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Deutsche Bank Recommends Hedging Fed Volatility, Likes European Value Story

The recent Fed announcement regarding inaction relative to raising interest rates is a market dynamic that could be responsible for an increasing volatility of market volatility that has not dissipated after the September 17 announcement. There is an uncertainty in the markets, one that certain investors might do well to hedge against, a September 24 Deutsche Bank AG (NYSE:DB) (ETR:DBK) (FRA:DB) report notes.

Volatility: Deferral of Fed lift-off leaves markets treading water

“Deferral of Fed lift-off to later this year or into Q1 leaves markets treading water,” the report titled "Stuck in the lights" said, nothing that a “heightened sensitivity” to forthcoming economic data “is likely.” In other words, prepare for volatility. Deutsche Bank’s baseline is upbeat on European growth, and they have confidence the Fed will soon hike for domestic reasons, nothing that China is more positive than the consensus thinking, calling concerns “overblown.”

Issues remain, however. Market confidence in global growth is low and in order for the Fed to engineer a smooth rate liftoff (for equities) will require both good data and good signaling.

Deutsche Bank: Europe is favored developing market, cuts end of year S&P 500 target

With 14 times forward earnings, European stocks are a bargain on a relative basis, even if this price / earnings multiple is in line with the twenty five year average. While global softness drags earnings per share lower, a tug-of-war exists with strong European domestic demand and cheap oil push, which push EPS higher.

“Multiple expansion may be challenging if US rates are rising, but earnings dynamics for Europe continue to look good, with underpinning of low rates / QE to remain in place well into 2017,” the report said, selling QE as a stock enhancing drug. In the U.S., however, the bank cut its year-end target from 2150 to 2100 “on continued uncertainty around the Fed.” While the Fed delay reduces the threat to S&P 500 earnings that could result from a stronger U.S. dollar and continuing falling oil prices, the bank remains on valuation support while noting a market aberration.

The S&P 500 dividend yield, currently at 2.2 percent, rarely exceeds 10 year treasury, which is at 2.15 percent. This statistical divergence “argues for upside.”

Deutsche Bank...


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