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28.12.2007

UniCredit Markets & Investment Banking: economic & capital markets

UniCredit Markets & Investment Banking assumes that the impacts of the credit crisis will still be significant in the first quarter of 2008. The early weeks of 2008 are likely to be overshadowed by fears of stagflation and recession, with a negative effect on the stock markets. Only in the second quarter is a recovery likely to be on the cards. UniCredit Markets & Investment Banking expects share prices to return to their current level by mid-year, with a sideways trend, by and large, being expected for the second half of the year. The euro/U.S. dollar exchange will remain at a high level.

Moderate economic environment
UniCredit Markets & Investment Banking anticipates for the eurozone a slightly lower economic growth rate of 1.9 per cent next year. Whilst the European economy will increasingly succeed in escaping the influence of the U.S., economic activity trends in that country will continue to play an important role for the European economy. Whether or not a recession will occur in the U.S. will depend especially on the labour market. While recruitment figures have slowed down recently, thanks to numerous new jobs being created in the public sector – which is less sensitive to cyclical factors – (education, healthcare) as well as in the tourism industry, employment did not witness a dramatic downturn. This trend is expected to continue next year. In the export sector, the importance of the U.S. for Europe and especially Germany continues to decline. In contrast, exports to central eastern Europe, Russia, the OPEC states, China and India are growing. For instance, German exports to Russia have increased almost three-fold since early 2002, and the volume exported to China has doubled. In addition, Russia announced an investment programme in September to expand the country’s infrastructure by a volume of 1,000 billion U.S. dollars within the next ten years.

Interest rates largely expected to remain stable
The early weeks of the year 2008 are likely to be overshadowed by fears of stagflation and recession. The situation will probably be compounded by further negative news from the finance sector. "The U.S. Fed will respond to this scenario with further cuts in its key lending rate", says Michael Rottmann, Head of Interest and Currency Strategy at UniCredit Markets & Investment Banking, who expects a key interest rate of four per cent at the end of the first quarter of 2008 (current level: 4.5 per cent). In this period, however, the U.S. economy will accomplish a soft landing, making additional interest-rate cuts superfluous. The ECB will leave key interest rates unchanged, even though there will be increasing calls for monetary policy assistance in the course of the first quarter. At the end of next year, UniCredit Markets & Investment Banking expects the key interest rate to reach a level of four per cent. The yields of 10-year bonds in the eurozone should see a slight rise, to return to a level close to 4.5 per cent again.

Strength of euro exchange rate expected to continue
As a result of the subprime crisis, euro interest rates meanwhile are higher than U.S. interest rates, as was impressively reflected in the USD weakness in recent weeks. While interest rate cuts of about 125 basis points to 3.25 per cent have already been priced in for 12-month money market forwards, interest rates are expected to be stable in the second half of the year. Expressed in different terms, at the beginning of the year the U.S. dollar, in the context of money market forwards for 12 months in the G 10 universe (JPY, USD, EUR, NZD, AUD, GBP, SEK, NOK, CAD, CHF), was the fourth-highest interest-bearing currency. Today, in this context the U.S. dollar is the third-lowest interest-bearing currency; accordingly, it has been “degraded” to a financing currency. "The ongoing skittishness on the financial markets will continue to impact the U.S. dollar in the first quarter, which will cause the euro’s exchange rate to the dollar to exceed the 1.50 mark”, according to Michael Rottmann, Head of Interest and Currency Strategy at UniCredit Markets & Investment Banking. A stabilisation of the financial markets, coupled with declining fears of recession in the U.S., will restore the status quo ante in the course of the second half of the year, giving the U.S. dollar a further interest lead. This will strengthen the greenback again slightly, bringing the exchange rate back to a level of 1.45.

Sideways trend on equities markets
"For 2008, we anticipate moderate price increases of three to five per cent on the equities markets", says Gerhard Schwarz, Head of Global Equity Strategy at UniCredit Markets & Investment Banking. In recent months, the stock markets in Europe and the U.S. have been highly volatile, and this trend will continue for the time being. In the wake of the current recovery in stock prices, we anticipate for the Euro Stoxx 50 that the support lines of 4050 to 4200 will be tested again in the first quarter. In particular, the credit crisis and the associated weaker economic outlook will continue to subject the markets to a general sentiment of uncertainty. A substantial recovery is expected to occur only in the second quarter. Moreover, lower valuations, further interest-rate cuts in the U.S., record dividend payments and, ultimately, positive corporate earnings growth rates will act as a robust counterweight to the burdens associated with higher currency and commodity prices. Nevertheless, the potential for further earnings growth will see an increasing decline. In mid-2008, stock market indices are likely to be at about today’s levels, trending more or less sideways in the second half of the year. Conditions for mid & small-cap securities will remain difficult in the medium term.

About UniCredit Markets & Investment Banking 
The UniCredit Markets & Investment Banking Division was launched in July 2006, bundling the global markets and investment banking services of Bank Austria Creditanstalt AG, Bayerische Hypo- und Vereinsbank AG and UniCredit Banca Mobiliare SpA under one brand and organization. The division has approx. 3,300 employees in 39 offices worldwide, including all the major financial centers, and an extended network presence in Emerging Europe. In 2006, the division has posted revenues of 3.2 bn Euros and a pre-tax profit of 1.6 bn Euros.

Market forecasts at a glance:

   Mid-2008           End-2008
 Euro Stoxx 50   4 400  4 400
 DAX  7 900  7 900
 MDAX  10 000  10 000
 S&P 500  1 500  1 500
 Dow Jones  13 500  13 500
 Topix   1 600  1 600
 Nikkei   16 000  16 000

Most promising regions: Eastern Europe (in particular Russia)

Most promising industry segments:
Construction & Materials, Food & Beverages, Industrial Goods & Services, Insurance, Chemicals

    Mid-2008            End-2008
 Euro : USD    1.52  1.45
 Euro : YEN    160  155
 USD : YEN    105  107

Brent oil (annual average)   USD 95
Economic growth, EMU    1.9%

Press contact:

Nicole Rappl,
Tel. 0049/89/378-26001,
nicole.rappl@hvb.de