27 May 2015
House view: Greece, US, China key risks - Deutsche Bank
FXStreet (Bali) - David Folkerts-Landau, Group Chief Economist at Deutsche Bank, shares the Bank's core view on the main macro subjects impacting financial markets/currencies, noting that the key risks remain Greece and a sharper slowdown in the US and China.
Key Quotes
"The past month was marked by a sharp sell-off in European rates as Bunds experienced one of the strongest corrections on record. Underlying the move was a repricing of the impact of ECB QE and a rise of inflation expectations, both underpinned by an improving macro backdrop in the Eurozone. Assets outside Europe were less affected, but the sell-off may just have been a precursor of future market tremors. The current fiscal, regulatory and monetary policy mix, while successful in avoiding excessive leverage, raises the risk of significant supply / demand mismatches and recurring spikes in market volatility."
"The global recovery continues to somewhat disappoint. Although growth momentum is no longer slowing, concerns remain. Europe stands out as the undeniable positive story. However, after upward revisions at the beginning of the year, recent data have been weakening and scope for further upside surprises is now limited. In the US, data have continued to underwhelm, but robust fundamentals should be reflected in stronger growth over coming quarters. In China, fiscal stimulus will now add to monetary easing, providing a boost to growth."
"A Fed hike is still very much on the table in 2015; our base case is a first hike in September, given a robust labour market and an improving inflation picture. Any action remains data dependent, however."
"Rates markets appear to be mispricing the path of monetary policy, with core rates in Europe now above pre- QE levels and US rates pricing in too gradual a hiking cycle. In equities, upside in Europe seems now limited while a pullback in the US appears likely; we see more opportunities in stock-picking than in broad indices. Implied volatility in equity markets looks low relative to other asset classes, though this is not infrequent. We expect volatility spikes to continue to be short-lived. The environment remains supportive for credit and spreads are not particularly tight; we favour high-yield, given lower duration risk and higher yield."
"The key risks remain Greece and a sharper slowdown in the US and China."
Key Quotes
"The past month was marked by a sharp sell-off in European rates as Bunds experienced one of the strongest corrections on record. Underlying the move was a repricing of the impact of ECB QE and a rise of inflation expectations, both underpinned by an improving macro backdrop in the Eurozone. Assets outside Europe were less affected, but the sell-off may just have been a precursor of future market tremors. The current fiscal, regulatory and monetary policy mix, while successful in avoiding excessive leverage, raises the risk of significant supply / demand mismatches and recurring spikes in market volatility."
"The global recovery continues to somewhat disappoint. Although growth momentum is no longer slowing, concerns remain. Europe stands out as the undeniable positive story. However, after upward revisions at the beginning of the year, recent data have been weakening and scope for further upside surprises is now limited. In the US, data have continued to underwhelm, but robust fundamentals should be reflected in stronger growth over coming quarters. In China, fiscal stimulus will now add to monetary easing, providing a boost to growth."
"A Fed hike is still very much on the table in 2015; our base case is a first hike in September, given a robust labour market and an improving inflation picture. Any action remains data dependent, however."
"Rates markets appear to be mispricing the path of monetary policy, with core rates in Europe now above pre- QE levels and US rates pricing in too gradual a hiking cycle. In equities, upside in Europe seems now limited while a pullback in the US appears likely; we see more opportunities in stock-picking than in broad indices. Implied volatility in equity markets looks low relative to other asset classes, though this is not infrequent. We expect volatility spikes to continue to be short-lived. The environment remains supportive for credit and spreads are not particularly tight; we favour high-yield, given lower duration risk and higher yield."
"The key risks remain Greece and a sharper slowdown in the US and China."