The House View Deutsche Nov2016

The House View
Deutsche Bank
Research
Switching into a higher gear
29 November 2016
Distributed on: 29/11/2016 05:10:00 GMT
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 057/04/2016
Month in Review
NY Times, 21-Nov-2016
theguardian, 20-Nov-2016
Bloomberg, 18-Nov-2016
Zerohedge, 22-Nov-2016
Reuters, 22-Nov-2016
ETF Daily News, 17-Nov-2016
WSJ, 16-Nov-2016
ValueWalk, 23-Nov-2016
The Telegraph, 27-Nov-2016
Market Pulse, 17-Nov-2016
WSJ, 18-Nov-2016
The New York Times, 9-Nov-2016
The Huffington Post, 21-Nov-2016
The China Post, 28-Nov-2016
Business Indiser, 23-Nov-2016
WSJ, 23-Nov-2016
Financial Post, 21-Nov-2016
Reuters, 25-Nov-2016
Deutsche Bank
Research
thehouseview@list.db.com
http://houseview.research.db.com
The House View 29 November 2016
CyprusMail, 23-Nov-2016
2
The House View, 29 November 2016

Switching into a higher gear
Trumps win may have opened a new chapter for the US. The shift toward a more
balanced mix of easy monetary and fiscal policy and looser regulation is expected to
jumpstart the economy, ending years of low growth and inflation. Faster US growth
would also have positive spillovers to the rest of the world.
Risks remain that some of these growth-friendly policies are not implemented or have
unexpected effects. But the biggest threat to growth is a possible protectionist turn,
which would further depress already anaemic global trade.
Any political spillover in Europe would also be negative. The first risk event is Italys
Senate referendum on 4-December. Polls suggest the vote will fail, and if it does, PM
Renzi will likely resign. The sell-off in Italian assets indicates that this outcome is
being priced, but as long as immediate elections and a eurosceptic government are
possible, market stress can build further. Elections in the Netherlands, France and
Germany next year will ensure that political risk remains a source of volatility.
Table of contents
Introduction
4-boxes
Total returns
Macro
update
Global growth and inflation

post-election
US growth outlook
Downside Protectionism
risks from Deglobalisation
US election Political spillovers
Global
growth
Eurozone and China

update
Markets
Post-election market
moves
Fed and ECB outlook
Summary of market views
FX, rates, and EM views
In the coming weeks we will see the last ECB and Fed decisions of 2016. In Europe,
taper talk is premature, and we expect a six month extension of QE. In the US, a rate
hike in December is all but a done deal.
Markets have so far focused on the positives of Trumps policies, with the dollar
strengthening, rates selling off and equities rising, reaching all-time highs in the US.
Several of these trends should continue in the coming months: the rates sell-off has
some further room to run and the dollar should strengthen further, with the euro
reaching parity next year and further weakness expected in sterling and yen.
David Folkerts-Landau, Group Chief Economist
The views in this publication are informed by Deutsche Banks Global Strategy Group, which advises management and
clients on broad market risks and global economic and financial developments. The views and forecasts of the group,
which consists of senior research staff, may occasionally differ from those disseminated by their research colleagues
Deutsche Bank
Research
Editors: Marcos Arana, Aditya Bhave,

Matthew Luzzetti, Rajni Thakur
3
More bullish on US outlook following Trump win. But European

politics remain a key potential headwind in year ahead
Economic outlook
Central bank watch
Global outlook remains sluggish. Expect growth to rise

modestly to 3.4% in 2017. Potential for upside on the
back of stronger US growth
Much more bullish on US growth following Trump win.
Marked up forecasts for 2017 (2.3%), with acceleration
coming mostly in H2, and 2018 (3.5%)
Eurozone growth to remain subdued. Faster US helps
but with lag. Headwinds from credit, Brexit, politics to
keep growth muted in 2017 (1.1%) and 2018 (1.4%)
EM outlook also subdued. Expect pick-up in LatAm,
CEEMEA , but spillover from US initially likely negative
Fed: expect December hike. Risks of faster hikes than

Fed projection, but unlikely to be revised until H2-2017
ECB: expect 6 month QE extension in December. Too
early for ECB to taper, given core inflation still low
BoJ: easing bias. Limited rate cuts possible. Monetary
base expansion likely to slow
BoE: neutral stance, with risks slightly skewed to
easing but further rate cut no longer our baseline
PBoC: return to easing with rate cut in H1-2017
EM: generally on hold, with few exceptions (e.g.,
tightening in Turkey)
Views on key themes
Key downside risks to our view
US regime shift: potential for US economy to shift into

higher gear on material fiscal stimulus. Provides first
concrete move toward more balanced policy mix in DM
Politics: political uncertainty high over next 12 months,
especially in Europe with Italian referendum as well
as Brexit process and elections across eurozone
European banks: underlying issue remains unresolved,
continues to be a source of downside risk for growth
Trump disappointment: US policies tilted to negatives

M
M
M
M
Deutsche Bank
Research
rather than positives, US growth fails to accelerate

Political risk escalation, banking stress in Europe that
derails recovery Italy a key risk
China hard landing: sharp contraction that drags down
global growth, possibly due to deflating property bubble
Deglobalisation: rise of anti-trade policies exacerbates
already anaemic global trade and sharply slows growth
EM crisis on the back of rising dollar, US interest rates.
More likely on corporate than sovereign sector
Notes: H / M / L indicates estimated probability of risk (High, Medium, Low).

(*) Sharp deceleration in growth, e.g., growth falling below 5%
(**) Non-performing loans
Trumps election has been the key driver for markets leading to
dollar and DM equities rally, and core rates and EM sell-off
2016 YTD and since US election on 8-November
%
Corporate
Credit
Equities
30
Sovereign
debt
FX**
Commodities**
30
24
19
20
13
10
13
12
10
10
8
5
0
-1
-10
-4
-4
-1
-1
-2
-6
EM sell-off on stronger
dollar, rising rates. Russia
an exception, on hopes of
friendlier US stance
Strong rally in DM equities,

especially US, on
expectation of fiscal
stimulus, stronger growth
Credit weighed down

by rise in rates,
despite tighter
spreads in the US
Widespread
core rate selloff
Italy underperformance
as referendum
nears
MXN
FX moves dominated
by dollar strength.
MXN, TRY among
worst performers
Oil up on
OPEC supply
cuts hopes
Gold
-17
BBG Cmdty Index
-16
Brent Oil
-15
GBP
EUR
EM FX
Dollar Index
JPY
Italy
US
Germany
UK
EUR IG
US IG
EUR HY
US HY
Italy Milan
Spain IBEX 35
Japan Nikkei
Europe Stoxx 600
German DAX 30
US S&P 500
MSCI EM
Russia Micex
UK FTSE 100
Since US Election
-20
TRY
2016 YTD
Gold underperformed on
risk-on tone
Note: (*) Total return accounts for both income (interest or dividends) and capital appreciation. (**) FX, Commodities are spot returns.
Source: Bloomberg Finance LP, Deutsche Bank Research. As of 28 November 2016
Deutsche Bank
Research
Donald Trumps unexpected election in the US has triggered a

reassessment of the US and global macro outlook
Past the election surprise, the focus has shifted to
the macroeconomic implications of Trumps policies
This has triggered a positive reassessment of the
US and global macro outlook
The view centres on the expectation of a shift
toward a more balanced policy mix
Monetary policy only game in town post-crisis
ultra easy monetary policy compensated for
tight fiscal policy, tight regulation, lack of reform
Fiscal stimulus, regulatory easing welcome at a
time when monetary easing seen as exhausted
The US is the first to take this step
Only major country planning material fiscal
easing (infrastructure spending, tax cuts)
Similar response elsewhere unlikely for now, but
the pendulum is shifting in this direction
UK: only marginal relaxation of austerity, but
new fiscal flexibility rules and corporate tax cuts
EU: likely to use flexible approach toward
existing fiscal rules
China: some fiscal easing likely in 2017
Deutsche Bank
Research
Policy mix: Trumps fiscal plan to be the first shift toward a more
balanced policy mix
Monetary
policy
Fiscal
policy
Financial
regulation
Structural
reform
Ultra easy, has

compensated for
tightness
elsewhere
Large
stimulus
planned
Possible
easing
Prospects
unclear
Currently tight but expected to ease
More relevant
in Europe
Trump proposes a material increase in the fiscal deficit

0
Fiscal balance, % of GDP
-2
Current
law (CBO)
Trumps
plan
-4
-6
-8
-10
2010 2012 2014 2016 2018 2020 2022 2024 2026

Source: CBO, CRFB, Haver Analytics, Deutsche Bank Research. Note: deficit projection under Trump
assumes growth and tax revenues will follow the CBO's estimates. We expect both series to outperform
these estimates. As a result, the change in the deficit is likely to be less drastic than shown above.
US Economics Weekly: What a difference a week makes 17-Nov-2016
This reassessment of the outlook brings about the expectation of

higher inflation as growth accelerates
The reassessment of the macro outlook is based on
the expectation of the start of a regime shift
Normalisation away from years of low growth,
low inflation and low interest rates
The US election reinforced a process that started
earlier, underpinned by green shoots in inflation...
US inflation on a broad uptrend, with further
upside risk from fiscal stimulus
European inflation stable at low level, but
expected to rise, albeit slowly
...as well as signals from central banks that the
policy stance was shifting away from lower rates
ECB, BoJ acknowledged limits of more rate cuts
Fed eager to resume rate hikes
Likely gradual through 2017 but faster pace
expected in 2018
There remain risks to this assessment
Much depends on the success of Trumps
administration to sustainably lift US growth
US core inflation is grinding steadily upward; Eurozone inflation is

low but expected to rise, albeit slowly
3.0
%yoy
US Core PCE
Europe Core CPI
2.5
2.0
1.5
1.0
0.5
0.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: BEA, Eurostat, Haver Analytics, Deutsche Bank Research
The increase in long-term inflation expectations accelerated after the

US election
3.5
5y5y inflation expectations, % (5d avg.)
US election
3.0
Started rising
ahead of election
2.5
2.0
1.5
1.0
2010
US
2011
Europe
2012
2013
2014
2015
2016
Source: Bloomberg Finance LP, Deutsche Bank Research
Deutsche Bank
Research
The main reason to be optimistic about US growth is a material

fiscal stimulus package that should help lift business spending
A unified Republican government increases the
chances that Trump will deliver his pro-growth plan
Lower income, capital gains and corporate taxes
Rollback of business regulations
Increase in defense and infrastructure spending
As a result, we have raised our real GDP growth
forecasts to 2.3% in 2017 and 3.5% in 2018 (from
1.7% and 1.9% respectively)
Peak impact expected in H2 2017 and H1 2018
A key driver will be increase in business spending
Scope for substantial acceleration as capex has
been very weak in this cycle
Increase in capital stock would help stabilise or
reverse the downtrend in productivity growth
Consumption to improve more modestly as
there is little pent-up consumer demand
Labor gains to improve, with unemployment rate
possibly dropping to 4% by 2018 (from 4.9% now)
Inflation to remain contained in near-term by dollar
strength due to improved growth prospects
Deutsche Bank
Research
We have revised our GDP growth forecasts substantially upwards.

Peak impact expected in H2-2017 and H1-2018
5
US GDP forecast
% qoq annualised
Peak impact
4.0
3.5
4.0
3.5
3.0
2.5
2.5
2.0
2
1.0
1
0
Q4'16 Q1'17 Q2'17 Q3'17 Q4'17 Q1'18 Q2'18 Q3'18 Q4'18
Pre-election
Source: Deutsche Bank Research
Post-election
Business investment has been weak relative to prior expansions

30
% yoy
Nonresidential equipment spending
20
10
0
-10
-20
-30
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
Source: BEA, Haver Analytics, Deutsche Bank Research
US Daily: Trump plan to give meaningful lift to GDP 14-Nov-2016
But not all of Trumps programme is positive. The success will

depend on what gets implemented and uncertainty here is high
Overview of Trumps policies
Policy area
Proposal
Assessment
Substantial stimulus, of around 2-3% of GDP

Infrastructure and tax cuts, financed via deficit
Fiscal
deficit
Corporate: slash tax rate*, one-off offer to repatriate foreign

profits at 10%, move from worldwide to territorial tax
Personal: cut top rate, repeal estate tax
Tax
Potential game changer for growth

Higher deficits risk raising debt to GDP
but acceptable if growth does accelerate
Congress could water it down
Reduce regulatory burden, repeal parts of Dodd-Frank
Ease credit supply constraints, helping

support growth
Fed
Critical of QE / low interest rates policy, supports Fed audit

Chair Yellen likely to be replaced in 2018
Challenges to Fed independence would

be negative
Trade
Protectionist stance: introduce tariffs / duties

Tough on China: 45% tariffs, label as FX manipulator
Renegotiate NAFTA, reject TPP, unlikely to support T-TIP**
Material blow to globalisation

Major threat for global economy
Foreign
policy
Isolationist stance
Swing toward Russia, criticism of NATO, China
Challenge to US-led liberal world order

that has prevailed for last 70 years
Tough stance on immigration: build Mexico wall, end

birthright citizenship
Very negative at face value, though likely

to be watered down
Finance
Immigration
Other
Deutsche Bank
Research
Repeal Obamacare
Minimum wage determined at state / local level
Scale back climate change regulation
Note: (*) From 35% to 15%; (**) Trans Pacific Partnership and Transatlantic Trade and Investment
Partnership; (#) High frequency trading
Major concerns include the threat of protectionism, the potential

drag from a strong dollar on the US economy, and EM
1 Threat of protectionism
2 Impact of strong $ on US economy
Anti-trade tone appeals to Republican base
Impact of strong dollar
Trade
Makes US exports less

competitive
Worsens US trade deficit
Manufacturing
Raises cost of made in

USA, disincentivises
investment
Corporate
profits
Stronger dollar depresses

foreign earnings which
account for 25% of S&P
60 % support for free trade*
50
Collapsing
support for free
Democrats
trade (and
Republicans globalisation)
40
30
2009
2011
2013
2015
Note: % saying free trade has been a good thing for the US
Source: Pew Research, Deutsche Bank Research
Trump vowed to protect US jobs by

erecting trade barriers, shifting from
US long-standing free-trade stance
Position is negative for global trade
Question is how strongly US
embraces protectionism
Pledged withdrawal from TPP,
tweaks to NAFTA manageable
More extreme action, e.g., WTO
withdrawal or attacking China as
currency manipulator, could be
very negative
Deutsche Bank
Research
Stronger dollar reflects expectations

of higher growth, inflation, rates
this is positive
But there is concern that a strong
dollar could weigh on US economy
Negative for trade, investment,
manufacturing, corporate profits
Balancing forces should prevent
excessive dollar appreciation
Dollar strength depends on Fed
hikes, which depend on inflation
and strength of economy
3 Impact on EM
Dollar strength a negative for EM
$ strength negat30 % yoy
ive for EM credit
25
20
15
10
5
Credit to EM
0
Broad dollar (inverted, RHS)
-5
2000
2004
2008
2012
2016
95
100
105
110
115
120
125
130
Note: Credit to private non-financial sector.

Source: BIS, Bloomberg Finance LP, Deutsche Bank Research
Stronger US growth positive for EM

but only with a lag. Barriers to
trade diminish the positive spillover
But negative impact of stronger
dollar and higher rates is immediate
Effect on external debt service,
creditworthiness, external
accounts, risk assessment and
supply and demand of credit
EM to suffer over next few quarters
Hold the exuberance 18-Nov-2016
10
Threats to trade come at a time when the world economy may

be entering a period of deglobalisation
The several decade-long rise of
globalisation could be in retreat
Trades share of global GDP
has peaked
Capital mobility has declined
Tariffs have risen and could
rise further
Undercurrent of anti-globalisation
sentiment at centre of this trend
Evidenced in Brexit, Trumps
victory, rising support of
eurosceptic parties in Europe
Deglobalisation could have
significant implications for global
macro if it continues
Smaller trade imbalances,
flows of capital and FDI
Dollar funding will become
more constrained / expensive
Slower productivity growth
and higher inflation with
reduced specialisation
Deutsche Bank
Research
World trade share of global GDP has peaked;

do not take globalisation for granted
Falling support for openness since early

2000s, and generally lower in the US
70
90
% of GDP
60
50
%, Growing trade and business ties

are a good thing
80
WWI starts
2016
est.
40
30
20
70
US
60
10
WWI ends
0
1870 1890 1910 1930 1950 1970 1990 2010
Other country median

50
2002
2008
2010
2012
2014
Source: Pew, Deutsche Bank Research
Number of new free trade agreements has

been in decline
Non-tariff impediments to trade have been on

the rise
50
3.0
Number of free trade agreements signed
0.5
% of products
2.5
40
0.4
Trade barriers
2.0
30
0.3
1.5
20
Antidumping
1.0
10
0.5
Countervailing
duties (rhs)
0.0
0
1980
1990
2000
2010
Source: WTO, IMF WEO Oct-2016, Deutsche Bank Research
0.2
1990
1995
2000
2005
2010
0.1
0.0
2015
Source: IMF WEO Oct-2016, Deutsche Bank Research
Deglobalisation is here: what it means for global macro 16-Nov-2016

The risk of deglobalisation: a US-China trade war? 28-Nov-2016
11
Another risk is political spillover in Europe first and foremost in

Italy
Senate referendum: Simplified scenario tree
Italys referendum on 4-Dec next political risk event

Senate reform intended to improve governability
Vote now partly about PM Renzi
Opinion polls point to a No vote negative as seen
leading to new election, risk of 5SM# government
While possible, this is only a tail risk
A new interim government tasked with modifying
electoral law before new elections is most likely
While positive short-term, it poses medium term risk
Likely to lead to ineffectual governments, very
limited reform progress
Low growth, bank concerns to remain
Italy to continue to underperform, boosting
eurosceptic sentiment over time
Immediate reaction to No vote likely negative as
market reassesses risk of early election
Could lead to market pressure on Italian banks
any escalation could become systemic
Italian authorities will need to act swiftly and
decisively if this is to be avoided
Deutsche Bank
Research
Senate reform Government
Best case
Most market friendly
Limited reform progress
No immediate crisis but
economy, banks remain
vulnerable to shocks
Approved
4-Dec
Senate
referendum
Assessment / implications
Renzi stays
Unlikely
Rejected
According to polls,
No camp has gained
support and should
win referendum
Renzi
resigns
Early
Tail risk
elections 5SM# favourite to win
(Q1-2017)
Lower House, not Senate
Could lead to consultative
euro referendum
Muddle through
~
New
Interim government
government Positive short-term, as
avoids worst outcome
Base case
Mandate to change electoral
law, reform process to stall
Elections possible from Q22017
Negative medium-term as
likely to result in ineffectual
governments as in past 15
years, boosting eurosceptics
Note: Thicker lines denote most likely path. For a comprehensive analysis of the referendum see Italys
referendum and beyond: a cross market view 11-Nov-2016. (*) Proposal to narrow Senate role in favour
of Lower House, reducing chance of political gridlock. (#) Eurosceptic Five Star Movement party
Special Report - Risks after and beyond Italys referendum: 28 November 2016
12
Beyond Italy, Trumps win could further embolden nationalism in

Europe but current polls suggest the risk is relatively contained
1 Brexit uncertainty
2 French elections (Apr/May-2017)
Polls suggest a 2017 election would give the

government a much larger majority
200
Government
majority, MPs
150
Larger majority if
elections in 2017
4080
100
Smallest majority
in 40 years
50
0
1945
1950
1951
1955
1959
1964
1966
1970
1974
1974
1979
1983
1987
1992
1997
2001
2005
2010
2015
2017
-50
3 German elections (likely Sep-2017)
Opinion polls suggest a Le Pen win next year

is unlikely, but need to be taken with caution
Popularity of major parties has declined since

2013 election another Grand Coalition likely
% vote for presidential election run-off

70
60
50
40
30
20
10
0
Fillon Le
Macron Le
Valls Le
Pen
Pen
Pen
% popularity
50
Source: House of Commons, polls, Deutsche Bank Research
Notes: Fillon is centre-right candidate; Macron is a former Economy

Minister under Hollande; Valls is Hollandes PM; Le Pen is leader of far
right, eurosceptic Front National. Polls from Apr-2016 (Nov-2016 for
Fillon-Le Pen). Source: Opinion polls, Deutsche Bank Research
High Court ruling weakened

government hand vs. Parliament
Still expect Art. 50 trigger in Q12017, Brexit vote to be honoured
Early election in 2017 more likely
Government to gain stronger
majority, more room for
manoeuvre in EU negotiations
Chances of interim deal before enddeal is agreed have risen
Concern of eurosceptic, far right

government in France is rising
Le Pen unlikely to win presidency
according to current polls...
All likely second round
contenders would beat her
Hollande an exception, but
unlikely to make it to run-off
...Yet outcome cant be dismissed
Anti-immigration, protectionist
narrative underpinned Brexit and
Trump surprises
Current
Grand Coalition
Sep-13
40
30
20
10
0
Left Greens SPD CDU / FDP
Party
CSU
AfD Others
As of Mid-August 2016
Source: IfD Allensbach, Deutsche Bank Research
Merkel will seek a fourth term

Major parts of Merkels party favour
coalition with Greens but unclear
if feasible
Thus, another, but weaker, Grand
Coalition appears likely
Coalition partners overall lost
support vs. 2013 election result
Regardless of exact composition of
next coalition, looser fiscal policy is
unlikely
In addition, Austria, Netherlands elections also carry risk of populist / eurosceptic governments
Deutsche Bank
Research
Focus Europe: Momentum and Risk 25-Nov-2016

Brexit update: the prospects for a general election 7-Nov-2016
Focus Europe - Uncertainty and animal spirits: 04 November 2016
13
Stronger US growth should help eurozone growth prospects, but

downside risks continue to dominate the outlook
Eurozone growth remains slow but resilient at 1.21.5% despite recurring shocks
Upside to our forecast for Q4-2016
Growth expected to moderate to 1.1% in 2017
A stronger US outlook should help eurozone growth
but with limited impact in 2017
US is second most important destination for
eurozone exports, behind the UK
US acceleration likely in H2-2017, but 1-2
quarter lag before this is felt in Europe
But downside risks continue to dominate
Packed calendar keeps political risk high

Uncertainty will weigh on growth, especially by
deterring business spending
Risk of spillovers from Brexit, US election
Softer domestic demand on weaker credit impulse
Though lending incentives could improve with
better global growth, steeper curves
Financial conditions becoming less supportive as
rising rates outweighing euro depreciation
More longer-term, structural issues of high debt,
low growth, low competitiveness remain unresolved
Stronger US growth would be an upside risk to eurozone, but

political uncertainty high for key trade partners: US and UK
Eurozone financial conditions drifting tighter
Goods exports % EA GDP
# of standard deviations
1.2 Rising means easier, falling means tighter
1.0
0.8
0.6
Deutsche Bank
Research
Norway
Canada
India
Mexico
Brazil
Romania
Korea
Japan
Hungary
Turkey
Denmark
Source: Eurostat, Deutsche Bank Research
Sweden
Russia
Czech
Switzer
Poland
China
OPEC
US
0.4
UK
3.0
2.5
2.0
1.5
1.0
0.5
0.0
0.2
0.0
Narrow Financial Conditions Index

(market based)
0.19
0.76
0.84
Focus Europe: Economic growth and financial conditions 18-Nov-2016
14
In China, the US election poses downside risks to trade and

growth, raising odds of policy easing in 2017
US election could impact Chinas prospects
Potential for negative trade effect from disputes
and possible tariffs
Higher odds of looser policy in 2017: rate cut,
more fiscal stimulus to offset risk of softer trade
Looser policy raises risk of higher inflation, asset
bubble, and eventual sharper growth slowdown
Likely more focus on enhancing global influence
CNY weakness is not over: USDCNY to rise above
8 by end-2018, as outflow pressures persist
Recent data suggest China growth remains stable,

helped by a credit-fuelled property sector boom
But growth should slow as government continues to
tighten credit and property market regulations to
avoid a crisis
Growth expected to fall modestly to 6.5% in
2017 and further to 6% in 2018
In response to slower growth, monetary and fiscal
policies should once again ease in Q2-2017
China property sector set to cool as credit
growth slows and restrictions tightened
The Chinese fiscal deficit ratio generally saw

sizeable expansion during previous ext crisis
Previous 2Q avg., % yoy
60
% of GDP, 4Q trailing
-4 Expansionary
3Q02
50
-3
40
-2
Source: WIND, CREIS, Deutsche Bank Research
Source: WIND, Deutsche Bank Research
250
Japan 212 (rhs)

US 97
EU 92
80
60
200
150
100
China 45
40
2Q08
1.8%
2014
deficit/surplus (inversed)
2012
2010 2011 2012 2013 2014 2015 2016
% of GDP
120
100
11 EFC
2010
15
Contractionary
Actual Fiscal fiscal policy
2008
10
3Q97
-0.3%
2006
20
18
Deutsche Bank
Research
30
2004
Correlation: 0.86
3Q16
-4.4%
4Q14
-1.8%
3Q11
-0.6%
-1
2002
21
-2.7%
2000
24
2Q09
-2.4%
08 GFC
97 AFC
1998
Land auction premium, rhs
fiscal policy
1996
Broad Credit Growth,
1994
27
1992
30
Previous & current Q avg., %
Government debt: Chinese government still

has ample room in fiscal capacity
20
2000
50
0
2004
2008
2012
2016
Source: BIS, Haver Analytics, Deutsche Bank Research
Implication of US election for China 9-Nov-2016
15
Markets have clearly focused on the positive aspects of the US

election, with equities soaring and core rates selling-off
DM equities have rallied, while EM equities
have sold off
4
Cumulative % change since 8 Nov
US move led by cyclicals and sectors related

to deregulation and infrastructure plans
US long-end yields have reached new highs

for the year, as has the yield curve slope
15 %
3.2
10
-4
US S&P 500
EuroStoxx 600
MSCI EM
-2
S&P 500 sectors since 8 Nov
12
4
2
-5
-2
-3
-4
-8
130
120
US 2y10y slope, rhs
2.8
110
2.6
100
2.4
90
2.2
80
2.0
8-Nov 11-Nov 14-Nov 17-Nov 20-Nov 23-Nov 26-Nov
70
Jan
bps
US 30Y yield
3.0
5
-6
Mar
May
Jul
Sep
Nov
Contributing to a renewed bout of dollar

appreciation
EM funds have witnessed record outflows in

response to rising dollar and US rates
US credit spreads have continued their postBrexit tightening
% change vs. USD since 8-Nov
% of AUM
650
3.4
0.3
0
-1.8
-5
-3.2
-3.7
-6.3
-10
Dollar GBP
index
CNY EM FX EUR
Deutsche Bank
Research
JPY
2.0
EM weekly flows
1.5
1.0
0.5
0.0
-0.5
-1.0
-1.5
-2.0
-2.5
2009 2010 2011 2012 2013 2014 2015
Source: EPFR, Deutsche Bank Research
Cash credit spreads, bps
160
USD HY
600
USD IG, rhs
550
500
150
140
450
Brexit vote
US election
400
Jun
Jul
Aug
Sep
Oct
130
Nov
16
Summary of market views

Asset
View
Positive on US
Markets Cautious on Europe
and EM
Bullish US
Equities
Rates
Europe: no upside
into year-end
US: modest scope
for further sell-off
Europe: Bund yields
to rise due to inflation
Bullish dollar
FX
Bearish euro
Bearish sterling
Bearish yen vs. USD
Credit
Wider spreads in the

US and Europe
EM
Pressure to continue
Deutsche Bank
Research
Rationale
Pro-growth policies and accommodative Fed to support US risk assets
Caution on Europe due to tepid fundamentals and political event risk
EM concerns due to outflows driven by increase in DM yields
US: equities at all-time highs, rally can extend further on expected tax cuts.
Rotation into cyclicals
Europe: cautious given macro, political risk, possible bank stress and
weakness in oil due to dollar appreciation
US long-end rates have increased largely due to repricing of risk premium
Rates to continue to rise through mid-2017
Higher core inflation and positive data momentum to push Bund yields up
Sell-off possibly too fast given upcoming risk events: case for risk reduction
Perfect storm for dollar strength given likely fiscal stimulus, Fed rate hikes,
ECB and BoJ QE, and supportive risk-asset cycle
Euro close to breaking below long-standing range, to reach parity in 2017
Markets to re-focus on hard Brexit risks, weak sterling fundamentals
Forecasts revised due to sharp rise in US rates
Despite recent tightening, higher rates to push IG spreads wider; HY less so
IG and HY spreads to widen moderately in 2017, with elevated intra-year
volatility due to policy uncertainty and political risk
EM vulnerable to dollar strength due to substantial dollar-denominated debt
Higher US rates have caused reversal of recent inflows
However, fundamentals stronger than they were during 2013 taper tantrum
17
Fed is set to raise rates in December; upside risk to rate expectations in coming years if Trumps election brings faster growth
With data supportive and financial conditions
holding up well post-election, the Fed is expected to
raise rates by 25bp at its December meeting
Supported by Fed commentary, including
Yellens
Market now about fully pricing it
Beyond the rates decision, focus will be on if the
Feds forecasts react to the election surprise
Only modest changes likely as Fed waits for
more clarity on fiscal policy outlook
Directionally, would expect higher growth,
inflation and rates, and lower unemployment
Upside risk to Feds expectations for rate hikes in
coming years if growth picks up materially
Fed expects only two rate hikes in 2017 and
three in 2018
Faster inflation, lower unemployment, higher
neutral rate could all warrant more increases
But risk unlikely to materialise before H2-2017
Inflation could moderate early in 2017
It will take time for fiscal, regulatory policies to
pass and the economic impact to materialise
Deutsche Bank
Research
Market is now about fully pricing a rate hike at the Feds December
meeting
100
%, probability
Rate hike at December 2016 meeting
80
60
Market odds for

Dec rate hike at
highest this year
post-election
40
20
0
Upside risk to Feds expectations for rate increases if fiscal stimulus

brings a material boost to growth
%, fed funds rate
2.0
1.5
Actual
FOMC Sep 2016 dots
3% growth scenario
Fed funds futures (current)
Fed funds futures (pre-election)
Upside risk
to Fed rate
hikes under
faster growth
1.0
Market has
priced more
hikes since
election
0.5
0.0
Dec-14
Dec-15
Dec-16
Dec-17
Note: 3% growth scenario based on Chair Yellens preferred Taylor rule and implications of this growth rate for
unemployment, inflation, and the neutral fed funds rate .
Source: FRB, Bloomberg Finance LP, Deutsche Bank Research
18
The ECB, meanwhile, is expected to announce a six-month QE

extension at its 8-December meeting, amid a cautious outlook
Downside risks to ECBs inflation outlook remain, suggesting caution
is appropriate
%yoy
Long-run average: 1.6%
1.6
1.2
0.8
Headline HICP
0.4
DB forecast
0.0
-0.4
Jan-16
May-16
Sep-16
Jan-17
May-17
Source: Haver Analytics, Deutsche Bank Research
Bond scarcity remains an issue despite recent bond sell-off, with

large share of bonds still trading below deposit rate floor
60 %
40
20
0
Note: percent of debt trading below the deposit rate (-40bp) as of 28-Nov
Deutsche Bank
Research
The ECB maintains an easing bias given a cautious

view on the eurozone inflation outlook
Downside risks to growth remain (e.g., softening
credit impulse, political uncertainty, rising oil)
Insufficient evidence that core inflation (0.8%
yoy) will rise sustainably toward target
As Draghi noted, improvements to date (and
expected) rely on ultra easy monetary policy
No further cuts to the deposit rate expected
ECB has little urgency to weaken euro,
especially given decline since the US election
Further cuts would hurt banks and potentially
damage bank lending channel
Instead, we expect a QE extension on 8-December
6-month extension from 2017 March expected
A longer extension appears inappropriate at this
stage given resilient macro data
A combination of changes to QE parameters to deal
with bond scarcity issues is also likely
Yield floor removal, issue limit increase most
likely; capital keys change cannot be ruled out
Focus Europe: Momentum and risk 25-Nov-2016
19
Dollar strength due to fiscal stimulus to weigh on euro, yen and

sterling; EUR/USD remains on track to reach parity next year
Perfect storm for dollar strength
Large fiscal stimulus could accelerate Fed
tightening given limited excess capacity
QE in Europe and Japan continues to drive
demand for dollar-denominated assets
Risk-asset cycle supportive of fiscal stimulus
EUR/USD should break below 1.05-1.15 range that
held since early 2015, to reach parity next year
Forecasts unchanged but risks to the downside
Latest DB FX forecasts
Spot
Year-end 2017
Given US policy changes and reversal of the Abe

market rally, we are now bearish yen vs. dollar
Risk is yen reaches end-2017 forecast sooner
Despite gains since High Court Article 50 judgment,
we remain bearish sterling versus dollar and euro
Market to re-focus on hard Brexit without fiscal
stimulus and negative current account dynamics
US and European politics and US policy cycle to
keep FX volatility elevated
Euro trading near bottom of long-standing

range, to reach parity in 2017
We are now bearish yen vs. dollar given the

increase in US yields
1.4
3.0
EUR/USD
1.3
EUR/USD
1.06
0.95
USD/JPY
113.2
115
1.2
GBP/USD
1.25
1.06
1.1
EUR/JPY
119.8
109
2.5
130
2.0
120
1.5
110
1.0
100
0.5
EUR/GBP
0.85

Note: Spot as of 24th Nov close
Deutsche Bank
Research
0.90
1.0
2014
2015
2016
140
DB forecast
0.0
Jan-16
US 2 year yield
USD/JPY, rhs
Jul-16
US 10 year yield
90
80
Jan-17
Jul-17
FX Forecasts and Valuations- The Perfect storm?: 23 November 2016
20
Change in growth, policy outlook has allowed US and Eurozone

rates to reprice higher; sell-off to continue through 2017
US long-end yields have increased sharply post
election, e.g., 10Y yield up about 50 bps
Large rise in term premium: risk premium in long
rates relative to expectations of short rates
Inflation and Fed rate hike expectations also up,
but to lesser extent
Foreign flows due to dollar strength and QE by ECB
and BoJ limit magnitude of sell-off
10Y yield to increase to 2.5% around mid-2017
and then return near current level by year-end
Positive data momentum has been supportive of

the repricing of European rates since the summer
Eurozone PMIs consistent with above-potential
growth and thus improved core inflation
Oil price base effects to lift inflation expectations
10Y yield up about 45bps since post-Brexit low,
to rise further in 2017
Sell-off possibly too fast (but not too far): there is a
case for tactical risk reduction ahead of key events
E.g., Italian referendum, ECB meeting
The increase in US long-end yields has been driven by

normalization of term premium, which plummeted earlier this year
In Europe, price components of surveys imply further upside to core

inflation
60
40
20
0
-20
-40
-60
-80
-100
bps
46
10Y Term Premium

-79 -87
1 Jan - 8 Jul*
48
51
8 Jul - 8 Nov
37
10Y Yield
8 Nov - Present
Source: FRBNY, Haver Analytics, Deutsche Bank Research

Note: (*) The 10-year yield troughed for the year on 8 July.
Deutsche Bank
Research
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
%yoy
PPI core cons goods (8m lead)

Implied by PMI
HICP core goods, rhs
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
21
Pressure on EM assets will continue, but expect improvement in

coming quarters given stronger fundamentals vs. taper tantrum
1 EM are vulnerable to a sharp rise in the dollar, US rates...
E.g., Fundamentals: EM corporates face a wall of (hard currency
debt) maturities in the coming years
$bn
180
200
150
158
107
198
2 ...But fundamentals are stronger vs. 2013 taper tantrum

Deutsche Bank aggregate macro vulnerability index shows
significant reduction in EM vulnerability since 2013
0.60
182
More vulnerable
0.58
165
139
124
Average percentile ranking across EM
0.56
121
97
100
0.54
0.52
77
LatAm
CEEMEA
Asia
50
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
0.50
0.48
Less vulnerable
0.46
Jul-08
Jul-10
Jul-12
Jul-14
Jul-16
E.g., Technicals: EM benefited from sustained inflows in the last

several months, and we are starting to see a reversal
Bar a few exceptions, FX reserves cover is higher than in 2013
40
% of GDP
$bn
60
85
50
20
Current
EMEA
May'13
Asia
80,81
LatAm
40
0
30
20
Debt funds inflows
-40
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: IIF, Deutsche Bank Research
Deutsche Bank
Research
10
0
EGP
TRY
ZAR
UAH
RON
HUF
PLN
KZT
ILS
RUB
CZK
IDR
INR
KRW
PHP
CNY
MYR
THB
TWD
VEF
ARS
CLP
MXN
COP
BRL
PEN
-20
Note: Gross reserves used for Turkey. Source: Deutsche Bank Research
FX reserves adequacy in EM 22-Nov-2016
22
DB forecasts
GDP growth (%)
Global
US
Eurozone
Germany
France
Italy
Spain
Japan
UK
China
India
EM Asia
EM CEEMEA
EM LatAm
EM
DM
2015
3.2
2.6
1.9
1.7
1.2
0.7
3.2
0.6
2.2
6.9
7.2
6.1
1.0
-0.4
4.0
2.1
2016F
3.0
1.5
1.6
1.9
1.3
0.9
3.0
0.7
1.9
6.6
7.0
6.0
1.9
-1.0
4.1
1.5
2017F
3.4
2.3
1.1
1.0
1.3
0.6
2.0
1.0
0.9
6.5
7.0
5.9
2.6
1.6
4.6
1.7
2018F
3.8
3.5
1.4
1.3
#N/A
#N/A
#N/A
1.2
1.3
6.0
7.8
5.9
2.6
2.5
4.8
2.4
CPI inflation, YoY* (%)

US
Eurozone
Japan
UK
China
Key market metrics

US 10Y yield (%)
EUR 10Y yield (%)
EUR/USD
LATAM:
ASIA:
DM:
China, HK, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Sri Lanka, Taiwan,
Thailand, Vietnam
Australia, Canada, Denmark , Eurozone, Japan, New Zealand, Norway, Sweden,
Switzerland, UK, US
2017F
1.9
1.3
0.5
2.2
2.7
2018F
2.2
1.5
1.1
2.5
2.4
Current Q4-16F Q4-17F

2.31
2.25
2.30
0.21
0.30
0.35
1.061
1.05
0.95
112
109
115
2,202
2,200
2,350
Stoxx 600
340
325
345
Oil WTI (USD/bbl)
46.9
48.0
55.0
Oil Brent (USD/bbl)
48.1
50.0
57.0
S&P 500
CPI (%) forecasts are period averages
Czech Rep., Israel, Egypt, Hungary, Kazakhstan, Nigeria, Poland, Romania, Russia, Saudi
Arabia, South Africa, Turkey, UAE and Ukraine
Argentina, Brazil, Chile, Colombia, Mexico, Peru, Venezuela
2016F
1.2
0.2
-0.3
0.7
1.9
Central Bank policy rate (%) Current Q4-16F Q4-17F Q4-18F

US
0.375 0.625 1.125 2.125
Eurozone
0.00
0.00
0.00
0.00
Japan
-0.10
-0.10
-0.10
-0.10
UK
0.25
0.25
0.25
0.25
China
1.50
1.50
1.50
1.50
USD/JPY
*
CEEMEA:
2015
0.1
0.0
0.8
0.0
1.4
Current prices as of 28-Nov-2016
Deutsche Bank
Research
23
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Appendix 1
Important Disclosures
*Other information available upon request
*Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg
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or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global
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Analyst Certification
This report covers more than one security and was contributed to by more than one analyst. The views expressed in this report accurately reflect the
views of each contributor to this compendium report. In addition, each contributor has not and will not receive any compensation for providing a specific
recommendation or view in this compendium report. Marcos Arana / Matthew Luzzetti / Aditya Bhave / Rajni Thakur
Attribution
The authors wish to acknowledge the contributions made by Shakun Guleria in the preparation of this report.
Deutsche Bank
Research
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The House View Deutsche Nov2016

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The House View

Switching into a higher gear

DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI(P) 057/04/2016

ETF Daily News, 17-Nov-2016

The Telegraph, 27-Nov-2016

Market Pulse, 17-Nov-2016

The New York Times, 9-Nov-2016

The Huffington Post, 21-Nov-2016

The China Post, 28-Nov-2016

Business Indiser, 23-Nov-2016

The House View, 29 November 2016

Global growth and inflation

Eurozone and China

Editors: Marcos Arana, Aditya Bhave,

More bullish on US outlook following Trump win. But European

Central bank watch

Global outlook remains sluggish. Expect growth to rise

Fed: expect December hike. Risks of faster hikes than

Views on key themes

Key downside risks to our view

US regime shift: potential for US economy to shift into

Trump disappointment: US policies tilted to negatives

rather than positives, US growth fails to accelerate

Notes: H / M / L indicates estimated probability of risk (High, Medium, Low).

Strong rally in DM equities,

Credit weighed down

Europe Stoxx 600

Donald Trumps unexpected election in the US has triggered a

Ultra easy, has

Currently tight but expected to ease

Trump proposes a material increase in the fiscal deficit

Fiscal balance, % of GDP

2010 2012 2014 2016 2018 2020 2022 2024 2026

This reassessment of the outlook brings about the expectation of

US core inflation is grinding steadily upward; Eurozone inflation is

The increase in long-term inflation expectations accelerated after the

5y5y inflation expectations, % (5d avg.)

Source: Bloomberg Finance LP, Deutsche Bank Research

The main reason to be optimistic about US growth is a material

We have revised our GDP growth forecasts substantially upwards.

Source: Deutsche Bank Research

Business investment has been weak relative to prior expansions

Nonresidential equipment spending

Source: BEA, Haver Analytics, Deutsche Bank Research

US Daily: Trump plan to give meaningful lift to GDP 14-Nov-2016

But not all of Trumps programme is positive. The success will

Substantial stimulus, of around 2-3% of GDP

Corporate: slash tax rate*, one-off offer to repatriate foreign

Potential game changer for growth

Reduce regulatory burden, repeal parts of Dodd-Frank

Ease credit supply constraints, helping

Critical of QE / low interest rates policy, supports Fed audit

Challenges to Fed independence would

Protectionist stance: introduce tariffs / duties

Material blow to globalisation

Challenge to US-led liberal world order

Tough stance on immigration: build Mexico wall, end

Very negative at face value, though likely

Major concerns include the threat of protectionism, the potential

2 Impact of strong $ on US economy

Anti-trade tone appeals to Republican base

Impact of strong dollar

Makes US exports less

Raises cost of made in