FINCOR Market Perspectives Março 2013

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Monthly Perspectives For important disclosures, refer to the Disclosure Section, located at the end of this report. n March 2013

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Transcript of FINCOR Market Perspectives Março 2013

Monthly Perspectives

For important disclosures, refer to the Disclosure Section, located at the end of this report.

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March

2013

The Italian election delivered a hung parliament due to thefragmentation in the Senate. There is now probably littleroom for the needed structural reforms. It is likely that alimited mandate government will be formed and marketsseem to already expect that new elections will occur over thenext 12 months. The Italian elections send negative signals toEuropean politicians and probably raise the bar for a futurepotential MoU with the Troika to activate the ECB’s OMT.

Moreover, France and the Netherlands have also given up onthe 3% deficit target for 2013. As a consequence, and in theface of growing resistance in public opinion, “fiscal austerity”will probably lose the appeal it still had in some countries. Ifconfirmed, it would provide some insurance against fiscally‐induced recessions and lower downside risk around thecurrent Euro area growth cenario (positive for Europeanequities?). The market response will probably depend on thecredibility of the ECB’s backstop, but may create growingtension in Germany.

Meanwhile, in the US, a deal to avoid the automatic cuts onFederal government´s spending ($85.2bn evenly splitbetween the Defence and the Non‐defence budget) provedelusive. Financial markets largely shrugged off the stalematein Washington. March 27th is probably the next date to watch

Executive Summarycarefully, as the Continuing Resolution expires. If no actionis taken, government could face temporarily a shutdown.

Another Eurogroup/ECOFIN meeting will be held onMarch 4th‐5th. European officials are due to discuss theoption set for assisting Ireland and Portugal in moving backto sustainable market financing.

The ECB meets on March 7th. The ECB is not expected toannounce any policy easing (refi rate at 0.75% and depositrate at 0.0%) or non‐standard measures. President Draghiwill likely repeat the message that the accommodativemonetary policy stance is still broadly right. He’ll probablyalso stress that the ECB is ready to activate the OMTprogramme for countries that have met the “necessarycondition”. New staff projections will also be released andcould point to lower GDP and inflation for 2013/14.

The FOMC will be reviewing its asset purchases at theupcoming meeting on March 19th ‐ 20th. Fed ChairmanBernanke’s semi‐annual congressional testimony confirmedthat the FOMC is paying a lot more attention to thepotencial costs of continuing with is QE policy this year. It islooking much more likely that the Fed will slow the pace ofits monthy purchases soon.

Asset Performance Review – February 2013• Developed Equity Markets have done better than EM benchmarks in February. EM equities were generally lower

across the board with stocks in Brazil and China down 3.9% and 0.8% respectively. The MSCI EM ($) index was alsodown in February;

• Portuguese equities reversed some of January’s gains, but are still significantly up for the year. Portuguese 10‐yearrates increased in February;

• In fixed income markets, Treasuries, Gilts and Bunds showed gains in February in terms of total return;• Italian assets (FTSEMIB and BTPs) stand out as an underperformer in February;• Commodities performed poorly , with Silver, Wheat, Gold and Copper being some of the biggest losers in February;• Almost all the major currencies depreciated against the Dollar in February , led by Sterling and the Euro;• In Corporate Credit, total returns were positive across the board.

Source: Bloomberg

Monthly Performance Review

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Chart 3: Conference Board Jobs Balance and Unemployment Rate

Conference Board ‐ Jobs Hard to Get Minus JobsPlentiful (adv. 3m, LHS)Unemployment Rate (%, RHS)

US: Q1 2013 should be hit by the expiry of the payroll tax cut• The NAHB homebuilders’ index is consistent

with continued growth in residentialconstruction spending (chart 2). Thehousing recovery has provided an importanthelp to GDP recovery. Rising home pricesshould provide an indirect support toconsumption;

• The 0.1% annualized increase in Q4 2012GDP doesn’t point to the onset of arecession. It was largely due to a big drop ingovernment spending. The growth rate ofthe ECRI’s leading indicators remains inpositive territory (chart 1);

• The three‐month average of non‐farmpayroll remains at 200,000. Theunemployment rate increased slightly inJanuary to 7.9% (chart 3);

• Real consumption growth accelerated to2.1% annualized in Q4 2012. However,January’s retail sales were weak, due tolower incomes, reflecting the payroll taxcut;

• The FDIC’s banking profile for Q4 2012shows that US banks are well placed tocontinue boosting lending to both firms andhousehold (Chart 4).

Source: Economic Cycle Research Institute Source: US Census Bureau; NAHB

Source: Federal Deposit Insurance Corporation Source: Bloomberg, Bureau of Labor Statistics

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Chart 1: ECRI Weekly Leading Index (% y/y)

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Chart 2: Housing Starts and NAHB Homebuilders Index 

Housing Starts (000s Ann., LHS)NAHB Housing Index (adv. 6m, RHS)

Economics

Eurozone: The improvement in economic momentum is continuing, for now…• February’s rise in the EC Economic Sentiment

Indicator confirmed that sentiment is rising inthe Euro area. The rise in the headline indexwas the fourth consecutive monthly gain.Nevertheless, the economic recovery seemsto remain weak, despite the improvement inthe financial markets conditions (chart 4);

• February’s increase in the headline Ifobusiness climate indicator was the fourth in arow and left the index at its highest level inalmost a year. Germany could easily be thestrongest performer of the major Eurozoneeconomies in 2013;

• Lending to firms and households remainsweak, with annual growth rates at ‐2.5% and0.5% respectively (chart 1);

• Peripheral economies are expected to havemet their fiscal deficit goals for 2012.However, government debt levels remainshistorically high and are rising in most Euroare economies (charts 2 and 3);

• The recent rise in Italian and other bondyields following the Italian general electionhas raised new questions over the ECB’sOMTs.

Source: Economic Cycle Research Institute Source: Bloomberg

Source: European Commission, Eurostat Source: European Commission’s Winter 2013 Forecast

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Chart 1: Bank Lending Survey ‐Change in Credit Conditions

Lending to Enterprises Consumer CreditMortgage Lending

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Chart 4: Eurozone Economic Sentiment Indicator and GDP growth rate

Eurozone Economic Sentiment IndicatorEurozone GDP (% y/y)

Economics

Portugal: Still in recession, but sentiment shows a slight improvement • The State budget balance recorded a deficit

of €31.4mn in January 2013, following asurplus of €308.1mn in January 2012.However, data are influenced by the paymentof financial contributions to the EuropeanUnion (€336mn), which have been broughtforward relative to last year (chart 4);

• According to news reports, the Eurogroup isconsidering the extension of bailout loanmaturities for Portugal. The postponement ofthe repayment of the bailout loans wouldeffectively be an OSI;

• Portugal’s Prime Minister suggested that thegovernment intends to move ahead with adeep reform of the state, which is expectedto include significant spending cuts. He alsoconfirmed that Portugal will request a delayof budget goals for a year;

• The Portuguese unemployment rate stood at17.6% in January 2013 (vs. 14.7% in January2012) (chart 1). The EC Economic Sentimentfor Portugal increased in February to 81.5,and left the index at its highest level sinceAugust 2012. It is probably to soon toconclude that Portugal is embarking on ameaningful recovery (chart 2).

Source: Eurostat Source: Bloomberg

Source: Bloomberg, Ernst & Young Forecast Winter Edition Source: Bank of Portugal

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Chart 1:  Unemployment Rates (%)

Portugal Euro area

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Chart 2: Portuguese Economic Sentiment Indicator and GDP

Portuguese EC Economic Sentiment Indicator (LHS)Portuguese GDP (% y/y, RHS)

Economics

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Chart 4: Portugal Budget Balance (%  GDP)

Spain: Budget deficit remains one of the widest in the Euro area• The General Spanish fiscal deficit came at

6.74% of GDP in 2012, somewhat above thetarget set by the European Commission (6.3%),but below the 2011 level of 8.96% of GDP.Including the costs of bank recapitalization, thefiscal deficit was 10% of GDP, up from 9.4% in2011 (table 1);

• The Secretary of State for the Economy saidthat GDP contraction is expected to moderatein Q1 2013 (chart 1). Moreover, no new freshbudget‐cutting measures are expected in 2013according to Spanish officials. The countryexpects the European Commission to grant amore “sensible” deficit‐cutting path over thenext three years. European Commissionrecently published forecasts suggest that morepolicy tightening measures will be neededfrom 2014 to continue the recent progress;

• According to the Bank of Spain, the country’scurrent account reached a surplus of €4.9bn inDecember 2012, reflecting an expansion inexports and a sharp drop in domestic demand;

• Spanish GDP fell 0.8% q/q in Q4 2012, mainlydue to a sharp drop in private consumption(‐3.0% q/q) and in business investment (‐5.4%q/q). (table 2)

Source: Statistical Office of Spain, European Commission

Source: Bank of Spain

Table 1: Public sector financial balance (% GDP)2011 2012

Central Government ‐5.1 ‐3.8Autonomous regional governments ‐3.3 ‐1.7Local government ‐0.5 ‐0.2Social security ‐0.1 ‐1.0General sector deficit ‐9.0 ‐6.7Support to banking sector 0.5 3.3Total including support to banking sector ‐9.4 ‐10.0Source: Spanish Treasury, Fincor

Table 2: Spanish Quarterly GDP

q/q Q3 Q4 Q1 Q2 Q3 Q4GDP growth 0.0 ‐0.5 ‐0.4 ‐0.4 ‐0.3 ‐0.8Private consumption ‐0.6 ‐1.0 0.5 ‐1.1 ‐0.5 ‐2.0Government consumption ‐1.3 ‐0.1 ‐1.1 ‐0.3 ‐2.5 ‐0.3Gross capital formation ‐0.9 ‐3.3 ‐1.8 ‐3.1 ‐1.3 ‐3.9Exports 3.5 0.1 ‐2.6 1.8 5.1 ‐0.9Imports 0.8 ‐2.8 ‐2.0 ‐1.3 2.7 ‐4.8ContributionsDomestic demand (pp) ‐0.8 ‐1.4 ‐0.3 ‐1.4 ‐1.1 ‐2.0Net trade (pp) 0.8 0.9 ‐0.2 1.0 0.8 1.2Source: Statistical Office of Spain, Fincor

‐‐‐‐‐‐ 2011 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐ 2012 ‐‐‐‐‐‐‐‐‐‐‐‐‐‐

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Chart 1 : Spain EC Economic Sentiment Indicator and GDP

Spain EC Economic Sentiment Indicator (LHS) Spain GDP (%, y/y, RHS)

Economics

China: Official PMI points to a moderation in growth • Even considering that there are uncertainties

related to the Chinese New Year adjustments,PMI manufacturing figures seem to indicate aslowdown in sequential growth (chart 1);

• Like the flash reading of the February’sHSBC/Markit PMI, most components of theofficial PMI showed signs of a slowdown fromtheir January levels;

• January monetary data were above marketexpectations (charts 2 and 3). This seems tosuggest the strong desire to borrow and lendby market participants, and current relativelyaccommodative liquidity conditions;

• In the recently released Q4 monetary policyreport, the PBOC mentioned possibleinflationary risks. This could suggests thatmodestly tighter controls are possible.However, a significant change in the monetarypolicy stance is not likely if inflation datacontinues to be benign;

• January exports and imports growth were upvery strongly (chart 4). However, this probablyreflects Chinese New Year distortions. TheChinese New Year was in January last year andin February this year.

Source: China Federation of Logistics & Purchasing;Bloomberg

Economics

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Chart 1: China PMI Manufacturing Indices

Official PMI Manufacturing indexPMI HSBC Manufacturing Index

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Chart 2: China Monthly Money Supply M2(y/y growth rate)

Source: The People’s Bank of China

Source: National Bureau of Statistics

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Chart 4:  China Exports and Imports (US$ Bn)

Exports ImportsSource: National Bureau of Statistics

US Equity Markets: Investors are looking past politics to improving economic growth • Main indices remain supported by the belief

that tail risks have come down. However,some consolidation has occurred, reflecting acorrection in global risk appetite (USSequestration, Italian elections, minutes fromJanuary’s FOMC meeting);

• The three‐month rate of change of the S&P500 has continued to rise, even as US macrosurprises turned negative. Nevertheless, theeconomic surprise index for the US hasrecently started to improve again (chart 3);

• Bottom‐up consensus forecasts $111 and$125 of EPS for 2013 and 2014, which impliesEPS growth of 15% in 2013 and of 13% in2014. In Q4 2012, 66% of stocks surprisedpositively on EPS (chart 2);

• Despite recent skepticism about the prospectfor further monetary easing (chart 4), the Fedis likely to still topping up the punch bowl(even if at a slower rate) given that theunemployment rate remains at a high level;

• The biggest risk is still that economicconditions don´t return to normal, i.e. thatUS economic growth doesn´t reaccelerate asexpected by market participants.

Source: Standard and Poors

Source: Bloomberg, US Bureau of Labour Statistics Source: Bloomberg

Source: Standard and Poors

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Chart 3: S&P 500 and US Macro Surprises

S&P 500 (%, 3m change, LHS)Citigroup Economic Surprise Index (RHS)

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Chart 4: US Headline Inflation and Inflation Expectations

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Chart1 : S&P 500 Operating Earnings  P/E (x)

Operating Earnings P/E (bottom up ests)Average (1988‐2012)

Markets ‐ Equities

European Markets: Will the Italian election mark the start of another Euro crisis?• The inconclusive outcome of the Italian

election, which seems to point to a potentiallylong period of political uncertainty, hasprompted some renewed pressure on theEuropean stock market indices (charts 2 and 4).Nevertheless, the ECB has effectivelycommitted to be a lender of last resort throughits OMT programme;

• Despite a clear improvement in Germany’seconomic momentum, Euro area is stillprobably stuck in a zero/negative growthterritory;

• The Q4 2012 European earnings seasoncontinues to be positive and showsimprovement compared to Q3. However,earnings estimates have declined over lastmonth. Earnings momentum has beennegative in Europe for almost two years.Consensus bottom‐up 2013 earnings growthforecasts stands at 6%;

• Valuation remains moderate (chart 1). A (slow)recovery in European economic growth anddeclining risk premia are expected to supportequity returns in Europe. However, Europe islikely to continue underperforming given apoor earnings momentum.

Source: Bloomberg

Source: Bloomberg Source: Bloomberg

Source: Bloomberg

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Chart 2: Citigroup Short term Macro Risk Index

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Chart 1: European Indices ‐ 2013 P/E Ratios

Peripheral markets include Portugal, Spain and Italy

Core markets include France, Germany and the Netherlands

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Chart 4: European Markets Relative Performance

Peripheral Markets Core Markets

Markets ‐ Equities

Portuguese Equities: Still driven by the sovereign risk premia• Portugal’s benchmark stock index declined by

3.5% in February, after rising 9.7% the monthbefore (chart 2);

• Our February top picks portfolio posted acombined performance of ‐6.7%, andunderperformed its benchmark by 3.5%. InMarch, we keep BES (as a pure play on thesovereign evolution), Portucel (despite lowerUWF paper prices since YE12), and JerónimoMartins (good execution, Poland on track). Weremove Portugal Telecom and add EDPRenováveis;

• EDP Renováveis reported FY12 results aboveconsensus expectations. The Board proposed ainaugural dividend (28% payout). Furtherminority stake disposals are expected in thecoming months, which is expected to supportthe stock price (chart 1);

• The earnings season has been relatively poor(table 1). So far 11 companies have reported Q42012 results (out of a total of 19 we expect toinclude). 27% of companies reporting havebeaten estimates and 64% have missedestimates. On sales, 73% of companiesreporting have beaten estimates and only 27%have missed estimates. Source: Bloomberg Source: Bloomberg

Source: Company Reports

Markets ‐ Equities

Table 1: PSI 20 Q4 2012 earnings results

Sector Reported Total Beat Missed MetEnergy  1 1 0 0 1Industrials  3 5 0 3 0Consumer Discretionary 0 1 0 0 0Consumer Staples 1 2 0 1 0Financials  (*) 3 4 2 1 0Telecommunication Services   2 3 0 2 0Utilities   1 3 1 0 0PSI 20 11 19 3 7 1

Sector Beat Missed MetEnergy  1 0 0Industrials  1 2 0Consumer Discretionary 0 0 0Consumer Staples 1 0 0Financials  (*) 3 0 0Telecommunication Services   1 1 0Utilities   1 0 0PSI 20 8 3 0(*) Excluding BANIF

Source: Bloomberg, Fincor

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Chart 3: Financial Stocks Relative Performance

BES BCPBPI

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Spanish Equities: IBEX 35 drops 1.6% in February but outperforms the PSI 20 • Our February top picks portfolio (Mapfre,

Abertis and Tecnicas Reunidas) posted acombined performance of 8.5% (chart 3), andoutperformed its benchmark by 5.1% in theperiod from February 4th to March 1st. In March,we keep Mapfre, remove Tecnicas Reunidas(but still like the story in the medium‐term) andAbertis (after the strong move in February), andadd Telefonica and Repsol;

• Q4 2012 results pointed to stronger‐than‐expected domestic cost cutting and improvedKPIs by Telefonica (chart 4). With LatAm growthset to continue, the stock price could eventuallyrecover in March some of the lost ground;

• Repsol’s upstream production increased by 11%y/y in 2012. This growth is expected to continuethis year, supported by new fields start‐ups.Moreover, the company has announced thesale of its LNG business, which is expected toallow the company to avoid a credit ratingdowngrade to junk;

• Despite important progress (e.g. therestructuring of the banking sector), theeconomic backdrop remains difficult. Spaincould still need to apply for the OMTprogramme in the near future.

Source: Bloomberg

Source: Bloomberg, FincorSource: Company Reports

Markets ‐ Equities

Source: Bloomberg

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Chart 1: Best Performances in February

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Chart 2: Worst Performances in February

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Chart 3: Relative Performance

Top Picks

IBEX 35

Corporate Bonds: Political issues returns to the forefront• In Italy, subordinated bank debt suffered the

largest losses post‐election. However, the moreinteresting development was the resilience inItalian high yield issuers. In Spain, the marketreaction has been more contained;

• The Italian political situation remains animportant headwind to peripheral corporatecredit (charts 1 and 2). Given weak domesticeconomic environments, investors face bothsovereign‐ and credit‐specific risks;

• The market will likely monitor possible spillovereffects of the Italian political impasse oneconomic growth, and how the rating agenciesview Italy’s sovereign rating in the comingmonths;

• In the US, in the coming weeks and months, USpolitical negotiations related to the ContinuingResolution (expires March 27th) and the DebtCeiling (reinstated May 19th) will probably takecenter stage. Across the board spending cutshave already taken place on March 1st, sincethere was no last‐minute agreement. Despitethese political uncertainties, the macroenvironment remains supportive to US IG andHY. However, HY remains call‐constrained giventhe current low interest rate environment.

Source: Bloomberg

Source: BloombergSource: Bloomberg

Markets – Corporate Bonds

Source: Bloomberg

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Chart 2: European Financials Corporate Spreads

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Chart 3: European High Yield Indices

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Chart 1: US Corporate Credit

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Sovereign Bonds: Euro core rates rally on the Italian election outcome• The inconclusive Italian election caused core rate

to fall (chart 1), associated to a sell‐off in ItalianBTPs (chart 2). Risks remain substantial.Nevertheless, Investors seem to be cautiouslyoptimistic that Italy’s newly government willmaintain a credible fiscal path. If that turns out tobe wrong, there is surely room for markets tomove much further;

• Italian debt is largely domestically owned.Moreover, the OMT programme is still perceivedby the market as a credible backstop.Nevertheless, Italy has driven systematicindicators higher, given the size of the sovereigndebt of the country. The election outcome hasraised market concerns on a rating downgrade forItaly, given that all three rating agencies haveItaly on a Negative Outlook. However, Italy hasrelatively better ratings when compared to Spain;

• A higher probability of QE has forced investors toreconsider their positions in the Gilt market(chart 3);

• The US Treasury market was also supported bythe Italian election outcome (chart 4). However,we could see higher Treasury yields and asteeper yield curve into the March 19th‐20thFOMC meeting.

Source: Bloomberg

Source: BloombergSource: Bloomberg

Markets – Sovereign Bonds

Source: Bloomberg

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Chart 1: Core Government  10‐yr Bond Yields (%)

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Chart 2: Euro Peripheral 10‐yr Government Bond Yields (%)

Italy (LHS) Spain (LHS) Portugal (RHS)

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Chart 3: UK 10‐yr Government Bond Yield (%)

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Chart 4: 10‐yr Treasuries Yield (%)

Eurogroup/ECOFIN meetings to be held on March 4th and March 5th• At this meeting, European officials are due to discuss the option

set for assisting Ireland and Portugal in moving back to sustainablemarket financing. Both countries are expected to continue torebuild their presence in primary markets in order to ensurequalification for the OMT programme. According to recentcomments from ECB Executive Board Member Benoit Coeure,Ireland and Portugal do not yet have sufficient access to bondmarket to qualify for OMT: "So this is the discussion that we'rehaving in particular when it comes to Ireland and Portugal, thatOMT can be available at some point when countries have regainedsufficient market access, which is not the case today in ourjudgment“;

• Moreover, Commissioner Rehn has already said that he wants todiscuss a possible extension in the maturities of EFSF and EFSMloans and precautionary credit lines via the ESM withcomplementary ECB bond‐buying;

• Also on the agenda are the second review of the Greek loanprogramme, the second review of the Spanish bankrecapitalization programme, and the discussion of theCommission’s winter forecast revisions and its implications for theexcessive deficit procedures;

• Talks of the Cypriot bailout could also continue, following theappointement of the new Cypriot cabinet;

• On March 14th‐15th, European Leaders will have the usualquarterly meeting in Brussels.

Source: European Central Bank

March Preview

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Chart 1: Deposits of Euro area residents (€bn)

Spain (LHS)Italy (LHS)Portugal (RHS)

‐10

‐5

0

5

10

15

20

25

30

35

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Chart 2: Loans to Euro area Residents (% y/y)

Spain

Italy

Portugal

Source: European Central Bank

ECB to hold an Interest Rate Meeting on March 7th• The ECB is not expected to announce any policy easing at the March

7th Interest Rate meeting. Further cuts in interest rates are likely torequire a strong negative shock to the outlook. Repairing themonetary transmission mechanism, which implies additional non‐conventional measures, will probably remain the main focus of theGoverning Council. The ECB should repeat the message that themonetary policy is and will remain accomodative;

• The Euro exchange rate is off its highs, which reduces the risk ofimmediate ECB action. At the February press conference, the ECBPresident Draghi mentioned that the Euro “is important for growthand price stability”;

• Most recent economic data available since the February ECBmeeting have been mixed. After rising for three consecutivemonths, the Euro area composite PMI declined in February.Moreover, the larger‐than‐expected decline in Euro area Q4 2012GDP showed that the economy weakened further at the end of lastyear. Nevertheless, the strong increase in the German Ifo wasencouraging (chart 1). The Euro area economy seems to remainweak and probably stuck in recession, which seems to be consistentwith the ECB Governing Council’s view expressed in February;

• The Governing Council will probably continue to view the risks tothe economic outlook as being on the downside;

• New ECB staff forecasts will be published (table 1). They are likely toreinforce the view that ECB policy is going to remainaccommodative.

Source: Ifo Institute

March Preview

Table 1: ECB Staff Macro Projections for the Euro area in 2013 (%, mid‐points, avg annual changes)

Mar 12 Jun 12 Sep 12 Dec 12HICP 1.6 1.6 1.9 1.6Real GDP 1.1 1.0 0.5 ‐0.3

Private consumption 0.8 0.5 0.0 ‐0.6Government consumption 0.6 0.0 ‐0.2 ‐0.6Gross fixed capital formation 1.4 1.5 0.5 ‐2.6Exports (goods and services) 4.4 5.0 4.6 2.3Imports (goods and servies) 4.0 4.4 3.7 1.0

Source: European Central Bank

New Italian Parliament is expected to convene by mid‐March• According to the Italian Constitution, the first session of the new

Parliament has to occur within 20 days of the elections. In thecurrent case, this would point to March 17th, which is a Sunday.Hence, the first session should take place no later than March 15th;

• The next step is the election of the Presidents of the two houses.The head of each parliamentarian group will then be chosen. ThePresident of the Republic will then consult with the Presidents ofthe two houses, the heads of the parliamentarian groups and theheads of the coalitions. The President of the Republic will give thetask of forming a government to the candidate who is most likelyto succeed;

• The President of the Republic will try to limit the uncertainty toavoid market turbulence, but a solution to find a way out of thegridlock could be weeks away. A PD‐led minority government withsupport from M5S, a government of national unity and a grandcoalition between PD and PdL seem to be the options that areright now on the table;

• Given the huge debt stock of 127% of GDP, the debt‐sustainabilityof Italy can quickly be questioned again by markets. To make thecountry less vulnerable to this risk, it is important that the debtstock comes down over time through GDP growth, moderateborrowing costs and a primary budget balance. Markets hope thatthe government will not backtrack on any of the Monti‐reformsand implement growth‐enhancing structural reforms, as well as(much needed) political reforms.

Source: European Commission

March Preview

Source: Italian Ministry of Interior

Bank of England holds a MPC meeting on March 7th• The Bank of England will hold another Monetary Policy Meeting. A

decision is expected to be announced on March 7th at 12:00 GMT;• The minutes from the February decision show that three members

of the MPC (including Governor King) voted for an extension of QEpolicy by £25bn (1.5% of GDP) to £400bn;

• In recent speeches, several MPC members suggested that, ifnecessary, further asset purchases were possible;

• The recent retail sales report and PMI manufacturing were weakand could have tip the committee into announcing another roundof QE. However, it is probably still a close call;

• The most important development for the UK economy since theFebruary meeting has been the decline in Sterling, and thedecision by Moody’s to downgrade the UK from AAA to Aa1;

• Any vote to extend QE, should it occur, is expected to be worth£25bn;

• However, the focus of the Bank of England’s policy actions hasrecently shifted from Gilt purchases towards credit easing andother unconventional measures. In the view of the MPC, “… itseemed possible that a further broad‐based monetary stimuluswould on its own be insufficient to transform the outlook forgrowth…” and “… interventions more targeted at particularfrictions or market failures in the economy were likely to be moreeffective.”

Source: Bloomberg

March Preview

Source: Labour Force Survey

0

1

2

3

4

5

6

06 07 08 09 10 11 12 13

Chart 1: Gilts Yields (%)

2‐yr

5‐yr

10‐yr

FOMC weighs the costs and benefits of more QE on March 19th‐ 20th• The minutes from the most recent FOMC

meeting in late January pointed to risingfears over the potential costs from furtherquantitative easing;

• Ben Bernanke’s semi‐annual testimonyconfirmed that the FOMC is paying moreattention to the potential costs ofcontinuing with its QE in 2013;

• However, the Fed Chairman still appears tobelieve that the benefits outweigh thecosts. He mentioned that "keeping longer‐term interest rates low has helped sparkrecovery in the housing market and led toincreased sales and production ofautomobiles and other durable goods“;

• Ben Bernanke considered that shrinking theFed’s balance sheet could lead to net losses,which would halt remittances to theTreasury;

• According to January’s minutes, the FOMCplans to review its assets purchases at thetwo‐day meeting, which concludes onMarch 20th. It seems to be increasingly likelythat the Fed will slow the pace of itsmonthly purchases soon.

Source: Bloomberg Source: Bloomberg

Source: Federal Reserve

‐1.8

‐1.6

‐1.4

‐1.2

‐1.0

‐0.8

‐0.6

1.5

2.0

2.5

Jan‐12 Jul‐12 Jan‐13

Chart 1: Breakdown of 5‐year Treasury Yield (%)

Breakeven Inflation Rate (LHS) Real Yield (RHS)

Chart 3:

“For example, a study based on theFederal Reserve Board’s FRB/US modelestimated that, as of 2012, the first tworounds of LSAPs had raised real grossdomestic product almost 3 percent andincreased private payroll employmentby about 3 million jobs, while loweringthe unemployment rate about 1.5percentage points, relative to whatwould have been expected otherwise.”

In Monetary Policy Report, February 26th, 2013

March Preview

China: National People’s Congress meeting will be held from March 5th onwards

Source: Bloomberg

March Preview

• The National People’s Congress has announced that this year’sannual session will be held from March 5th onwards. Typically, thesession lasts for about two weeks;

• The National People’s Congress is not an event that policy makersdecide on cyclical policy directions;

• GDP (which should be regarded as the lower bound), CPI (whichshould be regarded as the government’s tolerance zone), M2(which should be regarded as the desired level) and fiscal balancetargets for 2013 will probably be announced in the opening day;

• All senior government officials from the ministerial level up to thepresident of China will be officially appointed by the NationalPeople’s Congress;

• During the National People’s Congress, ministers may release goalsand measures in terms of the Urbanization (probably a key focusarea for the new government) and Property (will the governmentrelease further property thightening measures, on top of therecently announced measures?) policies;

• The market expects China’s 2013 budget target to be set at alarger deficit than the 1.5% that was set in the 2012 budget.However, this could not necessarily represent a significantlylooser fiscal policy if the actual deficit in 2012 was larger thanwhat was set in the budget.

6%

7%

8%

9%

10%

11%

12%

2007 2008 2009 2010 2011 2012

Chart 1: China Real GDP Growth (y/y)

‐4%

‐2%

0%

2%

4%

6%

8%

10%

05 06 07 08 09 10 11 12 13

Chart 2: China CPI Inflation (y/y)

Source: Bloomberg

Charts we are watching

Source: Bloomberg

Source: Congressional Budget Office

• February was a month of divergent asset class returns. Commoditiesperformed poorly. The CRB index reversed January´s gains, and is nowdown 0.7% since the beginning of 2013. Much of this performance canprobably be explained by the strength in the Dollar. Moreover,uncertainty following the Italian parliamentary elections caused weaksentiment across commodity markets. In base metals, nickel andaluminum have led the sell‐off. With business confidence in China dippingin February, markets believe that China’s appetite for commodities isslowing. The news flow from the 12th National People´s Congress inMarch could be key for sentiment in the base metals, particularly if thenew government announces additional infrastructure spending or policystimulus. Oil has also been in a downward drift. However, severalgeopolitical elements remain in the backdrop and could provide the nextcatalyst

• A last‐minute agreement on the US Sequestration was not possible.Therefore, the provisions of the Budget Control Act creates automaticcuts (0.5% of GDP in 2013) on Federal government’s spending sinceMarch 1st.March 27th is probably the next date to watch carefully, as theContinuing Resolution expires. If no action is taken, government couldface temporarily a shutdown. Markets are likely to face again theprospect of difficult negociations and lots of political noise. Nevertheless,investors seem to have adopted some complacency over the US debtceiling debate. This probably reflects current US economic backdrop, withthe economy expected to grow by 2% in 2013. Moreover, if the fiscaltightening proves damaging, Fed QE policy could last longer.

1.15

1.20

1.25

1.30

1.35

1.40

1.45

1.50

220

240

260

280

300

320

340

360

380

2010 2011 2012 2013

Commodities and US Dollar

Thomson Reuters/Jefferies CRB Commodity Index (LHS)EURUSD Spot Rate (RHS)

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