7/31/2019 MD_120614

1/9

7/31/2019 MD_120614

2/92

The move was, to a certain extent, expected, asMoodys was still rating Spain clearly above the othertwo agencies, especially after the events last weekendand Moodys views on countries that might depend onexternal support. In fact, while Fitch has Irelandsrating above Spain (see chart below) yesterdaysdowngrade by Moodys still places Spain one notchabove Ireland.

Chart 1: Euro Countries ratings according to the three mainrating agencies and EMU high

FITCH

S&P

MOODY'S

AAA AA+ AA AA- A+ A A- BBB+BBB BBB- BB+ BB BB- B+ B B- CCC +CCCC CC-CC

Ger, Net, Fin

Spa

Bel

Ire

Ita

Gre

Por

Fra, Aus

Source: Rating Agencies, Santander

Greek elections become even more interesting

This downgrade also ratchets up the pressure on thisweekends big events as a negative outcome of theGreek elections (i.e., victory for Syriza) could add evenmore volatility to bond markets and increase theexpectations on the Euro Council meeting at the endof the month.

According to the press (ft), France could be pushingfor a comprehensive package to be discussed at thisJune 28-29 meeting, with the measures to beconsidered possibly including putting the ECB incharge of bank supervision and using the ESM torecapitalise banks directly. Germanys views on thesubject remain to be seen but any progress alongthose lines would be very well received by the market.The other option that might discussed again is to givethe ESM a bank license so that it can leverage itscapital and increase its firepower

Focus on peripherals access to capital markets,Italy again in the market today

The other big focus today will be Italys BTP auction,especially after the higher yield it paid yesterday in its6.5bn TBill tap (3.97% vs 2.33% in the previousauction). Italy is expected to sell up to 3bn in the frontend of its curve (2015) and to reopen another twolonger-dated bonds (2019-2020).

In the long end of the curve, Italian ten-year yieldsclosed above 6.20% yesterday, more than 405bpabove the AAA-rated Euro area benchmark. Thecorrelation between Spain and Italy in the longer endof the curve is above 80%.

In fact, as seen in the chart below, not only is therecent correlation between Spain and Italy (10y sectovery significant, but the beta is close to one at 1.2x.

This implies that the market considers that, despite tfinancial aid for Spanish banks announced lastSaturday, Italians destiny is closely linked to SpainsRecently, Italian yields have not traded just above thecurrent levels, but have been even higher than thecurrent SPGB yields (2y BTPs at 7.66% and 10y BTPat 7.26% last November) showing current high ratesare not necessarily irreversible.

Chart 2: Spain and Italian 10-year yields

y = 1.21x - 0.76

R2 = 0.80

4.5

5.0

5.5

6.0

6.5

7.0

4.0 4.5 5.0 5.5 6.0 6.5 7.0 7

Italy 10y

Spain

10y

2H10-2H11

Jlast Month

14-Jun-12

Source: Santander, Bloomberg

7% approaching. Is the ECB (SMP) watching?

Another factor to keep in mind is that both Spanishand Italian banks were big buyers of peripheral debtwith the money borrowed in the ECBs two three-yeaLTROs and they might be incurring MtM losses onthose assets. Accordingly, between the Spanish

downgrade and the BTP auction we might seeSpanish 10y bonds approaching the 7% mark. It isstill to be seen whether these recent movementsare enough to make the ECB reconsider reopeninits SMP programme.

Antonio Vil larroya +34 91 257 22

GBP Rates: Auction of longsAnother session of big market swings. With nodomestic news, direction came from the Euro areamarkets. The long end, in particular, came underpressure, with a combination of factors at play, most

notably the 10bp rise in 30Y Bund yields. This movecame on the back of expectations of more limitedhedging flows from Scandinavian investors followingproposals that pension funds switch their discount rafrom government bonds to swaps. This, coupled witthe 50Y auction today, saw the 10s30s spreadsteepen further.

The auction of 1.5bn of the 4% Jan 2060 will be thedays highlight. Ultra-longs have steepenedaggressively against the 10Y part of the curve over thcourse of the week and, in conjunction with the back

7/31/2019 MD_120614

3/93

up in yields, this could encourage some cash-for-cashlengthening. There should be the usual mix of trackerfunds, which need to match the 0.02 year extension induration that the addition of this stock implies, andliability hedgers, where the magnitude of pensiondeficits suggest there may be more hedging interestthan usual. There may also be some of the cash fromthe 7 June coupon payment to put to work, given that

most of it had accrued to the +15Y bucket. But, whileyields on the 4% Jan-2060 are over 30bp off theirlows, they are only back to the middle of the range thathas dominated since the start of the year. This was aperiod over which QE meant the long end of the curvewas well supported. With QE now no longer in play,yields still look low. More importantly, the cessation ofQE means that the street is now not able to pass giltson to the Bank and, in the current environment, thishas seriously undermined appetite to take on risk. Asa consequence, flows are light and, as the 5Y auctionon Tuesday showed, the street could be reluctant toabsorb this supply. So, risks persist for the long end of

the curve and we continue to see wider breakevens,even once the auction is out of the way. For all of thedetails and a full relative value run-down see ourpreview published on 12 June.

Jason Simpson +44 (0)20 7756 4574

FX: RBNZ on hold, more EURdownside as Moodys downgradesSpainOvernight:

The RBNZ kept the cash rate at an all-time low of

2.5% last night, whilst giving no immediate signals thatthere will be any change any time soon. This wasexpected, with NZD/USD remaining in this weeks0.77-0.78 range. AUD/USD still sits close to parity and,after some weak equities in Asia overnight, looksunlikely to break through this level unless the marketsees a positive result from this weekends Greekelections. After touching above 1.2600 in Europeantrading yesterday, EUR/USD weakened last night, asMoodys downgraded Spains rating to Baa3 thelowest level in investment grade. The crossstrengthened slightly this morning, but remains below1.2600.

Further easing from the BoJ? Perhaps, but maybenot just yet

Earlier in the week, IMF First Deputy ManagingDirector David Lipton said that the JPY wasmoderately overvalued and that monetary policy couldbe eased further to help Japan achieve its 1% inflationgoal by the end of 2014. There are many that agreewith him, but there are also reasons why the BoJ mightnot take additional easing measures tonight.

To begin with, the JPY has dropped from its recentpeak both versus the USD and in terms of the effective

exchange rate. Whilst the BoJ is still likely to considethe currency as overvalued, the JPY has beenweakening in June and the central bank may not wisto tempt fate by changing things now. Timing is also consideration. Whatever the BoJ decides to do tonigcome Monday morning, the FX markets will likely befully focused on the after-effects of this weekendsGreek elections, with the BoJ meeting likely to be

considered relatively ancient history. If the marketconsiders the Greek election result to be a success,there will likely be a safe haven sell-off, which wouldweaken the JPY anyway. Conversely, if the marketconsiders the Greek election result to be a negative,the JPY would likely still be bid even if the BoJ were commit to further easing tonight.

The BoJ might try to use the surprise factor byapproving additional easing tonight, but other factors

justify holding off for a month or two. In July, the BoJreviews its growth and inflation forecasts, which coulpaint a clearer picture as to how much easing may bneeded. Also, the Diet (Japanese parliament) may

decide on the appointment of two potential new BoJboard members next week, Takahide Kiuchi andTakehiro Sato. Both have been nominated as they ain favour of doing more to end deflation and promotegrowth. USD/JPY has held obediently in a tight 79.0080.00 range since last Thursday. If the BoJ surpriseswith further easing, we would expect the cross to maa sharp move above the 80.00-level. Even if nomeasures are taken at this meeting, with inflationremaining negative in May, the central bank will likelyadd stimulus in the coming months, and this should benough to keep USD/JPY above the 79.00-level, atleast going into the weekend.

Chart 3: JPY overvalued, but USD/JPY remains above 79.00

75

77

79

81

83

85

Sep-11 Nov-11 Jan-12 Mar-12 May-12

USD/JPY

Source: Bloomberg, Santander

Watch list:

GBP/USD

Cable has been on an upwards trend in June, but haso far been capped at 1.56. On several occasions, thcross has come close to breaking through this level,but to no avail. With no data released today andJunes equity rally seemingly having petered out,GBP/USD may again struggle to break through the

7/31/2019 MD_120614

4/94

1.56-level today, with any potential upside movesappearing reserved for after the Greek elections thisweekend, assuming a favorable outcome for themarket.

EUR/CHF

After the SNB created the 1.20 EUR/CHF floor inSeptember, the initial 1.20-1.25 range was considered

tight. This range has continued to tighten, with a moveabove even 1.2040 now considered excessive. TheSNB is due to announce the target rate today. Whilstdeflationary pressures remain a concern, surprisegrowth of 0.7% in the first quarter may be enough toconvince the SNB to maintain the status quofor now.EUR/CHF pushed slightly higher overnight, to1.20150, but we would expect this position to unwind ifthe SNB simply reiterates its prior rhetoric of defendingthe 1.20 floor at all costs.

Michael Flisher /Stuart Bennett +44 (0)20 7756 4136

Update on Euro Countries: Moodys downgrades Spanish debt to Baa3

from A3. Moodys investors service yesterdaydowngraded Spains government bond rating toBaa3 from A3 and has placed it on review for apossible further downgrade. The decision reflectsthe following factors: 1) the new loan to banks willfurther increase the countrys debt burden; 2) theSpanish government has a very limited access tofinancial markets; and 3) the Spanish economyscontinued weakness.

Italy sells the planned 6.5bn in 12m bills, with

yields jumping to 3.97% from 2.34% a month ago.

Monti denies Italy will need bailout. ItalianPrime Minister Mario Monti insisted yesterday thatItaly, even in the future, will not need aid from theEU. These words came after the Austrian financeMinister said that Italy requesting aid was apossibility.

C. Rodrguez Barbero +34 91 257 2244

Economics: Inflation on the declineon lower oil pricesEuro area data preview: Euro area final CPI andlabor costs; German wholesales prices; Italiangeneral government debt; Spanish house prices;Dutch retail sales and trade balance. (1) Euro areaCPI. The rapid decline in international oil prices is on

partially offset by the euros recent depreciation, soheadline inflation keeps edging lower. (2) Spanishhouse prices have fallen 21% from their early 2008peak, but it looks like they have still further to go.

US data preview: CPI; current account balance(and annual revisions); weekly jobless claims. (1CPI. The headline index will almost certainly declineon lower energy prices and, perhaps, (in light of whawe saw yesterday in the PPI) more than the 0.2% m/suggested by the consensus, but core inflationprobably saw a monthly increase in line with recentmonths. (2) Current account balance. The currentaccount deficit probably widened in the first quarter, athe trade deficit was USD 4.7bn wider than in Q4. (3)Weekly jobless claims. After spiking again in the lastweek of May, initial jobless claims declined in the weended 2 June, and possibly managed to stay belowthe 380k mark last week again.

Chart 4: Spain house price index (index, 2005=100)

85

90

95

100

105

110

115

120

125

04 05 06 07 08 09 10 11 12

Source: Bloomberg, Santander

Juan Perez Campanero +34 91 257 22

7/31/2019 MD_120614

5/95

Technical Analysis CornerAlfredo Vitallerajvitaller@gruposantander.com

Jos Alberto lvarezjoalvarez@gruposantander.com

INDICES EuroStoxx

EuroStoxx: no changes in the neutralstance between the very well known

range that is perfectly valid since last

May, based on 2103/2108 and

2178/2188 as resistance area.

Probability map 2093 - 2183

BONDS, BUND, SCHATZ

BUND: The 1.50% yield referenceconfirmed its resistance role and it is

time to rest/correct the recent impulsive

move turning back to the now

resistance area between 142.48 and

142.66/67, our today's map top and

selling area with stop at 142.78

SCHATZ: Also correcting developinga typical pull back move to the now

resistance 110.57, map top and

110.59/60 price resistance. Try shorts

here with stops at 110.63.

FX

The up expectations were confirmedwith the 1.2530 break opening an

impulsive leg that has fixed a relativehigh at 1.2609. Above this level the

short term structure is capped below the

main resistance at 1.2668 also our

today's map top and selling area with

stop at 1.2685. Adjust yesterday longs

stops to break even.

Sources: Reuters and Santander

7/31/2019 MD_120614

6/96

Weekly economic calendarD A T E C O U N T R Y E v ent S urv ey A ctu a l Prio r

F R In dus tr ia l Pro du ction (Y oY) -0 .3% 0 .9 % -0 .9 %

IT G D P sa a nd w d a (YoY ) -1 .3 % -1.4 % -1 .3 %

G E G e rm a n y T hir d Q ua r te r M a n po w e r E m p lo ym e n t O ut lo o k ( T ab le )

U K R IC S H o u se Pr ice Ba la n ce -17 % -1 6 % -1 9%

U K In du s tr ia l Pro du ction (Y oY) -1 .0% -1.0 % -2 .6 %

P O C PI - EU H arm o nised (YoY) 3 .0% 2 .7 % 2 .9%

U S Im p ort Pr ice Inde x (Yo Y) -0 .6 % -0.3 % 0 .5 %

U S M onth ly B udg e t S ta tem e n t -$ 1 25 .0 B -$ 1 24 .6B -$ 5 7 .6 B

F R C PI - EU H arm o nised (YoY) 2 .3% 2 .3 % 2 .4%

G E C PI - EU H arm o nised (YoY) 2 .1% 2 .2 % 2 .1 %

SP C PI (EU H arm o n ise d) (YoY) 1 .9% 1 .9 % 1 .9%

IT C PI - EU H arm o nized (YoY ) 3 .5% 3 .5 % 3 .5 %

U S M BA M o rtg a ge A pp lica tio ns -- 1 8 % 1 .3%

U S Prod uce r Pr ice Ind e x (Yo Y) 1 .2% 0 .7 % 1 .9 %

U S Advanc e R e ta il Sa le s -0 .2 % -0.2 % 0 .1 %

U S R e ta il S a les Le ss Au tos 0% -0.1 % 0 .1 %

U S Bus in e ss Inven to ri es 0 .3% 0 .4 % 0 .3 %

N E T ra d e Ba la nc e -- - - 4.1 B

E C E CB Pu bl ishe s J un e M on th ly R ep ort

EC Euro -Z o ne C P I (Yo Y) 2 .4% -- 2 .4 %

U S C urre n t Accou n t B a lan ce -$ 1 32 .0 B -- -$1 2 4.1 BU S C on sum er Pr ice In de x (Yo Y) 1 .9% -- 2 .3 %

U S In iti al Job less C la im s 37 5 K -- 3 77 K

U S C on tinu in g C la im s 32 69 K -- 3 29 3K

EC EU 25 N e w C a r R e g is tra tio n s -- - - -6 .9%

SP Lab ou r C os ts (Yo Y) -- - - 1 .6 %

U K T ota l T rad e Ba la n ce (G B P/Mln ) -2 70 0 -- - 27 39

EC Euro -Z one T rade Ba la nce 4 .0 B -- 8.6 B

U S Em p ire M an u fac tu r in g 1 4 -- 17 .0 9

U S N et Lon g -te rm T IC Flo w s -- -- $ 36 .2 B

U S In dus tr ia l Pro du ction 0 .1% -- 1 .1 %

W e d 1 3

T h u 1 4

Fr i 15

M o n 1 1

T u e 1 2

Weekly supply calendarDATE ISSUER TYPE AMOUN T MATURITY COUPON

Net herlands 20-Year Bonds EUR 1.5-2.5 bn Janu ary 15 , 2033 2.5%

50-Year Bond s Janu ary 26 , 2062 3.8%

10-Year Bond s Novembe r 22 , 2022 3.4%

UK 5-Year Gi lts GBP 4.75 bn September 7, 2 017 1%

US New 3-Year Notes USD 32bn Ju ne 15, 20 15 0 .25 %

10-Year Notes EUR 5 bn July 4 , 2022 1 .75 %

6-Year OBLi EUR 1 bn Apri l 15, 2 018 0 .75 %

US 10-Year Notes USD 21 bn May 1 5, 202 2 1 .75 %

Italy 3-Year BTPs EUR 3 bn Ma rch 1, 2 015 2.5%

UK 50-Year Gil ts GBP 1.5 bn Janu ary 22 , 2060 4%

US 30-Year Bonds USD 13 bn May 1 5, 204 2 3%

June 20, 2012 Germ any 2-Year Notes EUR 5 bn Ju ne 13, 20 14 0%

Spain Bond auction

Franc e BTAN / linker auc tion

UK New 10-Year Gi lt September 7, 2022

US 30-Year TIPS

Germany

June 21, 2012

EUR 1.1bnAustria

Details TBA on Friday , June 15

Details TBA on Friday , June 15

Details TBA

Jun 14, 2012

June 12, 2012

June 13, 2012

Sources: Bloomberg, Treasury agencies and Santander.

7/31/2019 MD_120614

7/97

Market overviewCentral Bank Meetings and Market Expectations *

Rate Da te S prea d Rate D ate Spre ad Rate Date S pre ad Current 1.00% / 67 0.25% / 9 0.50% / 1

Jun '12 - - - 0.27% (20th) 10 - - -Jul '12 0.97% (5th) 70 - - - 0.50% (5th) 5

Aug '1 2 0.96% (2nd) 70 0.27% (1st) 10 0.51% (2nd) 7.5 Sep '12 0.95% (6th) 70 0.25% (12nd) 7.5 0.52% (6th) 10

Oct '12 0.94% (4th) 70 0.25% (24th) 7.5 0.52% (4th) 10 Nov '1 2 0.94% (8th) 70 - - - 0.51% (8th) 10 Dec '12 0.95% (6th) 70 0.27% (11st) 10 0.50% (6th) 10

Jan '13 0.95% (10th) 70 0.25% (30th) 7.5 0.51% (10th) 12.5 Feb '13 0.95% (7th) 70 - - - 0.50% (7th) 12.5 Mar '13 0.96% (7th) 70 0.26% (20th) 7.5 0.52% (7th) 15 Apr '13 0.97% (4th) 70 - - - 0.53% (4th) 15 M ay '13 0.98% (2nd) 70 0.28% (1st) 10 0.53% (9th) 15 Jun '13 0.93% (6th) 70 0.29% (19th) 10 0.54% (6th) 20

ECB Fed BoE

* OIS forward rates for every maintenance period + CB-OIS spread (SAN estimates).

Money markets

EONIA Rates CurrentT'day

chg (bp)Y'day

chg (bp)1w chg

(bp)1m chg

(bp)3m chg

(bp)1y chg

(bp)

O/N (%) 0.34% 0.0 -0.1 2 2 -2 -971m (%) 0.33% -0.2 0.3 -1 -1 -3 -903m (%) 0.28% -0.3 0.1 0 -2 -7 -1026m (%) 0.26% 0.2 -0.1 0 -2 -8 -110

12m (%) 0.26% 1.0 0.2 0 -1 -11 -120

USD OIS Rates

O/N (%) 0.16% 0.0 0.0 0 0 2 61m (%) 0.17% -0.1 -0.1 1 1 4 63m (%) 0.17% -0.2 -0.2 1 1 4 56m (%) 0.17% -0.3 -0.2 1 1 3 3

12m (%) 0.18% 0.1 0.0 2 0 1 0

SONIA Rates

O/N (%) 0.49% 0.0 1.2 0 0 1 -31m (%) 0.48% 1.4 -1.3 0 0 -1 -53m (%) 0.45% -0.1 -0.1 -1 -3 -3 -86m (%) 0.43% -0.4 -0.3 -1 -5 -6 -15

12m (%) 0.40% -0.3 -1.2 -3 -8 -10 -20

L-OIS SPREAD (3m)

EUR 38.0 0.3 0.0 0 0 -13 19USD 29.7 0.2 0.2 -1 -1 -5 17GBP 54.0 0.1 0.0 1 1 -2 25

L-OIS SPREAD (6m)

EUR 67.5 -0.2 0.2 0 -2 -14 29USD 56.6 0.3 0.3 -1 -1 -3 31GBP 88.1 0.4 0.2 1 3 1 36

Bond Yields

2y BONDS CurrentT'day

chg (bp)Y'day

chg (bp)1w chg

(bp)1m chg

(bp)3m chg

(bp)1y chg

(bp)

US (yield, %) 0.29% 0.0 0.0 2 0 -7 -9UK (yield, %) 0.28% 0.0 0.6 0 -6 -19 -47

Germany (yield, %) 0.13% 0.0 3.1 5 8 -15 -132Spread vs Germany (bp)

France 45.5 1.3 -3.6 1 -19 20 16 Netherlands 24.6 -0.5 -3.4 -1 0 9 13

Austria 48.0 5.8 -1.5 7 -2 -5 16

Belgium 84.2 1.5 -2.8 13 -16 11 -18Spain 487.1 8.7 0.2 74 73 275 275

Italy 463.1 3.3 16.3 92 99 290 303 Portugal 1046.5 143.7 5.1 49 163 -209 -117

Ireland 638.4 0.0 13.9 5 -38 194 -512Greece - - - - - - -

10y BONDS

US (yield, %) 1.61% 1.9 -7.2 -3 -9 -67 -132UK (yield, %) 1.75% 0.0 5.4 3 -9 -62 -143

Germany (yield, %) 1.49% 0.0 6.4 11 7 -48 -143Spread vs Germany (bp)

France 125.2 0.6 -5.9 6 -21 25 83

Netherlands 53.4 -0.3 -1.8 7 3 2 22 Austria 93.3 1.3 -3.9 7 -16 5 41

Belgium 174.1 0.1 -4.0 10 -16 36 52 Spain 533.0 6.4 -1.5 62 43 211 259

Italy 480.1 7.3 -1.9 47 39 191 287 Portugal 939.4 18.4 1.8 -59 -103 -237 144

Ireland 587.7 0.0 1.8 -13 -8 100 -365Greece 2913.9 157.9 -39.2 186 144 1306 1411

Swap Rates

EUR SWAP Rates CurrentT'day

chg (bp)Y'day

chg (bp)1w chg

(bp)1m chg

(bp)3m chg

(bp)1y chg

(bp)

2y (%) 0.94% -0.1 1.4 3 -5 -22 -1105y (%) 1.37% 0.7 -0.2 6 2 -30 -128

10y (%) 1.94% 1.4 1.1 11 -1 -42 -13730y (%) 2.25% 0.7 14.5 22 7 -39 -142

USD SWAP Rates

2y (%) 0.60% 0.5 0.3 2 -5 -2 -55y (%) 1.01% 1.2 -3.6 -1 -7 -31 -83

10y (%) 1.78% 1.7 -7.3 -4 -6 -56 -131

30y (%) 2.47% 1.6 -7.3 -3 -2 -63 -145

GBP SWAP Rates

2y (%) 1.19% 0.0 -2.1 -3 -14 -9 -21

5y (%) 1.45% 0.5 0.0 0 -7 -27 -91

10y (%) 2.17% 0.0 3.7 1 -4 -40 -11930y (%) 3.03% 0.1 6.0 8 3 -28 -92

FX Rates

vs EUR CurrentT'day

chg (%)Y'day

chg (%)1w chg

(%)1m chg

(%)3m chg

(%)1y chg

(%)

USD 0.7955 -0.1% -0.4% 0% 1% 4% 13%GBP 1.2337 -0.1% -0.8% 0% -1% 3% 8%JPY 1.00 0.0% -0.4% 0% 1% 9% 15%CHF 0.8324 0.0% 0.0% 0% 0% 0% 0%SEK 0.1132 0.0% 0.1% 2% 4% 1% 4%NOK 0.1331 0.0% 0.0% 1% 1% 1% 4%

vs USD

EUR 1.2570 0.1% 0.4% 0% -1% -4% -12%GBP 1.5507 0.0% -0.4% 0% -2% -1% -4%JPY 79.43 -0.1% -0.1% 0% 0% -5% -1%CAD 1.0277 -0.3% 0.4% 0% 1% 4% 5%AUD 0.9953 0.2% -0.3% 1% 1% -5% -6%

vs GBP

EUR 0.8106 0.1% 0.8% 0% 1% -3% -8%USD 0.6449 0.0% 0.4% 0% 2% 1% 4%JPY 0.81 0.0% 0.5% 0% 2% 7% 6%

Sources: Bloomberg and Santander

7/31/2019 MD_120614

8/9

Important Disclosures

ANALYST CERTIFICATION:

The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and

will not receive any compensation for providing a specific recommendation or view in this report:

Antonio Villarroya, Juan Prez-Campanero, Antonio Espasa, Jos Mara Fernndez, Csar Rodrguez-Barbero, Alfredo Vitaller, Jos Alberto

lvarez, Jason Simpson and Stuart Bennett, Michael Flisher and Stuart Green.

The analysts referenced in connection with the section for which he or she is responsible may have received or will receive compensation based upon,among other factors, the overall profitability of the Santander group, including profits derived from investment banking activities.

EXPLANATION OF THE RECOMMENDATION SYSTEM*

DIRECTIONAL RECOMMENDATIONS IN BONDS DIRECTIONAL RECOMMENDATIONS IN SWAPSDefinition Definition

Long / Buy Buy the bond for an expected average return ofat least 10bp in 3 months (decline in the yieldrate), assuming a directional risk.

Receive fixed rate Enter a swap receiving the fixed rate for anexpected average return of at least 10bp in 3months (decline in the swap rate), assuminga directional risk.

Short / Sell Sell the bond for an expected average return ofat least 10bp in 3 months (increase in the yieldrate), assuming a directional risk.

Pay fixed rate Enter a swap paying the fixed rate for anexpected average return of at least 10bp in 3months (increase in the swap rate), assuminga directional risk.

RELATIVE VALUE RECOMMENDATIONSDefinition

Long a spread / Play steepeners Enter a long position in a given instrument vs a short position in another instrument (with a

longer maturity for steepeners) for an expected average return of at least 5bp in 3 months(increase in the spread between both rates).

Short a spread / Play flatteners Enter a long position in given an instrument vs a short position in other instrument (with ashorter maturity for flatteners) for an expected average return of at least 5bp in 3 months(decline in the spread between both rates).

IMPORTANT DISCLOSURESThis report has been prepared by Banco Santander, S.A. and is provided for information purposes only. Banco Santander, S.A. is registered in Spainand is authorised and regulated by Banco de Espaa, Spain.

This report is issued in the United States by Santander Investment Securities Inc. (SIS), in Spain by Banco Santander, S.A., under the supervision ofthe CNMV and in the United Kingdom by Banco Santander, S.A., London Branch (Santander London). SIS is registered in the United States and is amember of FINRA. Santander London is registered in the United Kingdom and subject to limited regulation by the Financial Services Authority, UK(FSA). SIS, Banco Santander, S.A. and Santander London are members of Grupo Santander. A list of authorised legal entities within GrupoSantander is available upon request.

This material constitutes investment research for the purposes of the Markets in Financial Instruments Directive and as such contains an objective orindependent explanation of the matters contained in the material. Any recommendations contained in this document must not be relied upon asinvestment advice based on the recipients personal circumstances. The information and opinions contained in this report have been obtained from, orare based on, public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate,complete or up to date and it should not be relied upon as such. Furthermore, this report does not constitute a prospectus or other offering document oran offer or solicitation to buy or sell any securities or other investment. Information and opinions contained in the report are published for the assistanceof recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, are subject to changewithout notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein.

Any reference to past performance should not be taken as an indication of future performance. This report is for the use of intended recipients only andmay not be reproduced (in whole or in part) or delivered or transmitted to any other person without the prior written consent of Banco Santander, S.A..

Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategiesdiscussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Any decision topurchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in theprospectus or other offering document issued in connection with such offering, and not on this report.

The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not takeinto account whether an investment, course of action, or associated risks are suitable for the recipient. Furthermore, this document is intended to beused by market professionals (eligible counterparties and professional clients but not retail clients). Retail clients must not rely on this document.

To the fullest extent permitted by law, no Santander group company accepts any liability whatsoever (including in negligence) for any direct orconsequential loss arising from any use of or reliance on material contained in this report. All estimates and opinions included in this report are made asof the date of this report. Unless otherwise indicated in this report there is no intention to update this report.

Banco Santander, S.A. and its legal affiliates (trading as Santander and/or Santander Global Banking & Markets) may make a market in, or may, asprincipal or agent, buy or sell securities of the issuers mentioned in this report or derivatives thereon. Banco Santander, S.A. and its legal affiliates mayhave a financial interest in the issuers mentioned in this report, including a long or short position in their securities and/or options, futures or otherderivative instruments based thereon, or vice versa.

Banco Santander, S.A. and its legal affiliates may receive or intend to seek compensation for investment banking services in the next three months fromor in relation to an issuer mentioned in this report. Any issuer mentioned in this report may have been provided with sections of this report prior to itspublication in order to verify its factual accuracy.

Banco Santander, S.A. and/or a company in the Santander group is a market maker or a liquidity provider for EUR/GBP, EUR/JPY and EUR/USD.

*NOTE: Given the recent volatility seen in the financial markets, the recommendation definitions are only i ndicative until further notice.

7/31/2019 MD_120614

9/9

ADDITIONAL INFORMATIONBanco Santander, S.A. or any of its affiliates, salespeople, traders and other professionals may provide oral or written market commentary or tradingstrategies to its clients that reflect opinions that are contrary to the opinions expressed herein. Furthermore, Banco Santander, S.A. or any of itsaffiliates trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.

No part of this report may be copied, conveyed, distributed or furnished to any person or entity in any country (or persons or entities in the same) inwhich its distribution is prohibited by law. Failure to comply with these restrictions may breach the laws of the relevant jurisdiction.

Investment research issued by Banco Santander, S.A. is prepared in accordance with the Santander group policies for managing conflicts of interest. Inrelation to the production of investment research, Banco Santander, S.A. and its affiliates have internal rules of conduct that contain, among otherthings, procedures to prevent conflicts of interest including Chinese Walls and, where appropriate, establishing specific restrictions on research activity.Information concerning the management of conflicts of interest and the internal rules of conduct are available on request from Banco Santander, S.A..

COUNTRY & REGION SPECIFIC DISCLOSURES

U.K. and European Economic Area (EEA): Unless specified to the contrary, issued and approved for distribution in the U.K. and the EEA byBanco Santander, S.A. Investment research issued by Banco Santander, S.A. has been prepared in accordance with Grupo Santanders policies formanaging conflicts of interest arising as a result of publication and distribution of investment research. Many European regulators require that a firmestablish, implement and maintain such a policy. This report has been issued in the U.K. only to persons of a kind described in Article 19 (5), 38, 47 and49 of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (all such persons being referred to as relevant persons). Thisdocument must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this document

relates is only regarded as being provided to professional investors (or equivalent) in their home jurisdiction. United States of America (US): Thisreport is being distributed to US persons by Santander Investment Securities Inc (SIS) or by a subsidiary or affiliate of SIS that is not registered as aUS broker dealer, to US major institutional investors only. Any US recipient of this report (other than a registered broker-dealer or a bank acting in abroker-dealer capacity) that would like to effect any transaction in any security or issuer discussed herein should contact and place orders in the UnitedStates with the company distributing the research, SIS at (212) 692-2550, which, without in any way limiting the foregoing, accepts responsibility (solelyfor purposes of and within the meaning of Rule 15a-6 under the US Securities Exchange Act of 1934) under this report and its dissemination in theUnited States. US recipients of this report should be advised that this research has been produced by a non-member affiliate of SIS and, therefore, by

rule, not all disclosures required under NASD Rule 2711 apply. Hong Kong (HK): This report is being distributed in Hong Kong by a subsidiary oraffiliate of Banco Santander, S.A. Hong Kong Branch, a branch of Banco Santander, S.A. whose head office is in Spain. The 1% ownership disclosuresatisfies the requirements under Paragraph 16.5(a) of the Hong Kong Code of Conduct for persons licensed by or registered with the Securities and

Futures Commission, HK. Banco Santander, S.A. Hong Kong Branch is regulated as a Registered Institution by the Hong Kong Monetary Authority forthe conduct of Advising and Dealing in Securities (Regulated Activity Type 4 and 1 respectively) under the Securities and Futures Ordinance. The

recipient of this material must not distribute it to any third party without the prior written consent of Banco Santander, S.A. Japan (JP): This report hasbeen considered and distributed in Japan to Japanese-based investors by a subsidiary or affiliate of Banco Santander, S.A. - Tokyo RepresentativeOffice, not registered as a financial instruments firm in Japan, and to certain financial institutions defined by article 17-3, item 1 of the FinancialInstruments and Exchange Law Enforcement Order. Some of the foreign securities stated in this report are not disclosed according to the FinancialInstruments and Exchange Law of Japan. There is a risk that a loss may occur due to a change in the price of the shares in the case of share trading

and that a loss may occur due to the exchange rate in the case of foreign share trading. China (CH): This report is being distributed in China by asubsidiary or affiliate of Banco Santander, S.A. Shanghai Branch (Santander Shanghai). Santander Shanghai or its affiliates may have a holding in anyof the securities discussed in this report; for securities where the holding is greater than 1%, the specific holding is disclosed in the ImportantDisclosures section above.

For further country and region specific disclosures please refer to Banco Santander, S.A..

Local OfficesMadrid Lisbon London MilanTel: 34-91-257-2035 Tel: 351-21-389-3400 Tel: 44-20-7332-6900 Tel: 39-02-8542-09810Fax: 34-91-257-0252 Fax: 351-21-387 0175 Fax: 44-20-7332-6909 Fax: 39-02-8606-71648

Brussels Paris Frankfurt TokyoTel: 32 2 286 5447 Tel: 33 15353 7000 Tel: 49 6959 67-6403 Tel: 813-5561-0591Fax: 32 2 230 6724 Fax: 33 15353 7060 Fax: 49 6959 67-6407 Fax: 813-5561-0580

New York Bogota Buenos Aires CaracasTel: 212-756-9160 Tel: 571-644-8008 Tel: 54114-341-1052 Tel: 582-401-4306Fax: 212-407-4540 Fax: 571-592-0638 Fax: 54114-341-1226 Fax: 582-401-4219

Lima Mexico DF Santiago de Chile So PauloTel: 511-222-1031 Tel: 525-629-5040 Tel: 562-336-3300 Tel: 5511-3012-5721Fax: 511-221-0577 Fax: 525-629-5846 Fax: 562-697-3869 Fax: 5511-3012-7368

Grupo Santander . 2012. All Rights Reserved.