EUROPE AND GERMANY NEWSLETTER - STOXX · from a week earlier. Yields on five-year, 10-year and 30-year benchmarks declined 224 bps, 107 bps, and 68 bps on Mar. 27, compared to Mar.

EUROPE AND GERMANY NEWSLETTER

Mar. 27, 2015

Aureliano Gentilini Head of Research

“One never finds anything perfectly pure and ... exempt from danger.”

– Niccolò Machiavelli (1469-1527)


THE GLOBAL INVESTMENT PENDULUM OSCILLATES BETWEEN MARKET EUPHORIA AND GLOOM AT THE END OF MARCH.

Safe-haven driver took its toll at the end of the

week as markets went into risk-off mode on

concerns about an escalation of a sectarian war in

Yemen.

» The Saudi Arabia-led air strike operation “Storm of Resolve” marked an escalation in the Yemen crisis as the red line of the “security and defense doctrine” in the Arabian peninsula was crossed. Safe-haven drivers were at play at the end of the week. Concerns about disruption in the passage of crude oil supplies in the Bab el-Mandeb Strait drove short-covering rallies, with spot prices of Brent and WTI crudes edging 4.86% and 5.54% higher, respectively, on Thursday, Mar. 26. In fact, net-short positions were built in the ICE Brent crude delta-adjusted options and futures combined to the tune of USD367.84 million notional value in the two-week period ended March 17. Large speculators net positioning on Brent crude delta-adjusted options and futures combined flipped to net short from net long at the beginning of March, according to the latest available data from the Intercontinental Exchange. As a result, net-long exposure to the ICE Brent crude outstanding on Mar. 17 decreased to about USD9.80 billion notional value, down from USD11.89 billion notional value on Mar. 3. OVX (an index that measures implied volatility on the light crude WTI) increased 5.42% on the day of air strikes in Yemen. Implied volatility for at-the-money options in the front-month WTI contract increased to about 50% on Thursday, Mar. 26. (An elevated OVX value reflects higher prices of options traded on WTI futures contracts and implies that market participants expect further large price movements in the near term.)

» Geopolitical tensions shifted market focus away from the creeping risks arising from a prolonged standoff between the European Union (EU) and Greece. The country appears to be on the verge of a precipice as the Greek government faces a EUR1.7 billion wage and pension bill at the end of March, and a EUR450 million payment loan repayment to the IMF due on Apr. 9. In its review of risks to financial stability, the Bank of England’s Financial Policy Committee statement from its meeting on Mar. 24 highlighted significant threats posed by Greece and its financing needs. The presentation on Monday to its Eurozone partners of a package of reforms, which should be approved by Eurozone finance ministers, remains the compelling condition to unlock aid to Greece. At the same time, the Greek government has requested the return of about EUR1.2 billion in cash left in the Greek bank bailout fund that was withdrawn by the Eurozone last month. Investors appeared to shrug off negative market sentiment following comments from German Minister for Foreign Affairs Frank-Walter Steinmeier, and Eurogroup chief Jeroen Dijsselbloem, suggesting an agreement on the conditions for Greece to receive additional financing may be close. Yields on Greece government bonds edged down in the medium- to long-end segments of the curve from a week earlier. Yields on five-year, 10-year and 30-year benchmarks declined 224 bps, 107 bps, and 68 bps on Mar. 27, compared to Mar. 19 close. The Athex General Composite Index edged 1.19% higher in the early morning trading session on Friday, Mar. 27 from previous day’s close. Similarly, a stock market index of Greek banks, which face severe liquidity issues as outflows accelerated since the beginning of 2015, rose 2.11% from Mar. 26 close. » In the FX market, after weakening in the wake of the recent dovish Fed statement, the US dollar gave ground against the euro and the yen as Saudi


Arabia launched air strikes in Yemen. Information arrival sustained safe-haven currencies such as the yen and the Swiss franc. Nonetheless, at the end of the trading session on Thursday the greenback made a comeback posting the largest daily gain against the euro (+0.78%) in a week and recovered from the minimum against the Swiss franc, rising 0.31% at the end of the trading session on Thursday. In spite of comments by Swiss National Bank (SNB) board member Fritz Zurbruegg, who on Thursday stressed that SNB is prepared to intervene in the FX market “as necessary in order to influence monetary conditions”, the Swiss franc appreciated 0.68% against the euro in the last week. In its annual report, the SNB unveiled it spent CHF25.8 billion on defending the cap in 2014. » Risky assets continued to edge higher at the beginning of the week but lost ground thereafter amid news about growth worries on the other side of the Atlantic and geopolitical tensions. The STOXX Europe 600, the EURO STOXX 50, and the DAX returned -1.57%, -0.03%, and -0.47%, respectively, week on week at March 26 close. All sectors of the STOXX Europe 600 but Oil and Gas (+0.30%) and Telecommunications (+0.27%) posted negative returns at Mar. 26 close, compared to the end-of-the-day reading a week earlier. » The latest reading of the Ifo Business Climate Index for German trade and industry fulfilled expectations of strong economic activity levels in the first quarter. The Business Climate Index rose to 107.9 points in March - its highest level since July 2014 - from 106.8 points in February, beating a Reuters consensus forecast of 107.3. German firms showed a higher degree of satisfaction with their current business situation, also feeling more optimistic about future business developments. The Ifo business climate readings showed improvements in the German retail, wholesale and manufacturing sectors, while sentiment in the construction sector continued to deteriorate as the

boom in construction is weakening. The negative sentiment appeared to be confirmed by the decline in the price-adjusted value of orders received by the German building construction in January. In a separate reading, the Markit Flash Germany Purchasing Managers’ Index (PMI) confirmed in March that German private sector output increased at its strongest rate in eight months. Output growth accelerated at both manufacturers and service providers, with some respondent firms highlighting increased order intakes and more investments. » The Eurozone growth pattern appeared to gain momentum in March as business activity in the region rose at the fastest rate in nearly four years. The Markit Flash Eurozone PMI rose for the fourth month in a row from 53.3 in February to 54.1 in March, hitting the highest reading since May 2011. The growth in business activity was driven by an increase in new orders, which rose at the highest pace since May 2011. The improvement was evenly spread across sectors, although service sector growth outpaced that observed in manufacturing across the Eurozone. In a separate reading, the latest flash Markit France PMI data signaled a rise in private sector output for the second month in a row in March. Despite the rate of growth easing from the previous month and being modest overall, the reading added to early signs that France is emerging from stagnation sustained by lower oil prices and a weaker euro. The seasonally adjusted Markit Flash France Composite Output Index recorded 51.7 in March, down from February’s three-and-a-half year high of 52.2. Resembling February’s reading, activity growth in the service sector outpaced and offset a further decline in manufacturing output. » Export volume data released for 2014 confirmed Germany is a heavily export-oriented economy and German GDP growth remains highly sensitive to the value of exports. Germany continues to hold the top spot, above China, in a global ranking of countries


by trade surplus. As expected, a depreciation pattern of the euro boosted export levels of the country. In 2014 export surplus for Germany stood at a record high of EUR216.9 billion, exceeding the previous peak of EUR195.3 billion reached in 2007. In 2013 Germany recorded a surplus of the foreign trade balance to the tune of EUR195.0 billion. » Driven by a decline in energy prices, the index of producer prices for industrial products in Germany dropped by 2.1% year on year in February 2015. Net of the energy component, the overall index decreased by 0.6% compared with February 2014. In January 2015 the annual rate of change of producer prices for industrial products stood at a negative 2.2%. In February 2015 energy prices dropped by 5.5%, prices of consumer non-durable goods declined by 1.5% and prices of intermediate goods by 1.3%. Conversely, prices of capital goods rose by 0.6% and prices of durable consumer goods by 1.1%. » In January 2015, the total price-adjusted value of orders received by the German building industry declined 0.8% year on year in January 2015. The trend in value orders diverged among industry sectors. In building construction demand dropped 7.3%, while in civil and underground engineering it rose 7.9%.

LIGHT AND SHADOWS – DAX CONSTITUENTS

» Following the Germanwings crash, German aviation association BDL has announced that all German airlines, including Lufthansa and its unit Germanwings, have agreed to discuss possible new regulations enforcing two pilot crew members to be in the cockpit at all times. » In announcing its five-year strategy, German sportswear company Adidas clarified that it would focus on "speed, cities and open source", with

investment in Los Angeles, New York, London, Paris, Shanghai and Tokyo. It aims to increase sales and profitability at a higher pace by selling directly to customers in these six key cities and expanding product customization. Adidas said it would target a rise in net income of around 15% per year on average until 2020. The company expects the dividend payout ratio to rise to 30%-50% of net income from 20%-40%. » Bayer has received approval for its Gadovist (gadobutrol) injection in Japan for use with magnetic resonance imaging (MRI). Gadovist is the first high concentration/high relaxivity gadolinium-based contrast agent to be approved in Japan. » Private investors are reported to have built up stakes in ThyssenKrupp in recent weeks. According to Thomson Reuters data, BlackRock, Vanguard, Manning & Napier, Deka, and DB Platinum filed notices on Feb. 28 that they had increased their stakes, holding a total of 3.76%. » Australia has invited Germany, France and Japan to join forces for a contract to build its new submarine fleet, kicking off a contentious and long-delayed AUD50 billion project. Germany's ThyssenKrupp Marine Systems and France's state-controlled naval contractor DCNS have both expressed interest. » A German court is expected to rule on a claim for damages that Russia's Sintez filed against RWE AG for its decision in 2008 to terminate plans to buy Russian power generator TGK-2 jointly with Sintez.

“ONE NEVER FINDS ANYTHING PERFECTLY PURE AND ... EXEMPT FROM

DANGER.”

– Niccolò Machiavelli (1469-1527)


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Mar. 27, 2015

©STOXX 2015. All Rights Reserved. The report was closed with information available as of the Mar. 7, 2015 at 10:00 am CET. STOXX research reports are for informational purposes only, and do not constitute investment advice or an offer to sell or the solicitation of an offer to buy any security of any entity in any jurisdiction. Although the information herein is believed to be reliable and has been obtained from sources believed to be reliable, we make no representation or warranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of such information.

No guarantee is made that the information in this report is accurate or complete and no warranties are made with regard to the results to be obtained from its use. STOXX Ltd. will not be liable for any loss or damage resulting from information obtained from this report. Furthermore, past performance is not necessarily indicative of future results. The views and opinions expressed in this research report are those of the author and do not necessarily represent the views of STOXX Ltd. This report is for individual and internal use only. It may not be reproduced or transmitted in whole or in part by any means, electronic, mechanical, photocopying, or otherwise, without STOXX's prior written approval.

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EUROPE AND GERMANY NEWSLETTER - STOXX · from a week earlier. Yields on five-year, 10-year and 30-year benchmarks declined 224 bps, 107 bps, and 68 bps on Mar. 27, compared to Mar.

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