Global Markets Roundup

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1 Oct14 Nov14 Dec14 Jan15 Feb15 Mar15 Apr15 May15 Jun15 Jul15 Aug15 Sep15 Oct15 Nov15 Dec15 Jan16 Feb16 Mar16 Apr16 May16 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Charts of the week September 23, 2014 Global Markets Roundup NBG Strategy and Economic Research Division A dovish Fed and the positive outcome of the Scottish referendum encourage risk taking See disclosures and analyst certification on last page. The Fed reiterated its forward guidance of keeping interest rates at zero levels for a long time after the likely end of the asset purchase programme next month (currently $15bn per month). It also projected a faster pace of monetary policy tightening going forward. In particular, the FOMC forecasts for the fed funds rate moved up by 25 bps to 1.375% for end-2015 Director and of by 37.5 bps to 2.875% for end-2016 compared with three months ago. The balanced approach between retaining a dovish stance and higher interest rate forecasts supported US equities, with the S&P500 hitting an all-time high of (up by 1.3% on a weekly basis), and the US Dollar (DXY index) reached its highest level since mid In a similar vein, 2-Year Treasury yields (particularly sensitive to policy interest rate expectations) hovered around their 3-year high of 0.57%. All in all, financial markets continue to: i) foresee a first interest rate hike in mid-2015; but ii) price-in a slower tightening of the Fed (see graph). The Scottish independence referendum resulted in a NO vote by a wider-than-expected margin (55% to 45%). The last-minute pledge by the three main UK parties (Conservatives, Labour and Lib/Dems) to devolve more powers to Scotland may have helped tilt the balance in favor of unionists. All told, the outcome of the referendum was market-positive for UK assets, with the British Pound gaining ground across the board, following downward pressures during the past two weeks. Specifically, the GBP appreciated by 1.4% to 0.78 against the euro and by 0.6% against the US dollar to 0.61, while 2-year Gilt yields rose to a three-month high of 0.88%. Euro area banks borrowed 83bn from the ECB for 4-years at a fixed rate of 0.15% (MRO rate + 10 bps spread) in the first targeted long-term refinancing operation (TLTRO), significantly below consensus estimates of 150bn. The low take-up has already raised doubts over the effectiveness of the ECB s goal to increase its balance sheet to 2.7tn - 3.0tn and drive inflation to its target of close but below 2% (through a lower euro exchange rate). Indeed, medium-term market inflation expectations have fallen below levels mentioned in Mr. Draghi s speech at Jackson Hole (see graph). The central bank of China (PBoC) provided extra liquidity (RMB500bn or $81bn or 0.9% of GDP) to five major Chinese banks for a period of three months and cut its two-week repo rate by 20 bps to 3.5% in light of weak economic activity. These measures represent targeted easing, with the likelihood of a large-scale monetary policy package remaining low, as long as the Government s 2014 GDP growth target of around 7.5% is attainable (current GDP expectations for 2014 are 7.4%). The G20 communique revealed that policy actions (agreed earlier in the year) could lift collective (G20 members) GDP by 1.8 pps by 2018 according to IMF/OECD analysis. Note that these include more than 900 individual policy commitments, the majority of policy actions refer to employment (30% of policy actions), infrastructure (27%), competition (16%) and trade (13%). Furthermore, the G20 noted that members are aware of the potential for a build-up of excessive financial risk, especially in a low policy rate - low volatility environment. Paul Mylonas, PhD NBG Group Chief Economist pmylonas@nbg.gr Ilias Tsirigotakis tsirigotakis.hlias@nbg.gr % 3,00 2,75 2,50 2,25 2,00 1,75 1,50 1,25 1,00 0,75 0,50 0,25 0,00 Federal Reserve Projections (September 2014) Federal Reserve Projections (June 2014) Fed Fund Futures (September 2014) Fed Fund Futures (June 2014) % EUR Breakeven 5Y/5Y Inflation Swap Rate 2,40 2,35 2,30 2,25 2,20 2,15 2,10 2,05 2,00 1,95 Draghi's speech at Jackson Hole 1,90 Source: Bloomberg,Deutsche Bank 1

2 Economics In the US, the Fed retained its forward guidance of keeping interest rates at zero levels for a considerable time after the asset purchase programme ends. The statement also revealed key elements of its policy normalization strategy (when the latter becomes appropriate). Specifically, the Fed will continue to roll-over maturing Treasuries and agency MBSs (thus maintaining an accommodative stance) at least until the first rate increase has taken place. Ms Yellen stated that the Fed s balance sheet (currently at 25.2%of GDP) could return to a more normalized level by the end of the decade. Note that the Fed s balance sheet as of end-2006 (pre-crisis) was circa 6.2% of GDP. Overall, the statement contained modest changes, with a more dovish description of inflation which has been running below the Fed s longerrun objective compared with has moved closer to the Fed s longer-run objective at the July meeting. Finally, as widely expected, the Fed reduced its asset purchase programme by $10bn evenly split between Treasuries and agency MBSs -- to a pace of $10bn per month for Treasuries and $5bn per month for agency MBSs ($15bn in total) and will terminate QE at its next meeting (October 29th). Regarding the future path of the Fed funds rate, the median FOMC forecasts moved modestly higher. Specifically, the median forecast for end-2015 was revised up by 25 bps to 1.375% and for end-2016 by 37.5 bps to 2.875% compared with three months earlier. In addition, the median forecast for end-2017 stood at 3.75% matching the median FOMC view for the neutral fed funds rate. All told, the upwardly revised forecasts imply slightly faster interest rate hikes by the Fed, whereas analysts and financial markets expect the first interest rate hike around mid Finally, the Fed reduced slightly its 2014 (Q4 YoY) GDP and 2015 GDP forecasts by 0.1 pps and 0.3 pps, respectively, to 2.1% and 2.8%, and left unchanged at 2.8% its projection for 2016 GDP. A projection for 2017 (of 2.2%) was included for the first time. The unemployment rate (Q4 average) was reduced by pps during the forecasting horizon (6.0%, 5.5%, 5.3% and 5.1%), while changes to PCE inflation (Q4 average) were minor (1.6% in 2014, 1.8% in 2015, 1.9% in 2016 and 2.0% in 2017). US inflationary pressures moderated in August, with core CPI flat on a monthly basis, following an increase of 0.1% m-o-m in July and, as a result, the annual change of core CPI decelerated to 1.7% y-o-y in August from 1.9% y-o-y in July. Headline CPI declined by 0.2% m-o-m (1.7% y-o-y) in August from 0.1% m-o-m in July (1.9% y-o-y), mainly driven by declining energy prices (-2.6% m-o-m). It should be borne in mind that the Fed s preferred measure of inflation is the Personal Consumption Expenditures (PCE) price index, with expectations for a slowdown in the PCE to 1.4% y-o-y in August from 1.6% y-o-y in July. Regarding other US economic news, initial jobless claims declined by 26k to 280k for the week ending September 13 th, significantly below consensus estimates of 305k, while the less volatile 4-week moving average index remains broadly steady at circa 300k since mid-july. Regarding the US housing market, housing starts declined by 14.4% m-o-m (8.0% y-o-y) to 956k in August from +22.9% m-o-m (24.4% y-o-y) in July and building permits decreased by 5.6% m-o-m (5.3% y-o-y) from +8.6% m-o-m (8.2% y-o-y for the same period). In addition, existing home sales were broadly stable at 5.05mn in August compared with consensus expectations of 5.20mn. On the other hand, surveys continue to point to a brighter outlook, with the NAHB index -- that captures homebuilders confidence for new home sales -- increasing to 59 in September, its highest level since November 2005, from 55 in August. Euro area consumer confidence deteriorated further in September. Specifically, the EC s consumer confidence indicator (CCI) fell to from in August, below consensus estimates for an unchanged reading. The latest outcome maintained CCI above its 15-year average (-12.2), albeit the index has deteriorated for a third month in a row, suggesting that weak economic activity is taking its toll in consumer sentiment (euro area GDP growth in Q2:14 was zero and business indicators so far point to an anemic increase in Q3:14). Euro area banks borrowed 83bn from the ECB in the first TLTRO, significantly below consensus estimates of 150bn. There are several reasons offered for the low take-up including: i) banks could be reluctant to pledge collateral before the announcenment of the results of the ECB s AQR and stress tests (due on October 26th); ii) banks may have opted to finance their liquidity needs between September and December (the second TLTRO is due on December 11) through main refinancing operations at a lower cost of 0.05% (compared with 0.15% of the TLTRO); iii) the existing 3-Year LTROs (which are indexed to the MRO rate currently at 0.05%) will mature in January and February 2015, making it cheaper to roll the existing LTRO into the new TLTRO in December; and iv) banks could be awaiting the full details of the ECB ABSs purchase programme on October 2 nd as they may prefer to sell ABSs to the ECB than pledge them now as collateral. However, the low take-up has already raised doubts over the effectiveness of the ECB s goal to increase its balance sheet to 2.7tn - 3.0tn. In the UK, the unemployment rate slipped to 6.2% in July, the lowest rate since November 2008, from 6.4% in June and has fallen by 1.5 pps compared with one year ago, marking the steepest annual change in more than 25 years. Note that the lower unemployment rate (in July) was mainly driven by the decline in the labor force participation rate (by 0.2 pps to 63.5% in July), albeit the latter remains on an upward trend since early 2010 and slightly above its long-term average of 63.1%. Nevertheless, wage growth continues to appear constrained. Indeed, average weekly earnings (excluding bonuses) rose by 0.7% y-o-y in July from 0.8% y-o-y in June, and are well below their long-term average of 3.0% y-o-y. According to the BOE, the changing composition of the workforce toward the services sector of the economy (more part-time workers), a rising participation rate among older workers and inflows of foreign workers are likely to have dampened wages. The weak wage growth, as well as depressed unit labor costs, continues to support the decision for maintaining policy rates at low levels (currently at 0.50%), according to the minutes of the Bank of England meeting on September 4th. 2

3 23-Jun-14 4-Jul Jul Jul-14 6-Aug Aug Aug-14 8-Sep Sep Jun-14 4-Jul Jul Jul-14 6-Aug Aug Aug-14 8-Sep Sep Jun Jul Jul Jul Aug Aug Aug Sep Sep Jun Jul Jul Jul Aug Aug Aug Sep Sep-14 NBG Strategy and Economic Research September 23, 2014 Against this backdrop, the BoE voted for a second consecutive month -- to leave rates on hold, with the two dissenting members voting for a 25 bp interest rate hike. It is worth noting that the first interest rate increase is now fully priced in for early Q2:15 -- according to GBP OIS forwards -- back from early Q1:2015 one month ago, on the back of a more dovish stance by Governor Carney. In China, the central bank (PBoC) proceed with targeted monetary policy measures in order to cope with weak economic activity (e.g. industrial production rose by 6.9% y-o-y in August, the slowest annual rate since December 2008), as well as declining house prices that fell for a third consecutive month (-1.2% m-o-m / +0.5% y-o-y in August from -0.9% m-o-m / 2.6% y-o-y in July). Specifically, the PBoC injected liquidity of RMB500bn ($81bn) to the top-five banks through collateralized lending for a maximum duration of up to three months and lowered its 2-week repo rate by 20 bps to 3.5%. Quote of the week: " we stand ready to use additional unconventional instruments within our mandate, and alter the size and/or the composition of our unconventional interventions should it become necessary to further address risks of a too prolonged period of low inflation, ECB President, Mario Draghi, on September 22 nd Markets Global equity markets ended the week higher as the Fed reiterated its pledge to maintain interest rates low for a considerable time after QE ends and the outcome of the Scottish referendum was market friendly with a NO vote of 55%-45%. Developed markets outperformed their emerging peers for a second consecutive week, with the MSCI World increasing by 0.8% and the MSCI Emerging Markets declining by 0.1% over the week. The Nikkei225 outperformed by 2.3% on a weekly basis, while the S&P 500 and the EuroStoxx increased by 1.3% and 0.9%, respectively. For H2:2014, a steady pick-up in global growth, combined with reduced uncertainty and an ongoing accommodative monetary policy stance from most major central banks, is expected to support global equities. However, with most valuation multiples having returned to (or exceeding) their longterm averages, earnings growth needs to be the catalyst for the equity market performance this year. On the other hand, the major market risk could stem from a disorderly re-pricing of the Fed s interest rate hiking cycle, especially as we approach the termination of asset purchases (October 2014). In addition, the ongoing Ukraine/Russia conflict (as well the developments in the Middle East) will continue to attract market attention % 2,80 2,60 2,40 2,20 2,00 1,80 1,60 1,40 1,20 1,00 0,80 0,60 bps Equity Indices (3-months before = 100) Euro Area Japan UK US 10-Year Government Bond Yields US (left) Euro Area (left) UK (left) Japan (right) 10-Year Government Bond Spreads Greece (left) Portugal (right) Ireland (right) Italy (right) Spain (right) % 0,80 0,75 0,70 0,65 0,60 0,55 0,50 0,45 0,40 bps Government Bonds remained broadly flat during the past week, with the US 10-year Treasury yield hovering around three month highs of 2.58% as the effect of a more-dovish-than-expected Fed statement was broadly offset by higher interest rate forecasts by Fed officials. The German Bund yield decreased by 4 bps to 1.04%, while Japan s 10-year Government Bond yield declined by 2 bps on a weekly basis to 0.56%. In a similar vein, the UK 10-year Gilt yields remained flat at 2.54%. 1,38 1,37 1,36 1,35 1,34 1,33 1,32 1,31 EUR/USD (left) USD/JPY (right) In foreign exchange markets, the US dollar gained ground across the board, appreciating by 1.6% against the Japanese yen and reaching its highest level since August 2008 (109.04). The FOMC median forecasts for the federal funds rate increased significantly compared with three months ago, triggering broad-based US dollar gains (with the exception of the GBP). Indeed, following the NO vote victory in Scotland, the British pound closed the week higher against majors. 1,30 1,29 1,

4 Economic News Diary: September 16 - September 29, 2014 Day Region Release Period Survey Actual Prior Current Week Tuesday 16 US Net Long-term TIC Flows ($ bn) JULY 25,0-18,6-18,7 UK CPI YoY AUGUST 1,5% 1,5% 1,6% UK CPI Core YoY AUGUST 1,8% 1,9% 1,8% GERMANY ZEW Survey Current Situation SEPTEMBER 40,0-25,4 44,3 GERMANY ZEW Survey Expectations SEPTEMBER 5,0 + 6,9 8,6 Wednesday 17 US CPI YoY AUGUST 1,9% 1,7% 2,0% US Core CPI YoY AUGUST 1,9% 1,7% 1,9% US Fed pace of monthly Treasury purchases ($bn) SEPTEMBER US Fed pace of monthly MBS purchases ($bn) SEPTEMBER US Fed announces its intervention rate SEPTEMBER 17 0,25% 0,25% 0,25% US NAHB housing market confidence index SEPTEMBER UK Bank of England releases MPC Minutes UK ILO Unemployment Rate JULY 6,3% + 6,2% 6,4% EURO AREA CPI YoY AUGUST F 0,3% 0,4% 0,3% EURO AREA Core CPI YoY AUGUST F 0,9% 0,9% 0,9% Thursday 18 US Initial Jobless Claims (k) SEPTEMBER US Continuing Claims (k) SEPTEMBER US Housing starts (k) AUGUST US Building permits (k) AUGUST US Philadelphia Fed Business Outlook SEPTEMBER 23,0-22,5 28,0 JAPAN Exports YoY AUGUST -2,6% -1,3% 3,9% JAPAN Imports YoY AUGUST -1,2% -1,5% 2,3% Friday 19 US Conference board leading indicators (MoM) AUGUST 0,4% 0,2% 1,1% Monday 22 US Existing home sales (mn) AUGUST 5,20-5,05 5,14 EURO AREA Consumer Confidence Indicator SEPTEMBER A -10,50-11,40-10,00 Next Week Tuesday 23 EURO AREA PMI Manufacturing SEPTEMBER P 50,6.. 50,7 EURO AREA PMI Services SEPTEMBER P 53,0.. 53,1 EURO AREA PMI Composite SEPTEMBER P 52,5.. 52,5 CHINA HSBC flash PMI manufacturing SEPTEMBER P 50,0.. 50,2 Wednesday 24 US New home sales (k) AUGUST JAPAN Markit/JMMA PMI manufacturing SEPTEMBER P ,2 GERMANY IFO- Business Climate Indicator SEPTEMBER 105, ,3 GERMANY IFO- Current Assesment SEPTEMBER 110, ,1 GERMANY IFO-Expectations SEPTEMBER 101, ,7 Thursday 25 US Durable goods orders (MoM) AUGUST -18,0% 22,6% US Durable goods orders ex transportation (MoM) AUGUST 0,7% -0,7% EURO AREA M3 money supply (YoY) AUGUST 1,9%.. 1,8% Friday 26 US GDP (QoQ, annualized) Q2:14 T 4,6%.. 4,2% US Personal consumption (QoQ, annualized) Q2:14 T 2,9%.. 2,5% JAPAN CPI (YoY) AUGUST 3,3%.. 3,4% JAPAN CPI ex-fresh food (YoY) AUGUST 3,2%.. 3,3% JAPAN Core CPI (YoY) AUGUST 2,3%.. 2,3% Monday 29 US Personal income (MoM) AUGUST 0,3%.. 0,2% Source: Bloomberg US Personal spending (MoM) AUGUST 0,4%.. -0,1% US PCE Deflator (YoY) AUGUST.... 1,6% US PCE Core Deflator (YoY) AUGUST 1,4%.. 1,5% EURO AREA Economic Confidence SEPTEMBER ,6 EURO AREA Business Climate Indicator SEPTEMBER.... 0,16 4

5 Financial Markets Monitor Equity Market Returns (%) Developed Markets 1 Current Level 1-w eek Year-to-Date 1-Year 2-year US S&P ,3 8,8 16,7 37,6 Japan NIKKEI ,3 0,2 10,5 76,8 UK FTSE ,5 1,3 3,2 16,1 Canada S&P/TSX ,7 12,1 18,1 22,7 Hong Kong Hang Seng ,2 4,3 3,4 16,6 Euro area EuroStoxx 328 0,9 4,2 10,3 29,2 Germany DAX ,5 2,6 12,7 32,6 France CAC ,4 3,8 6,1 26,3 Italy FTSE/MIB ,5 10,6 16,1 30,3 Spain IBEX ,0 10,9 20,2 35,8 Emerging Markets 1 MSCI Emerging Markets ,1 6,5 6,6 12,0 MSCI Asia 729-0,4 6,7 7,5 15,3 China 65-1,8 3,0 4,0 16,9 Korea 578-0,2-2,0-0,6-0,1 MSCI Latin America ,9 8,2 5,7 2,3 Brazil ,4 8,5 4,7 1,2 Mexico ,2 7,2 9,9 12,7 MSCI Europe ,2-1,5-5,0-1,2 Russia 725-2,4-8,5-9,3-8,0 Turkey ,3 14,0-3,5 15,4 As of September 19, 2014, 1) in local currency World Equity Market Sector Returns (%) in US Dollar terms Current Level 1-w eek Year-to-Date 1-Year 2-year Energy 289,1 0,5 4,9 9,5 14,8 Materials 243,0 0,0 1,2 2,4 2,9 Industrials 202,4 0,6 0,2 6,9 33,0 Consumer Discretionary 180,5 0,2-0,7 6,1 40,1 Consumer Staples 196,9 0,7 3,4 6,2 21,8 Healthcare 197,1 1,7 14,7 23,0 54,5 Financials 104,8 0,5 2,9 7,4 34,0 IT 137,7 0,4 11,8 23,1 33,0 Telecoms 71,9 1,6-0,1 8,9 18,1 Utilities 120,0 0,4 9,2 9,0 16,3 in local currency Energy 276,4 0,4 6,3 11,0 17,5 Materials 213,6 0,2 3,7 5,5 9,5 Industrials 191,5 0,9 2,5 10,0 41,6 Consumer Discretionary 167,8 0,5 1,2 8,6 48,3 Consumer Staples 185,6 0,8 5,4 7,9 25,2 Healthcare 187,9 1,8 16,7 24,8 58,1 Financials 98,2 0,7 4,9 10,3 41,6 IT 131,9 0,5 12,7 24,4 36,8 Telecoms 69,4 1,9 2,5 11,9 23,8 Utilities 115,9 0,6 11,5 11,2 20,0 As of September 19, 2014, MSCI Indices Bond Markets (%) 10-Year Government Bond Yields Current Last w eek Year Start One Year Back 10-year average US 2,58 2,61 3,03 2,75 3,37 Germany 1,04 1,08 1,93 1,92 2,94 Japan 0,56 0,58 0,74 0,68 1,24 UK 2,54 2,53 3,02 2,90 3,60 Greece 5,78 5,71 8,42 10,08 8,98 Ireland 1,75 1,85 3,51 3,90 5,20 Italy 2,37 2,46 4,08 4,29 4,35 Spain 2,20 2,35 4,15 4,32 4,33 Portugal 3,17 3,24 6,13 7,17 5,67 Government Bond Yield Spreads (in bps) US Treasuries 10Y/2Y US Treasuries 10Y/5Y Bunds 10Y/2Y Bunds 10Y/5Y Corporate Bond Spreads (BofA/ML Indices, in bps) Global Inv. Grade (IG) Global High yield US IG US High yield Euro area IG Euro area High Yield US Mortgage Market 30-Year FRM 1 (%) 4,36 4,36 4,72 4,75 5,10 vs 30Yr Treasury (bps) As of September 19, 2014, 1. Fixed-rate mortgage rate Foreign Exchange & Commodities Foreign Exchange Euro-based cross rates Current Level 1-w eek 1-month 1-Year Year-to-Date EUR/USD 1,28-1,0-3,3-5,2-6,7 EUR/CHF 1,21-0,2-0,3-2,0-1,6 EUR/GBP 0,79-1,2-1,4-6,7-5,2 EUR/JPY 139,89 0,5 1,7 4,0-3,4 EUR/NOK 8,15-1,2-0,8 3,3-2,3 EUR/SEK 9,18-0,5 0,1 7,0 3,8 EUR/AUD 1,44 0,2 0,7 0,2-6,7 EUR/CAD 1,41-2,2-3,3 1,3-3,6 USD-based cross rates USD/CAD 1,10-1,1-0,1 6,8 3,2 USD/AUD 1,12 1,3 4,1 5,7-0,1 USD/JPY 109,04 1,6 5,1 9,6 3,5 Commodities Agricultural 502-3,4-9,6-23,1-17,3 Energy ,0 0,1 0,9 0,6 West Texas Oil ($) 92 0,2-3,8-13,1-6,1 Crude brent Oil ($) 97 0,6-3,4-11,7-12,5 Industrial Metals ,2-4,2-0,3 0,4 Precious Metals ,6-6,4-13,1-0,2 Gold ($) ,1-5,9-11,0 0,8 Silver ($) 18-4,4-8,5-22,7-8,4 Baltic Dry Index ,0 1,3-42,2-52,8 Baltic Dirty Tankers Index 612-4,4-20,3 5,5-38,6 As of September 19, 2014, Goldman Sachs Indices for Commodities 5

6 NBG Economic & Markets Forecasts Euro area & US: GDP Growth & Inflation Forecasts GDP (%) a Q1a Q2a Q3f Q4f 2014f Q1f Q2f Q3f Q4f 2015f HICP Inflation (%) a 2014f 2015f Euro area -0,4 0,2 0,0 0,3 0,4 0,8 0,4 0,4 0,4 0,5 1,5 US 2,2-0,5 1,1 0,7 0,9 2,1 0,8 0,8 0,9 0,9 3,3 Euro area 1,3 0,7 0,6 0,5 0,8 0,7 1,0 1,3 1,3 1,3 1,2 US 1,5 1,4 2,1 2,0 2,2 1,9 2,2 2,1 2,1 2,1 2,1 a: Actual, f: Forecasts 1. Seasonally adjusted q-o-q grow th rates, 2.Year-to-year average percent change Interest Rates & Foreign Exchange Forecasts Current (*) 3-month 6-month 12-month 10-year government bond yield (%) Germany 1,04 1,20 1,40 1,60 US 2,58 2,80 3,10 3,30 Official rate (%) Euro area 0,05 0,05 0,05 0,05 US 0,13 0,13 0,13 0,50 Currency EUR/USD 1,28 1,28 1,28 1,25 EUR/GBP 0,79 0,78 0,77 0,75 EUR/JPY (*) As of September , end of period 6

7 Equities Government Bonds Foreign Exchange NBG Strategy and Economic Research September 23, 2014 NBG View and Key Factors for Global Markets Euro area US Japan UK Reduced short-term tail risks Current account surplus Sluggish growth Deflation concerns The ECB s monetary policy to loosen further (LTROs, ABSs purchases, Quantitative Easing) Overvalued on a tradeweighted basis The Fed is expected to increase its policy rate (currently at 0.00%-0.25%) in mid-2015 Structural weakness due to twin deficits Safe haven demand More balanced economic growth recovery (longterm) Additional Quantitative Easing by the Bank of Japan if inflation does not approach 2% Strong appetite for foreign assets The Bank of England is expected to increase its Bank Rate (currently at 0.50%) in late 2014-early 2015 Solid economic growth with real GDP at c. 3% for Current account deficit Backloaded fiscal adjustment Lower euro against the US dollar Higher US dollar against its major counterparts Lower yen against the US dollar Higher British Pound against the euro Weak growth outlook Medium-term inflation expectations are drifting lower Ultra accommodative monetary policy Upside risk in US benchmark yields Valuations appear excessive compared with long-term fundamentals Lower fiscal deficit Fed s commitment on low policy rates (qualitative forward guidance) Safe haven demand Valuations appear rich Growth prospects improve The Fed is expected to increase its policy rate (currently at 0.00%-0.25%) in mid-2015 Safe haven demand Extremely dovish central bank Fiscal deficits Restructuring efforts brightens growth prospects Fiscal consolidation Safe haven demand Rich valuations Relatively sticky inflation feeds through inflation expectations The Bank of England is expected to increase its Bank Rate (currently at 0.50%) in late 2014-early 2015 Higher yields expected Higher yields expected Higher yields expected Higher yields expected Periphery spreads tightening Declining equity risk prem Bottoming out corporate earnings Tight credit conditions & bank de-leveraging process Ongoing, albeit milder, fiscal austerity Sovereign debt crisis Political uncertainty Very low government bond yields Strong EPS growth Cash-rich corporates lead to share buybacks and higher dividends (de-equitization) Slightly demanding valuations Peaking profit margins Disorderly re-pricing of expectations for the first interest rate-hike by the Fed Bottoming out corporate earnings Aggressive QE by the BoJ Japanese Yen depreciation favors export companies Japanese stocks have rallied strongly for the past one and a half year Strong appetite for foreign assets Undemanding valuations Declining equity risk premium Growth recovery Strong EPS growth The BoE ends QE Fragile banking sector Peaking profit margins High UK exposure to the Energy sector Neutral stance on equities Neutral-to-positive stance on equities Neutral stance on equities Neutral stance on equities 7

8 Equities Foreign Debt Foreign Debt Domestic Debt Foreign Exchange NBG Strategy and Economic Research September 23, 2014 NBG 6-Month View and Key Factors for South Eastern European Markets Emerging Markets Research Team, tel: , Turkey Romania Bulgaria Serbia High domestic debt yields Narrowing current account deficit Sizable external financing Political noise ahead of June 2015 parliamentary elections Precautionary Stand-By Agreement with the IMF Small current account deficit Sizable external financing Currency board arrangement Large foreign currency reserves and fiscal reserves Current account surplus Sizable external financing Ongoing EU membership talks High domestic debt yields Sizable external financing Stable to stronger TRY against the EUR Stable to stronger RON against the EUR Stable BGN against the EUR Weaker to stable RSD against EUR Low public debt-to-gdp ratio Stubbornly high inflation Precautionary Stand-By Agreement with the IMF Low public debt-to-gdp ratio Negative inflation outlook Very low public debt-to- GDP ratio and large fiscal reserves Low inflation Positive inflation outlook Large public sector borrowing Stable to lower yields Stable to higher yields Stable to lower yields Stable to lower yields Narrowing current account deficit Appropriate policy mix Economic slowdown Sizeable external financing Precautionary Stand-By Agreement with the IMF Small current account deficit Robust economic activity Large external financing Solidly-based currency board arrangement, with substantial buffers Current account surplus Large external financing Ongoing EU membership talks Strengthening foreign investor sentiment Sizable external financing Slow progress in structural reforms Stable to narrowing spreads Stable to narrowing spreads Stable to narrowing spreads Stable to narrowing spreads Attractive valuations Economic slowdown Weak foreign investor appetite for emerging market assets Attractive valuations Robust economic activity Weak foreign investor appetite for emerging market assets Attractive valuations Low-yielding domestic debt and deposits Weak foreign investor appetite for emerging market assets Attractive valuations Weak foreign investor appetite for emerging market assets Neutral stance on equities NBG South Eastern Europe Economic Forecasts Neutral/Positive stance on equities Neutral/Positive stance on equities Neutral/Positive stance on equities 8

9 SEE Economies f 2015f Real GDP Growth (%) Turkey 9,2 8,8 2,2 4,0 3,5 4,0 Romania -1,2 2,3 0,6 3,5 2,8 3,2 Bulgaria 0,4 1,8 0,6 0,9 1,5 2,0 Serbia 1,0 1,6-1,5 2,5-0,5 2,0 Headline Inflation (eop,%) Turkey 6,4 10,5 6,2 7,4 9,0 7,2 Romania 8,0 3,1 5,0 1,6 2,2 2,8 Bulgaria 4,5 2,8 4,2-1,6 0,5 1,8 Serbia 10,3 7,0 12,2 2,2 5,4 4,0 Current Account Balance (% of GDP) Turkey -6,2-9,7-6,2-7,9-5,6-6,0 Romania -4,4-4,5-4,4-1,1-1,8-2,4 Bulgaria -1,5 0,1-0,8 1,9 0,8-0,1 Serbia n.a. n.a. -12,3-6,5-6,3-7,0 Fiscal Balance (% of GDP) Turkey -3,6-1,4-2,1-1,2-2,2-2,0 Romania -6,4-4,3-2,5-2,5-2,2-1,9 Bulgaria -4,0-2,1-0,4-1,9-3,0-2,2 Serbia -4,7-4,9-6,5-5,0-6,5-5,5 f : NBG f orecasts SEE Financial Markets September 19 th 3-month forecast 6-month forecast 12-month forecast 1-m Money Market Rate (%) Turkey 8,6 8,4 8,2 8,1 Romania 2,7 2,7 2,7 2,8 Bulgaria 0,2 0,2 0,2 0,3 Serbia 7,3 7,2 6,2 6,0 Currency TRY/EUR 2,88 2,86 2,84 2,80 RON/EUR 4,42 4,45 4,46 4,45 BGN/EUR 1,96 1,96 1,96 1,96 RSD/EUR 118,9 117,2 117,6 117,8 Sovereign Eurobond Spread (bps) Turkey (EUR 2017) Romania (EUR 2018) Bulgaria (EUR 2017) Serbia (USD 2021)(*) (*) Spread ov er US Treasuries SEE Stock Market Returns 1 September Last w eek 19 th return (%) YTD (%) 2-year Index Turkey ISE ,2 14,5 15,7 Romania BET-BK ,0 3,0 25,9 Bulgaria SOFIX 551-0,2 12,1 72,0 Serbia BELEX ,0 14,0 45,8 1. In local currency 9

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