Investment Research General Market Conditions ECB Preview Ready to scale back QE Aila Mihr Jens Peter Sørensen Morten Helt Analyst Chief Analyst Senior Analyst +45 45 12 85 35 +45 45 12 85 17 +45 45 12 85 18 amih@danskebank.com jenssr@danskebank.dk mohel@danskebank.dk 18 October 2017 Investment Research www.danskebank.com/ci Important disclosures and certifications are contained from page 20 of this report
ECB preview: ready to scale back QE In line with recent ECB communication which points to a preference for a lower for longer scenario, we change our call and now expect the ECB to announce a QE extension by nine months at a pace of EUR30bn at the meeting on 26 October. After that, we expect the ECB to end its QE purchases in Q4 18. In our view, a larger scaling down of purchases would ease future QE implementation and higher reinvestment volumes of maturing bonds will also add to the monthly QE flows in 2018. The appreciation pace of the effective euro has slowed since September and is hence less of a headache for the ECB now. According to our projection, inflation will stay below the ECB s target in 2018. However, we do look for core inflation to remain above 1.0% for the rest of 2017 and 2018, which would be an important argument in the ECB s QE recalibration decision. We expect the QE extension to be implemented with continuing capital key deviations, while we also consider it likely that the ECB will buy a higher share of corporate bonds, as these purchases will have a more direct economic impact and the ECB s holdings are not close to the 70% ISIN limit. Apart from a scaling down of QE purchases, we expect the ECB to make no changes to its forward guidance at the upcoming meeting. We also believe it will retain the option to extend the QE horizon or scale up purchases again if the inflation outlook deteriorates. Markets currently expect the first hike only in mid-2019, which we think is fair. From a fixed income perspective, we expect continued support for the periphery and tight ASW-spreads after the QE extension, given support from the reinvestment flows as well as a positive rating cycle. The main risk factor is a QE extension in 2018 that includes reinvestment flows or a reduction in monthly purchases to less than EUR20bn for nine months. We do not expect any dramatic steepening of the yield curve, as the ECB will be keen to avoid its 2011 policy mistake. With regard to the FX market, we do not expect any significant reaction in EUR/USD on the ECB s QE recalibration announcement, as we have already seen substantial repricing of the ECB in the FX market over the summer. We still see EUR/USD around current levels on a 1-3M horizon with the risks skewed slightly to the downside, although any dips in EUR/USD should be shallow and short-lived. Longer term, we continue to stress that a 2018 rebound towards 1.25 is on the cards, as upside risks still dominate the longer-term outlook. 2
ECB preview: ready to scale back QE 1. QE extension in 2018 as inflation outlook remains uncertain 2. ECB to scale down QE purchases at the October meeting 3. FI - continued support for the periphery, as ECB has learnt from the events in 2011 4. FX - EUR/USD close to bottom as ECB smells exit 3
#1: QE extension in 2018 as inflation outlook remains uncertain Different QE extension scenarios discussed According to the minutes from the September meeting, economic conditions were increasingly falling into place that would allow the intensity of monetary policy accommodation to be adapted and [ ] scale back the Eurosystem s net asset purchases. At the last meeting the Governing Council compared the benefits from a longer intended purchase horizon, combined with a greater reduction in the pace, [ ] with those from a shorter period of purchases and larger monthly volumes. According to ECB sources, these discussions centered around cutting the monthly purchases from the current EUR60bn to EUR40bn with a six-month extension or to EUR20bn or EUR30bn with a nine-month extension. Given recent ECB communication which points to a preference for a lower for longer scenario, we change our call and now think a QE extension by nine months at a pace of EUR30bn is the most likely scenario. After that we expect the ECB to end its QE purchases in Q4 18. This should reflect a combination of binding technical QE restrictions and a Governing Council that is not willing to change the restrictions, while a move towards a higher monthly flow of purchases from the reinvestments will also affect the decision. According to our inflation projection, there will not be a sustained adjustment in the path of inflation consistent with the inflation aim. However, we do look for core inflation to remain above 1.0% for the rest of 2017 and 2018, which would be an important argument in the ECB s QE recalibration decision. October meeting decision Scenario 1: old baseline 6M x EUR 40bn Scenario 2: our new baseline 9M x EUR 30bn Scenario 3: 9M x EUR 20bn QE extension scenarios Total new QE: EUR300bn Total new QE: EUR270bn Total new QE: EUR180bn Market expectation Q1 18 Q2 18 Q3 18 Q4 18 +3M x EUR20bn +redemptions* +Redemptions* +Redemptions* +Redemptions* * ECB sources have in different media reports suggested that QE redemptions will amount to EUR15bn or EUR20bn per month on average in 2018. Note that redemptions will be gradually increasing throughout the year. Source: Danske Bank, Bloomberg 4
#1: QE extension in 2018 as inflation outlook remains uncertain Macro conditions have strengthened ECB confidence in recovery and plans for gradual policy normalisation Uptick in wage growth should please ECB supporting gradual policy tightening ahead ECB 2019 F Wages: 2.3% Unemp: 8.1% ECB 2018 F Wages: 2.0% Unemp: 8.6% ECB 2017 F Wages: 1.5% Unemp: 9.1% ECB 2016 Wages: 1.2% Unemp: 10.0% Source: ECB, European Commission, Eurostat, OECD, Danske Bank Source: ECB, Eurostat, Danske Bank 5
#1: QE extension in 2018 as inflation outlook remains uncertain Higher core inflation but inflation expectations still muted Core inflation has picked up, but mainly due to volatile items and ECB remains too optimistic in our view Market based inflation expectations still below the level when QE was first announced Source: Eurostat, ECB, Macrobond Financial, Danske Bank Source: Bloomberg, ECB, Danske Bank 6
#1: QE extension in 2018 as inflation outlook remains uncertain QE extension in 2018 needed as uncertainty of inflation outlook still high German wage growth needs to accelerate to push euro area wages and core inflation higher To get inflation back to target ECB needs higher energy prices, which we currently do not foresee Although the German unemployment rate is below NAIRU and continues to reach new lows, wage growth has been fairly stable around 2.5% for five years. Looking ahead, despite the strong German labour market, we think higher inflation will still fail to spill over to significantly higher wage growth in Germany. Current wage agreements all have lower wage growth in 2017 compared with 2016 and employees increasingly favour more flexibility in working hours rather than higher wages. Source: ECB, Eurostat, Macrobond Financial, Danske Bank Source: Eurostat, Macrobond Financial, Danske Bank 7
#2: ECB to scale down QE purchases at the October meeting Lower for longer supported by recent ECB communication From the ECB minutes of the 7 September 2017 meeting: Members also discussed some general trade-offs inherent in various scenarios for the future recalibration of the APP [ ]. Within the framework of the Governing Council s forward guidance, the benefits from a longer intended purchase horizon, combined with a greater reduction in the pace, were compared with those from a shorter period of purchases and larger monthly volumes. In this context, the point was made that both the costs and benefits of extending APP purchases, including possible financial stability risks, needed to be taken into account. It was also argued that the monetary policy stance would remain highly accommodative in either scenario on account of the range of policy instruments in place, most notably the reinvestment of the principal of maturing securities, the liquidity related to the targeted longer-term refinancing operations, and the forward guidance on the ECB s key policy rates. Speech by Chief Economist Peter Praet on 2 Oct 2017: In more tense market conditions, a higher purchase pace in the near term is generally seen as having a higher easing potential. [ ] By contrast, in more normal market conditions, the market s capacity to engage in intertemporal arbitrage improves. Consequently, investors may become more patient or [ ] better able to evaluate the stimulus that can be expected to come from a purchase plan that is to be executed over a more extended time interval. ECB confirms two possible scenarios. Although it does not explicitly express preference for a specific scenario ECB now mentions that costs and not only benefits are associated with QE extension (bubble concerns are increasingly in focus) and. ECB sees the need to stress that policy stance would still remain highly accommodative, due to reinvestments alongside QE purchases and forward guidance on policy rates. Not only the volume and duration of QE purchases, but the combination of all policy instruments together determines monetary policy stance. We think these are signs that ECB could opt for a longer QE horizon with a higher scaling down in purchases. This is also supported by Peter Praet s recent remarks, that hinted at a preference for the lower for longer scenario during normal market conditions. This is important as Praet puts forward the proposals for Governing Council voting. 8
#2: ECB to scale down QE purchases at the October meeting Higher scaling down of purchases would ease future QE implementation The ECB is approaching the 33% ISIN limit on government bond holdings in a number of countries and continued buying requires changes to the restrictions or significant deviation from the capital key distribution. In our view, there is less pressure within the Governing Council to change the rules again as the deflation fear has abated, but also as additional changes to the restrictions would make the QE purchases even more controversial. Instead we expect the QE extension to be implemented with continuing capital key deviations, while we also consider it likely that the ECB will buy a higher share of corporate bonds (CSPP), by for example increasing the CSPP QE share to 15% from the current 10%. These purchases will have a more direct economic impact and the ECB s holdings are not close to the 70% ISIN limit (see next slide). A lower for longer extension would also make coping with binding QE constraints easier, as the ECB would need to buy a lower share of bonds in the market and thereby alleviate scarcity issues and the need for further capital key deviations. A larger capacity for QE purchases would also increase the capacity for future adjustments, thereby enhancing the credibility of the QE programme. Continued deviations from capital key suggest that QE restrictions are again binding 170 150 130 110 90 70 50 Monthly PSPP purchases - Index 2015 average 30 Mar 15 Jul 15 Nov 15 Mar 16 Jul 16 Nov 16 Mar 17 Jul 17 Total Supra FR FI DE NE IE IT PT ES Note: Index shows deviation relative to 2015 average in monthly PSPP purchases. Until March 2016 deviations have occurred identically in all countries, whereas from April 2016 onwards country specific deviations from the capital key have increased. Source: ECB, Danske Bank 9
#2: ECB to scale down QE purchases at the October meeting ECB has scope to scale up CSPP purchases, improving financing conditions for corporates Public sector (PSPP) far higher than purchases in other assets ECB CSPP holdings only at around 11% of eligible CSPP bond universe EURbn % 90 95 80 70 90 60 85 50 40 80 30 20 75 10 0 70 Mar-15 Aug-15 Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 PSPP CBPP3 ABSPP CSPP PSPP share (rhs) Source (both charts): ECB, Danske Bank % 100 80 60 40 20 0 Other (non-euro area) Other (euro area) NL ES IT DE FR 6 6 11 11 7 6 10 9 11 25 26 30 31 Holdings Country, sector and rating classification of CSPP holdings and CSPP-eligible bond universe 11 Universe 17 18 7 8 12 11 10 22 32 Holdings Others Energy Communications Industrial Utilities Consumer 12 24 27 Universe 52 37 48 39 11 13 Holdings AA AA BBB Universe CSPP seems to have encouraged debt issuance by NFCs as an alternative to traditional bank lending, according to the ECB. By stimulating capital market financing for large NFCs, CSPP improves credit access for SMEs, supporting investment. 10
#2: ECB to scale down QE purchases at the October meeting Reinvestments will add to flow of purchases in 2018, allowing policy to stay accommodative despite scaling down When the ECB reveals its strategy for QE beyond the currently communicated horizon we believe it will argue it is adding more easing (higher stock), although we look for a slower pace of monthly purchases of EUR30bn (lower flow), see also next slide. The overall stock of additional purchases would be lower with an extension by nine months at EUR30bn, compared to a scenario with a six month extension at EUR40bn, which is why the market may initially interpret such a scenario as hawkish. However, the ECB s communication recently has strongly focused on the reinvestments of maturing bonds which are made alongside new QE purchases. So far QE redemptions have been limited, but will pick-up in 2018. According to our estimates, reinvestments in German government bonds will amount to an aggregate of around EUR18-22bn in H1 18 and total QE reinvestments will amount to EUR15-20bn per month on average in 2018. 8 7 6 5 4 3 2 1 - Redemptions in 2017 (EURbn) Jan Feb Mar Apr May Jun Jul Aug Sep CBPP ABSPP CSPP PSPP Reinvestments will add to monthly QE flow in 2018 We expect the ECB s communication to be strongly focused on these reinvestment flows when reducing the monthly purchases and argue that the policy stance will become increasingly accommodative next year as reinvestment volumes rise, also supporting a more pronounced scaling back in the flow of purchases from January 2018 onwards. Source (both charts): ECB, Danske Bank 11
#2: ECB to scale down QE purchases at the October meeting Stock of purchases is important due to the negative deposit rate: the hot potato effect is strengthening the impact of QE Higher total stock but lower monthly flow of QE purchases Excess liquidity has to be placed at negative with the ECB Source: ECB, Macrobond Financial, Danske Bank Source: ECB, Macrobond Financial, Danske Bank 12
#2: ECB to scale down QE purchases at the October meeting Stronger euro less of a headache for ECB now In the September meeting, the ECB explicitly voiced concerns about the risk of exchange rate overshooting: The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring with regard to its possible implications for the medium-term outlook for price stability. Effective EUR little changed since September update The minutes revealed that the board had a thorough discussion on how to treat the impact of a rise in the effective euro on inflation, and notably whether recent euro appreciation was reflecting a better eurozone outlook or external factors, hinting that in the case of the former a stronger currency should be embraced whereas the latter would be less welcome. We think this suggests that the ECB will tolerate euro strength if driven by domestic factors and it is not the level of the exchange rate that matters for the ECB, but rather the appreciation pace. The ECB s recent concern regarding euro strength would speak in favour of a more gradual QE reduction pace. However, helped by Fed repricing, the effective euro has only appreciated very moderately by 0.5% since September and hence we think the ECB will also be less concerned about taking a more hawkish QE stance at the upcoming meeting. Source: Bloomberg, ECB, Danske Bank 13
#2: ECB to scale down QE purchases at the October meeting No changes to forward guidance on policy rates ECB s forward guidance: (1) Level of policy rates Key ECB interest rates are expected to remain at present levels (2) Policy rates horizon for an extended period of time, and well past the horizon of our net asset purchases. (3) QE magnitude Net asset purchases, at the monthly pace of EUR30bn, are intended to run until the end of September 2018, or beyond, if necessary (4) QE tapering condition and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. (5) QE flexibility If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration. Apart from a scaling down in QE purchases, we expect the ECB to make no changes to its forward guidance at the upcoming meeting, since it has stressed that any reassessment of the monetary policy stance should proceed in a very gradual and cautious manner, while maintaining sufficient flexibility, also in the light of prevailing uncertainties with respect to the inflation outlook and financial conditions. Although we expect the ECB to announce a specific time horizon for its QE extension ( until the end of September 2018 ), it will still maintain the option to extend the QE horizon ( or beyond, if necessary ) given its focus on preserving flexibility while the outlook for inflation is muted. We also believe the ECB will retain the possibility of scaling QE up again if the inflation outlook deteriorates, meaning that the ultimate end date of the QE programme will remain dependent on inflation dynamics. Inour view, the ECB will also stick to its message regarding policy rates, as any deviation from its communicated exit sequencing would risk a loss of credibility in its forward guidance and could fuel additional euro strength, which the ECB will be keen to avoid. 14
#2: ECB to scale down QE purchases at the October meeting Market expects first hike only in mid-2019 Hiking cycle is now priced more aggressively compared to the September meeting First 10bp hike priced in during May 2019 (20bp hike by November 2019) 0.40% 0.30% 25 bp ECB dated Eonia swaps (assuming neutral Eonia is 4bp above deposit rate) 22.2 0.20% 20 19.6 0.10% 17.1 0.00% 15 14.6 12.1-0.10% -0.20% 10 7.4 9.6-0.30% -0.40% -0.50% 0M 6M 12M 18M 24M 30M 36M 42M 48M Eonia fwd curve (16-Oct-17) Eonia fwd curve (08-Sep-17) 5.3 5 4.0 2.7 1.6 0.3 0.4 0.4 0.5 0.5 0.7 0.9 0 Nov 17 Jan 18 May 18 Aug 18 Oct 18 Jan 19 Apr 19 Jul 19 Sep 19 Source: Bloomberg, Danske Bank Source: Bloomberg, Danske Bank 15
#2: ECB to scale down QE purchases at the October meeting Longer QE horizon to strengthen forward guidance on rates The ECB sees forward guidance on policy interest rates as an integral part of its overall monetary policy stance. A longer QE duration could strengthen the ECB s well past forward guidance on rates and help in reinforcing current market expectations of an interest rate hike only sometime in 2019. President Draghi also said in a recent speech that the ECB s pledge that interest rates will remain low well past QE is very, very important. October meeting decision Market expectation Q1 18 Q2 18 Q3 18 Q4 18 Q1 19 Q2 19 Q3 19 Q4 19 QE extension scenario 1: 6M x EUR 40bn +3M x EUR20bn Well past the horizon of APP +Redemptions Hiking cycle starts QE extension scenario 2: 9M x EUR 30bn +Redemptions Well past the horizon of APP Hiking cycle starts QE extension scenario 3: +Redemptions 9M x EUR 20bn Well past the horizon of APP Source: Danske Bank Hiking cycle starts 16
#3: FI continued support for the periphery, as ECB has learnt from the events in 2011 FI continued support to the periphery with the extension 10Y Spain vs. Germany is floored @100bp until the Spanish rating moves into single-a The communication from the ECB is very clear regarding the exit process from QE: Lower for longer / a very slow exit from QE / Still a very accommodative monetary stance Tight ASW-spreads and continued support for the periphery given the QE is supported by the reinvestment flow as well as a positive rating cycle. Any short-term widening of periphery-core spreads/asw-spreads after the ECB meeting should be used to take on spread tightening positions as Ireland is upgraded into single-a in 2014 by S&P and Fitch Source: Bloomberg, Danske Bank Jens Peter Sørensen, Chief Analyst, jenssr@danskebank.dk, +45 45 12 85 17 the supply of government bonds continues to shrink as budget deficits are slowly turned into balanced budgets/budget surplus. However, a significant spread tightening for the periphery is dependent on a positive rating cycle as shown by Ireland, where the 10Y spread broke through 100bp back in 2014, when Ireland was upgraded to single-a by S&P and Fitch. The main risk factor is if the QE extension in 2018 includes reinvestment flows or if the ECB signals that it will be less than EUR20bn for nine months. 17
#3: FI continued support for the periphery, as ECB has learnt from the events in 2011 FI the slope of the EUR swap curve 2-10Y and 10-30Y ECB has learnt from the events in 2011 2-10Y slope steepened with some 50bp from the long end of the curve in the spring 2011 200 180 160 140 120 100 80 2-10Y EUR swap curve, bp 10-30Y EUR swap curve, bp ECB hikes by 50bp in the Spring 2011 In 2011, the ECB hiked rates by 50bp, which is recognised by most as a policy mistake as it drove the eurozone back into recession on the back of the EU debt crisis. We expect that the ECB will try to avoid this scenario and the significant steepening of the 2-10Y EUR swap curve. Today, the slope of the 2-10Y swap curve is at the same level as in the spring 2011 before the hike from the ECB. As noted above, the ECB is very keen NOT to repeat the mistake of 2011. 60 40 20 0 10 11 12 13 14 15 16 17 Source: Bloomberg, Danske Bank Hence, we do NOT expect to see any dramatic steepening of the yield curve as this would signal that the market believes that ECB is behind the curve. There is room for a modest steepening but we believe it will be short-lived. Similar for the 10-30Y slope here we look for a modest flattener. Jens Peter Sørensen, Chief Analyst, jenssr@danskebank.dk, +45 45 12 85 17 18
#4: FX EUR/USD close to bottom as ECB smells exit FX EUR/USD range for now; still higher in 2018 We do not expect any significant reaction in EUR/USD on the ECB s QE recalibration announcement, as we already have seen substantial repricing of the ECB in the FX market over the summer. We still see EUR/USD around current levels on a 1-3M horizon with the risks skewed slightly to the downside, as we expect the Fed to hike interest rates in December and as speculative accounts look stretched on EUR/USD longs according to IMM data. However, we maintain that any dips in EUR/USD should be shallow and short-lived. We target 1.17 in 1M and 1.18 in 3M. Longer term, we continue to stress that a 2018 rebound towards 1.25 is on the cards as upside risks still dominate the longer-term outlook. While a first 10bp hike from the ECB is only priced in in mid-2019, which we deem as fair, we stress that what is key for the FX market is the direction in which the ECB is now headed. Positioning looks stretched on EUR/USD longs Eurozone portfolio flows to support EUR/USD going forward In particular, we deem it will be difficult for the ECB to avoid a reversal in euro portfolio debt flows (see chart) as it phases out unconventional measures. As we argued in FX Edge: Power of flows - EUR/USD eyeing 1.30 longer term (23 August), a normalisation scenario with the 2Y interest rate spread and flows heading back to normal (neutral) levels has the potential to send EUR/USD towards 1.30 on a 3 year horizon. We target 1.22 in 6M and 1.25 in 12M. Morten Helt, Senior Analyst, mohel@danskebank.dk, +45 45 12 85 18 Christin Tuxen, Chief Analyst, tux@danskebank.dk, +45 45 13 78 67 Source (both charts): Macrobond Financial, Danske Bank 19
Disclosures This research report has been prepared by Danske Bank A/S ( Danske Bank ). The authors of this research report are Aila Mihr (Analyst), Jens Peter Sørensen (Chief Analyst) and Morten Helt (Senior Analyst). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates None. Date of first publication See the front page of this research report for the date of first publication. 20
General disclaimer This research report has been prepared by Danske Bank (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided herein. This research report is not intended for, and may not be redistributed to, retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report was created by Danske Bank A/S and is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank A/A, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non-u.s. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission. Report completed: 18 October 2017, 19:41 CEST Report first disseminated: 18 October 2017, 07:00 CEST 21