C-Space Jun 2019 Final-2

Deutsche Bank
Essential Market
Insights for the
C-Suite
US-China: Markets The Hierarchy of Implications for

the End of Underpricing Vulnerability Corporate Strategic
the Beginning Policy Risk Decision Making
Authors
Deutsche Bank Capital Markets Strategy Team
Tom Joyce
Capital Markets Strategist
+1 (212) 250-8754
tom.joyce@db.com
Hailey Orr
+1 (212) 250-8844
hailey.orr@db.com
Stephanie Kendal
+1 (212) 250-4354
±´©¶¥°¹¥¶¨¥²³²·¸¶¥¨¸³²¥°°½§¥°°©¨·¬Ɔ^°³²_³¶·¬Ĩ·¬Ɔ stephanie-e.kendal@db.com
(stone lions) in Chinese and colloquially called ‘Foo Dogs’ in the
¡©·¸»©¶©Î¶·¸²¸¶³¨¹§©¨¸³¬²¥¥·¥«ª¸¸³¸¬©¥²½²¥·¸½
court (206 BC–220 AD) from Persian emissaries traveling
¸¬©°¹§¶¥¸º©°¯³¥¨²ª¥§¸¸¬©»³¶¨·¬Ɔ·¸¬³¹«¬¸¸³¦©
derived from šer, the Persian word for lion. Seen in Buddhism
as a protector of spiritual teaching, or dharma, the image
of the lion was welcomed by the Chinese as an auspicious
symbol of protection and, by sixth century BC, had come to
symbolize prosperity, wealth and good fortune when positioned
in accordance with the metaphysical practices of feng shui.
To this day, guardian lions can be seen protecting the entrance
to businesses and homes in yin/yang pairings, the male (yang)
guarding the external structure, with his paw on a representation
of the world, and the female (yin) with hers on a lion cub,
symbolizing her role as guardian of the building’s inhabitants.
If one were to apply similar feng shui symbolism to today’s

market, what might it look like? Might the lions be surrounded
by a hierarchy of animals from the Chinese New Year, a bullish
market represented by this year’s prosperous pig or a bearish
turn as next year’s hoarding rat, averse to risk?
³·¸±´³¶¸¥²¸»°°»©Î²¨¸¬©¨³³¶·³´©²²«³¶§°³·²«¸³
new opportunities, marking a beginning or an ending?
This presentation has been prepared by Deutsche Bank’s Capital Markets Strategy team within the Corporate Finance division, and does not necessarily
represent the views of our Research department or Deutsche Bank’s “House View”. Deutsche Bank | C-Space | June 2019
Contents
The Hierarchy of Vulnerability Contemplating “Disorderly” Brexit

6 Geopolitical & Policy Risk Rising 8
52 Markets Pricing More Disorderly 54
Brexit Scenario
Markets Underpricing Policy Risk 12
Political Uncertainty & Change 58
The Hierarchy of Vulnerability 16
Withdrawal Agreement & 62
2019 Economic & Market Forecasts 20
Future Framework
Economic & Policy Implications 64
of “No Deal” Brexit
¬²¯²«Ï©¶©²¸°½¦³¹¸¶¥¨©·¯ Corporate Strategy, Uncertainty

22 Delineating Between Policy Tools 24 66 & Recession Risk
& Objectives Global Growth Decelerating 68
The Trump, Xi and Powell Put 26 Caution in the C-Suite 72
The Great Decoupling 28 Reluctant Fed Rate Cuts 78
Tech Sector Warfare 38 US Recession Risk Assessment 82
China’s Formidable Policy Toolkit 46 Measuring the Longest US Recovery 88
Rare Earth Battlegrounds 48 on Record
¥¸Î§¥¸³²²§©¶¸¥²¸½ #
Deutsche Bank | C-Space | June 2019

6
Everyone should keep in mind

that duties that can be imposed
by a tweet, and be taken away
by a tweet, can always be
re-imposed by a tweet.
Ted Murphy, Principal and Managing Partner, Baker
McKenzie Washington, D.C.
The Hierarchy
of Vulnerability

8 9
Geopolitical & Policy Risk Rising Post WW2 trade policy consensus
breaking down
Geopolitical risk premium in
oil markets has increased
# of DM protectionist measures
·»©©²¸©¶¸¬© ³ª '¸·²¸©¶©·¸²«¸³²³¸©¸¬¥¸¸¬©±³·¸·«²Î§¥²¸±¥§¶³¸¬¶©¥¸· 1,037
for global markets are likely to arise from developed market economies.
Brent: $61
²¸¬©¸¶¥¨©´³°§½¶·¯¥²¨[¬²¥©·§¥°¥¸³²°³³±°¥¶«©²¸¬© ³ª '»¸¬¶¥¸Î§¥¸³²°³³¯²«

WTI: $52
²§¶©¥·²«°½¨Ñ§¹°¸¦½½©¥¶©²¨¹¶¸¬©¶³²©±¥½¶«¬¸°½µ¹©·¸³²»¬©¸¬©¶¶©·¨©²¸¶¹±´Å·¹·©³ª¸¥¶Ï·¬¥º©
become a “bigger” and “more frequently” used stick than previously anticipated. As the 2020 election campaign $40
¬©¥¸·¹´°³³¯ª³¶¬²¥¸¶¥¨©´³°§½¥²¨Ç¦«¸©§¬È¸³¦©§³±©²§¶©¥·²«°½§¥¹«¬¸²¸¬©§¶³··Î¶© 2009 2018 Jan 2019 Jun 2019
In Europe, existential questions remain front and center, with Italian risk high and the outlook for Brexit
Rising Italian sovereign credit risk Sterling signaling more
negotiations looking every bit as protracted and complex as we had feared. With the Withdrawal Agreement “disorderly” Brexit path
5 yr Italy CDS
already causing a change in Government, the longer and more arduous task of negotiating the future EU-UK GBP/USD
relationship will be an exceptionally challenging endeavor. Europe’s high exposure to China growth, trade 1.50
policy and oil prices are also a concern. 221 bps
While geopolitical and policy risk have been high for much of the post-crisis period, the concern today
becomes: (i) the unpredictable paths from policy error; (ii) the sheer number of complex policy issues
1.26
concurrently “in play”; (iii) the ability of late cycle economies and fully valued markets to absorb such risks;
¥²¨^º_¸¬©·¸¶©²«¸¬³ª¸¬©¨©º©°³´©¨©§³²³±½´³°§½¸³³°¯¸¸³·¹Ñ§©²¸°½¶©·´³²¨ (-12%)
1.15
Jan 2018 Jun 2019 Jan 2016 Jun 2019
In the May 2019 European Parliamentary elections, the Centre-right and Centre-left 2020 US election risk looms large US sanctions grip on Iran tightening
parties lost their combined majority as more Eurosceptic parties made notable gains Iran oil production, m/b/d
4.0
S&P 500:
Change in seat distribution
+15%
-38 Centre-right Production:

Healthcare: 2.3 m/b/d
-36 Centre-left +5%
National
-18 conservative
2.2
Jan 2019 Jun 2019 Jan 2017 May 2019
-14 Left-wing
Hong Kong interbank lending rates Venezuela economic and

-14 ³¸¥Ñ°¥¸©¨
at post crisis highs political crisis
Eurosceptic populist/ g Kong 3 month interbank rate
Hong ²Ð¥¸³²£`£
Brexit Party
+15
2.9% 2.4%
282,973%
Greens/EFA +18
Right-wing +21
New members +28

0%
Liberals +39
Jan 2019 Jun 2019 Jan 2018 Apr 2019
Source: (1) Global Trade Alerts. Shows total implemented measures that are almost certainly discriminatory towards foreign commercial interests.(2-8) Bloomberg. Data
Source: (1) European Parliament via BBC. Statista. as of June 14, 2019.
10 11
Europe / UK Risks
— “No Deal” Brexit
scenarios
— ¥¹¸³¸¥¶Ï·²
November
— Vulnerability to trade /
China risk
— ³²Î¨©²§©² China Risks
United States Risks policy toolkit
— Growth deceleration
— Italian risk (political,
— China and trade policy — More assertive US policy
economic)
— ¶¥¸Î§¥¸³² — SOE & corporate debt
— Late cycle dynamics — Political stability
(i.e., Hong Kong)
— Corporate earnings
recession — US & South China Sea
— 2020 election campaign
rhetoric
Middle East Risks
— “Big tech” scrutiny — Oil price risk
— US-Iran tension &
sanctions
— Regional Sunni-Shia
tensions
Developed
— Syria, migrants,
non-state actors
Economies Pose
³·¸«²Î§¥²¸ Latin America Risks
Macro Risk — Venezuela crisis (politics,
oil, economy)
— Mexico (public policy
Global Risks
— Global growth slowdown
uncertainty, economy)
As we enter the 2H of 2019, it — Declining trade volumes
— Argentina (recession,
is interesting to note that the currency risk) — Tech sector intervention
±³·¸·«²Î§¥²¸±¥§¶³¸¬¶©¥¸· — Migrant caravans, refugees, — Rising nationalism / populism
security risks
for global markets arise from — Vulnerability to China,
— Idiosyncratic EM risk
— Cybersecurity
developed market economies trade, commodity prices
Source: CIB Capital Markets Strategy

12 Below the surface, however, global markets have been pricing in a 13
·«²Î§¥²¸¥±³¹²¸³ª´³°§½¶·¯
Markets Underpricing Policy Risk China underperforming global Cyclical sectors underperforming on
equities policy risk contagion
MSCI US defensive
Are markets underpricing global policy risk? 15%
% S&P 500:
Equities
sectors: +2.4%
At initial glance, US equities near record highs and Global economic policy +8% 3%
USD HY spreads below 20 year averages suggest uncertainty rising Global:

+2%
Global economic policy uncertainty index
the answer may be yes. A closer look at global Shanghai
Comp:
markets, however, reveals a pattern similar to (-12%)
-30%
% -8% MSCI US cyclical
this time last year. With policy risk rising in 2018, sectors: (-1.2%)
currency markets and commodities re-priced early Jan 2018 Jun 2019 Apr 2019 Jun 2019
in Q2, followed by global equities in Q3, and USD

credit markets (IG and HY) in Q4. Bear market correction in oil Copper was an early indicator of
markets escalating friction
Commodities
To be sure, the re-pricing in 2019 for rising policy $70 $350
risk has been formidable. Chinese equities are
Jan 1997 May 2019
sharply underperforming global stocks. Defensives
have outpaced cyclicals. Oil and copper have again WTI:
$52
had bear market 20% corrections. Bond and equity ¸¥¶Ï·®¹·¸¥ª©»¨¥½·°¥¸©¶³³¯²«¸³!³°´¶§©· (-21%) $264
volatility has diverged. Global bond yields have (-22%)
could just as easily move sharply lower (US-China $40 $250
dropped sharply lower. escalation) or higher (US-Iran escalation). Jan 2019 Jun 2019 Jan 2018 Jun 2019
Equally important questions arise from the sheer While strong market rallies on a US-China trade
Bond & stock market volatility Energy HY credit spreads back to late
challenge of pricing policy risk in this market. In the deal or a Fed rate cut are quite possible, we see the
diverging
g g 2018 wides
same week in early June, the US dropped steel and balance of risk tilted more toward the likelihood of a
30 100
1 750
¥°¹±²¹±¸¥¶Ï·³²©¼§³³²°½¸³¸¬¶©¥¸©²#[ #9 global market still underpricing policy risk. MOVE: 76
628 bps
US risk assets have not priced in as much policy risk as other markets globally VIX: 16 +298 bps
10 40
4 200
Jan 2019 Jun 2019 Jan 2018 Jun 2019

US equities near record highs VIX at historical averages US HY spreads below
20 year averages Fed easing now widely expected 3m-10yr yield curve now deeply inverted
S&P 500:
3200 55 1900
2,892 Market implied prob of Fed cut in 2019 and signaling rising recession risk
100% 1.5%
Credit
-0.5% (-7 bps)
May 2018 Jun 2019 Jan 2018 Jun 2019
10 yr UST yields moving sharply lower Global negative yielding securities have
16
increased 25% in 2019
20 yr 428 bps
10 yr 2.9% $13 $12 tn
avg: 18 avg: 566
2.09%
(-60 bps)
0 0 0
2.0% $0
2009 2019 2009 2019 2009 2019
Jan 2019 Jun 2019 Dec 2009 Jun 2019
³¹¶§©^_§³²³±§·¥²¨¸¶¥¸©«½°³¦¥°©§³²³±§´³°§½¹²§©¶¸¥²¸½²¨©¼·¥»©«¬¸©¨²¨©¼³ª §³¹²¸¶©·¸¬¥¸¶©Ð©§¸·¸¬©¶©°¥¸º©ª¶©µ¹©²§½³ª³»²[
country newspaper articles that contain a trio of terms pertaining to the economy, policy and uncertainty. (2-4) Bloomberg. Data as of June 14, 2019. Source: (1-10) Bloomberg. Data as of June 14, 2019.
14 15
Currency markets have been an early indicator of rising policy risk Asian currencies have depreciated sharply as trade risk escalated in 2H 2018 and Q2 2019
Unexpected USD strength on safe EMFX under pressure on trade and Bloomberg Asia currency index USD/TWD
haven flows & rate divergence China concerns
DXY index MSCI EMFX index 107 30.5
99 1750
31.53
(-2%)
+10%
(-2%) (-2%)
87 1550 103 31.8

Jan 2018 Jun 2019 Jan 2018 Jun 2019 Jan 2019 Jun 2019 Jan 2019 Jun 2019
USD/KRW USD/CNY
Mexican Peso falls on ratings CAD softer, in part, on USMCA
changes and Trump trade threats uncertainty 1100 6.6
USD/MXN USD/CAD
18.50 1.31
1.33 1,185
19.15
6.92
(-6%)
(-3%)
(-2%)
(-2%) 1250 7.0
Jan 2019 Jun 2019 Jan 2019 Jun 2019
20.00 1.37
Jan 2019 Jun 2019 Jan 2019 Jun 2019
Trade heavy Euro and Swedish Kroner have also declined with escalating trade risk
JPY outperforming on AUD/JPY weakness provides good
EUR/USD USD/SEK
·¥ª©[¬¥º©²Ð³»· proxy for China trade & slowdown
USD/JPY AUD/JPY 1.25 7.5
107 81
108
1.12
9.46
75
+4% (-10%)
(-7%) (-17%)
113 74 1.08 10.0
Jan 2019 Jun 2019 Jan 2019 Jun 2019 Jan 2018 Jun 2019 Jan 2018 Jun 2019
Source: (1-6) Bloomberg. Data as of June 14, 2019. Currency axis inverted to show depreciation. Source: (1-6) Bloomberg. Data as of June 14, 2019. Currency axis inverted to show depreciation.
16 17
¬©·´©©¨¥²¨±¥«²¸¹¨©³ª #9¥²¨¬²¥¸¥¶Ï·»³¹°¨¦©
The Hierarchy of Vulnerability a shock to the global economy and markets if not “back-tracked”
on a path toward resolution in the months ahead
A bilateral rift with multi-lateral consequences
After recovering $11 trillion from January to April, global equities have declined
approximately $3 trillion since May 1 on the back of escalating US-China trade policy
$90 Less resilient
Fed hiking into trade war / Fed “on hold” / US-China Since May 1
China (currency, markets, economy)
China slowdown China stabilizes escalation
Emerging Markets (currency, economy)
Since
Q4 2018 Jan 1 – Apr 30 May 1
(-$10.5 tn) +$10.7 tn 2019 (-$3.0 tn) Commodities (oil, industrial metals)
(-$3.0 tn)
Is the market still
$54
Oct 2018 Jun 2019 underpricing global
Global Trading Volumes (lower, redirected) policy and economic
Tech and industries high beta to trade and economic risk (energy, industrials, consumer, slowdown risk?
financials) have underperformed since policy escalation in early May
S&P 500 sub-sector performance since May 1, 2019
Europe (trade, economy)
s
le
c.
ap
is
St
D
te
re
ls
er
er
ls
s
a
ls
ca
ia
0
ia
om
st
ia
es
50
r
gy
nc
lth
su
su
lE
st
er
iti
ec
h
er
du
P
na
on
on
ea
at
a
c
til
Global Manufacturing & Industrial Sector
S&
l
Re
En
Te
Te
M
In
Fi
U
C
4%
US Equities (tech, industrials, banks)
-8% Global & Cross-Border M&A Volumes
The relative impact of tariff escalation on USD IG industry sectors has been directionally
similar to equities
US High Yield (spreads wider, less origination)
IG sector spread moves, bps, since May 1, 2019
30
US Corporate Earings (slower growth, stronger USD, lower oil)
0
US Economy ^Î²¥²§¥°§³²¨¸³²·§³²·¹±©¶_
ry
to
gy
ia
om
ls
il
ity
ds
su s
re
te
es
nk
ta
le
l
de
ur
nc
tio
c
ria
ia
ed
st
ta
ca
Au
ic
oo
Te
er
til
ap
Re
ec
is
nc
Ba
ra
in
du
ta
Es
rv
st
M
lth
En
Le
lG
St
l
na
or
Se
IG
du
Te
In
ea
al
ita
sp
In
er
Fi
In
Re
c
H
si
ap
an
Ba
su
C
Tr
Global Services Sectors

on
C
More resilient
Source: (1-2) Bloomberg. Data as of June 14, 2019. (3) IFR. Thomson Reuters. Data as of June 12, 2019.
18 19
Escalating policy risk has impacted manufacturing more than services, and
certain industry sectors more than others (auto, agriculture, semis, cyclicals)
2019 manufacturing PMI decline Monthly change in US
preceding services PMI manufacturing jobs declining
Net change, thousands
57 35
Services
Manufacturing 50.9
50.5
50
3
48 0
Jan 2018 May 2019 Apr 2018 May 2019
Europe manufacturing sector Mexico manufacturing & services

contraction sectors in contraction territory
Eurozone manufacturing PMI
62 55
Manufacturing PMI: 49.4
50 50
47.7
Services PMI: 49.4
45 48
Jan 2018 May 2019 Jan 2018 May 2019
Policy and price shocks dragging Semiconductors and auto sectors

US agriculture lower vulnerable
US agriculture economy barometer index
Semiconductors: +11%
30%
160
US auto: (-17%)
60 -35%
Jan 2016 May 2019 Jan 2018 Jun 2019
Source: (1-6) Bloomberg. Data as of June 14, 2019.

Wind and rain bridge of Cheng Yang in Sanjiang, China Deutsche Bank | C-Space | June 2019
20 21
2019 Economic & Market «¥²·¸¥¦¥§¯¨¶³´³ª¶·²«´³°§½¶·¯±³·¸ '«°³¦¥°©§³²³±§ª³¶©§¥·¸·

have been revised lower than previously anticipated just six months ago
Forecasts Advanced
Economies 2018 2019E Change
Emerging
Economies 2018 2019E Change
Developed Markets Asia

DB and market consensus have made multiple significant revisions to 2019 forecasts that
have directionally moved toward a much stronger US dollar and lower rate view than was United States 2.9% 2.4% China 6.6% 6.2%
the case just 6 months ago
Japan 0.8% 0.5% India 7.4% 6.5%
FX pair June 14, 2019 spot YE 2019E YE 2020E
Europe Indonesia 5.2% 4.8%
EUR / USD 1.12 1.13 1.25
Eurozone 1.9% 1.1% South Korea 2.7% 2.0%
USD / JPY 108 105 100 Philippines 6.2% 6.0%
Germany 1.4% 0.7%
GBP / USD 1.26 1.22 1.34 Singapore 3.1% 1.7%
France 1.7% 1.3%
USD / CHF 1.00 1.02 0.94 Vietnam 7.1% 6.6%
Italy 0.7% 0.3%
USD / AUD 1.45 1.39 1.43 CEEMEA
Spain 2.6% 2.2%
Czech Republic 2.9% 2.7%
USD / CAD 1.33 1.36 1.38 Netherlands 2.7% 1.8%
Egypt 5.3% 5.6%
USD / CNY 6.92 7.30 7.50 Belgium 1.4% 1.2%
Hungary 4.9% 4.0%
USD / MXN 19.20 19.80 20.50 Austria 2.8% 1.6%
Israel 3.3% 3.4%
USD / BRL 3.88 3.70 3.70 Finland 2.4% 1.7%
Poland 5.1% 4.1%
USD / RUB 64.34 62.00 63.50 Greece 1.9% 1.6%
Russia 2.3% 0.9%
Portugal 2.1% 1.7%
USD / INR 69.80 72.00 70.00 Saudi Arabia 2.2% 1.6%
Ireland 6.8% 3.1%
South Africa 0.8% 0.1%
US rates June 14, 2019 spot YE 2019E Q1 2020E Other Advanced Economies
Turkey 2.6% (-0.2%)
2 yr UST 1.86% 1.60% 1.60%
United Kingdom 1.4% 1.5%
United Arab Emirates 2.0% 1.9%
5 yr UST 1.85% 1.70% 1.70% Denmark 1.4% 1.8%
Latin America
10 yr UST 2.09% 2.15% 2.20% Norway 1.8% 2.4% Argentina (-2.4%) (-1.4%)
30 yr UST 2.60% 2.70% 2.75% Sweden 2.5% 1.5% Brazil 1.1% 0.7%
Switzerland 2.5% 1.1% Chile 4.0% 3.0%
Crude June 14, 2019 spot YE 2019E YE 2020E
Canada 1.9% 1.4% Colombia 2.6% 3.2%
WTI $52 $59 $56
Australia 2.8% 2.4% Mexico 2.0% 1.3%
Brent $61 $67 $65
New Zealand 2.8% 2.7%
Source: DB Global Markets Research (FX. Rates. Commodities. Economics). Source: (1) DB Global Markets Research (Economics).
22
N
Now this is not the end. It is not even
tthe beginning of the end. But it is, ¬²¯²«Ï©¶©²¸°½
perhaps, the end of the beginning.
Winston Churchill, UK Prime Minister, war hero & writer
About Trade Risk

24 25
Delineating Between Policy Tools The answers to these questions will have implications for markets and the global
economy for decades to come
& Objectives Common questions

”Conventional thinking”
Alternative questions
Ç¬²¯²«¨Ï©¶©²¸°½È
Nearly one year ago, we released a new presentation called “Thinking Differently About Trade Risk”, the
theme of which we believe remains critically important today.
Is China’s leadership as the 21st
For one, market participants would have been well In addition, we would emphasize the limitations of century hegemonic power a
served over the last 18 months had they assumed a “game theory” lens of analysis that has multiple Which political system can
a much higher level of global trade policy risk than dimensions (i.e., the idea that actions will be closely
1 better sustain a trade war?
foregone conclusion, and how
initially appeared to be warranted. We believe this governed by the relative leverage of one economy
will the US respond as that
observation holds true today. over another, one political system over another, etc). transition takes place?
Similarly, while market pressure may provide useful
Secondly, as was the case a year ago, we believe it is a guard rails for forecasting behavior, the last year
±·¸¥¯©¸³¸¬²¯³ª¶©·¨©²¸¶¹±´Å·¹·©³ª¸¥¶Ï·¥· has been littered with examples of markets being an
a “policy tool” intended to push allies and adversaries ²·¹Ñ§©²¸«¹¨©ª³¶·¹¦·©µ¹©²¸¨©§·³²±¥¯²« Have the US and China entered
closer to a free trade oriented world order. Rather, Which economy can better a distinctly new period of
¥±³¶©¹·©ª¹°¥´´¶³¥§¬±¥½¦©¸³¸¬²¯³ªÇ¸¥¶Ï·È Lastly, with consideration to the formidable 2 sustain a trade war? intense economic rivalry and
in the Trump administration as something that more ¨Ï©¶©²§©·¸¬¥¸©¼·¸¦©¸»©©²§³¹²¸¶©·¥²¨´³°¸§¥°
closely resembles a “policy objective”, by virtue of the systems, the prospect for “policy errors” to dictate competition?
frequency and long term outlook of their use. outcomes (including tail risk) remains high.
Declining global trade volumes Rising global protectionist measures Has the technology sector
Y/Y growth rates # of DM protectionist measures Is US Huawei policy an become a new arena for US-
20% 1100 1,037 3 attempt to maximize China rivalry given the sector’s
leverage on a trade deal? economic, geopolitical and
national security implications?
Will political pressures in

How will policy error on both
China (employment) and the
2.4% 4 US (2020 election) necessitate
sides of the US-China escalation
impact subsequent decisions?
a near term agreement?
0% 200
2010 2018 2009 2018
Is the US-China trade deal simply

The US actually maintains a $250 bn trade surplus in services with the rest of the world, “the end of the beginning”?
¥²¨¥¸¶¥¨©¨©Î§¸²«³³¨·°©¨¦½¬²¥ Are President Trump’s use of
US trade in services surplus, USD bn ¸¶¥¨©²«³³¨·¨©Î§¸¦² Will market pressure
¸¥¶Ï·¥²¨²³²[¸¥¶Ï¦¥¶¶©¶·
$300 2000 2018 5 force Presidents Trump
a “policy tool” to move China
$0 and Xi to do a deal? closer to a free trade oriented
world order, or rather, a “policy
World:
W China:
C objective” in and of themselves?
$
$253bn (-$
(-$420bn)
China:
C World: Ç¥¶Ï·¥¶©¥¦©¥¹¸ª¹°¸¬²«È
$
$41bn (-$875bn)
$0 President Trump in “live” CNBC interview on June 10, 2019
2000 2019 -$1,000
Source: (1) UNCTAD. Volume growth rates of merchandise exports and imports, quarterly. (2) Global Trade Alerts. Shows total implemented measures that are almost
certainly discriminatory towards foreign commercial interests. (3-4) US Bureau of Economic Analysis. US Census Bureau. US services surplus is 12 month/4 quarter
rolling sum. Source: (1) CIB Capital Markets Strategy.
26 27
The Trump, Xi and Powell Put

The strengthening of the “Powell put” in recent weeks may actually embolden
¶©·¨©²¸¶¹±´¸³¹·©¸¬©¸¬¶©¥¸³ª¸¥¶Ï¥²¨²³²[¸¥¶Ï¦¥¶¶©¶·±³¶©¥··©¶¸º©°½
and more frequently, in US relations with China and other countries
China
The Trump “put”: The S&P 500 Initial
9¸¥¶Ï·
on $200bn ¸¥¶Ï·¶¥·©¨
3000 ¸¥¶Ï· China goods to 25%
Description: To date, equity markets have
played a role in the escalations and de-
©·§¥°¥¸³²·³ª¶¹±´¸¶¥¨©´³°§½Y#
2,650 has been a floor below which President
Trump has not escalated.

Implication:¥¶¯©¸´¥¶¸§´¥²¸·¶·¯
underestimating the potential for significant
policy pivots by assuming the market
provides a robust floor for tail risk scenarios. 2200
Jan 2017 Jun 2019
The Xi “put”: 6% China GDP growth 15%
Description: While China has stabilized

its economy in 2019, a sharp escalation in
US-China policy in the 2H would have a
6.6%
substantive impact on China growth.
6.2%
5.8%
Implication:¡¬°©¬²¥Å·´³°§½¸³³°¯¸¥²¨
willingness to “dig-in” may be greater than
many appreciate, President Xi has strong
incentives to limit escalation scenarios.
0%
2000 2020
¬©³»©°°Ç´¹¸ÈÎ²¥²§¥° 100.5
§³²¨¸³²·Y²Ð¥¸³²
Description: The tightening of US financial Tighter
conditions in late 2018 caused Chair Powell
¸³§©¥·©¸«¬¸©²²«©§°²²«²ª°¥¸³²²
2019 may precipitate an easing cycle sooner
than anticipated.

Implication:±³¶©¨³º·¬©¨±¥½¥§¸¹¥°°½ Looser
give President Trump the runway to be more
assertive on US-China policy than he may 98.5
otherwise be. Jun 2018 Jun 2019
Source: DB Global Markets Research (Ruskin. Chadha. “Is there A Trump Put? S&P 500 2650?”). (1,3) Bloomberg. Data as of June 14, 2019. (2) DB Global Markets
Research (Economics).
28 29
The Great Decoupling

¡¬°©¸¬©¥²¨¬²¥¬¥º©¦¹°¸¥°¥¶«©°½·½±¦³¸§¥²¨±¹¸¹¥°°½¦©²©Î§¥° The US-China relationship has likely entered a fundamentally new
economic relationship over the past 40 years, the unsustainable imbalances ±¹°¸[¨©§¥¨©´©¶³¨¨©Î²©¨¦½©§³²³±§§³±´©¸¸³²¸©§¬²³°³«½
built over this period have left the world’s 1st and 2nd largest economies in a warfare, diverging socio-political models, geopolitical rivalry and
§³[¨©´©²¨©²¸»©¦¸¬¥¸»°°¦©¨Ñ§¹°¸¸³¨·©²¸¥²«°© §³±´©¸²«·´¬©¶©·³ª«°³¦¥°²Ð¹©²§©
1. China’s low cost production & wealthy US consumption 1. Trade policy disruption (tariff and non-tariff barriers)
2. ¬²¥Å··¹¶´°¹·©·ª¹²¨²«¨©Î§¸·^´¹¶§¬¥·©·_ 2. US moving supply chains “away from China”
3. China’s currency managed or pegged to the US Dollar
3. China diversifying “away from the West” (Belt & Road)
4. China based supply chains combined with US management
and technology expertise 4. Tech sector restrictions, digital warfare & cyber-incursions
5. China’s rising middle class & US MNC sales 5. More confrontational public policy and legal architecture
Source: CIB Capital Markets Strategy

30 31
China may be the only area where Washington is united. The US Congress,
for example, has 30 distinct legislative bills with a tough US-China agenda
The Arc of History Pivots
Bill # Name Sponsor
While US policy in the 2000s and the 2010s was dominated by “the war on S. 2 Fair Trade with China Enforcement Act Rubio (R-FL)
terror” and “post crisis recovery”, a coherent and strong US-China policy fell S. 75 Preventing SBA Assistance from Going to China Act of 2019 Rubio (R-FL)
US Senate
S. 152 Telecommunications Denial Order Enforcement Act Cotton (R-AR)
behind the rapid pace of China’s rise economically and geopolitically S. 188 Border, Law Enforcement, Operational Control, and Sovereignty Act of 2019 Hyde-Smith (R-MS)
¦°°¸³¶©µ¹¶©¥²¹²§°¥··Î©¨²¸©¶¥«©²§½¶©´³¶¸³²¸¬©´³°¸§¥°²Ð¹©²§©³´©¶¥¸³²·³ª¸¬©
S. 480 Rubio (R-FL)
Government of China and the Communist Party of China with respect to the United States
S. 987 U.S.-China Economic and Security Review Act of 2019 Coons (D-DE)
A bill to control the export to the People’s Republic of China of certain technology and intellectual
1990s: “The End of History” S. 1459
property important to the national interest of the United States, and for other purposes
Hawley (R-MO)
To limit funding for any extension of the New START Treaty or any successor agreement
S. 1433 unless the agreement includes the People’s Republic of China and covers all strategic and Cotton (R-AR)
— Triumph of liberal democratic order (“the end of history”) non-strategic nuclear forces of the Russian Federation.
— Computer and internet revolution accelerates S. 1092 Sanction Entities in China for Undermining Rules, Exploiting Intellectual Property Act of 2019 Cruz (R-TX)
— Globalization, free trade and multi-lateral institutions S. 939 CONFUCIUS Act Kennedy (R-LA)
A concurrent resolution recognizing that Chinese telecommunications companies such as
— EU formed, Euro launched, WTO founded and NAFTA signed S.Con.Res.10
Huawei and ZTE pose serious threats to the national security of the United States and its allies
Gardner (R-CO)
A resolution commending the Government of Canada for upholding the rule of law and
expressing concern over actions by the Government of the People’s Republic of China in
S.Res.96 Risch (R-ID)
response to a request from the United States Government to the Government of Canada
for the extradition of a Huawei Technologies Co., Ltd executive
2000s: “The War on Terror” S.335 ZTE Enforcement Review and Oversight Act Rubio (R-FL)
A bill to amend the United States-Hong Kong Policy Act of 1992 to require a report on how the
S. 1824 Cruz (R-TX)
— The West vs. Islamic fundamentalism (9/11, Iraq, Afghanistan) People’s Republic of China exploits Hong Kong to circumvent the laws of the United States
— China joins WTO, rise of EM and commodities super cycle A resolution supporting measures taken by the Government of Taiwan to deter, or if so
S. Res. 228 Hawley (R-MO)
compelled, defeat, aggression by the Government of the People’s Republic of China
— Deregulation and global imbalances A resolution recognizing the 30th anniversary of the Tiananmen Square massacre and
S. Res. 221 condemning the intensifying repression and human rights violations by the Chinese Gardner (R-CO)
— “The Great Moderation” unwinds; Global Financial Crisis Communist Party and the use of surveillance by Chinese authorities
S. 1625 United States 5G Leadership Act Wicker (R-MS)
S. 1634 South China Sea and East China Sea Sanctions Act of 2019 Rubio (R-FL)
2010s: Post Crisis Rebuild & Recovery Bill # Name Sponsor

H.R. 704 Fair Trade with China Enforcement Act Conaway (R-TX)
— Euro Crisis, re-regulation and extraordinary policy easing H.R. 902 Protect American IPR Act King (R-IA)
US House of Representatives
— Proliferation of the digital economy H.R. 595 Denying Chinese Investors Access to US Small Business Aid Act Collins (R-NY)
H.R. 602 Telecommunications Denial Order Enforcement Act Gallagher (R-WI)
— Widening inequality gaps
H.R. 739 Cyber Diplomacy Act of 2019 McCaul (R-TX)
— Rising nationalism / populism (Brexit, Trump pivots, protectionism)
Expressing the sense of the House of Representatives that the United States
H.Res. 248 One-China Policy does not commit it to the People’s Republic of China’s One-China Chabot (R-OH)
Principle, and for other purposes
To limit funding for any extension of the New START Treaty or any successor agreement
2020s: US-China Rebalancing & Globalization Revisited H.R. 2707 unless the agreement includes the People’s Republic of China and covers all strategic and
non-strategic nuclear forces of the Russian Federation.
Cheney (R-WY)
H.R. 2565 U.S.-China Economic and Security Review Act of 2019 Sherman (D-CA)
— Globalization backlash ³¹²¸©¶²«¸¬©¬²©·©³º©¶²±©²¸¥²¨³±±¹²·¸¥¶¸½·³°¸§¥°²Ð¹©²§©
H.R. 1811 Smith (R-NJ)
— Tech sector intervention (competition, regulation, cybersecurity) Operations Act
H.R. 2903 Blocking Investment in Our Adversaries Act Banks (R-IN)
— Climate change, the environment and resource limitations
Remembering the victims of the violent suppression of democracy protests in Tiananmen
— US-China rebalancing: competition, rivalry and confrontation H.Res. 393
Square and elsewhere in China on June 3 and 4, 1989, and calling on the Government of
McGovern (D-MA)
the People’s Republic of China to respect the universally recognized human rights of all
people living in China and around the world
H.R. 2841 Zero Tolerance for Electronics Theft Act Chabot (R-OH)
Source: CIB Capital Markets Strategy Source: (1) Peck Madigan Jones.
32
32 33
¬²¥Å·¥º©¶¥«©¸¥¶Ï¶¥¸©·§°±¦²«³²«³³¨·¥²¨ª¥°°²«ª³¶¸¬©¶©·¸³ª¸¬©»³¶°¨
2018 2019
June 1
United States Sept 24
20.7%
18.3% 18.2% 16.5%
Aug 23
14.4%
July 6
April 2 May 1 July 1 10.1% Nov 1
Jan 1
8.4% 8.3% 7.2%
8.0%
8.0% 8.0%
6.9% 6.7% 6.7% 6.7%
All other exporters
China’s imports from the US have declined much more rapidly than imports from elsewhere
during the trade war
Total US imports
Y¬²¥¥¶Ï··²« Index, Jan 2018=100
120 Nov 1
from China: #9¸¥¶Ï·³²·¸!Y"¬²¥©¼´³¶¸·
$550bn (5,700 product categories) will have a more July 1

¨¶©§¸±´¥§¸³²Î²¥²§¥°±¥¶¯©¸·«°³¦¥° May 1
trade, manufacturing, agriculture and the 110
From
US consumer. Near term escalation likely, all other
with the June G-20 meeting as a pivotal event exporters Jan 1
List 4: Jul 2019: 25%
(possible) towards détente and subsequent resolution.
$300bn 100
July 6 Aug 23 Sept 24
From April 2
Total China United
imports from US:
States
$120bn 90
Jan 2018 Mar 2018 May 2018 Jul 2018 Sep 2018 Nov 2018 Jan 2019 Mar 2019
List 3: 2018 2019

$200bn May 2019: 25% Jul 2019: 25% April 2 May 1 July 1 July 6 Aug 23 Sep 24 Nov 1 Jan 1 June 1
List 4: $10bn (possible)
List 3: $60bn Jun 2019: 25%
Retaliation
for US
MFN
cut on
MFN cut on
consumer
Retaliation
for US
Retaliation
for US
Retaliation
for US
MFN cut on
industrial
Suspension of
retaliation for
¥¶Ï
increase on
Section 232 pharma goods, autos Section Section Section goods US Section some US
List 2: $16bn Aug 2018: 25% List 2: $16bn Aug 2018: 25% ¸¥¶Ï· ITA products !¸¥¶Ï· !¸¥¶Ï· !¸¥¶Ï· !¸¥¶Ï· products
($34 bn) ($16 bn) ($60 bn) against autos (subset of
List 1: $34bn Jul 2018: 25% List 1: $34bn Jul 2018: 25% and parts:
temporary
$60 bn)
MFN rates for

2019
US Actions China Response
Source: (1) DB Global Markets Research. Peterson Institute for International Economics. USTR. People’s Republic of China’s Ministry of Commerce and Ministry of ³¹¶§©^_©¸©¶·³²²·¸¸¹¸©ª³¶²¸©¶²¥¸³²¥°§³²³±§·Ç¶¹±´¥·³¸¸©²¬²¥³³»©¶¸·¥¶Ï·¹·¸³»¥¶¨º©¶½³²©°·©È¶¥¨©¥´¥¶¯©¸§§©··¥´
Finance. US Census Bureau. Total China imports from US based on 2018 full year data. (International Trade Centre). China’s Ministry of Finance. MFN is most favored nation. ITA is Information Technology Agreement.
34 35
Expectations for a US – China “mini-deal” should perhaps be less than previously

anticipated with substantive progress more likely on easier “low hanging fruit” issues
More Some Less

Metric
likely concessions likely
©¨¹§©¨¸¥¶Ï·
More access for FDI into China
©¨¹§©¨²³²[¸¥¶Ï¦¥¶¶©¶·ª³¶·³´©¶¥¸²«³²·¬³¶©
©¨¹§©¨«³³¨·¸¶¥¨©¨©Î§¸
Increased purchases of US products

(semiconductors, soybeans, natural gas)
Competitive FX devaluations prohibited
Foreign Investment Law as step towards more

equal treatment of MNCs
Substantive IP protection
Bans on forced technology transfer
Relaxation of JV requirements for market access
Enforcement & accountability provisions
Codifying agreement into Chinese law
¹°°¥²¨±±©¨¥¸©©°±²¥¸³²³ª¸¥¶Ï·
State subsidies for strategic industries
Investment in sensitive sectors
SOE reform
Substantive change to domestic policy initiatives (Made in China 2025)
Pullback in foreign policy initiatives (Belt & Road Initiative, 16+1)
US removing Huawei from US Entity List
China eliminating newly created ‘Unreliable Entity List’
Source: (1) CIB Capital Markets Strategy. New York Times. WSJ. Financial Times
36 37
Executive Actions, Loopholes

& Emergency Powers
Section 201 Section 301

Legal origin President Trump’s use Legal origin President Trump’s use
— US Trade Act of 1974 — 20-50%¸¥¶Ï·³²washing machines and — US Trade Act of 1974 — “List 1-3” 25% tariffs on $250 bn of US
washing machine parts©Ï©§¸º©·²§© — Allows the US Trade Representative to suspend imports from China effective, in stages,
— Allows the President to impose temporary
February 7, 2018 trade agreement concessions or impose import since July 6, 2018
duties if the US International Trade Commission
(ITC) determines a surge in imports is a — 30%¸¥¶Ï·³²solar cells and solar modules restrictions if it determines a US trading partner — Proposed “List 4” tariffs of up to 25% on
su¦·¸¥²¸¥°§¥¹·©³¶¸¬¶©¥¸³ª·©¶³¹·²®¹¶½¸³¥ ©Ï©§¸º©·²§©©¦¶¹¥¶½% & is º³°¥¸²«¸¶¥¨©¥«¶©©±©²¸§³±±¸±©²¸·³¶ approximately $300 bn of remaining US imports
²¨¹·¸¶½ ©²«¥«²«²¨·§¶±²¥¸³¶½³¶¹²¶©¥·³²¥¦°© from China. Announced on May 5, 2019
´¶¥§¸§©·¸¬¥¸¦¹¶¨©²³¶¶©·¸¶§¸§³±±©¶§©
“If the United States International Trade Commission determines that an article is being imported into
the United States in such increased quantities as to be a substantial cause of serious injury, or the threat Ç©°©«¥¸©·¥¹¸¬³¶¸½¸³¸¬©¼©§¹¸º©¸³±³¨ª½§©¶¸¥²¸¥¶Ï¶¥¸©·»¬©²Ç¸¬©¶«¬¸·³ª¸¬©²¸©¨¸¥¸©·
thereof, to the domestic industry producing an article like or directly competitive with the imported article, under any trade agreement are being denied” or “an act, policy, or practice of a foreign country ... (i)
the President, in accordance with this chapter, shall take all appropriate and feasible action within his º³°¥¸©·³¶·²§³²··¸©²¸»¸¬¸¬©´¶³º·³²·³ª³¶³¸¬©¶»·©¨©²©·¦©²©Î¸·¸³¸¬©²¸©¨¸¥¸©·¹²¨©¶
´³»©¶»¬§¬¸¬©¶©·¨©²¸¨©¸©¶±²©·»°°ª¥§°¸¥¸©©Ï³¶¸·¦½¸¬©¨³±©·¸§²¨¹·¸¶½¸³±¥¯©¥´³·¸º© ¥²½¸¶¥¨©¥«¶©©±©²¸³¶^_·¹²®¹·¸Î¥¦°©¥²¨¦¹¶¨©²·³¶¶©·¸¶§¸·²¸©¨¸¥¸©·§³±±©¶§©È
¥¨®¹·¸±©²¸¸³±´³¶¸§³±´©¸¸³²¥²¨´¶³º¨©«¶©¥¸©¶©§³²³±§¥²¨·³§¥°¦©²©Î¸·¸¬¥²§³·¸·È
¶¥¨©§¸³ª'%"S!
¶¥¨©§¸³ª'%"S
Section 232 IEEPA

Legal origin President Trump’s use Legal origin President Trump’s use
— US Trade Expansion Act of 1962 — 10%¸¥¶Ï·³²·©°©§¸©¨aluminum products — International Emergency Economic Powers — Proposed 5-25% tariffs on all US imports
— Allows the President to take actions to adjust ©Ï©§¸º©·²§©¥¶§¬ ! & Act of 1977 from Mexico in response to the national
the imports of goods if the Department of — 25%¸¥¶Ï·³²·©°©§¸©¨steel±´³¶¸·©Ï©§¸º© emergency at the US-Mexico border.
— Allows the President to regulate commerce after Announced on May 30, 2019
³±±©¶§©Î²¨·¸¬©´¶³¨¹§¸·¥¶©±´³¶¸©¨² since March 23, 2018 declaring a national emergency in response to an
such quantities or under such circumstances as — Potential additional 25%¸¥¶Ï·³²motor ¹²¹·¹¥° and ©¼¸¶¥³¶¨²¥¶½¸¬¶©¥¸ to US national
to ¸¬¶©¥¸©²¸³±´¥¶²¥¸³²¥°·©§¹¶¸½ vehicles, motor vehicle parts, and uranium security, foreign policy, or the economy
“If the President “declares a national emergency” “to deal with any unusual and extraordinary threat,
Çª¸¬©©§¶©¸¥¶½³ª³±±©¶§©ÇÎ²¨·¸¬¥¸¥²¥¶¸§°©·¦©²«±´³¶¸©¨²¸³¸¬©²¸©¨¸¥¸©·²·¹§¬
which has its source in whole or substantial part outside the United States, to the national security,
quantities or under such circumstances as to threaten to impair the national security,” then the President
foreign policy, or economy of the United States” under Section 202(a) (50 U.S.C. §1701(a)), “the President
is authorized to take “such other actions as the President deems necessary to adjust the imports of such
may ... investigate, block during the pendency of an investigation, regulate, direct and compel, nullify,
article so that such imports will not threaten to impair the national security.” ”
void, prevent or prohibit, any acquisition, holding, withholding, use, transfer, withdrawal, transportation,
importation or exportation of, or dealing in, or exercising any right, power, or privilege with respect to, or
¶¥¨©¼´¥²·³²§¸³ª'$ S ! ^¦_\^§_
transactions involving, any property in which any foreign country or a national thereof has any interest by
any person, or with respect to any property, subject to the jurisdiction of the United States.” ”
²¸©¶²¥¸³²¥°±©¶«©²§½§³²³±§³»©¶·§¸³ª'%%
³¹¶§©^_³²«¶©··³²¥°©·©¥¶§¬©¶º§©Ç¶©·¨©²¸¥°¹¸¬³¶¸½³º©¶¶¥¨©±´³·²«¥¶Ï·¥²¨¹¸©·È^¥¸°¥²©º©¶©¥¹¼©»·_Ç¶¹±´¨±²·¸¶¥¸³²¥¶Ï
Actions (Sections 201, 232, and 301): Frequently Asked Questions”
38 39
Tech Sector Warfare

Despite gridlock in Washington, politicians and policy makers from both sides of the aisle
and from nearly every major branch of the US government have taken unified action on
US-China technology intervention and policy
White House Treasury State Commerce

Action / USTR US Congress Department Department Department DoJ DoD
Technology Restrictions
Executive order banning US companies from buying or using certain foreign-made telecommunications equipment X
Restrictions on US government entities from using Huawei and other China-based technology X
'¨©ª©²·©·´©²¨²«¦°°¦¥²²²«·©¶º§©·Y©µ¹´±©²¸ª¶³±Îº©¬²©·©¦¥·©¨§³±´¥²©·¥²¨¥Ñ°¥¸©· X X X
Including Huawei on US “Entity List” X
Export restrictions on emerging and foundational technologies, critical technologies and intellectual property X X X
M&A and Market Access
Opposition to President Xi’s tech focused ‘Made in China 2025’ plan X X
Broadened CFIUS mandate to include transactions involving a non-controlling share X X X X X X X
CFIUS scrutiny of transactions involving critical infrastructure, technologies or maintenance of sensitive data X X X X X X X
National Security intervention in tech M&A X X X X X X X
Reports, Hearings & Investigations
Policy papers and reports on China’s unfair technology transfer and intellectual property dealings X X X X
USTR Section 301 update document in response to unfair technology transfer and intellectual property dealings X
Hearings on Chinese espionage and cybersecurity X X X
Sanctions violations penalties for Chinese telecommunications companies X X X
²¸©¶²¥¸³²¥°³¦¦½²«Ï³¶¸·
International lobbying on national security threat posed by certain Chinese companies X X X X X X
Restricting intelligence sharing with allies who continue to work with Huawei X X
Outreach to US universities regarding joint tech / R&D work with Chinese companies X X
Cybersecurity
Investigations & charges against APT-10 hacking group X X
Investigations into cyber attacks on US private companies X X X
Visa Restrictions
Tighter tech sector visa approval processes X X
¸¹¨©²¸º·¥¶©·¸¶§¸³²·^´¶³¬¦¸³²·ª³¶¥²½³²©¥··³§¥¸©¨»¸¬·§©²¸Î§`©²«²©©¶²«²·¸¸¹¸©·¥Ñ°¥¸©¨»¸¬¬²¥Å·¶±½_ X X X
³¹¶§©^_©§¯¥¨«¥²³²©·Ñ§©³ª¸¬©¶¥¨©©´¶©·©²¸¥¸º©²³§·±³²«¶©··³±±©¶§©©´¥¶¸±©²¸©´¥¶¸±©²¸³ª¹·¸§©©´¥¶¸±©²¸³ª©ª©²·©
40 41
Huawei
Global policy action toward Huawei
Huawei revenue growth since 2014 Huawei was the 5th largest R&D spender
Huawei revenue, Yuan, bn globally in 2018, as the company strives Adversarial
to build its 5G network
USA France
800 Consumer business Other revenue 2018, USD, bn Government ban on Huawei enacted Legislation remains under review as to
Samsung in August 2018 with additional restricting the Chinese telecom giant.
$15.5
executive orders to restrict Huawei, ¹¶³´©¥²Ï¥¶·²·¸©¶ª¥º³¶·¦¶³¥¨
Alphabet $15.4 ZTE equipment more broadly. EU action.
Volkswagon $15.1
Microsoft $14.1 Canada Australia
Huawei $13.1 South China Morning Post warns that The Oceanic nation banned Huawei for
Intel $12.6 Huawei likely faces 5G ban in Canada use in its 5G infrastructure, though it was
after arrest of Huawei CFO in Vancouver. noted to have paid Huawei $1 million
Apple $11.1
Former PM Stephen Harper backs for research in February due to “poor
Roche $10.2 this stance. government coordination.”
Johnson & Johnson $10.1
0
2011 2012 2013 2014 2015 2016 2017 2018 Daimler $10.0 Taiwan Poland
The Taiwanese government-subsidized Considering Huawei ban after the
Industrial Technology Research Institute arrest of spies in early January. Huawei
Huawei has the largest market share of ...and is leading the race to develop 5G has blocked Huawei smartphones and ¶©·´³²¨·¦½³Ï©¶²«·©§¹¶¸½°¥¦ª¥§°¸½
existing mobile infrastructure… Number of 5G standard technical computers from accessing its internal in early February.
network, and government considers
2G/3G/LTE market share, 2018 contributions by company
blacklisting Huawei and ZTE according Japan
Huawei 11,423 to Nikkei. Washington Post reports that Japan has
31%
Ericsson 10,351 Ç©Ï©§¸º©°½¦¥²²©¨È¹¥»©¥²¨¤ª¶³±
27%
Hisilicon 7,248 EU government related projects.
22% Nokia 6,878 ³Ñ§¥°·¥¶©§³²·¨©¶²«¸¥¶«©¸©¨
QUALCOMM 4,493 bans on Huawei tech for 5G rollouts in Mexico
Samsung 4,083 sensitive national security areas. Mexico has partnered with Huawei to
11% ZTE 3,738 provide telecom rollouts, though the
Intel 3,502 New Zealand USMCA includes clauses that trade deals
5% 4% New Zealand followed its ANZAC partner with China could be cause for expulsion
LG Electronics 2,909
Australia in banning Huawei amid from the North American pact.
CATT 2,316
security concerns.
Huawei Ericsson Nokia ZTE Samsung Other NTT DOCOMO 2,135
MediaTek 1,482
NEC 1,346
Mixed Outlook
Huawei is also a growing share of the Though the company has far more Belgium India
smartphone hardware space traction in Europe rather than the US The Belgium Centre for Cybersecurity Economic Times of India reports that India
Share of smartphones, unit sales to end users Share of smartphones by country reportedly considers ban on the use of ·¹²°¯©°½¸³¦¥²¹¥»©ª¶³±#©Ï³¶¸·
¹¥»©©µ¹´±©²¸³Î¶±²¨§¥¸³²·¥¶© despite heavy U.S. pressure, but the company
13% Italy 24% ³Ï©¶©¨¦½«³º©¶²±©²¸·´³¯©·´©³´°© is banned from 5G trials in September 2018
in favor of Sweden-based Ericsson.
Spain 19%
10% UK
9% Germany 12% UK ministers plan new laws that bar the Norway
Chinese telecoms infrastructure giant The government of the Nordic nation is
7% France 12% from “sensitive” infrastructure projects considering a ban on Huawei products for
6% related to 5G. British Telecom stops its 5G rollout, according to Reuters. No
5% Switzerland 6%
4% short of full ban. ³Ñ§¥°¦¥²¬¥·½©¸¦©©²©²¥§¸©¨
2% UK 6%
2% Italy Germany
Canada 2% Under Consideration, but has not yet Government rules out outright ban,
©²¥§¸©¨¥²½Î¶±¶©·¸¶§¸³²·¥²¨¬¥· though stricter security measures remain
US 1%
2010 2011 2012 2013 2014 2015 2016 2017 2018 denied reports it will do so. under review.
Source: (1) S&P Capital IQ. (2) 2018 EU Industrial R&D Investment Scorecard. (3) IHS Markit. (4) Statista. Iplytics as of December 2018. (5) Gartner. Statista. (6) Statista
Global Consumer Survey. Survey conducted from Jan to Mar 2019 with samples of 8,000 and 20,000 people depending on the selected countries. Source: Real Money. “Chart of the Day: Huwaei’s Trade War Scorecard.” Kevin Curran. February 11, 2019.
42 43
Selected companies
that have announced
Huawei restrictions
of varying types:
Germany
UK
Canada
Taiwan
US
Geopolitical Struggle for ³²Î¶±©¨²©¸»³¶¯`º©²¨³¶
5G & Internet Governance ¹¥»©¦¥²§³²Î¶±©¨ Japan
Huawei’s Global Reach for 5G M.O.U. / Testing with Huawei
Source: Wall Street Journal, @declanganley. h/t @MattGarrett3. Information provided on this infographic is compiled from Huawei’s press announcements, news
reports and statements by carriers and is subject to change.
44 45
Huawei Marine’s
Undersea Cable
Network
Approximately 95% of intercontinental
º³§©¥²¨¨¥¸¥¸¶¥Ñ§·§¥¶¶©¨¦½
undersea cables. Huawei has over 90
ongoing projects to build new cables or
upgrade existing infrastructure.
Completed cables Planned cables
Source: Huawei Marine. TeleGeography. Wall Street Journal (“America’s Undersea Battle With China for Control of the Global Internet Grid”, March 13, 2019).
46 47
Contemplating “Nuclear” Options
China’s Formidable Policy Toolkit While we expect China policy to continue to be “measured and balanced”, the sharp
©·§¥°¥¸³²²[¬²¥¸¶¥¨©§³²Ð§¸¬¥·´¹¸ª³¹¶´¶©º³¹·°½¹²©¼´©§¸©¨´³°§½¸³³°·
“on the table” in a way not considered before
While the US may have comparatively more leverage in a trade war, China also has a
·«²Î§¥²¸¥²¨¨º©¶·©´³°§½¸³³°¯¸»¬§¬·¬³¹°¨²³¸¦©³º©¶°³³¯©¨¦½±¥¶¯©¸· 1 Rare Earth element (REE) export restrictions
³¸©²¸¥°²©»¸¥¶Ï±©¥·¹¶©· There is historical precedent for China to use its near-monopoly Share of global rare earth production
on the sourcing and processing of REEs as a tool in international 100% 71% 12%
Other:
negotiations: i) in 2010, China put a two-month ban on REE US: 9%
¼·¸²«¸¥¶Ï· ¥·©¸¥¶Ï¶¥¸©ª³¶©¼·¸²«·¸[!¸¥¶Ï·^>¦²³ª«³³¨·_ exports to Japan; ii) in 2015, the US won a WTO suit against China: 71%
China for its taxes and quotas on REE exports aimed at resource
conservation. A 2010 US GAO study redirected US policy
to reduce REE dependency and vulnerability, however, the
study also noted that rebuilding US REE production and Australia: 9%
List 4 ©»¸¥¶Ï·³²¶©±¥²²«©¼´³¶¸·¸³¬²¥^¥´´¶³¼±¥¸©°½>¦²³ª«³³¨·_
processing supply chains could take 15 years. 0%
1960 2018
Autos ©·©¸"9¸¥¶Ï·ª¶³±¥½©¥¶¥«³³¶´³··¦°½±´°©±©²¸¬«¬©¶¶¥¸© 2 RMB devaluation through 7.0 threshold

USD/CNY
If some form of détente is not reached after the 6.2
Additional Currently excluded goods such as Boeing aircraft and crude oil could be subject
G-20 meetings on June 28-29, DB’s Chief Asia
¸¥¶«©¸©¨¸¥¶Ï· ¸³²©»¸¥¶Ï· Macro Strategist, Sameer Goel, believes a new
RMB trading range of 7.4-7.9 is possible. While this
´³°§½¨³©·¬¥º©°±¸¥¸³²·¥²¨·«²Î§¥²¸±´°§¥¸³²· 6.92
³¸©²¸¥°²³²[¸¥¶Ï¦¥¶¶©¶· for Asia currencies and global risk assets, RMB
¨©´¶©§¥¸³²¨³©·³Ï©¶¥²©Ñ§©²¸³Ï·©¸¸³¸¥¶Ï· (-10%) (-3%)
7.1
Stimulus ³±©·¸§¥°°½³¶©²¸©¨Î·§¥°¥²¨±³²©¸¥¶½·¸±¹°¹· Jan-2018 Jun-2019
packages
3 “Dumping” US Treasuries
Unreliable List of foreign organizations that take “discriminatory measures against Chinese
entity list ©²¸¸©·È¸¬©°·¸·°¯©°½¸³ª³§¹·³²¸©§¬²³°³«½Î¶±· Ñ§¥°²¹±¦©¶·²¨§¥¸©¬²¥Å·¬³°¨²«·¥¸> China UST holdings
trillion (7% of the total UST market), though the actual $1.4 $1.1 tn
number may be closer to $1.6-1.7 trillion. Given that a
Ç¨¹±´²«È´³°§½»³¹°¨°¯©°½²Ð§¸±³¶©¨¥±¥«©³²
Export controls ©·¸¶§¸³²·³²¬²©·©§³±´¥²©·©¼´³¶¸²«§©¶¸¥²·©²·¸º©¸©§¬²³°³«©· China than the US (RMB strengthening, valuation hit to
reserve assets, limited liquid investment alternatives, Fed
´³°§½³Ï·©¸·_¸¬·³´¸³²··¸°°°¯©°½°³»´¶³¦¥¦°¸½
Nonetheless, a “structural bleed” of China’s UST holdings
Agricultural or escalation to this “nuclear option” are still possible. $0
Reduce purchases of agricultural and other products from politically important US states
purchases 2000 2019
Nationalist 4 “Friction” for US MNC sales in China

Anti-US tone could damage sales for US brands in China
rhetoric US exports & MNC sales to China
At an estimated $400 bn per annum, US MNC on-shore
sales far exceed annual US exports to China of $120 $400 bn
Travel Travel advisory for Chinese travelers in the US (implications for tourism and ¦²º©²¬²¥Å·¶©°¥²§©³²·ª³¶Ð³»·
management expertise and technology access, formidable
restrictions luxury brands)
disruption here may be low on the list of policy preferences. $120 bn
Friction, however, can come in many forms with varying
degrees of impact: encouraging boycotts of targeted US
»¥¸±´¥§¸³ª·¸"¸¥¶Ï·³²§³²·¹±©¶YÎ²¥²§¥°±¥¶¯©¸· brand names, slower customs processes, license and
Buying time 2020 Presidential election
US exports to China Estimated US MNC
on-shore subsidiary
regulatory approval delays, etc.
sales in China
³¹¶§©^_¹¶©¥¹³ª²©·¨¥±¥·²¸©°°«©²§©¶©·©¥¶§¬ &Î«¹¶©·¥¶©©·¸±¥¸©·^ [!_°³³±¦©¶«¥¸¥¥·³ª¹²©" '^"_©²·¹·°³¦¥°

Source: (1) US International Trade Commission. Markets Research (Zhang).
48 49
Rare Earth Battlegrounds The US relies on China for production or processing of most of the Earth’s 17 rare
minerals critical for thousands of technology and industrial applications
Since the 1990s, China has developed a
Atomic # Element Sample applications
near-monopoly (eclipsing US leadership from
the 1980s) on the sourcing and processing of 21 Scandium ´³¶¸²«©µ¹´±©²¸ ·Ð¹³¶©·§©²¸Y©²©¶«½·¥º²«°«¬¸·°¥·©¶·¥°°³½·
many of the Earth’s 17 REEs that have critical
applications for thousands of products in Cell phones & larger display screens, lighting, medical treatments, surgical supplies,
the aerospace, defense, technology, energy,
39 Yttrium superconductors, catalysts, alloys
consumer electronics and other industries.
Studio lighting & projector lights, camera and telescope lenses, catalytic converters,
Further, China has been very clear that it would 57 Lanthanum Ð¹¨§¥¸¥°½¸§§¶¥§¯²«¶©§¬¥¶«©¥¦°©¦¥¸¸©¶©·
not stand idle while the US placed restrictions
on the sale of US technology components that
Light Rare Earth Elements

58
²§¥²¨©·§©²¸«¥·±¥²¸°©··©°ª[§°©¥²²«³º©²·¶©Î²²«§¶¹¨©³°§¥¸¥°½¸§§¥¶
Cerium
use REEs sourced or processed in China. §³²º©¶¸©¶·Ð¹¨§¥¸¥°½¸§§¶¥§¯²««°¥··´³°·¬²«§³±´³¹²¨·
Electric motors & generators used in hybrid cars and wind turbines, specialized glass,
China’s use of this tool is not without 59 Praseodymium aircraft engines, permanent magnets, alloys, ceramics, lasers
precedent, as evidenced by China’s two month
ban on REE exports to Japan in 2010. The US Permanent magnets (for modern vehicles, aircrafts, consumer electronics), alloys,
also won a 2015 WTO suit against China for 60 Neodymium ceramics, lasers
its taxes and quotas on REE exports aimed at
Nuclear batteries for guided missiles, watches, pacemakers. Possible use as portable
resource conservation. While a US GAO study 61 Promethium x-ray source
in 2010 has redirected US policy to reduce
REE dependency and vulnerability, that same Optical lasers, permanent magnets, headphones, small motors and pickups, electric
study concluded that rebuilding the US REE 62 Samarium guitars, IV radiation cancer treatment, lasers
production and processing supply chain could
TVs, printing of Euro banknotes, control rods in nuclear reactors, lasers,
take 15 years. 63 Europium optoelectronic devices
64 Gadolinium Microwaves, TVs, MRIs and x-rays, imaging sensors, alloys

Rare earth prices are soaring
65
China gadolinium oxide price, CNY per metric tons China dysprosium metal price, CNY per kg °©§¸¶³²§¨©º§©·±©¨§¥°¼[¶¥½·°¥·©¶¨©º§©·Ð¹³¶©·§©²¸°«¬¸²«ª¹©°§©°°·
Terbium
Heavy Rare Earth Elements

sonar systems
210,000 2,500
201,50
201,500 2,400
Nuclear fuel rods, permanent magnets (wind turbines & electrical vehicles), hard
66 Dysprosium computer disks, dosimeters
Magnet production, coloring for glass and cubic zirconia, microwave equipment,
67 Holmium ceramics, lasers
68
¹§°©¥¶¶©¥§¸³¶§³²¸¶³°¶³¨·§³°³¶²«¥«©²¸²«°¥¾©·¥²¨«°¥··©·¥±´°Î©¶·¥²¨
Erbium °¥·©¶·´¬³¸³«¶¥´¬§Î°¸©¶·
69 Thulium Euro banknotes, lasers, portable X-rays
70
³¶¸¥¦°©¼[¶¥½±¥§¬²©··¸¶©··«¥¹«©·¸³±³²¸³¶©Ï©§¸·³ª©¥¶¸¬µ¹¥¯©·¥²¨
Ytterbium explosions, health care, atomic clocks
71
¥²§©¶¸¬©¶¥´½¥«©¨©¸©¶±²¥¸³²³ª±©¸©³¶¸©·¥²¨±²©¶¥°·´©¸¶³°©¹±¶©Î²²«
Lutetium °©²·©·±¥«²«Ð¹¨§¥¸¥°½¸§§¶¥§¯²«
80,000 1,500 US lacks production

Jan 2018 Jun 2019 Jan 2018 Jun 2019
Source: (1-2) Bloomberg. Data as of Jun 14, 2019. Source: (1) DB Global Markets Research “Rare Earth Pressure Point” (Hsueh). Rare Earth Technology Alliance.
50 51
¥¸Î§¥¸³²²§©¶¸¥²¸½
¬³¹«¬´³··¦°©¶¥¸Î§¥¸³²² '»°°¦©º©¶½¨Ñ§¹°¸¸³¥§¬©º©¦©ª³¶©½©¥¶©²¨
Largest US trading partners
Imports & exports, 2017
©½¶©±¥²²«·¸©´·
China $656bn
Reports to Congress and Public
Canada $588bn
At least 30 days before submitting implementing bill: Submission of draft statement of administrative
Mexico $561bn
1 ¥§¸³²¥²¨§³´½³ªÎ²¥°°©«¥°¸©¼¸³ª¸¬©¥«¶©©±©²¸©§¸³²$^¥_^_^_
Japan $207bn
ª¸©¶©²¸©¶²«²¸³¥«¶©©±©²¸^²³¨©¥¨°²©·´©§Î©¨_¹¦±··³²³ª§³´½³ªÎ²¥°°©«¥°¸©¼¸³ª¸¬©
Germany $173bn 2 agreement, draft implementing bill, statement of administrative action, and supporting materials.
Section 6(a)(1)(E).
South Korea $122bn
¸¸±©¶©·¨©²¸·¹¦±¸·§³´½³ªÎ²¥°°©«¥°¸©¼¸³ª¸¬©¥«¶©©±©²¸Submission of environmental
UK $110bn 3 review, employment impact review, and plan for implementing and enforcing the agreement.
Section 5(d)(1), (d)(2), (e).
France $84bn
India $76bn
Congressional Consideration of Agreement
Mexico is top source of US car imports

Value of new passenger & light truck imports to the US, 2018 4 Implementing bill introduced in House and Senate (no deadline)
Mexico $52.6bn
45 days after submission of implementing bill: Ways and Means must report bill (or automatic
Japan $40.3bn
5 discharge).
Canada $38.4bn
$18.2bn
Germany
6 15 days thereafter: House must vote on bill.
South Korea $13.8bn
UK $9.5bn
7 15 days thereafter: Senate Finance must report bill (or automatic discharge).
Italy $4.5bn
Slovakia $3bn
8 15 days thereafter: Senate must vote on bill.
Sweden $2bn
Finland $1.7bn 30 days prior to entry into force with respect to a party: written notice to Congress that the
9 President has determined that the party has taken measures necessary to comply with the
Rest of world $7.7bn agreement. Section 6(a)(1)(G).
Source: (1) World Bank. WITS. Trade in goods and services. (2) US Department of Commerce. Source: (1) Peck, Madigan and Jones.
52
Lets bring the UK’s Withdrawal to an

orderly end. We owe it to history.
Jean-Claude Juncker, European Commission President
Contemplating
“Disorderly” Brexit
54 55
Markets Pricing More Disorderly UK market sentiment has trailed the EU following June 2016 referendum
Brexit Scenario
120
sentiment
EU sentime
FX markets have been pricing in a more disorderly Brexit outcome with weakness in both
Sterling and Euro
GBP/USD EUR/USD EUR/GBP
1.45 1.27 0.92
0.89
1.12
1.26 UK sentime
sentiment
(-12%) (-10%)
1.20 1.07 0.82 80
Jan 2018 Jun 2019 Jan 2018 Jun 2019 Jan 2018 Jun 2019 Jan 2010 May 2019
Sterling has been one of the worst performing G10 currencies since the Brexit Referendum UK equities underperforming global stocks Renewed weakness in UK equities
Total return basis since Jun 23, 2016 since the Brexit referendum relative to Europe in 2019
35% 18%
+5.5%
+0.2% MSCI
MSCI all Europe
world: ex UK:
(-1.7%) (-2.3%) (-2.4%) (-2.6%) (-2.9%) (-3.0%) +26% +13%
(-5.3%)
(-13.2%) FTSE 100: MSCI UK:

(-14.5%)
+16% +9%
US
Canada
Euro
Denmark
New Zealand
Japan
Australia
Norway
Switzerland
UK
Sweden
-10% -2%
Jun 2016 Jun 2019 Jan 2019 Jun 2019
Source: (1-3) Bloomberg. Data as of June 10, 2019. Sentiment is European Commission Economic Sentiment. Calculated from the European Commission’s Business
Source: (1-3) Bloomberg. Data as of June 13, 2019. FX returns are on total return basis as of June 23, 2016. US is trade weighted performance, all others calculated ¥²¨³²·¹±©¶¹¶º©½·³²·¸¶¹§¸©¨ª¶³±²¨¹·¸¶¥°§³²Î¨©²§©²¨§¥¸³¶·©¶º§©§³²Î¨©²§©²¨§¥¸³¶§³²·¹±©¶§³²Î¨©²§©²¨§¥¸³¶§³²·¸¶¹§¸³²§³²Î¨©²§©
with USD base. ²¨§¥¸³¶¥²¨¸¬©¶©¸¥°¸¶¥¨©§³²Î¨©²§©²¨§¥¸³¶
56

58 Theresa May’s resignation as PM has increased the chance of a 59
“No Deal” Brexit, though early general elections remain DB’s base case
Political Uncertainty & Change New Prime Minister selected
On June 7th, Theresa May formally stepped down as Despite these challenges, a “No Deal” Brexit is not
leader of the Conservative Party and Prime Minister. DB’s base case. In fact DB’s Oliver Harvey believes
Her resignation and the subsequent UK leadership there is a 50% chance that an early general election
§³²¸©·¸·«²Î§¥²¸°½²§¶©¥·©·¸¬©¶·¯³ª¥Ç³©¥°È will take place with the outcome of that election
Brexit for several reasons: ultimately determining the outcome for Brexit.
— “Power dynamics” shift to “No Deal”: While a second referendum is unlikely, it is

Conservative party members largely support a still possible. The “Remain” camp appears to
“No Deal” outcome over either a “Remain” or have gained support in polls on a hypothetical
prolonged negotiation scenario. As a result, the New PM calls New PM runs New PM seeks
referendum, but the growing popularity of ³§³²Î¨©²§©
new Conservative Party leader could shift the
the newly created Brexit party suggests the for early on “No Deal” renegotiation
negotiations to favor “No Deal” vote
population may be even more divided than general election platform with EU
— Timing: The UK Parliament is in recess from July during the 2016 initial referendum vote. In
20 to September 5 allowing for limited time to addition, a study by the UCL Constitution Unit
attempt approval of a withdrawal agreement indicates a second referendum would take at — Likely only happens — No new government
— EU reticence on renegotiations: The EU indicated least 21 weeks to complete, a challenge given with post PM bump formed within two
it is less willing to renegotiate the terms worked for conservative weeks
the October 31 deadline. party in polls
out with Theresa May
— Requires 2/3 majority
of MPs to approve
A number of scenarios are still “in play” for Brexit. While a general election is DB’s base case,
risk of a “No Deal” exit have increased.
Parliament
EU not EU
Scenario Details blocks
receptive receptive
“No-Deal”
Scenarios driving this outcome include: i) the newly selected PM calls
ª³¶¥²©¥¶°½©°©§¸³²_¥²³§³²Î¨©²§©º³¸©·¸¶««©¶©¨¥²¨¥²©»
Early General government cannot be formed in two weeks; iii) Parliament blocks
Election a new government’s bid for “No Deal”. If current polls, or the EU
election results are any indicator, mainstream parties (Conservative &
Labour) could lose seats to more polarized parties.
In the case of a general election, DB’s Oliver Harvey expects the UK

Brexit Extension would ask for and receive an extension of Article 50 in order to carry
out the election later in 2019 Orderly Brexit
Early general “No Deal”
¶¥¸Î©¨¦½
The new PM and Conservative Party leadership is likely to favor a election Brexit
“No Deal” Brexit harder stance on exit from the EU 50% probability 25% probability
October 31
25% probability
De¥°¥¸Î©¨ With the EU less willing to re-open negotiations on the existing
Withdrawal Agreement, an orderly Brexit by October 31 has become
by October 31 lower probability — Conservatives win on no deal
platform: 20% probability
A second referendum is possible, though the timing is tough (could — Liberal Democrats/Labour win on
2nd Referendum take 21 weeks, or more) and the outcome remains unclear soft Brexit/second referendum
platform: 20% probability
— No one party able to form
government: 10% probability
Source: (1) DB Global Markets Research (Harvey “Brexit update: a race to the bottom” June 11, 2019. “Brexit update: May resigns, what happens next?” May 24, 2019). DB Global Markets Research (Economics. Harvey “Brexit update: a race to the bottom”. “Brexit update: May resigns, what happens next?”)
60 61
Once selected, the new PM will face a deeply divided Conservative Party and
The UK’s political contest will take place in two phases and is a narrow majority in Parliament
expected to yield a new Prime Minister by late July
Narrow government majority Parliament divided on customs union
Current
urrent state of the parties Indicative votes: Clarke’s Customs Union Motion
Phase 1 Phase 2 313 Narrow governing majority
264 272
247
May Resigns Candidate Selection Vote

35
— June 7, 2019 — June 13-20, 2019 — July 22, 2019 16 11 10 5 13
— May resigns (expected) (expected)
ur
io ish
r l
C nis ic
er
oc ra
as leader of — 10 candidates — Conservative
en
iv
U
o t
th
bo
de al
em at
ha t
ni ra
e
t
at t t
nd
va
e
em ib
n
O
U oc
N o
La
ng
Conservative party initially nominated party members
D L
Sc
pe
ser
Against For
on
D
º³¸©³²Î²¥°¸»³
In
— Will stay on as — Conservative MPs
C
interim PM until new vote in multi-step candidates to select
leader found elimination process conservative party Parliament opposed to a “No Deal” Brexit In the unlikely event of a second referendum
¸³·©°©§¸¸»³Î²¥° leader / PM Indicative votes: Fysh’s “No Deal” Motion the country is still divided on leaving the EU
— Agrees not to
present Withdrawal candidates — Approximately
Agreement to 160,000 members of 422 52%
Parliament again Conservative Party

45%
139
June 20-21 ³¹²§°¹±±¸^¸³¸¥¯©·¸³§¯³ª¶©¼¸´¶³«¶©··_

Against For Leave Remain
July 2 ©»¥¶°¥±©²¸·¸·
Recent polls and the outcome of EU parliamentary elections indicate mainstream parties
have lost favorability
July 20 ¥¶°¥±©²¸·¹±±©¶¶©§©··¦©«²· Current polls for political parties
50%
July 22 Expected date for new PM selection

Other: 38%
Sep 5 UK Parliamentary session resumes
Liberal
Sep 29 - Oct 2 UK Conservative Party Conference democrat: 24%
Conservatives:
19%
Oct 17 - 18 Last scheduled EU summit ahead of October 31 Article 50 deadline Labour: 19%
Oct 31 Brexit deadline with default option “No Deal” / “hard” Brexit
0% UKIP: 1%
Jan 2016 May 2019
Source:: (1-3) House of Commons. Narrow majority of 4 in the Parliament includes the Conservative Party and the DUP. (4) WhatUKThinks.org Polling data as of May
Source: (1) DB Global Markets Research (Oliver Harvey. “Brexit update: a race to the bottom”, “Brexit update: May resigns, what happens next?”) 20, 2019. (5) YouGov. Data as of May 29, 2019
62 63
Withdrawal Agreement & As the UK and EU negotiate their future framework in the years ahead, numerous models
for economic, political and trade relationships with the EU will be considered
Future Framework
On November 14, 2018 the 585 page draft Withdrawal Agreement was released.
While the agreement has been endorsed by the EU 27, former UK PM Theresa May was
unable to achieve ratification in the UK Parliament. Ukraine/UK
Association
Selected key components of the Withdrawal Agreement EEA/Norway Agreement CETA/Canada WTO
— Run through end 2020 with option to extend one time by up to two years Gradual
''9¸¥¶Ï·³²
Transition period — Continued application of EU law in UK without UK participation in EU ¤©¶³¸¥¶Ï· reduction
industrial goods Subject to
institutions & governance except on ³ª¸¥¶Ï·³²
¥¶Ï· eliminated. common WTO-
agriculture/ industrial goods.
Agriculture/ ¦¥·©¨¸¥¶Ï·
— Retain current rights for all who arrive before transition period ends Î·¬²« Agriculture/
Î·¬²«©¼§°¹¨©¨
Î·¬²«©¼§°¹¨©¨
Citizens’ Rights — More stringent immigration laws thereafter
— > 3 million EU citizens in UK, > 1 million UK nationals in EU
Outside Outside, custom Outside Outside
Governance
— After transition period, disputes settled by joint committee followed by Customs union (Rules of Origin agreement could (Rules of Origin (Rules of Origin
binding arbitration checks) be incorporated checks) checks)
— ¸³ª¥°°²¸³©¼·¸²«·½·¸©±³ªÎ²¥²§¥°±¥¶¯©¸¥§§©··Ç©µ¹º¥°©²§©È
Financial markets Goal of Limited
— Similar access for US and Japan Regulatory
Regulatory status harmonization
regulatory regulatory None
harmonization cooperation
— Close relationship between UK and EU on services, investment and
Future Trade sectorial cooperation
Agreement — UK may negotiate but not sign 3rd party trade agreements during EU levels of Potentially EU
Services access levels of access
Limited Limited
transition period
— ¥²¨¦©·¸©Ï³¶¸¸³¬¥º©ª¹¸¹¶©¸¶¥¨©¨©¥°§³²§°¹¨©¨·¼±³²¸¬·
before end of transition period Freedom of Some Visa
— If not, backstop arrangement – UK and EU to form a temporary single
Immigration movement with Visa liberalization free access for None
Ireland & emergency break professionals
customs territory and Northern Ireland would follow EU single market
Northern Ireland rules. Goods checked when entering Northern Ireland from rest of UK.
— At any point after transition, UK or EU could decide backstop Informal Formal alignment
arrangement no longer necessary, but must decide together cooperation on with EU foreign
Security & defense ª³¶©«²¥Ï¥¶· and/or security
None None
— ¦³¹²¨¦½¨©§·³²·³²Î·¬©¶©·¹²¸°¸¶¥²·¸³²´©¶³¨©²¨· and security policy
Fisheries
— ©´¥¶¥¸©¸¶¥¨©¥«¶©©±©²¸¸³¦©¨©¸©¶±²©¨³²Î·¬©¶©·
— Spanish-British cooperation on citizens’ rights, environment, goods, Budget contributions Substantial Likely substantial None None
Gibraltar police and customs matters
— Protect rights of 11,000 Cypriots living and working in the areas of the Subject to EFTA Subject to
British Bases in sovereign military bases EU law/ECJ None None
Cyprus Court arbitration panel
— EU law will continue to apply
Source: (1) The European Commission “The EU-UK Withdrawal Agreement Explained.” Source: (1) DB Global Markets Research “Brexit, Kiev-style: towards an Association Agreement” (Harvey).
64 65
Economic & Policy Implications In a “No Deal” scenario, barriers will rise for key export destinations as well as
key investment sources
of “No Deal” Brexit UK goods export destinations (2017) Net UK inward FDI flows (2017)
A “No Deal” Brexit would have varying impact across the UK economy EU
Forecasted economic effects as of 2018 (% change) North 26% Japan
8% Europe America 29%
4% 6% 7%
56% 24%
Asia US
-8% 14% 27% Rest of
world Canada 4%
14%
Africa 3%
-30%
Rest of world 2% South America 1%
-48%
Market probability for BoE action by DB revised its forecast to expect only 25 bps
Commercial House GDP Bank rate: avg Bank rate: ²Ð¥¸³² Unemployment
property prices prices over years 1-3 peak level rate
YE 2019 has changed dramatically tightening by YE 2020 vs. 75 bps previously
Expectation in Expectation in
Jan 2019 Jun 2019 Prior forecast Q4 ‘20:
Slower growth and Sterling weakness have raised the risk of stagflation 66% 1.50%
UK GDP growth y/y UK inflation

4% Q4 ‘19:
2.9% 1.00%
Q3 ‘19:
2.3% 0.75% Q4 ‘20:
2.1%
1.00%
1.8% 1.8% 26%
1.5%
1.4% 1.3%
Q3 ‘19: Q4 ‘19:
0.75% 0.75%
0% 1%
Current forecast
Hike Cut Hike Cut
-0.5%
2014 2015 2016 2017 2018 2019 2020 Jan 2012 Apr 2019
Gilts have rallied as a “No Deal” outcome The UK 3m-10 yr curve has flattened
has become more plausible rapidly toward inversion
UK business has taken a more cautious stance on investment 10 yr UK Gilt
UK business investment y/y 1.4% 1.6%
6%
June 2016:
Brexit vote
0.84% 12 bps
bp
(-1.25%)
0.7% 0.0%
-4%
Jan 2019 Jun 2019 Jan 2018 Jun 2019
Mar 2015 Mar 2019
Source: (1) Bank of England. Statista. (2) DB Global Markets Research (Economics). (3-4) Bloomberg. Data as of June 10, 2019. UK business investment is rolling 4 ³¹¶§©^_¦·©¶º¥¸³¶½³ª§³²³±§³±´°©¼¸½¼´³¶¸¦½¨©·¸²¥¸³² %^ _³¹·©³ª³±±³²·¶©Î²«¥´©¶Ç³¶©«²¶©§¸²º©·¸±©²¸¸¥¸·¸§·È¥¸¥¥·³ª
quarter average. March 25, 2019. (3-4) DB Global Markets Research (Economics). (5-6) Bloomberg. Data as of June 11, 2019.
66
Bull steepenings generally take
place when the market starts
to see the risk of recession
prompting the Fed to act.
Seema Shah, Senior Investment Strategist,
Principal Global Investors
Corporate Strategy,
Uncertainty &
Recession Risk

68 69
Global Growth Decelerating DB and market consensus have revised most major 2019 GDP forecasts lower in recent months.
While global growth has been dropping closer to the low 3% levels, it is concerning to observe
how many large global economies will grow at rates below 1.5% in 2019
2019 Y/Y GDP growth
Commodity prices are trading at 50 year lows vs. S&P 500 earnings, a development that Emerging markets Developed markets
amplifies both global growth concerns and the asset price distortions created by
extraordinary imbalances in global monetary and fiscal accommodation -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8%
General commodity leading price indicator index / S&P 500 India
6.5%
10 6.2% China
4.8%
Indonesia
3.3% Global
50 year
low
2.4% United States

0
1970 2019
2.0% South Korea

The Citi global economic surprise index has been deep in negative territory since the trade
policy escalation of early 2018
50
1.5% United Kingdom
1.4% Canada
1.3% Mexico
1.3%
France
Euro area
1.1%
0.9% Russia
0.7% Brazil
0.7%
0.5%
Germany
-40 Japan
Jan 2016 Jun 2019 -1.4% Argentina
Source: (1-2) Bloomberg. Data as of June 13, 2019. David Wilson. Commodity index is S&P GSCI total return index. Widely used as the leading measure of general
§³±±³¨¸½´¶§©±³º©±©²¸·¥²¨²Ð¥¸³²²¸¬©»³¶°¨©§³²³±½ Source: (1) DB Global Markets Research (Economics). IMF forecast where DB not available.
70 71
US financial conditions tightening in the 2H 2018 was sharp enough to end the Europe’s large manufacturing and trade driven sectors have been deep in contraction territory
current Fed tightening cycle. With its capital markets based economy, financial Manufacturing PMI Germany export and global trade growth, y/y
markets contagion is the most rapid channel, and often underestimated, through 65 25%
which policy escalation impacts US economic fundamentals.
106
Tighter Global
trade
growth
France: +2.4%
50.6
50 Germany
Looser Italy:
export
49.7
growth:
(-1.0%)
95
2000 2019 Euro area:
47.7
S&P 500 earnings recessions in the absence of economic recessions are reasonably rare
events, having happened only 4x since 1970 (with low oil or a strong dollar a factor on Germany:
each occasion). With the global and US economy slowing, a 2019 earnings recession 44.3
remains high risk, whether the US and China strike a trade deal, or not. 40 -25%
100%
% Jan 2017 May 2019 2006 2019
2019E S&P 500 earnings

While Europe’s policy need is more fiscal than monetary, the ECB does have numerous tools
Q1: (-0.4%)
at its disposal as an alternative to more deeply negative policy rates
Q2: (-2.3%)
Q3: 0.2% Already Utilized Still Available
Q4: 7.0%
©Î¶¥¸©§¹¸ Resuming QE & CSPP
Deposit rate cut Equity ETF purchases
QE purchases Purchases of unsecured bank debt
©±³º¥°³ª½©°¨Ð³³¶ Deviation from capital keys
Corporate bond purchases Higher issue(r) limits

High chance of
TLTROs Tiered deposit system
2019 earnings
-30%
% recession TLTROs at negative rate More negative rates
Q1 2000 Q4 2019
Source: (1) Bloomberg. Data as June 13, 2019. (2) DB Global Markets Research (Arita). FactSet. Data as of June 13, 2019. Q4 2008 (-62.4% earnings growth, Q4 2009: Source: (1) Bloomberg. Data as of June 13, 2019. (2) UNCTAD. Volume growth rates of merchandise exports and imports, quarterly. Bloomberg. Data as of June 13,
181% earnings growth. 2019. (3) Pictet Wealth Management.
72 73
Caution in the C-Suite Corporate Strategic Decision Making

·«°³¦¥°«¶³»¸¬·°³»©¨·²§©¸¬© &[¹¸©¥²¨¦¹·²©··§³²Î¨©²§©¬¥·¦©§³±©
more cautious
CEO economic outlook US business confidence index
130 102
89.1
99.8
Repurchase Intellectual Key performance Employment
property indicators agreement
20 98
2012 2019 2012 2019
CEO confidence index Conference Board CEO confidence index

8 75
6.8
42.0
Equity stake Share Corporate Preferred
5 26 valuation governance stock
2012 2019 2012 2018
CFO confidence index CEO capital expenditure expectations

75 140
64.6
88.1
Stock prices Additional Strategic Shareholder

45 20
capital decisions value
2012 2019 2012 2019
CEO sales expectations CEO employment expectations

150 110
75.2
105.1
Accretion Performance Peer Proprietary

60 20
improvement benchmarking information
2012 2019 2012 2019
³¹¶§©^[&_¬©ª¼©§¹¸º©¥«¥¾²©³²Î¨©²§©²¨©¼¹¯©³´¸±·±²¨©¼©§³²³±½[J±³·¸³´¸±·¸§·±¥°°¦¹·²©··³´¸±·±
²¨©¼¦¹·²©··§³²Î¨©²§©²¨©¼°³³±¦©¶«¥¸¥¥·³ª¹²©! '³²ª©¶©²§©³¥¶¨¹·²©··³¹²¨¸¥¦°©§³²³±§¹¸°³³¯²¨©¼¥·©¨³²
survey conducted quarterly of Business Roundtable member CEO plans for hiring and capital spending and their expectations for sales over the next six months. Taking
the factors together, the survey signals the direction of the US economy.
74 75
Corporate Capital Expenditure Slowing Headwinds for Global and Cross Border M&A
²§©¸¬©«°³¦¥°Î²¥²§¥°§¶··§³¶´³¶¥¸©Y·´©²¨²«¬¥·³¹¸´¥§©¨§¥´¸¥°©¼´©²¨¸¹¶© As rising policy risk has adversely impacted global growth, global M&A volumes have
on structures and equipment, while stock buybacks have steadily risen higher than overall declined over 20% in 2019
capex volumes Global M&A volumes, USD tn # of global M&A transactions
¬¥²«©²´¶º¥¸©Î¼©¨²³²[¶©·¨©²¸¥°²º©·¸±©²¸ S&P 500, total, quarterly, USD bn $4.5 55,000
80% 215
(-22%) (-36%)
IP R&D: Buybacks: decline decline
+68% $192bn
Equipment: Capex: 2019 YTD: 2019 YTD:
+48% $162bn $1.7tn 18,257
Capex: Dividends:
+37% $121bn
$0.0 0
2000 2019 2000 2019
Structures:
(-9%)
Cross border M&A volumes have been hit particularly hard by rising uncertainty
Global cross border volumes, USD tn US cross border volumes, USD bn

-50% 0 $2.0 $900
2007 2019 2006 2019
(-50%) (-46%)
decline decline
²§©¸¬©´¥··¥«©³ª¸¥¼¶©ª³¶±°©··³Ï·¬³¶©§¥·¬¬¥·¦©©²¶©´¥¸¶¥¸©¨¸³¸¬©¸¬¥²
2019 YTD: 2019 YTD:
¥²¸§´¥¸©¨³¶©¶©§©²¸°½§¥´©¼·´©²¨²««¶³»¸¬¬¥·¨©§©°©¶¥¸©¨¥·¸¶¥¨©´³°§½
$442bn $231bn
uncertainty and global growth have adversely impacted strategic decision making
©´¥¸¶¥¸©¨´¶³Î¸·¦½§³±´¥²©·¦² `§¬¥²«©²´¶º¥¸©Î¼©¨²³²[¶©·¨©²¸¥°
investment $0.0 $0.0
$300 5%
15% 2000 2019 2000 2019
$700bn since tax

reform passed While US M&A volumes appear to be more resilient, a few mega-deals have supported
volume by deal value, while the number of transactions is down sharply
$200
US M&A volumes, USD tn # of US M&A transactions
$2.4 17,200
Structures: (-10%) (-41%)
+0.4% decline decline
$100
2019 YTD: 2019 YTD:

Equipment: $1.1tn 5,320
(-0.3%)
$0 -5%
$0.0 $0.0
Q1 2015 Q4 2018 2015 2019 2000 2019 2000 2019
³¹¶§©^"_¹¥¶¸©¶°½¨¥¸¥¥·³ª¹²©! '¶º¥¸©Î¼©¨²³²[¶©·¨©²¸¥°²º©·¸±©²¸·«¶³···²§©" %^ [!_°³³±¦©¶«¥¸¥¥·³ª¹²©! ' Source: (1-6) Thomson Reuters. Data as of June 11, 2019. US is any involvement.
76 77
Supply Chain Disruption & Contingency Planning
©¥¶°½%#9³ª·¹¶º©½©¨§³±´¥²©··©©¥²©«¥¸º©¦¹·²©··±´¥§¸ª¶³±¬«¬©¶¸¥¶Ï· ²¶©·´³²·©¸³©·§¥°¥¸²«¸¥¶Ï·±¥²½§³±´¥²©·¥¶©¶©·¸¶¹§¸¹¶²«¸¬©¶¬²¥³´©¶¥¸³²·³¶
»¬°©®¹·¸¹²¨©¶¬¥°ª¬¥º©©¼´©¶©²§©¨²³²[¸¥¶Ï¶©¸¥°¥¸³¶½±©¥·¹¶©·ª¶³±¬²¥ ¨©°¥½²«²º©·¸±©²¸¨©§·³²·³¹¸¬©¥·¸·¥¥²¨©¼§³¬¥º©¦©©²¸¬©°¥¶«©·¸¦©²©Î§¥¶©·
of relocated supply chains.
How will the combined tariffs impact your business operations in China?
How are tariffs and US-China trade tensions impacting your business strategy?
52%
35%
33%
42%
38% 25%
23%
34%
20%
27% 27%
25% 14%
10% 10%
14%
3% 3%
10% 10%
Restructuring Delaying Adjusting Adjusting Considering No Other Considering Increasing Considering

China or canceling supply supply relocating impact relocation investment exiting the
operations investment chain by chain by manufacturing out of the China market
Decrease Increase Increase Reduce Reduce Reduce Reduce Reduce Other No to be more decisions seeking to seeking out of China U.S.
demand cost of sale price ´¶³Î¸ ´¶³Î¸ revenue revenue employee impact heavily “In source to source
manufacturing (< 10%) (> 10%) (> 10%) (< 10%) headcount China for outside the outside
China” U.S. China
Have you experienced any non-tariff retaliatory measures since tariffs were first implemented in If you have relocated China-based manufacturing facilities to other countries because of the
July 2018? tariffs and concerns over the future of US-China trade relations, where have you relocated?
53%
60%
20% 20%
25%
14% 14%
7% 6%
4% 4% 3% 11%
8%
6% 6% 4% 4%
No Increased Slower Slower Complications Others Challenges Increased Products Rejected
change inspections customs approval from with US ¨Ñ§¹°¸½ rejected by licenses
clearance increased employee completing customs or other
No plans Southeast Asia Mexico India Elsewhere US East Asia Europe
bureaucratic visa investment applications
subcontinent
oversight applications deals
Source: (1) AmCham China survey. Nearly 250 responses from AmCham China and AmCham Shanghai’s member companies to assess the impact of the increase in US
¥²¨¬²©·©¸¥¶Ï·³²§³±´¥²©·³´©¶¥¸²«²¬²¥¦³º©·¹¶º©½µ¹©·¸³²·»©¶©«º©²¸¬©Ç¬©§¯¥°°¸¬¥¸¥´´°½È²·¸¶¹§¸³²»¬©²¶©·´³²¨²«
78 79
Reluctant Fed Rate Cuts

Markets are pricing nearly a 90% probability of a Fed rate cut at the FOMC meeting in A number of relevant parallels make a comparison between 1998 and today useful,
July, a 100% probability of at least one Fed cut by year end, and 4 full Fed rate cuts by including the three Fed “insurance” rate cuts in response to a deteriorating late cycle
the end of 2020. global macro backdrop
Market implied probability of Fed cut in July 2019 Fed fund futures
100% 86% 2.5% 1998 2019
4 rate cuts by US economic Late cycle Late cycle

Tie
YE 2020 and credit cycle (longest on record) (longest on record)
Dec 2020: Asia

1.37% Ç·¯[³ÏÈ§¥¹·¥°¸½ US-China policy escalation
Î²¥²§¥°§¶··
²Ð¥¸³² Low Low

0% 1.1% Unemployment Low Low
May 2018 Jun 2019 Jun 2019 Dec 2020
Oil prices Low Moderate
¡¸¬´³°§½¶·¯¶·²«¥²¨±³¶©¨³º·¬©¨§³±±©²¸¥¶½¸¬©©²¸¶©ª¶³²¸©²¨³ª¸¬©
US Treasury Curve is now trading below Fed Funds. Similar to the market, DB is now USD credit spreads Re-priced wider Re-pricing wider expected
forecasting
ecasting three 2019 rate cuts at the July, Sept and Dec meetings
3.3% US equities Near record highs Near record highs
Fed Funds: 3 Fed Nearly 3 Fed cuts
2.50% Fed rate policy “insurance” cuts “priced in” by YE 2019
10yr UST:
2.09% Fed funds vs. HY OAS
5yr UST:
7.0% 1000
1.84% Fed funds
2yr UST:
1.7%
1.84% 1998
Jun 2018 Jun 2019
HY OA
OAS
Structural headwinds (aging demographics, technology, globalization) and slower global
growth have weighed more heavily on the reflation trade than the prospect of a Fed cutting
rates when the unemployment rate is at a 50 year low
Core PCE #½©¥¶²Ð¥¸³²¦¶©¥¯©º©²
Fed target 2%
2.0% 2.3% 2.5% 0
Fed target 2%
1996 1997 1998 1999 2000
1.6%
1.54%
“It is just not credible that the US can remain an oasis of prosperity
¹²¥Ï©§¸©¨¦½¥»³¶°¨¸¬¥¸·©¼´©¶©²§²««¶©¥¸°½²§¶©¥·©¨·¸¶©··È
0.5% 1.0% Alan Greenspan, Fed Chair (1998)
Jan 2017 Apr 2019 Jan 2017 Jun 2019
Source: (1-5) Bloomberg. Data as of June 13, 2019. Source: (1) CreditSights. “Fed Cuts, 1998 Parallel” (Reynolds). Bloomberg. Data as of June 14, 2019.
80 81
2019 10 Year UST yields have traded sharply lower than consensus forecasts just 6 months Global negative yielding securities have grown 25% in 2019 with European and Japanese
ago. DB now expects the 10 year UST yield to trade as low as 1.85% late this summer on the benchmark rates negative out to 10 years, and beyond
back of a more dovish Fed, escalating trade risk and US recession risk concerns.
Negative
Benchmark
10 yr
15 yr
20 yr
30 yr
1 yr
2 yr
5 yr
3.4%
2019 consensus 10 year UST forecast as of December 2018: 3.32% Positive policy rate
Switzerland (-0.25%) (-0.52%)
Revised DB 2019
Multi-century
10 Year UST Forecast Germany (-0.40%) (-0.26%)
lows
Q2: 2.00% World’s 3rd
Q3: 2.05% Japan (-0.10%) (-0.14%) & 4th largest
Q4: 2.15% economies
Denmark (-0.65%) (-0.24%)
Netherlands (-0.40%) (-0.09%)
(-60 bps) 2.09%

Finland (-0.40%) 0.05%
2.0% Sweden (-0.25%) 0.03%

Jan 2019 Jun 2019
Austria (-0.40%) 0.02%

US-G3 2 year rate differentials declined sharply as the Fed has responded more dovishly to
escalating policy risk than peer countries that are arguably more vulnerable to the adverse
growth implications of oil price and trade policy risk France (-0.40%) 0.09%
3.6%
Belgium (-0.40%) 0.16%
Ireland (-0.40%) 0.29%

US-Germany:
2.55%
Spain (-0.40%) 0.50%
US-Japan: Italy (-0.40%) 2.34%

2.06%
UK 0.75% 0.84%
US-UK:
1.25% US 2.50% 2.09%
1.0%
Jun 2018 Jun 2019
Source: (1-2) Bloomberg. Data as of June 14, 2019. Source: (1) Bloomberg. Data as of June 13, 2019. US benchmark is the upper bound. ECB is the deposit facility rate.
82 83
US Recession Risk Assessment 1s-2s inverted on Dec 24, 2018 1s-5s inverted on Dec 24, 2018
0.5% 1.1%
While 2019 US recession risk remains low, and would likely require an exogenous policy escalation to
happen this year, a number of economic models (Fed, DB, consensus) have been pointing to a rapid rise
in such risk over recent months. More likely, the US economy has been rapidly decelerating from the
fiscal sugar highs of mid 2018 (growth >4%) toward its normal long term trend growth rate of 2%.
Looking to the year ahead, however, a number of important economic and market metrics are signaling
US recession by late 2020, potentially creating a complicated overlap with the November 2020 US
Presidential election. While we agree that post crisis factors unique to this cycle have contributed to
yield curve inversion, we would nonetheless conclude that the yield curve is sending some important
signals regarding the economy, and should not be dismissed. Specifically, a Fed study in August 2018
highlighted the 3 month – 10 year curve inversion as the most accurate predictor of US recessions, with -0.4% (-16 bps) -0.4% (-16 bps)
a lead time between 6 and 17 months in each case.
Jan 2017 Jun 2019 Jan 2017 Jun 2019
With growth slowing and US-China trade policy risk escalating, DB is now forecasting three pre-emptive
Fed rate cuts in 2019 at the July, September and December meetings, bringing Fed Funds down to 1s-7s inverted on Dec 31, 2018 2s-5s inverted on Dec 3, 2018
1.63% by year end. While some at DB suggest that Fed cuts will serve to sustain the expansion, others
maintain that the impact on the economic cycle may be limited. In our opinion, US recession may come 1.7% 0.8%
sooner than expected.
When the cycle does turn, be it 2020 or 2021, our expectation would be for a mild and short US
recession by historic standards (given low leverage with the US consumer and financial system).
Fed recession models indicating rising risk in the next 12 months

Recession
100% 0 bp
bps
bps)
(-4 b
-0.3% -0.1%
Jan 2017 Jun 2019 Jan 2017 Jun 2019
2s-10s has not yet inverted 3M-10yr inverted on Mar 22, 2019, and
Cleveland Fed again on May 9, 2019
model: 35%
1.4% 2.1%
NY Fed model:
model
30%
26 bps
0% 0.0% -0.4% (-7 bp

bps)
Jan 1980 May 2020 Jan 2017 Jun 2019 Jan 2017 Jun 2019
Source: (1) Bloomberg. Data as of June 13, 2019. Source: (1-6) Bloomberg. Data as of June 13, 2019.
84 85
Market Signals for US Recession Risk
While each of these signals does not necessarily indicate a US recession, they are
nonetheless useful signals to watch
Past peak/ Past peak/
Already Already
Metric Not yet beginning to Metric Not yet beginning to
happened happened
turn turn
Government rates markets Equity market data
2s – 5s curve inversion S&P 500 20% correction
1s – 7s curve inversion
NASDAQ 20% correction
1s – 10s curve inversion
Russell 2000 20% correction
3M – 10yr curve inversion
3M spot – 3M yield 18M forward curve inversion US auto stocks 20% correction
2s – 10s curve inversion Cash & bond returns outperforming equities
TED spread > 120 bps

VIX > 30
Fed Funds above neutral
S&P 500 earnings recession
MOVE index > 150 bps
S&P 500 operating margin compression

Financial conditions
¬§¥«³©¨Î²¥²§¥°§³²¨¸³²·²¨©¼·¬¥¶´¸«¬¸©²²« Cyclicals underperform defensive equities
Î²¥²§¥°§³²¨¸³²·²¨©¼·¬¥¶´¸«¬¸©²²« Commodities data
°³³±¦©¶«Î²¥²§¥°§³²¨¸³²·²¨©¼·¬¥¶´¸«¬¸©²²«
Oil prices < $50 a barrel
Corporate credit markets
Industrial metals index 20% correction
B & CCC high quartile net debt / EBITDA > 7.0x
Copper 20% correction
Median HY net debt / EBITDA > 4.5x
Actual HY net debt / EBITDA sharp spike Bloomberg commodities index 20% correction
Corporate credit defaults > 6% US Banks & Financials
IG credit spreads > 250 bps

US bank stocks 20% correction
HY credit spreads > 800 bps
Financial equities underperform S&P 500
AA corporate credit spreads > 100 bps
\´¶§©¨Ï©¶©²¸¥°M> Financial spreads divergence wider from corps
Source: (1) St. Louis Fed. Federal Reserve Board. KKR (McVey. “Outlook for 2019: The Game Has Changed”). Bloomberg. *Real house prices based on the Case-Shiller
US National Home Price Index, Jan 2000 = 100. Expected change in employment is those who expect less unemployment-those who expect more + 100
86 87
Economic Signals for US Recession Risk
While each of these signals does not necessarily indicate a US recession, they are
nonetheless useful signals to watch
Past peak/ Past peak/
Already Already
Metric Not yet beginning Metric Not yet beginning to
happened happened
to turn turn
Loan delinquencies
Housing sector
Direct automobile loan delinquencies > 2.5%
Existing home sales recent avg < long avg Indirect automobile loan delinquencies > 2.5%
Residential investment/GDP recent avg < long avg Bank credit card loan delinquencies > 3.5%
Pending home sales prolonged decline Property improvement loan delinquencies > 2.0%
PMI data
30 yr mortgage rates recent avg < long avg
ISM US manufacturing PMI < 43
Real house prices* recent avg < long avg
ISM US non-manufacturing PMI < 49
Building permits (single unit) < 800k/month
ISM new orders index < 50
Labor market
ISM business employment index < 50
Unemployment rate steady/sharp rise from cycle low Chicago PMI < 50
±´°³½±©²¸«¥´²Ð©§¸³²´³²¸¦©°³» Global PMI < 50
Business investment
Average hours worked y/y decline
³²¶©·¨©²¸¥°Î¼©¨²º©·¸±©²¸·¬¥¶´¨©§°²©
Change in jobless claims > 10% increase y/y
Durable goods orders sharp decline
Payrolls decline in 3 month average
Heavy truck sales sharp decline
¸°¥²¸¥©¨»¥«©«¶³»¸¬·«²Î§¥²¸½`½¨©§°²©
Equipment Capex y/y decline
Univ. of Michigan 12 month employment expectations sharp decline
below 60 ©²³¶°³¥²³Ñ§©¶°³¥²·¸³°¥¶«©Î¶±·M 9¸«¬¸©²²«
Consumer sentiment ©²³¶°³¥²³Ñ§©¶°³¥²·¸³·±¥°°Î¶±·M9¸«¬¸©²²«
Dallas Fed manufacturing capex expectations < 0

Auto sales steady decline past peak
Wholesalers inventories to sales ratio sharp increase
³²·¹±©¶§³²Î¨©²§©©¼´©§¸¥¸³²··¬¥¶´°½¦©°³»§¹¶¶©²¸
¹·²©··§³²Î¨©²§©
²º©¶·¸½³ª§¬«¥²§³²·¹±©¶§³²Î¨©²§©·¬¥¶´¨©§°²©¦©°³»%
¦¹·²©··§³²Î¨©²§©²¨©¼L'&
©¸¥°·¥°©·Ð¥¸¸³L9½`½ NFIB Small business optimism index steady decline
³¬²·³²©¨¦³³¯·¥±©·¸³¶©·¥°©·Ð¥¸¸³L9½`½ Leading Economic Index (LEI) y/y decline
Source: (1) St. Louis Fed. Federal Reserve Board. KKR (McVey. “Outlook for 2019: The Game Has Changed”). Bloomberg. *Real house prices based on the Case-Shiller
US National Home Price Index, Jan 2000 = 100. Expected change in employment is those who expect less unemployment-those who expect more + 100 . Recent
average is 4Q average vs long term average is 3 year average.
88 89
Measuring the Longest US

Recovery on Record
While the length of the current economic expansion is more than double the average of While sluggish early in the recovery, inflation adjusted real wage growth picked up
post WWII recoveries (58 months); the strength of the recovery has been the slowest of meaningfully in the middle of 2014 and has sustained it’s recovery since
the nine most recent cycles Change in wages
Change in GDP
55%
% 10%
%
6%
120 months
0%
% -6%
%
0 5 10 15 20 25 30 35 40 0 10 20 30 40 50 60 70 80 90 100 110 120
Quarters through expansion Months through expansion
Federal government debt has ballooned to its highest level during a post WWII recovery, Accommodative Federal Reserve policy, corporate tax cuts and deregulation have all
though low interest rates have helped keep debt service costs low helped US stock exchanges reach new all-time highs
Change in government debt Change in Dow Jones
0%
100% 89% 0%
300%
+208%
-10%
0%
% -50%
0%
0 5 10 15 20 25 30 35 40 0 10 20 30 40 50 60 70 80 90 100 110 120
Quarters through expansion Months through expansion
Over 20 million jobs have been created in the current economic expansion, Household net worth increased by $47 trillion in the current expansion, largely driven by
a sluggish pace relative to history stock gains and the recovery in home prices
Change in jobs Change in household net worth
35%
% 60%
%
52
52%
15%
%
-3% %
-10%
0 10 20 30 40 50 60 70 80 90 100 110 120 0 5 10 15 20 25 30 35 40
Months through expansion Quarters through expansion
³¹¶§©^[!_¡Çª¸©¶©§³¶¨[³²«¼´¥²·³²©¶©Å·¡¬¥¸³¹°¨²³§¯¸¬©§³²³±½Ï³¹¶·©È³±±©¶§©©´¥¶¸±©²¸¶©¥·¹¶½©´¥¶¸±©²¸ ³¹¶§©^[!_¡Çª¸©¶©§³¶¨[³²«¼´¥²·³²©¶©Å·¡¬¥¸³¹°¨²³§¯¸¬©§³²³±½Ï³¹¶·©È³±±©¶§©©´¥¶¸±©²¸¶©¥·¹¶½©´¥¶¸±©²¸
Labor Department. Labor Department.
90 91
For the C-Suite Past Reports
April 2019 Mar 2019 Nov 2018
$#"
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Nov 2018 Oct 2018 Sep 2018
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Delicate Underestimating
Balancing Act US Tax Reform
20 Themes to Watch in 2H 2018
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Tom Joyce Hailey Orr Stephanie Kendal

Capital Markets Strategist Capital Markets Strategist Capital Markets Strategist ¥½ &
Jul 2018 May 2018 Mar 2018
Mar 2018 Feb 2018 Dec 2017

92 93
Past Reports Past Reports
Dec 2017 Nov 2017 Nov 2017 Oct 2016 Sep 2016 Sep 2016
Oct 2017 Sep 2017 Jul 2017 Jul 2016 Jun 2016 Jun 2016
May 2017 May 2017 Apr 2017 Apr 2016 Mar 2016 Feb 2016
Feb 2017 Jan 2017 Nov 2016 Jan 2016 Nov 2015 Sep 2015

94 95
Past Reports About the Authors

Thomas P. Joyce
Managing Director +1 (212) 250-8754 | tom.joyce@db.com
Tom Joyce is a Managing Director and Capital Markets Strategist within Deutsche Bank’s
Corporate Finance division. Based in New York, Tom heads a team that creates customized
analytical content for multi-national US corporates and Fortune 500 companies. His team
provides in depth analysis on the impact of economic, political, public policy and regulatory
dynamics on the US credit, foreign exchange, rates and commodities markets.
Sep 2015 Jul 2015 Jun 2015 Tom has over 20 years of Investment Banking experience at Lehman Brothers (10 years) and
Deutsche Bank (13 years) in New York, London, Hong Kong, and San Francisco. Over the last 12 years, Tom created
and built the Capital Markets Strategy role within Deutsche Bank’s Investment Bank, the only position of its kind on
Wall Street. He has previously served as the host of the Corporate Finance Monday morning meeting (4 years) and
the Managing Director Promotion Committee (2 years).
Tom’s educational background includes a year of study at Oxford University from 1991 - 1992, a Bachelor of Arts
in Political Science from Holy Cross College in 1993, and a MBA from Kellogg Business School, Northwestern
University in 2000.
Tom resides in New Canaan, CT with his wife and four sons, where he serves on the Board of Trustees of the
New Canaan Library, and the Board of the New Canaan Football (Soccer) Club. He also coaches youth soccer,
basketball and lacrosse.
Mar 2015 Mar 2015 Jan 2015
Hailey R. Orr
Director +1 (212) 250-8844 | hailey.orr@db.com
Hailey Orr is a Director in Deutsche Bank’s Capital Markets Strategy group, within the
Corporate Finance division. The team provides market based content for corporate
clients to assist in strategic decision making. Focus areas include the impact of
economic, political, public policy and regulatory dynamics on the US credit, foreign
exchange, rates and commodities markets. Hailey is also on the steering committee
of the Americas Women’s Network and helps lead the University of Michigan Global
Markets recruiting team.
Nov 2014 Oct 2014 Jul 2014
Prior to joining Capital Markets Strategy, Hailey spent nearly three years in Deutsche Bank’s Consumer
Equity Specialty Sales group. As part of the Global Markets division, her team focused on providing insights,
opinions, and flow updates on the consumer equity space to the bank’s largest institutional investor clients.
Hailey graduated with honors from the University of Michigan’s Ross School of Business with a BBA and a
minor in International Studies.
Stephanie E. Kendal
Analyst +1 (212) 250-4354 | stephanie-e.kendal@db.com
Stephanie Kendal is an Analyst in Deutsche Bank’s Capital Markets Strategy group.

May 2014 Mar 2014 Jan 2014
After interning with the bank in summer of 2016, Stephanie rejoined as a full time hire in
July 2017. She graduated with honors from the University of Michigan’s Ross School of
Business with a BBA.

96
Disclaimer Acknowledgements
The information herein is believed to be reliable and has been obtained from sources believed to be
reliable, but we make no representation or warranty, express or implied, with respect to the fairness, Deutsche Bank Global Markets Research China Expertise
correctness, accuracy, reasonableness or completeness of such information. In addition we have no Binky Chadha, Equity Strategist Graham Allison (Political Scientist & Professor, Harvard
obligation to update, modify or amend this communication or to otherwise notify a recipient in the event
Sameer Goel, Asia Macro Strategist JFK School of Government)
that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes
or subsequently becomes inaccurate. Oliver Harvey, Macro Strategist Robert Daly (Director, Kissinger Institute on China & the US)
Michael Hsueh, Macro Strategist Elizabeth Economy (Director for Asia Studies, CFR)
We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We
therefore strongly suggest that recipients seek their own independent advice in relation to any Matthew Luzzetti, US Economist Richard Haass (President, CFR)
investment, financial, legal, tax, accounting, or regulatory issues discussed herein. Analyses and Craig Nicol, Macro Strategist Jennifer M. Harris (Senior Fellow, Brookings Institute)
opinions contained herein may be based on assumptions that if altered can change the analyses or Ryan Hass (Fellow, Brookings Institute)
Jim Reid, Credit Strategist
opinions expressed. Nothing contained herein shall constitute any representation or warranty as to
future performance of any financial instrument, credit, currency rate or other market or economic Alan Ruskin, FX Strategist Perry Kojodjojo (FX Strategist, DB)
measure. Furthermore, past performance is not necessarily indicative of future results. Brett Ryan, US Economist Philippe Le Corre (Senior Fellow, Harvard University)
This communication is provided for information purposes only. It is not an offer to sell, or a solicitation Kevin Nealer (Partner, The Scowcroft Group)
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This presentation has been prepared by members of our investment banking department and does not Mark Wall, European Economist
Jackson Institute)
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department or Deutsche Bank’s “House View”.
Ç¬©¶©·²³²·¸¥²§©³ª¥²¥¸³²¦©²©Î¸¸²«ª¶³±´¶³°³²«©¨»¥¶ª¥¶©È
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Deutsche Bank

US-China: Markets The Hierarchy of Implications for

If one were to apply similar feng shui symbolism to today’s

The Hierarchy of Vulnerability Contemplating “Disorderly” Brexit

¬­²¯­²«­Ï©¶©²¸°½¦³¹¸¶¥¨©­·¯ Corporate Strategy, Uncertainty

Deutsche Bank | C-Space | June 2019

Everyone should keep in mind

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-38 Centre-right Production:

Hong Kong interbank lending rates Venezuela economic and

New members +28

Source: CIB Capital Markets Strategy

USD HY spreads below 20 year averages suggest uncertainty rising Global:

in Q2, followed by global equities in Q3, and USD

Jan 2019 Jun 2019 Jan 2018 Jun 2019

87 1550 103 31.8

Emerging Markets (currency, economy)

US Equities (tech, industrials, banks)

-8% Global & Cross-Border M&A Volumes

US Corporate Earings (slower growth, stronger USD, lower oil)

Global Services Sectors

Europe manufacturing sector Mexico manufacturing & services

Policy and price shocks dragging Semiconductors and auto sectors

Source: (1-6) Bloomberg. Data as of June 14, 2019.

2019 Economic & Market «¥­²·¸¥¦¥§¯¨¶³´³ª¶­·­²«´³°­§½¶­·¯±³·¸ '«°³¦¥°©§³²³±­§ª³¶©§¥·¸·

Developed Markets Asia

Deutsche Bank | C-Space | June 2019

& Objectives Common questions

Will political pressures in

Is the US-China trade deal simply

The Trump, Xi and Powell Put

The Xi “put”: 6% China GDP growth 15%

Description: While China has stabilized

The Great Decoupling

Source: CIB Capital Markets Strategy

2010s: Post Crisis Rebuild & Recovery Bill # Name Sponsor

$550bn (5,700 product categories) will have a more July 1

List 3: 2018 2019

MFN rates for

Expectations for a US – China “mini-deal” should perhaps be less than previously

More Some Less

More access for FDI into China

Increased purchases of US products

Competitive FX devaluations prohibited

Foreign Investment Law as step towards more

Bans on forced technology transfer

Relaxation of JV requirements for market access

Enforcement & accountability provisions

Codifying agreement into Chinese law

State subsidies for strategic industries

Investment in sensitive sectors

Substantive change to domestic policy initiatives (Made in China 2025)

Pullback in foreign policy initiatives (Belt & Road Initiative, 16+1)

US removing Huawei from US Entity List

China eliminating newly created ‘Unreliable Entity List’

Executive Actions, Loopholes

Section 201 Section 301

Section 232 IEEPA

Tech Sector Warfare

White House Treasury State Commerce

Geopolitical Struggle for ³²Î¶±©¨²©¸»³¶¯`º©²¨³¶

5G & Internet Governance ¹¥»©­¦¥²§³²Î¶±©¨ Japan

¬²¯²«Ï©¶©²¸°½¦³¹¸¶¥¨©·¯ Corporate Strategy, Uncertainty

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Geopolitical Struggle for ³²Î¶±©¨²©¸»³¶¯`º©²¨³¶

5G & Internet Governance ¹¥»©¦¥²§³²Î¶±©¨ Japan

Autos ©·©¸"9¸¥¶Ï·ª¶³±¥½©¥¶¥«³³¶´³··¦°½±´°©±©²¸¬«¬©¶¶¥¸© 2 RMB devaluation through 7.0 threshold

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June 20-21 ³¹²§°¹±±¸^¸³¸¥¯©·¸³§¯³ª¶©¼¸´¶³«¶©··_

©±³º¥°³ª½©°¨Ð³³¶ Deviation from capital keys

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¬§¥«³©¨Î²¥²§¥°§³²¨¸³²·²¨©¼·¬¥¶´¸«¬¸©²²« Cyclicals underperform defensive equities

Î²¥²§¥°§³²¨¸³²·²¨©¼·¬¥¶´¸«¬¸©²²« Commodities data

\´¶§©¨Ï©¶©²¸¥°M> Financial spreads divergence wider from corps

±´°³½±©²¸«¥´²Ð©§¸³²´³²¸¦©°³» Global PMI < 50