October 17 2014 “From Extraordinary to Ordinary” Publications

October 17th 2014
“From Extraordinary to Ordinary”
That is how my US colleague describes the Fed’s turnaround in her
weekly outlook. The US central bank is returning to a more ordinary
monetary policy and, in doing so, putting an end to a period of extraordinary low volatility (at least in a long-term comparison). In
contrast, the European Central Bank is continuing its extraordinary
policy and feeling its way towards quantitative easing. The more so
as inflation expectations of market participants – that are one of the
major indicators for the Central Bank – are in free fall after the latest
deterioration of growth figures coming from both sides of the Atlantic. A fact, that puts the ECB under pressure towards a European
styled QE.
The likelihood of QE has risen, but we still stick to our base case
scenario: Growth figures overall don’t indicate a recession, not to say
a deflationary scenario. What we have seen at equity markets during
the last few days seems to be primarily driven by the fact that markets were too complacent before and relied too much on Central
Bank’s liquidity.
Looking forward, investors should get used to the fact that volatility
will return. That is a piece of bad news for investors who quickly
need liquidity. Those, however, who can deal with higher volatility
should continue to put their money into a broadly diversified mix of
Historical lessons from Federal Reserve
rate-hike cycles
Conventional wisdom seems to suggest that a
tightening of monetary policy should weigh on
financial markets in general and risky assets in
particular. The good news is that this assumption is not corroborated by historical evidence.
Read more in Martin Hochstein’s latest white
The case of emerging market currencies
The case for emerging market currencies. With
emerging market currencies being markedly
more attractive than two years ago, Stefan
Hofrichter and Martin Hochstein come to the
conclusion that it is beneficial to build up
exposure to emerging market assets in the
current environment.
“Equities should receive support from technicals during the
coming week. According to the relative-strength indices, key
markets are clearly oversold by now. Higher volatility is a
Chart of the week: Relative Strength Index
clearly good sign as well. In the past, a higher VIX (the
benchmark index for volatility) often pointed to a significant
What does this mean for the coming week?
Two well-known drivers should play a major role: the reporting
season and economic data.
While the European reporting season has not really started yet, its
US counterpart is picking up speed. During the past week, US companies whose market capitalisation is equivalent to 20% of the
Source: Datastream, Allianz GI Global Capital Markets & Thematic Research , data as of
October 2014
aggregate capitalisation of the S&P 500 presented their figures for
Q3. This market capitalization ratio will rise to 33% during the coming week. By the end of the week, 329 companies – or 66% of the
companies in the broad market index – will have announced their
In subsequent weeks, the number of US company reports will
decline again, and attention will shift towards Europe.
Fears that the five-year uptrend in US corporate earnings might not
continue as before are quite understandable, particularly since the
US dollar is appreciating. Fortunately, analysts have already revised
their expectations downwards, which is why a deluge of negative
surprises is unlikely. In fact, about 67% of the results released so far
surprised to the upside.
German producer prices will be the first economic data to be released on Monday. On Tuesday, Chinese industrial output and GDP
figures and US existing home sales figures will be announced. On
Wednesday, we will get the minutes of the Bank of England, and
on Thursday, the Markit PMIs for the euro area. The Chicago Fed PMI
and the US leading index as well as the HSBC PMI for China will be
released on that day, too. And on Friday, the GfK consumer climate
index for Germany, US new home sales and British GDP figures for
Q3 will be announced.
Equities should receive support from technicals during the coming
week. According to the relative-strength indices, key markets are
clearly oversold by now (see our chart of the week). In such a situation, sentiment often changes. However, that is certainly not exceptional. Quite the contrary: markets depend on people’s moods.
Higher volatility might be seen as a good sign as well. In the past, a
higher VIX (the benchmark index for volatility) often pointed to a
significant upswing.
Wishing you extraordinary
Hans-Jörg Naumer
Hans-Jörg Naumer
Global Head of Global Capital
Markets & Thematic Research
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Upcoming Political Events 2014
23.-24. Oct.
26. Oct.
26. Oct
28-29. Oct
01. Nov
04. Nov
04. Nov
06. Nov
06.-07. Nov
12. Nov
15.-16. Nov
19. Nov
European Council Meeting
Prospective release of AQR and EU bank
stress test results
New elections Ukraine (announced)
FOMC meeting
18. Chinese Party Congress
General election Lebanon
Spain: Catalonia independence consultation
New European Commission taking office
US midterm elections
Launch of Single Supervisory Mechanism
ECB Governing Council Meeting
Eurogroup and ECOFIN Meetings
BoE inflation report & press conference
G20 Leaders Summit
ECB Governing Council Meeting
 Overview political events 2014
Global Capital Markets & Thematic Research
goes MP3, iPod & Blackberry:
 to our publications
 to our twitter feed
 to our podcasts
Calendar Week 43:
• Euro-Zone:
 ECB Current Account (Aug) (18.7bn EUR)
 Eurozone Current Account (Aug) (32.3bn EUR)
• Germany:
 PPI (Oct) (-0.1% m/m)
• UK:
 Rightmove House Prices (Oct) (+0.9% m/m)
Reports: Apple, SAP, Philips
• Euro-Zone:
 Government Debt/GDP Ratio (2013) (92.6%)
• US:
 Existing Home Sales (Sep) expt. +0.9% m/m (-1.8%)
• China:
 Industrial Production (Sep) +7.5% y/y (+6.5%)
 GDP sa (Sep) +1.8% q/q(+2.0%)
Reports: Coca Cola, Yahoo
 Markit Services PMI (55.7)
 Markit Composite PMI (54.1)
• US:
 Chicago Fed National Activity Index (Sep) (-0.21)
 Initial Jobless Claims (CW42)
 Continuing Claims (CW41)
 FHFA House Price index (Aug) (+0.1% m/m)
 Markit Manufacturing PMI (Oct) 57.5 (57.5)
 Bloomberg Consumer Comfort
 Leading Index (Sep) +0.7% m/m (+0.2%)
 Kansas City Fed Manufacturing Activity (Oct) (6)
• UK:
 Retail Sales ex Auto (Sep) +0.2%m/m)
• Japan:
 Markit Manufacturing PMI (Oct) (51.7)
• China:
 HSBC Manufacturing PMI (Oct) (50.2)
Payment Redemptions: France (8.8bn EUR)
Reports: Amazon, 3M, Microsoft, General Motors, Nokia, Daimler
• Germany:
• US:
 GfK Consumer Confidence (Nov) (8.3)
• US:
 New Home Sales (Sep) -5.8% m/m (+18.0%)
• UK:
 GDP (3Q) (+0.9% q/q)
 MBA mortgage applications (CW41)
 CPI (Sep) 0.0% m/m (-0.2% m/m)
 CPI (Sep) (+1.7% y/y)
• UK:
 Bank of England Minutes
• Japan:
 Trade Balance (Sep) (-949.7bn JPY)
Reports: Boeing, AT&T, Iberdrola
• Euro-Zone:
 Markit Manufacturing PMI (Oct) (50.3)
 Markit Services PMI (Oct) (52.4)
 Markit Composite (Oct) (52.0)
 Consumer Confidence (Oct) (-11.4)
• Germany:
 Markit Manufacturing PMI (Oct) (51.7)
The hypothetical performance and simulations shown are for illustrative purposes only and do not represent actual performance; they are not a
reliable indicator for future results. Back-testings and hypothetical or simulated performance data has many inherent limitations only some of
which are described as follows:
Investors should not assume that they will experience a performance similar to the back-testings, hypothetical or simulated performance
shown. Material differences between back-testings, hypothetical or simulated performance results and actual results subsequently achieved by
any investment strategy are possible.
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