indicator for Asia start to fall in 2012 as a result of rising interest rates.

Reason 2: DAX priced more attractively than at beginning of the year

Although DAX earnings expectations have risen by 13 per cent since the start of the year, latent risk factors such as the euro zone debt crisis, the shaky US recovery, the earthquake in Japan and the unrest in North Africa have meant that there has been no corresponding rise in share prices. Consequently, the DAX p/e ratio has fallen from 11x at the start of the year to 10x, a level last seen in August 2010, amid fears of a double-dip recession in the US, and in March 2011, following the earthquake in Japan (chart 5). With the benefit of hindsight, these were both profitable times at which to increase exposure to DAX positions. Following the strong earnings reported for the first quarter, we have raised our dividend forecasts for several DAX companies. We now believe that the total dividend payout of DAX companies for the current financial year will rise from 26.0 billion to a new record high of 28.1 billion. This would give the DAX a dividend yield of 3.5 per cent 50 basis points higher than the yield on ten-year German government bonds. Over the past 20 years, by contrast, the DAX dividend yield has, on average, been more than 200 basis points lower than the yield on Bunds. Furthermore, the dividend yield for many DAX companies is now higher than the yield on their corporate bonds. These attractive valuation ratios of DAX shares are one of the main reasons behind our forecast that the DAX will not suffer a correction of significantly more than 10 per cent in the course of 2011. CHART 3: Asia driving DAX earnings
OECD leading indicators, trend, indexed, mid-2006 = 100

CHART 4: Automotive, chemicals & industrials benefit

Earnings expectations for 2011, indexed, end of Dec = 100

150 140 130 120 110 100 90 80 2006 2007 Euro zone 2008 US 2009 2010 Asia 2011 World

120 115 110 105 100 95 90 85 80 Dec-10

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Auto Industrials
Source: I/B/E/S, Commerzbank Research

Chemicals Utilities

Source: OECD, Commerzbank Research

24 June 2011

research.commerzbank.com

CHART 5: P/E has fallen from 11x to 10x since January

DAX: price/earnings ratio (12-month forward)

CHART 6: DAX dividend yield attractive at 3.5%

DAX dividend yield vs. German bund yield (%)

35 30 25 20 15 10 5 1988

10 8 6 4 2 0 1988

1991

1994

1997

2000

2003

2006

2009

1991 1994

1997 2000

2003 2006

2009

DAX dividend yield

Source: I/B/E/S, Factset, Commerzbank Research

Bund yield

Source: I/B/E/S, Commerzbank Research

Reason 3: Investor sentiment has swung from euphoria to pessimism

The reversal of investor sentiment is the third decisive trend behind our optimistic DAX forecast. At the beginning of the year, there was a high level of optimism in the equity markets. The ratio of put to call options on US markets was at its lowest level for several years. Surveys of US private investors revealed that 60 per cent were optimistic and just 20 per cent were pessimistic. However, the constant flow of negative news from southern Europe, North Africa, Japan and, more recently from the US itself, has worn down many of the equity optimists. The ratio of put to call options has now risen to its highest level in several years as many investors look to hedge their equity exposure (chart 7). And in surveys of US private investors, the bears have significantly outnumbered the bulls since the beginning of May (Chart 8).

Offensive DAX strategy will be rewarded in second half of the year

In our optimistic DAX outlook, the high level of investor pessimism is the catalyst for a renewed upturn in the attractively priced DAX. A range of negative trends during the first half of the year have recently started to reverse. The impact of the Japanese earthquake on global supply chains is continuing to diminish; there has been a recent correction in commodity prices; inflation expectations are decreasing and bond yields in the US have fallen. And a new aid package for Greece could push the euro zone debt crisis into the background, at least temporarily. In light of these improving trends, we believe there is a good chance that consistently strong earnings reports by DAX companies in sectors such as automotives, chemicals and industrials that are set to benefit from global growth, will push the DAX index to a new record high of 8,200. CHART 7: Investors look to hedge equity exposures
Ratio of put to call options on US shares (15-day average)

CHART 8: Bears in the majority again

Optimists and pessimists amongst US private investors (%)

1.2 1.1 1.0 0.9 0.8 0.7 0.6 Jun-09

60 50 40 30 20 10 Jan-10

Apr-10

Jul-10 Bears

Oct-10

Jan-11 Bulls

Apr-11

Dec-09

Jun-10

Dec-10

Jun-11

Source: CBoE, Commerzbank Research

Source: AAII, Commerzbank Research

research.commerzbank.com

24 June 2011

Product idea: Buy a EUR-USD risk reversal

Lutz Karpowitz Tel. +49 69 136 42152

Amid the recent exacerbation of the Greek crisis, EUR-USD has managed to avoid stronger downside pressure. A better indicator of the sovereign debt crisis are risk reversals. Since we expect the aid package for Athens to be passed, we recommend buying a six-month (25-delta) risk reversal in EUR-USD. The Greek crisis has intensified in recent weeks. As political tensions within Greece grow, many market participants no longer rule out the non-passage of the new aid package for Athens. After all, euro zone officials have made it clear that there will be no fresh support unless the Greek parliament passes the additional austerity measures. The euro has coped surprisingly well with the recent turmoil surrounding Greece. At levels around 1.44, EUR-USD is trading less than 6 cents away from this years high. Most of all the negative news out of the US (weak economic data, the Feds adherence to its ultra-accommodative policy, problems with an increase in the statutory debt ceiling) have led to a situation where EUR-USD only partially reflects developments in the European sovereign debt crisis. A better indicator of events in Greece are EUR-USD risk reversals. They indicate the price difference for Calls and Puts on EUR-USD. Risk reversals are clearly negative at present, as hedging in EUR-USD is much more expensive to the downside than to the upside. This is a signal that they are pricing the risk of a failure of support for Greece. With Prime Minister George Papandreou having won the confidence vote on Tuesday night, risk reversals have already risen somewhat. However, it remains highly uncertain whether the parliament will eventually approve the new sizeable savings package. The consultations will begin on 29 June and a vote is expected for 30 June. We assume that Papandreou will be successful once again and that the disbursement of the overdue tranche of 12bn will avert Greeces imminent default. The risk reversals would benefit from this and continue rising. Our recommendation for next week is therefore to buy (25-delta) EUR-USD risk reversals. We consider the six-month maturities most attractive as they have more correction potential than the one-month options. But at the same time they are short enough to avoid being adversely affected by general doubts about a long-term resolution to the Greek crisis.

25-delta risk reversals on EUR-USD: Implied vol. in example: -2.70% Maturity: 6 months Strikes: 1.37 (downside); 1.4950 (upside)

24 June 2011

research.commerzbank.com

Preview The week of June 27th to July 1st

Time Region Indicator Period Forecast Survey Last

Monday, 27 June 2011 # 13:30 GER USA Retail sales, volume Personal income Personal spending Core PCE deflator May May May May mom, sa yoy mom, sa mom, sa mom, sa 0.7 2.4 0.4 0.0 0.2 0.7 1.3 0.4 0.1 0.3 0.6 3.6 0.4 0.4 0.2

Tuesday, 28 June 2011

07:00 # 14:00 15:00

GER GER USA

GfK consumer confidence CPI, first state results Case-Shiller house price index Consumer confidence (Conference Board)

Jul Jun Apr Jun

sa mom yoy yoy sa

5.0 0.0 2.2 -4.0 60.0

5.3 0.1 2.3 -4.1 61.7

5.5 0.0 2.3 -3.6 60.8

Wednesday, 29 June 2011 0:50 10:00 JPN EUR Industrial production Economic sentiment indicator Industrial confidence Services confidence Pending home sales Apr Jun Jun Jun May mom, sa yoy sa sa sa mom, sa 5.0 -7.8 105.0 3.5 9.0 2.0 5.5 -6.3 105.1 3.3 9.0 -2.0 1.6 -13.6 105.5 3.9 9.2 -11.6

15:00

USA

Thursday, 30 June 2011 7:45 8:55 9:00 10:00 13:30 FRA GER EUR Consumer spending, real Unemployed M3 Loans HICP, preliminary Initial claims Chicago PMI May Jun May Feb Jun 25 Jun Jun mom yoy mom, k, sa yoy yoy yoy k, sa sa 1.5 0.5 -10 2.1 2.6 2.7 425 53.0 -13 2.1 2.8 54.0 -1.6 1.2 -8 2.0 2.6 2.7 429 56.6

USA

14:45

Friday, 1 July 2011 0:30 JPN Consumer prices Unemployment rate Tankan, situation Tankan, outlook PMI PMI manufacturing, final PMI manufacturing Consumer sentiment (Uni. of Michigan), final ISM manufacturing Total auto sales May May Q2 Q2 Jun Jun Jun Jun Jun Jun yoy sa, % sa sa sa sa sa sa SAAR, m 0.2 4.8 -5 0 51.5 52.0 52.5 71.8 49.0 12.0 0.2 4.8 -7 2 51.5 52.0 52.5 72.0 52.0 12.0 0.3 4.7 6 2 52.0 52.0 (p) 52.1 71.8 53.5 11.76

2:00 9:00 9:30 14:55

CHN EUR GBR USA

15:00 22:00

Source: Bloomberg, Commerzbank Economic Research *Time BST (subtract 5 hours for EDST, add 1 hour for CEST), # = Possible release; mom/qoq/yoy: change to previous period in percent, AR = annual rate, sa = seasonal adjusted, wda = working days adjusted;

= data of highest importance for markets.

research.commerzbank.com

24 June 2011

Economic data preview:

USA: Is the ISM index set to drop below 50?

Dr Christoph Balz Tel. +49 69 136 24889

Following its massive drop in May, the ISM index for manufacturing looks set to take another plunge in June, possibly even below the level of 50, which signals contraction. If this sector of the US economy, which has until recently been very dynamic, were to contract we would see this as a clear indication that growth in the US is set to slow. In Germany, lower petrol prices are acting as a damper on inflation. Going beyond the usual corrections, Mays plunge took the ISM index for manufacturing from 60.4 to 53.5, marking the largest monthly decline in this top-tier US indicator since January 1984. As the economic recovery in the US was largely driven by industrial activity, we view this setback as a serious warning signal. We have already made it clear in the past that the ISM index had risen to fairly high levels when set against other macroeconomic parameters. Not only was it high when viewed against the backdrop of moderate GDP growth, but also looked very robust in the light of slowing corporate earnings trends. In the first quarter, earnings growth slowed to 8% versus the same period a year earlier (chart 9). While this is still a solid increase, the buoyant expansion of the early recovery phase has clearly come to an end. We expect that the ISM index fell further in June, down to 49.0 (consensus: 52.0), as suggested by the notable declines evident in the regional purchasing managers' indices already published by the Philly Fed and New York Fed. Both indices slipped below the boom/bust level of zero, which corresponds to a reading of 50 in the national ISM index (chart 10). Our view that the ISM index is set to tumble further is also supported by the fact that the orders component took an exceptionally marked plunge in May and, at 51.0, came in below the overall index reading of 53.5. In the past, this constellation was followed by a decline in the overall index in two-thirds of the cases. We do not doubt that the post-earthquake disruptions in the supply chain of Japanese companies have left their negative imprint on the ISM. The automotive industry, in particular, has been adversely affected. As producers do not plan to significantly boost output at their US plants before July, the Japan effect is likely still to have weighed on the ISM index in June.

Germany: Consumer prices are stagnating

In our view, German consumer prices in June look set to be unchanged from May, sending the inflation rate down from 2.3% to 2.2% (consensus: 2.3%). On the back of the recent decline in oil prices to under USD 112, petrol prices have come down as well: For one litre of Super, German car owners had to pay less than EUR 1.50, while the EHEC scare which caused a collapse in demand for vegetables, should have dampened food prices.
CHART 9:

USA: Corporate earnings growth losing steam

CHART 10:

USA Regional indicators point to ISM index

ISM index for manufacturing, quarterly average; corporate earnings as stated in the national accounts, change versus previous year in %

below 50
ISM index for manufacturing; average of regional indices (Philly Fed and Empire State)

65 60 55 50 45 40 35 30 2001 2003 2005 2007 2009 2011

50 40 30 20 10 0 -10 -20 -30 -40 ISM (LS) Profits (RS)

40 30 20 10 0 -10 -20 -30 -40 2002

70 65 60 55 50 45 40 35 30 2004 2006 2008 2010 ISM index (RS) regional indices (LS)

Source: Global insight, Commerzbank Research

Source: Global Insight, Commerzbank Research

24 June 2011

research.commerzbank.com

Central Bank Watch (1)

Fed
The chairman of the Federal Reserve Board Ben Bernanke acknowledged stronger than expected headwinds for the economy at his press conference after the 22 June FOMC meeting. He would not exclude that the current slowdown is partly be attributable to more permanent factors. However, the Fed does not yet have a firm understanding of these longer-term factors, in his view. The Fed may have grown more sceptical when it comes to the economic recovery. However, the data are obviously not yet bad enough to justify additional stimulus measures. Bernanke stressed the differences of the current situation to the environment back in August 2010 when he announced QE2. Back then, deflation has been a non-trivial risk, all measures of inflation had been falling. Currently, core inflation is moving up to the Feds comfort zone. Furthermore, the labor market has improved since August last year despite the disappointing May employment report. While Bernanke does not slam shut the door to QE3, the bar for additional measures is very high. This has been our view for quite some time. Thus, our Fed forecast remains unchanged. The first rate hike is unlikely to happen before the second half of 2012. Bernd Weidensteiner +49 69 136 24527 CHART 11: Expected Federal Funds Rate (USD)
1,0 0,8 0,6 0,4 0,2 0,0 current Sep 11 Overnight Index Swaps 22.06.11 Dez 11 Mrz 12 Jun 12 Sep 12

15.06.11

Commerzbank

TABLE 1: Consensus forecast Fed funds rate

Q3 11 Consensus High Low Commerzbank 0.25 1.00 0.25 0.25 Q4 11 0.25 1.50 0.25 0.25 Q2 12 0.50 3.00 0.25 0.25

Source: Bloomberg, Commerzbank Research

ECB
ECBs Stark argued that strong vigilance is "a code word ... which signals that with high probability interest rates will be increased, if necessary". ECBs Bonello, too, said that the bank might raise rates next month. He indicated that the ECB would not widen its interest-rate corridor to 200 bp from 150 bp, as this could increase the volatility of the overnight rate. Probably the corridor could be widened again when financial markets are more normal than they are now, he said. In addition, Bonello talked quite frankly about the ECBs refusal to provide additional measures to support Greece, as in his view the bank had already gone far beyond the call of duty. I would say that the Governing Council has exercised its mandate very flexibly, some people might say too much so. But we have to draw the line somewhere and emphasize that monetary policy is not designed to address the kind of market situation, market tensions that are prevailing today. Because the ECB seemed to do its job so well, there were expectations that the ECB could do more, including in areas that would exceed its remit, Bonello said. He expressed disappointment in government action during the crisis and suggested that in some instances the central bank had been coaxed into additional support by political promises that failed to materialize. Dr Michael Schubert +49 69 136 23700 CHART 12: Expected ECB minimum bid rate (EUR)
3,0 2,5 2,0 1,5 1,0 current Sep 11 Overnight Index Swaps 22.06.11 Dez 11 Mrz 12 Jun 12 Sep 12

15.06.11

Commerzbank

TABLE 2: Consensus Forecasts ECB minimum bid rate

Q3 11 Consensus High Low Commerzbank 1.50 1.75 1.50 1.50 Q4 11 1.75 2.00 1.50 1.75 Q2 12 2.25 2.75 1.50 2.25

Source: Reuters, Commerzbank Research

research.commerzbank.com

24 June 2011

Central Bank Watch (2)

BoE
As expected, the June MPC minutes revealed that the Committee voted 7-2 in favour of leaving rates on hold, with new member, Ben Broadbent, joining the majority in believing inflation is less of a threat than the recently-departed Andrew Sentance. For all the recent speculation that the BoE may embark upon a new round of asset purchases, there is nothing in recent comments suggesting this is actively being considered. Instead, the BoE is merely keeping all options open as it has done since the last round of asset purchases ended in January 2010. On the basis of current data, which shows no second round effects following the recent CPI inflation spike, there is no need for monetary tightening at present, and the markets are only pricing the first 25 bps rate increase in spring 2012. Peter Dixon +44 20 7475 1808 CHART 13: Expected interest rate for 3-month funds (GBP)
2,5 2,0 1,5 1,0 0,5 current Sep 11 Dez 11 Mrz 12 Jun 12 Sep 12 Futures 22.06.11 15.06.11 Commerzbank

Source: Bloomberg, Commerzbank Research

BoJ
Following from the minutes of the May meeting, two BoJ council members stated that it was still important for the Bank to continue supporting the economy. In their view, the need for additional monetary easing is potentially strong. However, the BoJ should consider the appropriate timing to launch additional policy actions by continuing to examine the effect of the measures already implemented. With this in mind, the BoJ announced additional two-year loans for innovative sectors in June totalling JPY 500 bn. The interest rate is 0.1%. In addition, it plans to implement the second tranche of credit aid (around JPY 130 bn) to companies in the earthquake areas at the end of June. Wolfgang Leim +49 69 136 24525 CHART 14: Expected interest rate for 3-month funds (JPY)
1,0 0,8 0,6 0,4 0,2 0,0 current Sep 11 Dez 11 Mrz 12 Futures 22.06.11 15.06.11 Jun 12 Sep 12

Commerzbank

Source: Bloomberg, Commerzbank Research

RBNZ (New Zealand)

As expected, the Reserve Bank of New Zealand did not raise the Official Cash Rate from its crisis-low of 2.5% in June. Nonetheless, Governor Bollard seemed more optimistic about the outlook for the domestic economy, arguing in the statement that a gradual increase in the OCR will be required over the next two years to curb the expected rise in underlying inflation. When lowering rates in early March, Bollard had already made it clear that the RBNZ would quickly remove the pre-emptive reduction once the economy gathers momentum. However, given recent new earthquakes, the central bank is likely to leave rates unchanged in the months ahead. We expect to see a first rate hike to 2.75% by year-end 2011. Wolfgang Leim +49 69 136 24525 CHART 15: Expected interest rate for 3-month funds (NZD)
4,5 4,0 3,5 3,0 2,5 current Sep 11 Dez 11 Mrz 12 Futures 22.06.11 15.06.11 Jun 12 Sep 12

Commerzbank

Source: Bloomberg, Commerzbank Research

24 June 2011

research.commerzbank.com

Bond market preview:

Chances for a change in sentiment

Rainer Guntermann Tel. +49 69 136 87506

A new bailout package for Greece is now within reach and the risks that contagion will spread to other countries in the euro zone appear to have decreased for now. Against this backdrop, we expect that risk premiums on Italian, Spanish and Belgian government bonds are set to decline in the weeks ahead. Over a longer-term horizon, however, spreads may once more approach their recent highs. TABLE 3: Weekly outlook for yields and curves Bunds Yields (10 years) Curve (10 2 years)
Source: Commerzbank Research

US Treasuries Sideways Neutral

Moderately higher Flatter

Outlook for the Bund Future June 27 July 1 Economy Inflation Monetary policy Trend Supply Risk aversion

Risk premiums for euro countries with sub-AAA credit quality have recently risen close to their 2011 highs, led by uncertainties about the course of Greek politics (chart 16). However, after the Greek government survived a confidence vote in Parliament, a new bailout package seems within reach. While this will not help to resolve the countrys structural problems, short-term contagion risks have decreased. In our view, risk premiums on the tier 2 countries Italy, Spain and Belgium are therefore set to decline in the weeks ahead. In parallel, Bund yields should be up moderately, as fears of systemic risks are fading and safehaven premiums are to some extent being priced out. We also believe that short and mediumterm yields will rise at a slightly faster pace than long-term yields as global growth worries will limit the upside potential for yields at the long-end of the curve. In this regard, next weeks US ISM index looks set to provide a tailwind for US Treasuries and Bunds as it is forecast to drop below the critical level of 50. Nonetheless, we do not believe that the relief-driven rally of tier 2 government bonds will be a one-way street. Greece will still have to pass some hurdles to secure the new bailout package, such as pushing the austerity measures through the Greek Parliament next week. Moreover, over a medium-term horizon, risks continue to exist. Talks about the involvement of private creditors are overshadowed by warnings from the rating agencies that they would cut Greeces rating to default, even if private creditors roll over their debt voluntarily. In this case, the ratings of other euro-zone countries and banks might also come under pressure. On top of that, market participants seem concerned that the discussion over a haircut will be back on the agenda at regular quarterly intervals, as the recipient countries are becoming increasingly unwilling to implement the necessary reforms, while support fatigue appears to be growing in the donor countries. At the same time, investors appetite for this volatile asset class might decline. If so, risk premiums and yields would not only remain structurally high but could once more rise close to recent highs later this year.

CHART 16: Is

the trend reversing?

CHART 17:

6% likely to be the critical yield for Spain

Spreads of five-year government bonds over Bunds, in basis points

Ten-year government bond yields, in %

350 300 250 200 150 100 50 0 Jan-10 Apr-10 Jul-10 BE Oct-10 IT Jan-11 Apr-11 SP

13 12 11 10 9 8 7 6 5 4 3 Jan-10

Apr-10

Jul-10 PO

Oct-10 IR

Jan-11

Apr-11 SP

Source: Bloomberg, Commerzbank Research

Source: Bloomberg, Commerzbank Research

10

www.cbcm.com

24 June 2011

FX market preview:
Stalemate between euro and US dollar?

Antje Praefcke

Tel. Tel. +49 69 136 43834 +49 (0) 136 41250 Alexandra Na Park Lutz Karpowitz You Bechtel

The last word has yet to be spoken on the Greece issue. Next week the parliament in Athens will decide about further austerity measures. Some uncertainty therefore remains in the market. Accordingly, euro buyers will probably be on their guard. On the other side of the Atlantic, the question is still unanswered whether US economic activity has started to falter. At least one thing is certain: The Feds policy remains expansionary. All the signs are that there will be a stalemate between the euro and the dollar in the coming days, which means sideways trading with only slight upside bias in EUR-USD. TABLE 4: Expected weekly trading ranges Range EUR-USD EUR-JPY USD-JPY 1.3900-1.4600 113.00-117.00 79.50-81.50 Bias EUR-GBP GBP-USD EUR-CHF Range 0.8750-0.9100 1.5750-1.6300 1.1600-1.2200 Bias

Source: Commerzbank Corporates & Markets

The fact that the ESM was increased early this week and new elections in Greece were averted shortly thereafter have removed much of the uncertainty that prevailed in the foreign exchange markets (chart 18). Nevertheless, the last word has yet to be spoken on the Greece issue. The next obstacle is already in place, as the Greek parliament will decide about further required austerity measures next week. At the end of the day, it is this vote which will decide the fate of support for Greece, not the confidence vote which Prime Minister Papandreou survived this week. In fact, the Prime Minister intentionally avoided linking the confidence vote with the vote on the austerity package because members of the Pasok party, who voted for Papandreou as an alternative to new elections, are not necessarily in favour of the governments fiscal policy. Though the news flow should be minimal ahead of the next vote, some uncertainty does remain in the market and could quickly flare up again. Euro buyers should therefore be on their guard in the next few days. The outlook is no better on the other side of the Atlantic. US data tended to disappoint recently and raised the question whether economic activity is starting to falter. The ISM index, to be released at the end of next week, is therefore very important. What is clear, though, is that the Fed will continue its expansionary monetary policy. Any disappointing economic data would underpin the FOMCs stance. The stalemate between the euro and the dollar looks set to continue (chart 19), unless any groundbreaking news comes in. This suggests that EUR-USD will trade sideways in the next few days with only slight upside bias. CHART 18: Fear of Greek default has eased slightly of late
CDS spreads, 5 years, in basis points

CHART 19: but EUR-USD remains driven by uncertainty in market

EUR-USD spot rate, daily data

1200 1000 800 600 400 200 0 Jan 10 Apr 10 Jul 10 Oct 10 Greece Portugal Jan 11 Apr 11 Ireland Spain

1.50 1.48 1.46 1.44 1.42 1.40 1.38 1.36 Mar-11 Apr-11 May-11 Jun-11

Source: Bloomberg, Commerzbank Research

Source: Bloomberg, Commerzbank Research

24 June 2011

research.commerzbank.com

11

Equity market preview:

Buying the DAX into US soft patch fears

Andreas Hrkamp Tel. +49 69 136 45925

Since our downgrade of sentiment at the beginning of May, the DAX has tended to consolidate. The record high for the OECD global leading indicator, the strong DAX earnings expectations trend, the attractive DAX forward P/E of 10x and last weeks upgrade of Sentiment back to Positive are key reasons why we recommend that DAX investors should continue anti-cyclical buying into US soft patch fears. TABLE 5: Nervous equity markets due to euro debt crisis and US soft patch fears Earnings 11e Performance (%) since Index points Growth (%) P/E 11e Index 31/05 31/03 31/12 current 31/12 current 31/12 current 31/12 DAX 30 7,286 MDAX 10,652 Euro Stoxx 50 2,802 S&P 500 1,296 -0.1 -2.1 -2.1 -3.7 3.5 3.3 -3.7 -2.3 5.4 5.2 0.3 3.0 667 768 289 99 635 729 294 95 6.5 24.2 10.2 18.3 11.4 25.7 12.3 13.3 10.9 13.9 9.7 13.1 10.9 13.9 9.5 13.3

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

Last week we upgraded our assessment of sentiment back to Positive as many sentiment indicators have reached the pessimistic levels of mid-March 2011 when the Japanese earthquake and nuclear crisis unsettled investors. Courageous DAX investors who bought the index in mid-March 2011 at around 6,500, made decent profits in the subsequent weeks. In our view, bold investors who buy the DAX in June 2011 amid uncertainty over a hard-landing of the US economy and the persistent euro debt crisis should also lock in good profits in the second half of 2011. In our central case we continue to recommend investors to overweight companies with rising or stable earnings expectations. Of 160 German companies within the HDAX and SDAX, 43 companies enjoyed positive EPS 2011 revisions of more than 5% quarter-on-quarter. And 82 of 160 companies had stable/rising EPS forecasts. Companies with rising earnings expectations regularly show one characteristic: they have big sales exposure to strongly growing economies in China, Brazil, Russia, Turkey, Mexico, Indonesia or India. We expect steady tailwind from these regions for DAX earnings as long as OECD leading indicators for emerging economies remain on an upward trend (chart 20). However, if OECD indicators for more emerging economies began to trend downwards (e.g. triggered by steadily rising key interest rates), then the bears would be in a stronger position to depress the DAX and cause a severe correction. However, we do not expect this negative outcome in 2011 as it takes time before rising key interest rates begin to exert a drag on the real economy. CHART 20: OECD leading indicators for emerging economies on an upward trend
OECD leading indicators, trend restored, indexed, mid 2006 = 100

200 180 160 140 120 100 80 Jun-06 Indonesia

Jun-07 Brazil

Jun-08 Korea

Jun-09 India

Jun-10 Russia

Jun-11 China

Source: Bloomberg, Commerzbank Research

12

research.commerzbank.com

24 June 2011

Commerzbank Forecasts
TABLE 6: Growth and inflation Real GDP (%) 2010 2011 USA 2.9 2.3 Canada 3.2 2.8 Japan 4.0 -1.0 Australia 2.7 2.0 Euro area 1.7 2.0 -Germany 3.6 3.4 -France 1.5 2.1 -Italy 1.1 1.3 -Spain -0.1 0.7 United Kingdom 1.3 1.4 Sweden 5.4 4.0 Switzerland 2.6 2.5 Norway 0.3 1.8 TABLE 7: Interest rates (end-of-quarter) 22.06.11 Q3 11 USA Federal funds rate 0.25 0.25 3-months Libor 0.25 0.35 2 years* 0.36 0.60 5 years* 1.49 1.70 10 years* 2.94 3.10 Spread 10-2 years 259 250 Swap-Spread 10 years 14 5 Euro area Minimum bid rate 1.25 1.50 3-months Euribor 1.53 1.95 2 years* 1.49 2.10 5 years* 2.14 2.60 10 years* 2.94 3.25 Spread 10-2 years 145 115 Swap-Spread 10 years 38 30 United Kingdom Bank Rate 0.50 0.50 3-months Libor 0.83 0.85 2 years* 0.75 1.40 10 years* 3.17 3.75 Japan Over night rate 0.10 0.10 3-months Libor 0.20 0.20 2 years* 0.16 0.20 10 years* 1.12 1.25 TABLE 8: Exchange rates (end-of-quarter) 22.06.11 Q3 11 EUR/USD USD/JPY GBP/USD EUR/JPY EUR/CHF EUR/GBP EUR/SEK EUR/NOK AUD/USD NZD/USD USD/CAD 1.44 80 1.61 115 1.21 0.89 9.16 7.87 1.06 0.81 0.98 1.50 83 1.69 125 1.24 0.89 8.80 7.85 1.10 0.82 0.95 2012 2.8 2.5 2.5 3.8 1.8 2.5 2.0 1.2 1.0 2.1 3.0 2.1 2.3 Q4 11 0.25 0.35 0.75 2.00 3.30 255 10 1.75 2.25 2.50 3.00 3.40 90 30 0.75 1.15 1.70 3.90 0.10 0.20 0.25 1.35 Q4 11 1.45 87 1.67 126 1.27 0.87 8.70 7.75 1.08 0.80 0.98 Inflation rate (%) 2010 2011 1.6 3.2 1.8 2.8 -0.7 0.2 2.8 3.3 1.6 2.6 1.1 2.4 1.5 2.3 1.5 2.4 1.8 3.0 3.3 4.4 1.2 3.3 0.7 1.0 2.4 2.0 Q1 12 0.25 0.35 0.90 2.15 3.35 245 20 2.00 2.50 2.70 3.20 3.45 75 30 1.00 1.35 1.90 3.95 0.10 0.20 0.30 1.40 Q1 12 1.42 95 1.65 135 1.30 0.86 8.60 7.70 1.05 0.79 1.01 Q2 12 0.25 0.65 1.40 2.75 3.60 220 30 2.25 2.75 2.85 3.30 3.50 65 30 1.25 1.65 2.20 4.05 0.10 0.20 0.30 1.40 Q2 12 1.39 99 1.64 138 1.33 0.85 8.70 7.65 1.02 0.78 1.03 2012 1.7 The western economies are 2.0 recovering from the bursting of the debt bubble. Germany is 1.0 even growing rapidly. 3.0 Many other EMU countries are 1.9 hardly growing at all which 2.1 is primarily attributable to 2.0 problems in the housing 1.9 sector and the sovereign debt 1.5 crisis. 2.4 Inflationary risks are rising due 2.8 to higher cost pressure. 1.6 2.0 Q3 12 0.75 1.25 2.00 3.30 3.75 175 30 10-year US Treasury yields should rise only moderately on the back of rather slow growth. Bund yields are likely to rise more strongly in shorter to intermediate maturities. The structural low-yield environment remains in place. We expect the ECB to raise rates each quarter while the 2.50 Fed remains on hold way into 2.90 2012. This should underpin 3.15 the flattening of the Bund 3.45 curve relative to US 3.55 Treasuries. 40 The euro zone government debt crisis is not over yet. 30 Yield spreads will decline only slowly and unevenly in the 1.50 mid-term. 1.95 10Y Bund swap spreads will 2.50 remain on a level around 4.15 30 bps. 0.10 0.20 0.35 1.45 Q3 12 1.37 The dollar will likely remain under pressure as the Fed will 103 continue its ultra-expansionary 1.63 policy for a very long time. 141 1.36 New rounds of the EMU debt crisis will likely cause 0.84 repeated sharp, but brief, 8.80 down moves in EUR-USD. 7.70 Otherwise, EUR-USD should 1.00 continue to trend upwards in 0.77 the short to medium run. 1.05

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

24 June 2011

research.commerzbank.com

13

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

Chief Economist

Dr Jrg Krmer +49 69 136 23650

Economic Research
Dr Jrg Krmer (Head) +49 69 136 23650 Dr Ralph Solveen (Deputy Head, Germany) +49 69 136 22322 Elisabeth Andreae (Scandinavia) +49 69 136 24052 Dr Christoph Balz (USA, Fed) +49 69 136 24889 Peter Dixon, (UK, BoE), London +44 20 7475 1808 Anthony Karydakis (USA), New York +1 212 895 1993 Jutta Kayser-Tilosen (Euro area) +49 69 136 28656 Wolfgang Leim (Japan) +49 69 136 24525 Ulrike Rondorf (Germany, Switzerland) +49 69 136 45814 Dr Michael Schubert (ECB) +49 69 136 23700 Eckart Tuchtfeld (German economic policy) +49 69 136 23888 Bernd Weidensteiner (USA, Fed) +49 69 136 24527 Christoph Weil (Euro area) +49 69 136 24041

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

Interest Rate Strategy

Christoph Rieger (Head) +49 69 136 87664 Alexander Aldinger +49 69 136 89004 Marcel Bross +49 69 136 87623 Rainer Guntermann +49 69 713 12052 Peggy Jger +49 69 136 87508 Markus Koch +49 69 136 87685 David Schnautz, London +44 20 7475 3229 Benjamin Schrder +49 69 136 87622 Ted Packmohr (Head Cov. Bonds) +49 69 136 87571 Annegret Hasler +49 69 136 87572

FX Strategy
Ulrich Leuchtmann (Head) +49 69 136 23393 Carolin Hecht +49 69 136 41505 Lutz Karpowitz +49 69 136 42152 Peter Kinsella +49 69 136 45847 Thu-Lan Nguyen +49 69 136 82878 You-na Park +49 69 136 42155 Antje Praefcke +49 69 136 43834

Equity Markets Strategy

Gunnar Hamann +49 69 136 29440 Andreas Hrkamp +49 69 136 45925

Dr Michael Schubert (Quantitative) Markus Wallner +49 69 136 21747 +49 69 136 23700

Other publications
Economic Research: Economics Briefing (up-to-date comment on main indicators and events) Economics and Market Monitor (monthly global view) Research Note (detailed analysis of selected topics) Commodity Research: Commodity Daily (up-to-date comment on commodities markets) Commodity Spotlight (weekly analysis of commodities markets and forecasts) Interest Rate Strategy: Ahead of the Curve (flagship publication with analysis and trading strategy for global bond markets) European Sunrise (daily commentary and trading strategy for Euro area bond markets) Covered Bonds Weekly (weekly analysis of the covered bond markets) FX Strategy: Daily Currency Briefing (daily commentary and forecasts for forex markets) Hot Spots (in-depth analysis of forex-market topics) These publications are available via e-mail and on the Internet (please ask your Commerzbank contact).

14

research.commerzbank.com

24 June 2011

This document has been created and published by the Corporates & Markets division of Commerzbank AG, Frankfurt/Main or Commerzbanks branch offices mentioned in the document. Commerzbank Corporates & Markets is the investment banking division of Commerzbank, integrating research, debt, equities, interest rates and foreign exchange. The author(s) of this report, certify that (a) the views expressed in this report accurately reflect their personal views; and (b) no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or views expressed by them contained in this document. The analyst(s) named on this report are not registered / qualified as research analysts with FINRA and are not subject to NASD Rule 2711. Disclaimer This document is for information purposes only and does not take account of the specific circumstances of any recipient. The information contained herein does not constitute the provision of investment advice. It is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the financial instruments mentioned in this document and will not form the basis or a part of any contract or commitment whatsoever. The information in this document is based on data obtained from sources believed by Commerzbank to be reliable and in good faith, but no representations, guarantees or warranties are made by Commerzbank with regard to accuracy, completeness or suitability of the data. The opinions and estimates contained herein reflect the current judgement of the author(s) on the data of this document and are subject to change without notice. The opinions do not necessarily correspond to the opinions of Commerzbank. Commerzbank does not have an obligation to update, modify or amend this document or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. The past performance of financial instruments is not indicative of future results. No assurance can be given that any opinion described herein would yield favourable investment results. Any forecasts discussed in this document may not be achieved due to multiple risk factors including without limitation market volatility, sector volatility, corporate actions, the unavailability of complete and accurate information and/or the subsequent transpiration that underlying assumptions made by Commerzbank or by other sources relied upon in the document were inapposite. Neither Commerzbank nor any of its respective directors, officers or employees accepts any responsibility or liability whatsoever for any expense, loss or damages arising out of or in any way connected with the use of all or any part of this document. Commerzbank may provide hyperlinks to websites of entities mentioned in this document, however the inclusion of a link does not imply that Commerzbank endorses, recommends or approves any material on the linked page or accessible from it. Commerzbank does not accept responsibility whatsoever for any such material, nor for any consequences of its use. This document is for the use of the addressees only and may not be reproduced, redistributed or passed on to any other person or published, in whole or in part, for any purpose, without the prior, written consent of Commerzbank. The manner of distributing this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are required to inform themselves about and to observe such restrictions. By accepting this document, a recipient hereof agrees to be bound by the foregoing limitations. Additional notes to readers in the following countries: Germany: Commerzbank AG is registered in the Commercial Register at Amtsgericht Frankfurt under the number HRB 32000. Commerzbank AG is supervised by the German regulator Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin), Lurgiallee 12, 60439 Frankfurt am Main, Germany. United Kingdom: This document has been issued or approved for issue in the United Kingdom by Commerzbank AG London Branch. Commerzbank AG, London Branch is authorised by Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin) and subject to limited regulation by the Financial Services Authority. Details on the extent of our regulation by the Financial Services Authority are available from us on request. This document is directed exclusively to eligible counterparties and professional clients. It is not directed to retail clients. No persons other than an eligible counterparty or a professional client should read or rely on any information in this document. Commerzbank AG, London Branch does not deal for or advise or otherwise offer any investment services to retail clients. United States: This document has been approved for distribution in the US under applicable US law by Commerz Markets LLC (Commerz Markets), a wholly owned subsidiary of Commerzbank AG and a US registered broker-dealer. Any securities transaction by US persons must be effected with Commerz Markets. Under applicable US law; information regarding clients of Commerz Markets may be distributed to other companies within the Commerzbank group. This report is intended for distribution in the United States solely to institutional investors and major U.S. institutional investors, as defined in Rule 15a-6 under the Securities Exchange Act of 1934. Commerz Markets is a member of FINRA and SIPC. European Economic Area: Where this document has been produced by a legal entity outside of the EEA, the document has been re-issued by Commerzbank AG, London Branch for distribution into the EEA. Singapore: This document is furnished in Singapore by Commerzbank AG, Singapore branch. It may only be received in Singapore by an institutional investor as defined in section 4A of the Securities and Futures Act, Chapter 289 of Singapore (SFA) pursuant to section 274 of the SFA. Hong Kong: This document is furnished in Hong Kong by Commerzbank AG, Hong Kong Branch, and may only be received in Hong Kong by professional investors within the meaning of Schedule 1 of the Securities and Futures Ordinance (Cap.571) of Hong Kong and any rules made there under. Japan: Commerzbank AG, Tokyo Branch is responsible for the distribution of Research in Japan. Commerzbank AG, Tokyo Branch is regulated by the Japanese Financial Services Agency (FSA). Australia: Commerzbank AG does not hold an Australian financial services licence. This document is being distributed in Australia to wholesale customers pursuant to an Australian financial services licence exemption for Commerzbank AG under Class Order 04/1313. Commerzbank AG is regulated by Bundesanstalt fr Finanzdienstleistungsaufsicht (BaFin) under the laws of Germany which differ from Australian laws. Commerzbank AG 2011. All rights reserved. Version 9.13 Commerzbank Corporates & Markets Frankfurt London Commerzbank AG Commerzbank AG DLZ - Gebude 2, London Branch Hndlerhaus PO BOX 52715 Mainzer Landstrae 153 30 Gresham Street 60327 Frankfurt London, EC2P 2XY Tel: + 49 69 13621200 Tel: + 44 207 623 8000 New York Branch Commerzbank AG 2 World Financial Center, 31st floor New York, NY 10281 Tel: + 1 212 703 4000 Singapore Branch Commerzbank AG 8, Shenton Way, #42-01 Singapore 068811 Tel: +65 63110000 Hong Kong Branch Commerzbank AG 29/F, Two IFC 8 Finance Street Central Hong Kong Tel: +852 3988 0988

24 June 2011

research.commerzbank.com

15