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+1.0% after 3 months and +3.7% after 6 months. Subsequent returns were positive in six of the eleven episodes and negative in the other five. Those stats are a little worse than the comparable numbers for the full sample but don’t indicate that a bond yield spike is definitively negative for equities. Chart 40: Rolling 3-month change in bond yields and equities Table 3: Track record mixed for stocks following bond yield spike Subsequent equity market returns following spike in bond yields (3m change >2.5SD} 100 ; 3m change in bund yields hits peaks >2.5SD Next 3m % Next 6m % Prior 3m % 90 10/06/1983 4.4 9.2 7.9 08/03/1985 5.3 10.2 11.1 02/03/1990 5.9 -6.9 -0.4 0 25/03/1994 -7.5 -4.7 -3.4 15/03/1996 4.7 7.0 49 09/07/1999 -3.6 9.8 3.7 22/08/2003 1.0 10.4 12.1 “0 15/06/2007 -7.1 -6.1 11.1 13/06/2008 -8.1 -32.1 1.6 26/11/2010 6.0 3.7 7.2 -100 08/05/2015 -1.2 -5.6 5.9 Median return 1.0 3.7 5.9 % positive 55% 55% 82% “150 Source: BofA Merrill Lynch Global Research, Bloomberg 01/10 01/12 01/14 01/16 ———= German 10Y 3m chg (LHS, bp) -———=MSCI Europe 3m chg % Source: BofA Merrill Lynch Global Research, Bloomberg It matters why yields are rising — higher inflation breakevens key for stocks. Digging a little deeper shows that the underlying dynamics in the bond market matter. Essentially rising inflation breakevens is the key driver for equities. Even when real yields are rising it is the change in implied inflation that has correlated most strongly with equity returns in recent years. Looking at 4-week rolling returns since 2009, in the periods that real yields rose Stoxx 600 returns were a median +1.7% if breakevens were also higher at the same time. In contrast a combination of higher real yields and lower inflation breakevens led to a median -0.7% return. Chart 41: Inflation breakevens on the rise in recent bond market move Chart 42: Rising inflation breakevens the key for equities 25 Stoxx 600 4-week returns vs 4-week change in real yields / inflation breakevens (since 2009) 2.0 2.0 1.5 15 1.0 10 0.5 0.5 0.0 0.0 -0.5 40 | German inflation linked 10y -0.5 1 ——— German 10y breakeven 40 O10 «O11 «O12 0118-0114 O11 116 Bund real >+0, b/even +ve Bund real >+0, b/even -ve Source: BofA Merrill Lynch Global Research, Bloomberg Source: BofA Merrill Lynch Global Research, Bloomberg BankofAmerica <2” 18 European Equity Strategy | 01 December 2016 Merrill Lynch HOUSE_OVERSIGHT_014477