Macro Outlook Report Discussing Le Pen, ECB Policy, and Global Growth Trends (Dec 2016)

Marine Le Pen victory could bring into question both the future of the EU and also the euro, should the polls be close it could make the uncertainty and market moves around Brexit look like a walk in the park. 2017 —- Reflation, Reversal, Rotation, Relief or Revolt? 2017 is likely to have a number of cross currents as themes. Recovery and Rotation go hand in hand. The stronger the recovery the more yields can rise the more we can see the rotation extend. Should investors become concerned that the recovery is stalling or that yields are peaking the rotation would likely stall potentially even reverse. Reversal refers to the ECB. Our economists are not yet convinced that the ECB will start to unravel some of its easing measures in 2017 but they do expect the debate to be a vigorous one within the ECB. For the first time Gilles Moec thinks there is a chance that the ECB will indeed choose to taper. Relief or Revolt relates to the French election. Will Europe follow the UK and US lead of 2016 and go down the route of populism (revolt from the voters) or will we find relief for the markets if by the end of 2017 froma Fillon/Merkel duo being in charge of the two largest economies in the Euro Area. Recovery - the world looks a better place going into 2017 Reflation has been the big theme of the second half of the year. As we had noted in previous publications there had been something of an improvement in the global growth picture emerging even before the US election. It started with Emerging Market growth, which our GEMScycle has been showing to be accelerating for some months, but seems to have spread to other parts of the developing world. US GDP for Q3 has just printed a revised 3.2%, with a number of indicators, such as ISM’s, PMI’s and consumer confidence pointing to a solid Q4 to follow. That quarter is currently tracking at 3.6% according to the Atlanta Fed. Chart 13: Eurozone PMI’s have picked up of late... Chart 14: US Consumer Confidence now at post-GFC highs 60.0 120 100 59.0 80 50.0 60 40 45.0 ———US Consumer Confidence... 20 400 —— EA Services PM] =====EA Manufacturing PMI Aug-09 Aug-10 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Source: Markit Source: Bloomberg The Euro Area too is showing signs of improvement with the latest manufacturing PMIs back to their best since early 2014 with other national surveys, such as Ifo pointing in the same direction. The composite PMI is back close to the year highs too. The UK numbers continue to surprise on the upside too for the moment. Our economists are also upbeat on Japan with growth expected to accelerate next year as the fiscal stimulus kicks in. Accordingly our economists expect growth to rise from 3% this year to 3.5% in 2017 and 3.8% in 2018. That acceleration in growth is despite a slightly slower US economy in the first half of the year as a higher USD and interest rates dampen growth before the fiscal stimulus kicks in. With growth firming and oil prices expected to be higher inflation is also expected to pick up through 2017 and 2018 to 2.8% and 3% respectively. At this stage it is worth noting that this is a modest acceleration in both growth and inflation. BankofAmerica <2” 6 European Equity Strategy | 01 December 2016 Merrill Lynch HOUSE_OVERSIGHT_014465