1. October 2012
Monthly Perspectives
n
For important disclosures, refer to the Disclosure Section, located at the end of this report.
2. September ‐ Highlights
ECB and FED doesn´t disappoint… New policies 2012 to 4.5% in 2013. The government’s
announced by the ECB and the FED were the main projections seems to be based in an economic
highlights in September. In Europe, the ECB left outlook that could be too optimistic.
interest rates unchanged but announced a new
sovereign debt purchase scheme in order to re‐ Euro‐zone continues in recession territory…
establish the effectiveness of monetary Business and consumer confidence remains
transmission in the Euro‐area. In the US, the central depressed. Spain and Italy seem particularly
bank announced an open‐ended QE3. $40bn of weak. In Spain, non‐performing loans reached a
Mortgage Backed Securities will be bought every new high in July. Comments from Bank of Spain
month until the outlook for the labor market has suggested a really weak economy during the third
improved. quarter. France, Italy and Greece unveiled belt‐
tightening budgets for next year.
… which supported risk assets: A more aggressive
stance by the ECB and the FED has supported a … but the US economy is still expanding at a
continuing higher allocation to risk by investors. moderate rate: the housing market recovery is
continuing. However, housing makes up a small
Spain was again on the news at the end of the part of GDP. The industry sector continues to
month: Spain’s 2013 budget was announced and it struggle against weak export markets.
targets a reduction in the deficit from 6.3% in
3. September – Financial Markets
Sovereign Debt Markets Stock Markets
Country Maturity Last September Year‐to‐date Country Indices Last Price Chg. % MTD Chg. % YTD
Change (bps) Change (bps)
Portugal PSI 20 5202.76 4.08% -5.31%
Germany 2 Years 0.041% 7.6 ‐10.3 Spain IBEX35 7708.5 3.88% -10.01%
5 Years 0.533% 19.9 ‐22.5 France CAC 40 3354.82 -1.71% 6.17%
10 Years 1.457% 12.3 ‐37.2 Germany DAX 30 7216.15 3.52% 22.34%
UK FTSE 100 5742.07 0.54% 3.05%
France 2 Years 0.191% 4.8 ‐61.8 Italy FTSE MIB 15095.84 -0.03% 0.04%
5 Years 0.945% 2.2 ‐96.8 Switzerland SMI 6495.88 1.69% 9.43%
10 Years 2.207% 4.9 ‐94.1 Euro-zone Euro Stoxx 50 2454.26 0.56% 5.94%
Italy 2 Years 2.399% ‐39.7 ‐271.8 US S&P500 1440.67 2.42% 14.56%
5 Years 4.058% ‐75.1 ‐214.0 US Nasdaq 3116.23 1.61% 19.62%
10 Years 5.118% ‐72.9 ‐199.0 Brazil Bovespa 59175.86 3.71% 4.27%
Mexico Mexbol 40866.96 3.67% 10.22%
Spain 2 Years 3.368% ‐28.8 6.4
5 Years 4.687% ‐81.4 54.1 Japan Nikkei 225 8870.16 0.34% 4.91%
Hong Kong Hang Seng 20840.38 6.97% 13.05%
10 Years 5.945% ‐91.2 85.7
Commodities Currencies
Portugal 2 Years 5.135% ‐45.6 ‐1092.5
5 Years 7.070% ‐79.4 ‐870.9 Last Price Chg. % MTD Chg. % YTD Last Price Chg. % MTD Chg. % YTD
10 Years 8.995% ‐31.6 ‐436.6
CRB 495.06 0.9% 2.7% Euro/$ 1.2865 2.18% -0.74%
US 2 Years 0.250% 3.0 1.1 WTI Oil 92.02 -4.9% -6.4% £/Euro 1.2555 -0.44% 4.52%
5 Years 0.644% 5.4 ‐18.8 Brent Oil 112.19 -1.6% 7.6% Euro/Yen 100.41 1.66% 0.75%
10 Years 1.654% 10.6 ‐22.2 Gold 1771.3 4.5% 13.3% Eur/CHF 1.20858 0.60% -0.68%
4. ECB: Draghi does it again…
• Following his August 2nd speech “The Euro is o Seniority: the ECB will renounce any claim
Irreversible”, Mario Draghi announced a program to seniority in the treatment of its bond
for outright sovereign purchases (maturities holdings accumulated under the OMT
between 1 and 3 years), in order to re‐establish program (pari passu);
the effectiveness of monetary policy transmission. o Sterilization: the purchases will be fully
Key characteristics are: sterilized;
o Transparency: OMT holdings will be
o Conditionality: a request for support to the published on a weekly basis.
EFSF/ESM is necessary. Such program can
take the form of a full program or a 2-year Government bonds -
precautionary program. Purchases will occur 7% Spain and Italy Mario Draghi's
Speech "The Euro
as long as the program implied is Irreversible"
6%
conditionality is respected. It might be
terminated when its objectives have been 5% 4.9% OMT is announced
Yield to maturity
reached or when there is non‐compliance
4%
with the program; 3.0%
4.0%
o Coverage: only for future cases of EFSF/ESM 3%
programs. Also possible for countries under 2%
Spain Italy 2.3%
a current program, when they regain market
access (Ireland, Portugal, Greece and 1%
01-Jun 01-Jul 01-Ago 01-Set 01-Out
Cyprus); Source: Bloomberg
5. What have Mario Draghi said? 3500
ECB Total Assets
3000
• “OMT will enable us to address severe distortions
2500
in Government Bond Markets which originate
Billion €
2000
from, in particular, unfounded fears on the part of
1500
investors of the reversibility of the Euro”;
1000
• He didn´t announced any details on acceptable
500
yields or spreads that could govern potential
0
interventions. But broad liquidity conditions will
be taken into account;
• The reason why the ECB will be buying bonds with Source: Bloomberg
a maturity not higher than 3 years is that “we act ECB Main Refinancing Rate
independently in determining monetary policy”. 5.00%
The ECB may sell the purchased bonds on the 4.50%
4.00%
secondary market if it concludes there’s non‐ 3.50%
compliance with the program by the country; 3.00%
• As happened with the LTRO, The OMT will create 2.50%
2.00%
excess liquidity. The decision to sterilize it is 1.50%
probably aimed at reassuring that the OMT 1.00%
program will not jeopardize the ECB´s mandate 0.50%
0.00%
regarding price stability.
Source: Bloomberg
6. ECB said that economic growth should remain weak…
• Bundesbank announced its opposition to the Eurozone: GDP Growth
program. It thinks that the ECB mandate should 3.20%
2.90%
only be price stability; 1.70%
2.00%
1.40% 1.40%
• Spain and Italy are the countries that might 0.30% 0.40%
benefit the most from the program. Nevertheless,
-0.50%
those countries will need to keep implementing
structural reforms in order to increase their
economy’s competitiveness;
-4.40%
• From the ECB: “Economic growth in the Euro Area 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
is expected to remain weak, with the ongoing Source: Bloomberg
tensions in the financial markets and heightened
Eurozone: CPI
uncertainty weighing on confidence and 3.28%
sentiment”. GDP growth forecast for 2012 was cut
2.69%
from ‐0.1% to ‐0.4% and in 2013 from 1% to 0.5%; 2.40%
2.19% 2.18% 2.13%
• Again from the ECB: “Inflation rates are expected 1.90% 1.80%
to remain above 2% throughout 2012, to fall 1.58%
below that level again in the course of next year
and to remain in line with price stability over the 0.29%
policy‐relevant horizon”. The Inflation increase
during 2012 were due to higher energy prices. 2005 2006
Source: Bloomberg
2007 2008 2009 2010 2011 2012 2013 2014
7. German court gives green light to the ESM.
• The positive German Court´s decision should
now allow the ESM to be ratified, nearly two Survey results on confidence in
years after is was first proposed;
• The German Constitutional Court ruled that the
German institutions (response in %)
ESM bail‐out fund is not against the German Domestic political parties
constitution; European Commission
• Nonetheless, it placed a €190bn cap on Federal government
liabilities, unless Parliament decides to provide Bundestag (lower chamber)
additional guarantees; Bundesrat (upper chamber)
• ESM will now gradually increase its total lending Federal President
capacity, in order to reach €500bn by July 2013. Constitutional court
Until then, the EFSF will be allowed to fill the gap Constitution
to ensure a total lending capacity of €500bn 0 10 20 30 40 50 60 70 80 90
from now on; Source: Institut für Demoskopie Allensbach, FAZ
• Together with ECB’s Outright Monetary
Transactions program (OMT), European
authorities hope that a substantial firewall could
now be in place. Will it be enough to meet Spain
and Italy’s joint financing needs?
• The ECB can now deliver…
8. Europe Economy: Business sentiment remains depressed.
• The Irish economy narrowly avoided a
contraction in Q2 2012. GDP growth is estimated Europe: PMI Manufacturing indices
to have been 0.0% qoq, with a subdued 62 France Germany
domestic demand. Revised data for Q1 2012 Italy Eurozone
58 UK
showed a ‐0.7% qoq contraction;
• Ifo business survey (Sep) – The headline 54
composite business indicator fell. The 50
deterioration was driven by declines in both the
46
current conditions and expectations indices. The
sentiment in the German manufacturing sector 42
Jan-10 Set-10 Mai-11 Jan-12 Set-12 Mai-13
seems to be falling rapidly;
Source: Bloomberg
• Business sentiment remains depressed across
Germany: Ifo business survey
Europe, despite the recent good news (ECB 125
decision, German constitutional court decision, 120
115
Dutch general elections and written proposal on 110
banking union). PMI manufacturing indices for 105
France, Italy, UK and Germany are all below 50. 100
The divergence between the German (up from 95
90
44.7 to 47.3) and the French survey (down to Jan-10 Set-10 Mai-11 Jan-12 Set-12 Mai-13
42.6 from 46.0) is quite striking. Should we Headline composite Business Indicator
Current Conditions Index
expect an ECB rate cut, especially with the euro Expectation Index
exchange rate rising? Source: Bloomberg
9. Spain: NPLs reached a new 1000
900
Spain: Loans
Historical high. 800
€ Billion
700
• According to the Bank of Spain, non‐performing 600 Lo ans Househ olds
500
Loans for the month of July reached 9.88% of 400
Lo ans Non Fin ancial
Corp orations
total loans, above the 1993 previous high; 300
2002 2004 2006 2008 2010 2012
• With the economy stuck in a recession, a weak
labor market and an increased risk aversion to Spain: Deposits
1200 20%
Spanish assets, bank deposits have been 1000 15%
decreasing. Moreover, the declining banking 800 10%
loans trend shows that the economy’s
€ Billion
600 5%
deleveraging process is continuing; 400
Total Depos its
0%
• Last week’s joint statement from the German, 200 YoY Growth Rate (right
scale)
-5%
Dutch and Finnish ministers increased market 0
2002 2004 2006 2008 2010 2012
-10%
doubts on whether the rest of euro‐zone will 10%
Spain: Non-performing
bear the costs of providing support for the 8% loans
region’s banking sector. Will a full‐blown 6%
banking union really happen in the euro‐zone?
• The head of the Catalan regional government 4%
announced that early regional elections will take 2%
place on 25th November this year (rather than 0%
1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012
in 2014 as scheduled). Source: European Cental Bank, Bank of Spain
10. Spain’s 2013 Budget and new economic reforms.
• Spain’s 2013 budget targets a reduction in the
deficit from 6.3% of GDP in 2012 to 4.5% in 2013. Macro assumptions and fiscal forecasts
2011 2012 2013 2014
An 1.5% contraction is expected for 2012,
Assumed GDP growth (% yoy) 0.7 ‐1.5 ‐0.5 1.2
followed by a 0.5% fall next year. Will the later Output gap (%) ‐4.6 ‐4.7 ‐3.8 ‐2.7
forecast prove to be too optimistic?
Fiscal balance and target (% GDP) ‐8.9 ‐6.3 ‐4.5 ‐2.8
• Tax revenues are expected to increase by just Change in fiscal balance (% GDP) 0.4 2.6 1.8 1.7
under 4% (Will it be possible with the local Fiscal tightening (% GDP) 0.0 2.7 1.4 1.2
economy stuck in a recession?). Ministry Primary fiscal tightening (% GDP) 0.5 3.5 2.0 1.1
spending is going to be cut by 8.9% and public Source: Ministry of Treasury and Public Administration
servant wages should be frozen;
• New laws should be introduced in the next 6 Spain: EC Economic Sentiment
months to liberalize the energy, services and 120 Index
telecom sectors. New measures are expected to
reform public administration and reform the
labor market (including wage bargaining); 100
• These two announcements can probably help
Spain to demand support from an EFSF/ESM 80
program by fulfilling required conditionality;
• The Oliver Wyman bottom‐up Stress Test results,
published last Friday, revealed a capital deficit 60
2006 2007 2008 2009 2010 2011 2012
post tax effects of €53.7bn. Source: Bloomberg
11. Spain: Stress Test results reveal Capital needs ‐ Base Scenario (€bn)
Financial Expected Loss
Capital
excess
Capital
excess
a €53.7bn capital deficit. Instituion
Santander
BBVA ‐ UNNIM
Loss
22
20
Absorption (pre‐tax) (post‐tax)
43
31
21.3
10.9
19.2
10.9
• This is an important milestone in the ongoing La Caixa 22 32 10.2 9.4
restructuring process that has been agreed upon Sabadell ‐ CAM
Kutxabank ‐ Cajasur
18
5
22
8
4.4
3.4
3.3
3.1
with Eurogroup on July 20, 2012; Unicaja ‐ CEISS
Popular ‐ Pastor
7
15
8
16
1.0
0.5
1.3
0.7
• The financial institutions which have shortfalls Bankinter 2 3 0.6 0.4
Libercaja 11 11 0.4 0.5
will have to prepare recapitalization plans. Their BMN 6 6 ‐0.4 ‐0.4
Banco Valencia 4 2 ‐1.7 ‐1.8
business plans will be reviewed in early October. NCG 9 6 ‐3.6 ‐4.0
The recapitalization period should last until mid‐ Catalunya Banc
BFA ‐ Bankia
13
30
6
17
‐6.2
‐12.2
‐6.5
‐13.2
2013. Recapitalization plans could include asset Total 183 212 ‐24.1 ‐25.9
sales, capital raising and liability management Capital needs ‐ Adverse Scenario (€bn)
Capital Capital
exercices; Financial Expected Loss excess excess
Instituion Loss Absorption (pre‐tax) (post‐tax)
• According to the results published, Popular has a
Santander 34 59 24.4 25.3
€3.2bn capital deficit. The bank has a €700mn BBVA ‐ UNNIM 31 40 8.2 11.2
La Caixa 33 37 3.9 5.7
pending right issue; Kutxabank ‐ Cajasur 7 9 1.8 2.2
Sabadell ‐ CAM 25 26 0.6 0.9
• In June, the Spanish government hired Bankinter 3 4 0.3 0.4
consultants Oliver Wyman and Roland Berger to Unicaja ‐ CEISS
BMN
10
9
9
6
‐0.9
‐3.1
0.1
‐2.2
conduct a transparency exercise. A top‐down Libercaja 16 12 ‐3.4 ‐2.1
Banco Valencia 6 2 ‐3.4 ‐3.5
stress test on the 14 largest Spanish banking Popular ‐ Pastor 22 17 ‐5.5 ‐3.2
NCG 13 6 ‐6.8 ‐7.2
groups assessed the aggregate capital shortfall at Catalunya Banc 17 7 ‐10.5 ‐10.8
€16‐25bn in the base case and €52‐62bn under BFA ‐ Bankia 43 19 ‐23.7 ‐24.7
Total 270 252 ‐57.3 ‐53.7
adverse scenarios. Source: Oliver Wyman Report
12. Italy: a weak economic backdrop… 2012 E 2013 F
New Previous New Previous
• Mario Monti’s government has pursued an
Budget Deficit (% GDP) 2.6% 1.7% 1.8% 0.5%
ambitious agenda of fiscal consolidation and Debt‐to‐GDP ratio 126.4% 123.4% 126.1% 121.5%
structural reforms, not always with success. Real GDP growth rate ‐2.4% ‐1.2% ‐0.2%
Nonetheless, it has been in line with what the Source: Italian Government
Italy: Current Account Balance
European policymakers are keen to see; (% GDP)
4%
• The large size of government refinancing makes
Italy sensitive to changes in market sentiment; 2%
• Market pressure could be the trigger to Italy 0%
demand some degree of sovereign support. Once
-1.91%
Spain applies for financial support, market -2%
pressures on Italy may increase; -4%
• ECB’s Outright Monetary Transactions mechanism 1988 1991 1994 1997 2000 2003 2006 2009 2012
could be important to reduce Italy’s funding costs. Source: Bloomberg
Italy: Real GDP
Conditionality (beyond what’s already been 6%
(% YoY)
agreed) could be a political problem, mainly 4%
because of the technocratic nature of the current 2%
0%
government;
-2%
• Forward looking indicators points to a weak -2.60%
-4%
economy. Local firms expects a further -6%
deterioration in their order books. Italy’s current -8%
account deficit is narrowing. 2000 2003 2006 2009 2012
Source: Bloomberg
13. Greece’s pain continues. 10%
Greece: GDP Growth
8%
• The leaders of Greece’s fractious coalition 6%
4%
government announced a basic agreement over 2%
an austerity package that will allow the country to 0%
cut €11.5bn in expenses and raise €2bn through -2%
-4%
new taxes; -6%
• The Government intends to cut pensions and -8%
salaries. Moreover, it wants to improve and -10%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
increase tax collection; Source: Bloomberg
• Antonis Samaras intends to make a formal request
at next month’s EU summit for the country’s Greece: Redemptions Calendar of Tradable Debt (M)
program to be extended by 2 years until 2016. The
problem is how to meet the additional funding 286.956,00 €
that would be required;
• Troika is still pushing Greece towards new
measures that could deepen labor market reforms 143.710,00 €
and reform the local public administration;
• Greece’s 2013 budget will probably sustain the 59.459,00 €
country’s severe economic recession. 14.031,00 € 13.212,00 € 15.818,00 € 7.055,00 €
3.442,00 €
23.040,00 €
5.823,00 € 1.366,00 €
2012 2013 2014 2015 2016 2017 2018 2019 2020 >2021 Total
Source: Bloomberg
14. France unveils a tough budget.
• The Government announced that it will
implement new austerity measures to cut its France: Government Deficit as % of GDP
Budget Deficit to 3% of the GDP in 2013, from 7.50%
7.10%
4.5% this year;
• Taxes on big companies will generate €10bn, 5.20%
mainly through the removal of various tax 4.50%
deductions and exemptions. €10bn expected to 3.30%
3.00%
be raised from household will hit top earners; 2.90%
2.30%
2.70%
• A freeze in nominal terms in government
spending is expected to save €10bn in 2013;
• A new 45% marginal income tax will apply to
earned income above €150,000 a year; 2005 2006 2007 2008 2009 2010 2011 2012F 2013F
• The French debt agency projects that France´s Source: Bloomberg and French Government
debt should increase to more than 91% of GDP
next year. Nonetheless, France has borrowed at
record low levels of interest, recently.
15. US Economy: still expanding at a moderate rate…
• The global slowdown is taking a greater toll in ISM Activity Indices
the US manufacturing sector. Manufacturing 70
output fell by 0.7% mom. The forward‐looking
ISM Manufacturing remained below 50 in 60
August; 53.7
50 49.6
• Other parts of the economy are less exposed to
overseas events. The ISM non‐manufacturing 40
ISM Non-Manufacturing Index
has risen to 53.7, from 52.6;
ISM Manufacturing Index
• The economy only created 96,000 jobs in 30
1997 1999 2001 2003 2005 2007 2009 2011 2013
August. The employment‐to‐population ratio is
Source: Bloomberg
at a 12‐month low of 58.3%;
• Retail sales excluding motor vehicles, gasoline Change in Non-Farm Payroll Employment
(000s) and NAHB Market Index
and building materials fell by 0.1 mom in August. 400 40
Nonetheless, this fall may partly be a payback 300
37
35
30
after the strong rise in July; 200 25
• The continuing recovery in the NAHB 100 94 20
15
homebuilders index points to increased 0
10
confidence in the sector; -100 5
• Despite higher gasoline prices, the Conference -200
2010 2011 2012 2013
0
Board measure of US consumer confidence Change in Non-Farm Payroll Employment (3 month average)
increased to a seven‐month high in September. National Association of home builders Market Index (right scale)
Source: Bloomberg
16. FED announced an open‐ended QE3 Unemployment rate: FOMC
• “The Committee seeks to foster maximum 10% Economic Projections
employment and price stability. The Committee is 9%
Max
average
concerned that, without further policy 8% Min
7%
accommodation, economic growth might not be 6%
strong enough to generate sustained improvement 5%
in Labor Market Conditions”; 4%
2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
• $40bn in Mortgage Backed Securities will be
purchased per month. the Fed intends to continue GDP: FOMC Economic Projections
5%
those purchases until the outlook for the labor 4%
market has improved; 3%
2%
• The FOMC extended its conditional commitment to 1%
leave its policy rate at near zero until mid 2015. -1%
-2%
Additionally, the FED added that "a highly -3% Max average Min
accommodative stance of monetary policy will -4%
2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
remain appropriate for a considerable time after Core PCE inflation: FOMC
Economic Projections
the economy strengthens.“; 2.5%
• Operation TWIST will be maintained until the end of Max average Min
the year; 2.0%
• Future policy action will depend on how economic 1.5%
conditions develop, particularly the unemployment
rate. 1.0%
2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F
Source: Bloomberg; US Federal Reserve
17. Will QE3 be a success? 1600
S&P500
End of
QE2
QE3
End of
QE2 Start
• Only one FOMC member voted against QE3. QE1
1400
According to Jeffrey Lacker, Richmond FED’s
President: “Further Monetary stimulus is now 1200 QE1 Start
unlikely to result in a discernible improvement in
1000
growth, but if it does, it’s also like to cause an
Operation
unwanted increase in inflation”; 800 TWIST
Start
• Will a further fall in mortgages rates help the
600
housing recovery, when rates are already a low 2008 2009 2010 2011 2012
levels? Additionally, many household will still not Source: Bllomberg; US Federal Reserve
qualify for a new loan;
• QE programs have usually a positive effect on FED Total Assets
stock markets; 3000.00
• QE3 should increase the Federal Reserve’s 2500.00
monetary base even further. What will be the 2000.00
End of Operation
QE2 TWIST
long‐term consequences of that Balance Sheet
Billion $
QE2 Start Start
End of
1500.00
expansion? Nonetheless, bank loans have been QE1
increasing more moderately; 1000.00
• Are higher inflation expectations going to be the 500.00
QE1 Start
result of QE3 announcement? 0.00
2008 2009 2010 2011 2012
Source: Bllomberg; US Federal Reserve
18. Bank of Japan increased its QE Program.
• Bank of Japan announced that it will increase its Japan: GDP Growth (YoY)
Asset Purchase Program in ¥10Tn to ¥80,2Tn. This 6%
4%
will be done by buying ¥5Tn of Treasury Discount
2%
Bills and ¥5Tn in Japanese Government Bonds
0%
(JGB);
-2%
• The increased short‐term purchasing budget is -4%
targeted to end by June 2013. The long‐term JGB -6%
purchasing budget is extended to the end of -8%
December 2013; -10%
1996 1998 2000 2002 2004 2006 2008 2010 2012
• Also important was the decision to abolish the Source: Bloomberg
10bp minimum bidding yield on long‐term JGB
purchases; BoJ Total Assets
160,000
• The Central Bank is trying to increase the
economy’s growth rate. Moreover, the bank might 140,000
also want to prevent a higher appreciation of its JPY million 120,000
currency. As BOJ Governor’s Shirakawa said: “a 100,000
stronger Yen causes a decline in exports and 80,000
corporate profits as well as a deterioration in
60,000
business sentiment”;
40,000
• BoJ has revised its 2012 growth forecasts from 1998 2000 2002 2004 2006 2008 2010 2012
2.3% to 2.2%. Source: Bloomberg
19. A triangle between Japan, China and Taiwan
• The dispute is over the control of Senkaku (in
Japanese) / Diaoyu (in Chinese) Islands.
Controlled by Japan since 1895, the archipelago,
with 5 small islands, is located on the East China
Sea;
• Different interpretations of the islands’ history
explain the dispute. The Chinese claim that they
discovered the archipelago in the XXIV Century.
The Japanese say that their country legally
incorporated the islands after the first Sino‐
Japanese War in 1895. They claim that they found
the islands inhabited with no signs of being under
China’s control prior to 1895;
• After WWII, United States occupied the
archipelago. It was returned to Japanese control
in 1971;
• The dispute started in 1969, after United Nations
stated that the area could be rich in oil and gas.
20. Iran threats to block the Strait of Hormuz
• Following various sanctions from Western nations
due to Iran’s nuclear program, the country
threatened to block the Strait of Hormuz, in an
effort to hamper Europe access to oil;
• Netanyahu claimed that diplomatic and economic
sanctions have failed to prevent Iran from
developing its nuclear program. According to the
Israeli prime minister, the world should set a clear
limit for Iran’s nuclear enrichment program (“red
line” for Tehran);
• Meanwhile, the US and 29 other countries led
some mine‐clearing exercises in the Gulf Persian
region;
• And what about Iran? It undertook military
exercises with missiles capable to hit warship
vessels.
21. Portugal Economy ‐ New Portuguese Companies –
austerity measures are BCP’s right issue
expected.
• The Government should announce new measures • BCP issued €500mn through a rights offering.
to comply with Troika’s 5th quarterly review. The 12,500,000,000 new shares will be issued at a
new budget targets are: 5% of GDP in 2012, 4.5% subscription price of €0.04. The new shares are
in 2013 and 2.5% in 2014; expected to start trading on October 10th;
• The Portuguese economy should contract 3% in • Results from the rights offering will be
2012 and 1% in 2013; published tomorrow. Let´s see if there´s going
• Additional measures will have to be announced as to be any change in the bank’s shareholders
the planned increase of the employee’s social structure;
contribution (from 11% to 18%) in combination • There’s been increased news flow regarding a
with a reduction of employer’s rate (from 23.75% possible Zon‐Sonaecom merger. Optimus’ CEO
to 18%) caused wide‐spread protests and forced underlined the benefits of a merger between
the Portuguese Government to cancel them. the two companies during an interview to a
Portuguese newspaper.
22. October – What to expect?
• ECB meeting: Will the bank announce a interest Event calendar for October
rate cut? Probably not. But, Draghi may indicate Oct 1 China Manufacturing PMI
that the bank could reduce the policy rate US ISM
further in the future and push the deposit rate EZ PMI Manufacturing
into negative territory; Oct 3 US First presidential debate elections
• US Q3 earnings season is poised to start. The
Oct 4 EZ ECB meeting
S&P 500 Q3 EPS forecast dropped 4.8% from
June to the end of August. The trend flattened Oct 5 US Change in Non‐Farm Payrolls
in September; Oct 8‐9 EU Eurogroup/Ecofin meetings
• Will Spain ask for EFSF/ESM support? The
Oct 11 US US Elections‐Vice presidential debate
Spanish Government seems to remain
undecided regarding a bailout. Key regional Oct 12‐14 IMF Annual meeting
elections will be held on October 21st. After Oct 15 US Advance retail sales
these elections, the Spanish treasury faces large Oct 16 US Second presidential debate
redemptions on 29Th and 31st of October (total
Oct 18‐19 EU European Council meeting
of €20.3bn). Pressure from the market, other
European countries or the ECB could ultimately Oct 22 US Third presidential debate
push Spain to ask for EFSF/ESM support; Oct 24 US FOMC meeting
• Economic data from the US, the euro‐zone and GER IFO ‐ Business Climate
China will be followed closely.
23. US Equity Market… Unstoppable? S&P 500: Historical NTM P/E
35
• S&P 500 has risen 14.56% YTD; 30
P/E
• Central Banks to the Rescue – Market’s
25
NTM P/E (x)
response to monetary policy stimulus is usually
20
positive. QE3 and the extension of Operation
15
Twist by the FED has allowed the “risk on” trade 3-yr rolling average
13.59
10
to continue;
5
• What could stop the rally?
0
o We continue to look carefully to economic
data and earnings growth;
Source: Standard&Poors
o The fiscal cliff and uncertain election
outcomes. These two issues could S&P 500: 12 month EPS growth rate
(Operating earnings. Estimates are bottom up)
progressively become more important for
47.3%
the market;
18.8%
o A setback in Eurozone that increases risk 18.5%
23.8% 14.7%
13.0% 15.1% 13.4%
aversion; 8.6% 14.8%
5.4%
o QE side effects – Will long‐run inflation
expectations rise? Inflation expectations -5.9%
are one of the main drivers of equity -30.8%
multiples. -40.0%
• Until one of these issues grab headlines, the
current market rally could continue. Source: Standard&Poors
24. US Equity Market: Q3 earnings report will start.
• Given the current macro environment, Q3 Operating Earnings
Per Share 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3
2012 report season will probably confirm the by Economic Sector Change Est. Forecast
current earnings slowdown trend; S&P 500 qoq 1.7% -6.2% 2.1% 4.9% -1.7%
• FedEx, Caterpillar and Intel have provided new yoy 17.3% 8.2% 7.4% 2.3% -1.1%
and lower, earnings guidance; Consumer qoq -3.7% 7.7% -12.0% 7.9% 1.1%
Discretionary yoy 16.9% 10.5% 5.1% -1.5% 3.5%
• Q3 2012 EPS estimates have been falling,
Consumer Staples qoq 2.2% 0.9% -9.0% 8.3% 1.6%
which should provide some cushion; yoy 10.0% 5.7% 2.8% 1.7% 1.1%
• The rally has been driven by a compression of Energy qoq 8.7% -28.8% 14.7% 6.0% -10.7%
the risk premium related to the European yoy 68.2% 10.3% 6.6% -5.9% -22.7%
sovereign crisis. QE also became an important Financials qoq 13.4% -9.6% -3.0% 11.5% -3.2%
yoy 14.3% 18.1% 4.8% 10.9% -5.4%
driver of return;
qoq -6.9% -3.9% 12.8% -4.0% 3.6%
• Going forward, are more supportive data on Health Care
yoy 3.5% 3.5% 8.4% -3.0% 7.9%
growth and earnings going to be necessary to qoq -1.8% -0.4% 1.1% 12.6% -5.2%
Industrials
sustain the rally? yoy 12.2% 3.4% 20.2% 11.4% 7.5%
S&P500: Weekly Number of Companies
Information qoq -4.8% 26.5% -10.7% -1.6% 1.5%
Reporting Earnings Technology yoy 9.3% 17.2% 15.2% 5.9% 12.8%
176
Materials qoq -27.9% -52.3% 126.2% 5.4% -26.0%
yoy 20.6% -45.3% -14.7% -18.0% -15.8%
88 Telecommunication qoq 9.6% -37.9% 57.0% 20.5% -19.2%
Servies yoy 6.0% -25.8% -0.5% 28.7% -5.1%
35
5 11 Utilities qoq 43.9% -43.8% 28.4% -10.1% 49.3%
yoy 0.5% 7.4% -5.4% -6.6% -3.1%
01-05 08-12 15-19 22-26 29-31
Source: Bloomberg Source: Standard&Poors
25. Monsanto should begin the US earnings season.
• 315 companies from the S&P500 index are expected to report earnings during October. The 4th week
will be the most important, with more than 35% of the total companies expected to report;
• Below, we list some US blue chips stocks that should announce its Q3 2012 earnings during the
month.
Day Company Estimated EPS ($) Day Company Estimated EPS ($)
03 MONSANTO CO ‐ 0.44 19 GENERAL ELECTRIC CO 0.36
09 CHEVRON CORP 2.99 MCDONALD'S CORP 1.48
ALCOA INC 0.01 MORGAN STANLEY 0.23
12 WELLS FARGO & CO 0.86 AMERICAN EXPRESS CO 1.08
GOOGLE INC‐CL A 10.52 23 APPLE INC 8.89
JPMORGAN CHASE & CO 1.15 XEROX CORP 0.25
24 BOEING CO/THE 1.12
15 CITIGROUP INC 0.97
CATERPILLAR INC 2.27
16 INTEL CORP 0.50
AT&T INC 0.63
COCA‐COLA CO/THE 0.50
25 UNITED PARCEL SERVICE‐CL B 1.07
GOLDMAN SACHS GROUP INC 2.09 UNITED STATES STEEL CORP 0.01
17 HALLIBURTON CO 0.70 COLGATE‐PALMOLIVE CO 1.38
PEPSICO INC 1.16 AMAZON.COM INC ‐ 0.09
BANK OF AMERICA CORP 0.15 26 FORD MOTOR CO 0.28
18 MICROSOFT CORP 0.60 EXXON MOBIL CORP 1.89
YAHOO! INC 0.26 MOTOROLA SOLUTIONS INC 0.73
JOHNSON & JOHNSON 1.21 PROCTER & GAMBLE CO/THE 0.96
VERIZON COMMUNICATIONS INC 0.65 CONOCOPHILLIPS 1.13
PHILIP MORRIS INTERNATIONAL 1.38 30 PFIZER INC 0.53
Source: Bloomberg Source: Bloomberg
26. Charts we are watching. Citigroup Economic Surprise
Indices Major Economies
US
80
• The economic surprises indices showed a Eurozone
positive evolution during the last few months. 40
This too has been a positive support for risk 0
assets. After this upward movement, are we -40
going to see a new deterioration?
-80
-120
Jan-11 Jun-11 Nov-11 Apr-12 Sep-12
Source: Bloomberg
S&P 500 and Euro Stoxx 50
1600 5500
5000
• The US market is getting closer to its pre‐crisis 1400
4500
peak. The European market (measured by 4000
1200
Euro Stoxx 50 index) is clearly lagging. The 3500
sovereign debt crisis is taking its toll. 1000 3000
2500
800
2000
600 1500
1996 2000 2004 2008 2012
S&P 500 Euro Stoxx 50 (Right Scale)
Source: Bloomberg
27. Charts we are watching. China: PMI Manufacturing
60
55
• China’s underlying growth momentum has not
50
shown a meaningful recovery so far.
45
40
35
2005 2006 2007 2008 2009 2010 2011 2012
Source: Bloomberg
S&P500: Monthly Average Return
1.48% 1.44%
1.26% 1.24%
• The 4th quarter usually shows a positive
return. However, one must not forget that S&P 0.55%
0.75% 0.74%
0.61%
0.41%
500 already displays significant gains since the
beginning of 2012. US Presidential election
(November 6th) and the fiscal cliff issue could -0.19% -0.15%
increase stock market’s volatility.
-1.11%
January February March April May June July August September October November December
Source: Bloomberg
28. Disclosure Section
This research report is based on information obtained from sources which we believe to be credible and reliable, but is
not guaranteed as to accuracy or completeness. All the information contained herein is based upon information
available to the public.
The recipient of this report must make its own independent assessment and decisions regarding any securities or
financial instruments mentioned herein.
This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related
financial instruments. The investment discussed or recommended in this report may be unsuitable for investors
depending on their specific investment objectives and financial position.
The material in this research report is general information intended for recipients who understand the risks associated
with investment. It does not take account of whether an investment, course of action, or associated risks are suitable
for the recipient.
Investors should seek financial advice regarding the appropriateness of investing in any securities or investment
strategies discussed or recommended in this research report and should understand that the statements regarding
future prospects may not be realized. Investors may receive back less than initially invested. Past performance is not a
guarantee for future performance.
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this research report.
Recommendations and opinions expressed are our current opinions as of the date referred on this research report.
Current recommendations or opinions are subject to change as they depend on the evolution of the company or may
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