Deutsche Bank

Markets Research
Global

Economics

Date
2 January 2014
Early Morning Reid
Macro Strategy


________________________________________________________________________________________________________________
Deutsche Bank AG/Hong Kong
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MICA(P) 054/04/2013.

Colin Tan, CFA
Research Analyst
(+852) 2203 5720
colin.tan@db.com

Jim Reid
Strategist
(+44) 20 754-72943
jim.reid@db.com


Anthony Ip, CFA
Strategist
(+61) 2 8258-3668
anthony.ip@db.com



A happy NY to everyone. We start 2014 by reviewing 2013 from a global cross
asset class perspective. As we know 2013 proved to be a very strong year for
DM equities although other asset classes were more mixed. The chart in the
pdf gives us a quick indication of this. It is colour coded by the main asset
classes and shows the 2013 asset returns ranked from best to worst. For the
record here are our top ten winners of the year and their respective total
returns: Nikkei (+59%), S&P 500 (+32%), Greece Athex (+30%), IBEX (+28%),
DAX (+26%), Stoxx600 Banks (+23%), Stoxx 600 (+22%), FTSEMIB (+20%) and
UK FTSE 100 (+19%).
Not only have DM equity benchmarks taken up all the Top Ten list in our chart,
the spectacular rally last year also helped key indices (MSCI World, S&P 500,
Stoxx600, DAX) close 2013 at or near record territory. Japanese equities have
been a clear standout this year with the Nikkei capping off its best annual price
return performance since 1972. Clearly much of these gains were attributable
to Abenomics and the BoJs balance sheet expansion programme but at the
same time the outsized returns were also helped by a sharp 18% depreciation
in the Yen against the Dollar - which marks the worst year for the currency
since 1979.
Away from Japan, US equities have also had a good year. The S&P 500 and
the Dow are up for the 2nd and 5th consecutive year as they celebrate their
strongest annual performance since 1998 and 1995, respectively. Finishing at
1848, the S&P 500 has been pretty much on the front foot throughout the year
and has not once dipped below its starting level of 1426. To repeat such a feat
for the second year in a row is a rare showing as there's been only one episode
(1975 and 1976) of such back-to-back performance since data starts on
Bloomberg in 1928. A repeat in 2014 would certainly be one for the record
books! The optimism in equities has also spurred a wave of new listing
activities which is seemingly set to continue this year. According to a PwC
survey, US IPO volumes (as of Dec 17th) reached 237 in 2013 a vast
improvement versus the 146 in 2012, which also marks it as the most active
year of IPO activity since 2007.
Away from DM equities, 2013 proved to be a relatively subdued year for fixed
income performance. With the exception of the European periphery, total
returns for the core government bond market were generally in the red. Indeed
whilst Spanish (+11.0%) and Italian (+7.2%) sovereign bonds saw pretty solid
gains in 2013, Treasuries, Gilts and Bunds were down -3.4%, -4.2% and -2.2%
respectively. It was a mixed performance for Credit although the chase for
yield has led to decent outperformance in higher beta parts of the Credit
spectrum. Total returns for European and US HY were 6.4% and 9.4% for the
year.
EM and commodities were the major losers of the year. The MSCI EM
equities index is down 2.4% for the year although the performance within the
BRIC is somewhat mixed. Latam seems to be a big driver of the EM
Upcoming Events
Release DB Prev Con
Initial jobless claims (12/28) 340k 338k 342k
Construction spending
(Nov) +1.0% +0.8% +0.7%
ISM Manufacturing (Dec) 56.0 57.3 56.9
Topical DB Publications
2014 Equity Outlook - Above and below trend, 29 Nov 2013
Made in Germany - Equity Outlook 2014: Focus on the GER
Consumer, 03 Dec 2013
EM 2014 Outlook: Diverging Markets, 05 Dec 2013
India Insight - Economy and markets around elections, 02
Dec 2013
European Investment Banks - 2014 Outlook: more cost
cuts, greater focus, 03 Dec 2013

Market Data
Index Close Change
ITX Crossover 286 +1
ITX Europe 125 70 -1
CDX 125 63 -1
CDX HY - pts 108.56 +0.344
S&P 500 1848 unch
Brent Oil^ 111.09 +0.26%
Gold^ 1223 +1.41%
10 yr Treasury^ 3.03 0 bp
ITX Sen Fin 87 +3
ITX Sub Fin 129 -4
CDX EM 274 unch
ITX Japan 68 unch
ITX Australia 96 -2
ITX Asia XJ 129 +1
Euro NonSov 79.82 -1
Euro Corp 113 -1
Euro BBB 151.43 -2
Sterling NonGilt 128 +2
Sterling Corp 156 unch
Sterling BBB 209 -1
WTI Oil^ 98.71 +0.05%
Dollar Index^ 80.20 -0.01%
EUR/USD^ 1.375 +0.04%
DJ Stoxx 600 328 0%
NIKKEI 16291 0%
Hang Seng 23239 -0.29%
VIX 13.72 unch
^ - Change from previous days 05.30 GMT to 05:30 GMT. Levels
as of 05:30 London time. European and US CDS indices above
refer to old off the run series
2 January 2014
Early Morning Reid: Macro Strategy


Page 2 Deutsche Bank AG/Hong Kong



underperformance with the Bovespa down by nearly 16% in 2013. The
Shanghai Composite closed off its 2013 lows but still finishing the year 4%
lower. Interestingly Indian (+8.5%) and Russian (+6.0%) bourses managed to
finish the year in the black despite persistent Taper-led worries in EM. EM
bonds were down 6% on the year as market technicals weakened on
persistent fund outflows. EMFX weakness was also a major theme in 2013
with the Indonesian Rupiah (-19.5%), South African Rand (-19.2%), and Turkish
Lira (-16.9%) amongst the top losers against the Dollar. In commodities, Corn
(-40%), Silver (-36%), and Gold (-28%) were the key losers of the year although
the asset class found some relief in WTI and Brent which rose by about 6-7%
on the year. We should also note that it was the first down year in Gold since
2000. The full review is contained in charts and a table in the pdf.
So as 2014 kicks off, the spotlight will be on US treasuries after the 10yr
finished the final trading session of 2013 at the years high of 3.028%, having
added around 140bp from the mid-2013 trough. The first trading day of 2014
has gotten off to a slow start in Asia with equity markets in Tokyo and onshore
China still closed for NY celebrations. The prevailing theme of subdued fixed
income performance has carried over to the New Year with government bonds
in Asia generally trading with a weaker tone this morning in sympathy with the
recent movement in USTs. China-growth assets are struggling following the
release of a below consensus official Chinese manufacturing PMI yesterday
(51.0 vs 51.2 expected). This has been followed up by the final HSBC
manufacturing PMI overnight (50.5, in line with flash estimate), which is 0.3pt
lower than Novembers reading. The Hang Seng is broadly unchanged,
Chinese A-shares are down 0.5%, and the AUDUSD is about 0.3% weaker than
the closing 2013 level. Volatility in onshore Chinese money market rates
continues with the 7-day repo rate jumping 200bp after easing by 350bp on
New Years Eve. Asian EM currencies are a touch weaker as we type.
Looking at the calendar over the next couple of days, the 2014 data docket
kicks off with the latest round of global ISM and PMI activity indicators today.
The final Euroarea manufacturing PMIs for December will be released, together
with the first manufacturing PMI readings for Spain, Italy and Greece. Recall
that the preliminary Euroarea manufacturing PMI for December was 52.7, a
31-month high. The closely-watched ISM is the main data release in the US
today where expectations are for a slight moderation in the headline number to
56.8 (vs 57.3 last month). US initial jobless claims will also be released today.
Turning to Friday, Ben Bernanke addresses the American Economic
Association annual meeting in Philadelphia, in one of his final public speeches
before the end of his second term as the Fed Chair. Other Fed speakers at the
event include Plosser, Stein and Lacker. Fridays data releases include the
official Chinese services PMI, US motor vehicle sales, Euroarea money supply
and the preliminary December CPI readings for Spain and Italy.