Monthly Perspectives

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

n

Octob

er20

12

ECB and FED doesn´t disappoint… New policiesannounced by the ECB and the FED were the mainhighlights in September. In Europe, the ECB leftinterest rates unchanged but announced a newsovereign debt purchase scheme in order to re‐establish the effectiveness of monetarytransmission in the Euro‐area. In the US, the centralbank announced an open‐ended QE3. $40bn ofMortgage Backed Securities will be bought everymonth until the outlook for the labor market hasimproved.

… which supported risk assets: A more aggressivestance by the ECB and the FED has supported acontinuing higher allocation to risk by investors.

Spain was again on the news at the end of themonth: Spain’s 2013 budget was announced and ittargets a reduction in the deficit from 6.3% in

2012 to 4.5% in 2013. The government’sprojections seems to be based in an economicoutlook that could be too optimistic.

Euro‐zone continues in recession territory…Business and consumer confidence remainsdepressed. Spain and Italy seem particularlyweak. In Spain, non‐performing loans reached anew high in July. Comments from Bank of Spainsuggested a really weak economy during the thirdquarter. France, Italy and Greece unveiled belt‐tightening budgets for next year.

… but the US economy is still expanding at amoderate rate: the housing market recovery iscontinuing. However, housing makes up a smallpart of GDP. The industry sector continues tostruggle against weak export markets.

September ‐ Highlights

Sovereign Debt Markets

Country Maturity Last September Year‐to‐dateChange (bps) Change (bps)

2 Years 0.041% 7.6 ‐10.35 Years 0.533% 19.9 ‐22.510 Years 1.457% 12.3 ‐37.2

2 Years 0.191% 4.8 ‐61.85 Years 0.945% 2.2 ‐96.810 Years 2.207% 4.9 ‐94.1

2 Years 2.399% ‐39.7 ‐271.85 Years 4.058% ‐75.1 ‐214.010 Years 5.118% ‐72.9 ‐199.0

2 Years 3.368% ‐28.8 6.45 Years 4.687% ‐81.4 54.110 Years 5.945% ‐91.2 85.7

2 Years 5.135% ‐45.6 ‐1092.55 Years 7.070% ‐79.4 ‐870.910 Years 8.995% ‐31.6 ‐436.6

2 Years 0.250% 3.0 1.15 Years 0.644% 5.4 ‐18.810 Years 1.654% 10.6 ‐22.2

Portugal

US

Germany

France

Italy

Spain

Commodities Currencies

Last Price Chg. % MTD Chg. % YTD Last Price Chg. % MTD Chg. % YTD

CRB 495.06 0.9% 2.7% Euro/$ 1.2865 2.18% -0.74%WTI Oil 92.02 -4.9% -6.4% £/Euro 1.2555 -0.44% 4.52%Brent Oil 112.19 -1.6% 7.6% Euro/Yen 100.41 1.66% 0.75%Gold 1771.3 4.5% 13.3% Eur/CHF 1.20858 0.60% -0.68%

September – Financial MarketsStock MarketsCountry Indices Last Price Chg. % MTD Chg. % YTD

Portugal PSI 20 5202.76 4.08% -5.31%Spain IBEX35 7708.5 3.88% -10.01%France CAC 40 3354.82 -1.71% 6.17%Germany DAX 30 7216.15 3.52% 22.34%UK FTSE 100 5742.07 0.54% 3.05%Italy FTSE MIB 15095.84 -0.03% 0.04%Switzerland SMI 6495.88 1.69% 9.43%Euro-zone Euro Stoxx 50 2454.26 0.56% 5.94%

US S&P500 1440.67 2.42% 14.56%US Nasdaq 3116.23 1.61% 19.62%Brazil Bovespa 59175.86 3.71% 4.27%Mexico Mexbol 40866.96 3.67% 10.22%

Japan Nikkei 225 8870.16 0.34% 4.91%Hong Kong Hang Seng 20840.38 6.97% 13.05%

ECB: Draghi does it again…• Following his August 2nd speech “The Euro is

Irreversible”, Mario Draghi announced a programfor outright sovereign purchases (maturitiesbetween 1 and 3 years), in order to re‐establishthe effectiveness of monetary policy transmission.Key characteristics are:

o Conditionality: a request for support to theEFSF/ESM is necessary. Such program cantake the form of a full program or aprecautionary program. Purchases will occuras long as the program impliedconditionality is respected. It might beterminated when its objectives have beenreached or when there is non‐compliancewith the program;

o Coverage: only for future cases of EFSF/ESMprograms. Also possible for countries undera current program, when they regain marketaccess (Ireland, Portugal, Greece andCyprus);

o Seniority: the ECB will renounce any claimto seniority in the treatment of its bondholdings accumulated under the OMTprogram (pari passu);

o Sterilization: the purchases will be fullysterilized;

o Transparency: OMT holdings will bepublished on a weekly basis.

4.9%

3.0%4.0%

2.3%

1%

2%

3%

4%

5%

6%

7%

01-Jun 01-Jul 01-Ago 01-Set 01-Out

Yie

ld t

o m

atur

ity

2-year Government bonds -Spain and Italy

Spain Italy

Mario Draghi's Speech "The Euro is Irreversible"

OMT is announced

Source: Bloomberg

0

500

1000

1500

2000

2500

3000

3500

Bill

ion

€

ECB Total AssetsWhat have Mario Draghi said?• “OMT will enable us to address severe distortions

in Government Bond Markets which originatefrom, in particular, unfounded fears on the part ofinvestors of the reversibility of the Euro”;

• He didn´t announced any details on acceptableyields or spreads that could govern potentialinterventions. But broad liquidity conditions willbe taken into account;

• The reason why the ECB will be buying bonds witha maturity not higher than 3 years is that “we actindependently in determining monetary policy”.The ECB may sell the purchased bonds on thesecondary market if it concludes there’s non‐compliance with the program by the country;

• As happened with the LTRO, The OMT will createexcess liquidity. The decision to sterilize it isprobably aimed at reassuring that the OMTprogram will not jeopardize the ECB´s mandateregarding price stability.

0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%5.00%

ECB Main Refinancing RateSource: Bloomberg

Source: Bloomberg

ECB said that economic growth should remain weak…• Bundesbank announced its opposition to the

program. It thinks that the ECB mandate shouldonly be price stability;

• Spain and Italy are the countries that mightbenefit the most from the program. Nevertheless,those countries will need to keep implementingstructural reforms in order to increase theireconomy’s competitiveness;

• From the ECB: “Economic growth in the Euro Areais expected to remain weak, with the ongoingtensions in the financial markets and heighteneduncertainty weighing on confidence andsentiment”. GDP growth forecast for 2012 was cutfrom ‐0.1% to ‐0.4% and in 2013 from 1% to 0.5%;

• Again from the ECB: “Inflation rates are expectedto remain above 2% throughout 2012, to fallbelow that level again in the course of next yearand to remain in line with price stability over thepolicy‐relevant horizon”. The Inflation increaseduring 2012 were due to higher energy prices.

1.70%

3.20% 2.90%

0.30%

-4.40%

2.00%1.40%

-0.50%

0.40%

1.40%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Eurozone: GDP Growth

2.19% 2.18% 2.13%

3.28%

0.29%

1.58%

2.69%2.40%

1.90% 1.80%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Eurozone: CPI

Source: Bloomberg

Source: Bloomberg

German court gives green light to the ESM.• The positive German Court´s decision should

now allow the ESM to be ratified, nearly twoyears after is was first proposed;

• The German Constitutional Court ruled that theESM bail‐out fund is not against the Germanconstitution;

• Nonetheless, it placed a €190bn cap onliabilities, unless Parliament decides to provideadditional guarantees;

• ESM will now gradually increase its total lendingcapacity, in order to reach €500bn by July 2013.Until then, the EFSF will be allowed to fill the gapto ensure a total lending capacity of €500bnfrom now on;

• Together with ECB’s Outright MonetaryTransactions program (OMT), Europeanauthorities hope that a substantial firewall couldnow be in place. Will it be enough to meet Spainand Italy’s joint financing needs?

• The ECB can now deliver…

0 10 20 30 40 50 60 70 80 90

Constitution

Constitutional court

Federal President

Bundesrat (upper chamber)

Bundestag (lower chamber)

Federal government

European Commission

Domestic political parties

Survey results on confidence in German institutions (response in %)

Source: Institut für Demoskopie Allensbach, FAZ

Europe Economy: Business sentiment remains depressed.

Source: Bloomberg

• The Irish economy narrowly avoided acontraction in Q2 2012. GDP growth is estimatedto have been 0.0% qoq, with a subdueddomestic demand. Revised data for Q1 2012showed a ‐0.7% qoq contraction;

• Ifo business survey (Sep) – The headlinecomposite business indicator fell. Thedeterioration was driven by declines in both thecurrent conditions and expectations indices. Thesentiment in the German manufacturing sectorseems to be falling rapidly;

• Business sentiment remains depressed acrossEurope, despite the recent good news (ECBdecision, German constitutional court decision,Dutch general elections and written proposal onbanking union). PMI manufacturing indices forFrance, Italy, UK and Germany are all below 50.The divergence between the German (up from44.7 to 47.3) and the French survey (down to42.6 from 46.0) is quite striking. Should weexpect an ECB rate cut, especially with the euroexchange rate rising?

42

46

50

54

58

62

Jan-10 Set-10 Mai-11 Jan-12 Set-12 Mai-13

Europe: PMI Manufacturing indices

France GermanyItaly EurozoneUK

90

95

100

105

110

115

120

125

Jan-10 Set-10 Mai-11 Jan-12 Set-12 Mai-13

Germany: Ifo business survey

Headline composite Business IndicatorCurrent Conditions IndexExpectation Index

Source: Bloomberg

Spain: NPLs reached a newHistorical high.• According to the Bank of Spain, non‐performing

Loans for the month of July reached 9.88% oftotal loans, above the 1993 previous high;

• With the economy stuck in a recession, a weaklabor market and an increased risk aversion toSpanish assets, bank deposits have beendecreasing. Moreover, the declining bankingloans trend shows that the economy’sdeleveraging process is continuing;

• Last week’s joint statement from the German,Dutch and Finnish ministers increased marketdoubts on whether the rest of euro‐zone willbear the costs of providing support for theregion’s banking sector. Will a full‐blownbanking union really happen in the euro‐zone?

• The head of the Catalan regional governmentannounced that early regional elections will takeplace on 25th November this year (rather thanin 2014 as scheduled). Source: European Cental Bank, Bank of Spain

-10%

-5%

0%

5%

10%

15%

20%

0

200

400

600

800

1000

1200

2002 2004 2006 2008 2010 2012

€Bill

ion

Spain: Deposits

Total Deposits

YoY Growth Rate (rightscale)

300

400

500

600

700

800

900

1000

2002 2004 2006 2008 2010 2012

€Bill

ion

Spain: Loans

Loans Households

Loans Non FinancialCorporations

0%

2%

4%

6%

8%

10%

1962 1967 1972 1977 1982 1987 1992 1997 2002 2007 2012

Spain: Non-performing loans

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.An 1.5% contraction is expected for 2012,followed by a 0.5% fall next year. Will the laterforecast prove to be too optimistic?

• Tax revenues are expected to increase by justunder 4% (Will it be possible with the localeconomy stuck in a recession?). Ministryspending is going to be cut by 8.9% and publicservant wages should be frozen;

• New laws should be introduced in the next 6months to liberalize the energy, services andtelecom sectors. New measures are expected toreform public administration and reform thelabor market (including wage bargaining);

• These two announcements can probably helpSpain to demand support from an EFSF/ESMprogram by fulfilling required conditionality;

• The Oliver Wyman bottom‐up Stress Test results,published last Friday, revealed a capital deficitpost tax effects of €53.7bn.

Macro assumptions and fiscal forecasts2011 2012 2013 2014

Assumed GDP growth (% yoy) 0.7 ‐1.5 ‐0.5 1.2Output gap (%) ‐4.6 ‐4.7 ‐3.8 ‐2.7

Fiscal balance and target (% GDP) ‐8.9 ‐6.3 ‐4.5 ‐2.8Change in fiscal balance (% GDP) 0.4 2.6 1.8 1.7

Fiscal tightening (% GDP) 0.0 2.7 1.4 1.2Primary fiscal tightening (% GDP) 0.5 3.5 2.0 1.1Source: Ministry of Treasury and Public Administration

60

80

100

120

2006 2007 2008 2009 2010 2011 2012

Spain: EC Economic Sentiment Index

Source: Bloomberg

Spain: Stress Test results reveala €53.7bn capital deficit.• This is an important milestone in the ongoing

restructuring process that has been agreed uponwith Eurogroup on July 20, 2012;

• The financial institutions which have shortfallswill have to prepare recapitalization plans. Theirbusiness plans will be reviewed in early October.The recapitalization period should last until mid‐2013. Recapitalization plans could include assetsales, capital raising and liability managementexercices;

• According to the results published, Popular has a€3.2bn capital deficit. The bank has a €700mnpending right issue;

• In June, the Spanish government hiredconsultants Oliver Wyman and Roland Berger toconduct a transparency exercise. A top‐downstress test on the 14 largest Spanish bankinggroups assessed the aggregate capital shortfall at€16‐25bn in the base case and €52‐62bn underadverse scenarios.

Source: Oliver Wyman Report

Capital needs ‐ Base Scenario (€bn)Capital Capital

Financial Expected Loss excess excessInstituion Loss Absorption (pre‐tax) (post‐tax)

Santander 22 43 21.3 19.2BBVA ‐ UNNIM 20 31 10.9 10.9La Caixa 22 32 10.2 9.4Sabadell ‐ CAM 18 22 4.4 3.3Kutxabank ‐ Cajasur 5 8 3.4 3.1Unicaja ‐ CEISS 7 8 1.0 1.3Popular ‐ Pastor 15 16 0.5 0.7Bankinter 2 3 0.6 0.4Libercaja 11 11 0.4 0.5BMN 6 6 ‐0.4 ‐0.4Banco Valencia 4 2 ‐1.7 ‐1.8NCG 9 6 ‐3.6 ‐4.0Catalunya Banc 13 6 ‐6.2 ‐6.5BFA ‐ Bankia 30 17 ‐12.2 ‐13.2

Total 183 212 ‐24.1 ‐25.9

Capital needs ‐ Adverse Scenario (€bn)Capital Capital

Financial Expected Loss excess excessInstituion Loss Absorption (pre‐tax) (post‐tax)

Santander 34 59 24.4 25.3BBVA ‐ UNNIM 31 40 8.2 11.2La Caixa 33 37 3.9 5.7Kutxabank ‐ Cajasur 7 9 1.8 2.2Sabadell ‐ CAM 25 26 0.6 0.9Bankinter 3 4 0.3 0.4Unicaja ‐ CEISS 10 9 ‐0.9 0.1BMN 9 6 ‐3.1 ‐2.2Libercaja 16 12 ‐3.4 ‐2.1Banco Valencia 6 2 ‐3.4 ‐3.5Popular ‐ Pastor 22 17 ‐5.5 ‐3.2NCG 13 6 ‐6.8 ‐7.2Catalunya Banc 17 7 ‐10.5 ‐10.8BFA ‐ Bankia 43 19 ‐23.7 ‐24.7

Total 270 252 ‐57.3 ‐53.7

New Previous New Previous

Budget Deficit (% GDP) 2.6% 1.7% 1.8% 0.5%Debt‐to‐GDP ratio 126.4% 123.4% 126.1% 121.5%Real GDP growth rate ‐2.4% ‐1.2% ‐0.2%

2012 E 2013 F

-1.91%

-4%

-2%

0%

2%

4%

1988 1991 1994 1997 2000 2003 2006 2009 2012

Italy: Current Account Balance(% GDP)

-2.60%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

2000 2003 2006 2009 2012

Italy: Real GDP(% YoY)

Italy: a weak economic backdrop…• Mario Monti’s government has pursued an

ambitious agenda of fiscal consolidation andstructural reforms, not always with success.Nonetheless, it has been in line with what theEuropean policymakers are keen to see;

• The large size of government refinancing makesItaly sensitive to changes in market sentiment;

• Market pressure could be the trigger to Italydemand some degree of sovereign support. OnceSpain applies for financial support, marketpressures on Italy may increase;

• ECB’s Outright Monetary Transactions mechanismcould be important to reduce Italy’s funding costs.Conditionality (beyond what’s already beenagreed) could be a political problem, mainlybecause of the technocratic nature of the currentgovernment;

• Forward looking indicators points to a weakeconomy. Local firms expects a furtherdeterioration in their order books. Italy’s currentaccount deficit is narrowing.

Source: Italian Government

Source: Bloomberg

Source: Bloomberg

Greece’s pain continues.• The leaders of Greece’s fractious coalition

government announced a basic agreement overan austerity package that will allow the country tocut €11.5bn in expenses and raise €2bn throughnew taxes;

• The Government intends to cut pensions andsalaries. Moreover, it wants to improve andincrease tax collection;

• Antonis Samaras intends to make a formal requestat next month’s EU summit for the country’sprogram to be extended by 2 years until 2016. Theproblem is how to meet the additional fundingthat would be required;

• Troika is still pushing Greece towards newmeasures that could deepen labor market reformsand reform the local public administration;

• Greece’s 2013 budget will probably sustain thecountry’s severe economic recession.

-10%-8%-6%-4%-2%0%2%4%6%8%

10%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Greece: GDP Growth

Greece: Redemptions Calendar of Tradable Debt (M)

14.031,00 € 13.212,00 € 15.818,00 € 7.055,00 € 3.442,00 €

59.459,00 €

23.040,00 €5.823,00 € 1.366,00 €

143.710,00 €

286.956,00 €

2012 2013 2014 2015 2016 2017 2018 2019 2020 >2021 Total

Source: Bloomberg

Source: Bloomberg

France unveils a tough budget.

• The Government announced that it willimplement new austerity measures to cut itsBudget Deficit to 3% of the GDP in 2013, from4.5% this year;

• Taxes on big companies will generate €10bn,mainly through the removal of various taxdeductions and exemptions. €10bn expected tobe raised from household will hit top earners;

• A freeze in nominal terms in governmentspending is expected to save €10bn in 2013;

• A new 45% marginal income tax will apply toearned income above €150,000 a year;

• The French debt agency projects that France´sdebt should increase to more than 91% of GDPnext year. Nonetheless, France has borrowed atrecord low levels of interest, recently.

Source: Bloomberg and French Government

2.90%2.30%

2.70%3.30%

7.50%7.10%

5.20%4.50%

3.00%

2005 2006 2007 2008 2009 2010 2011 2012F 2013F

France: Government Deficit as % of GDP

• The global slowdown is taking a greater toll inthe US manufacturing sector. Manufacturingoutput fell by 0.7% mom. The forward‐lookingISM Manufacturing remained below 50 inAugust;

• Other parts of the economy are less exposed tooverseas events. The ISM non‐manufacturinghas risen to 53.7, from 52.6;

• The economy only created 96,000 jobs inAugust. The employment‐to‐population ratio isat a 12‐month low of 58.3%;

• Retail sales excluding motor vehicles, gasolineand building materials fell by 0.1 mom in August.Nonetheless, this fall may partly be a paybackafter the strong rise in July;

• The continuing recovery in the NAHBhomebuilders index points to increasedconfidence in the sector;

• Despite higher gasoline prices, the ConferenceBoard measure of US consumer confidenceincreased to a seven‐month high in September.

US Economy: still expanding at a moderate rate…

53.749.6

30

40

50

60

70

1997 1999 2001 2003 2005 2007 2009 2011 2013

ISM Activity Indices

ISM Non-Manufacturing Index

ISM Manufacturing Index

Source: Bloomberg

94

37

0510152025303540

-200

-100

0

100

200

300

400

2010 2011 2012 2013

Change in Non-Farm Payroll Employment (000s) and NAHB Market Index

Change in Non-Farm Payroll Employment (3 month average)National Association of home builders Market Index (right scale)

Source: Bloomberg

4%

5%

6%

7%

8%

9%

10%

2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F

Unemployment rate: FOMC Economic Projections

MaxaverageMin

FED announced an open‐ended QE3• “The Committee seeks to foster maximum

employment and price stability. The Committee isconcerned that, without further policyaccommodation, economic growth might not bestrong enough to generate sustained improvementin Labor Market Conditions”;

• $40bn in Mortgage Backed Securities will bepurchased per month. the Fed intends to continuethose purchases until the outlook for the labormarket has improved;

• The FOMC extended its conditional commitment toleave its policy rate at near zero until mid 2015.Additionally, the FED added that "a highlyaccommodative stance of monetary policy willremain appropriate for a considerable time afterthe economy strengthens.“;

• Operation TWIST will be maintained until the end ofthe year;

• Future policy action will depend on how economicconditions develop, particularly the unemploymentrate.

Source: Bloomberg; US Federal Reserve

-4%

-3%

-2%

-1%

1%

2%

3%

4%

5%

2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F

GDP: FOMC Economic Projections

Max average Min

1.0%

1.5%

2.0%

2.5%

2005 2006 2007 2008 2009 2010 2011 2012E 2013F 2014F 2015F

Core PCE inflation: FOMC Economic Projections

Max average Min

Will QE3 be a success?• Only one FOMC member voted against QE3.

According to Jeffrey Lacker, Richmond FED’sPresident: “Further Monetary stimulus is nowunlikely to result in a discernible improvement ingrowth, but if it does, it’s also like to cause anunwanted increase in inflation”;

• Will a further fall in mortgages rates help thehousing recovery, when rates are already a lowlevels? Additionally, many household will still notqualify for a new loan;

• QE programs have usually a positive effect onstock markets;

• QE3 should increase the Federal Reserve’smonetary base even further. What will be thelong‐term consequences of that Balance Sheetexpansion? Nonetheless, bank loans have beenincreasing more moderately;

• Are higher inflation expectations going to be theresult of QE3 announcement?

Source: Bllomberg; US Federal Reserve

Source: Bllomberg; US Federal Reserve

600

800

1000

1200

1400

1600

2008 2009 2010 2011 2012

S&P500

QE1 Start

End ofQE1 QE2 Start

End ofQE2

OperationTWIST Start

QE3

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

2008 2009 2010 2011 2012

Bill

ion

$

FED Total Assets

QE1 Start

End ofQE1

End ofQE2

QE2 Start

OperationTWIST Start

Bank of Japan increased its QE Program.• Bank of Japan announced that it will increase its

Asset Purchase Program in ¥10Tn to ¥80,2Tn. Thiswill be done by buying ¥5Tn of Treasury DiscountBills and ¥5Tn in Japanese Government Bonds(JGB);

• The increased short‐term purchasing budget istargeted to end by June 2013. The long‐term JGBpurchasing budget is extended to the end ofDecember 2013;

• Also important was the decision to abolish the10bp minimum bidding yield on long‐term JGBpurchases;

• The Central Bank is trying to increase theeconomy’s growth rate. Moreover, the bank mightalso want to prevent a higher appreciation of itscurrency. As BOJ Governor’s Shirakawa said: “astronger Yen causes a decline in exports andcorporate profits as well as a deterioration inbusiness sentiment”;

• BoJ has revised its 2012 growth forecasts from2.3% to 2.2%.

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1996 1998 2000 2002 2004 2006 2008 2010 2012

Japan: GDP Growth (YoY)

Source: Bloomberg

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1998 2000 2002 2004 2006 2008 2010 2012

JPY

mill

ion

BoJ Total Assets

Source: Bloomberg

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 ChinaSea;

• Different interpretations of the islands’ historyexplain the dispute. The Chinese claim that theydiscovered the archipelago in the XXIV Century.The Japanese say that their country legallyincorporated the islands after the first Sino‐Japanese War in 1895. They claim that they foundthe islands inhabited with no signs of being underChina’s control prior to 1895;

• After WWII, United States occupied thearchipelago. It was returned to Japanese controlin 1971;

• The dispute started in 1969, after United Nationsstated that the area could be rich in oil and gas.

Iran threats to block the Strait of Hormuz

• Following various sanctions from Western nationsdue to Iran’s nuclear program, the countrythreatened to block the Strait of Hormuz, in aneffort to hamper Europe access to oil;

• Netanyahu claimed that diplomatic and economicsanctions have failed to prevent Iran fromdeveloping its nuclear program. According to theIsraeli prime minister, the world should set a clearlimit for Iran’s nuclear enrichment program (“redline” for Tehran);

• Meanwhile, the US and 29 other countries ledsome mine‐clearing exercises in the Gulf Persianregion;

• And what about Iran? It undertook militaryexercises with missiles capable to hit warshipvessels.

• The Government should announce new measuresto comply with Troika’s 5th quarterly review. Thenew budget targets are: 5% of GDP in 2012, 4.5%in 2013 and 2.5% in 2014;

• The Portuguese economy should contract 3% in2012 and 1% in 2013;

• Additional measures will have to be announced asthe planned increase of the employee’s socialcontribution (from 11% to 18%) in combinationwith a reduction of employer’s rate (from 23.75%to 18%) caused wide‐spread protests and forcedthe Portuguese Government to cancel them.

Portugal Economy ‐ Newausterity measures areexpected.

Portuguese Companies –BCP’s right issue

• BCP issued €500mn through a rights offering.12,500,000,000 new shares will be issued at asubscription price of €0.04. The new shares areexpected to start trading on October 10th;

• Results from the rights offering will bepublished tomorrow. Let´s see if there´s goingto be any change in the bank’s shareholdersstructure;

• There’s been increased news flow regarding apossible Zon‐Sonaecom merger. Optimus’ CEOunderlined the benefits of a merger betweenthe two companies during an interview to aPortuguese newspaper.

• ECB meeting: Will the bank announce a interestrate cut? Probably not. But, Draghi may indicatethat the bank could reduce the policy ratefurther in the future and push the deposit rateinto negative territory;

• US Q3 earnings season is poised to start. TheS&P 500 Q3 EPS forecast dropped 4.8% fromJune to the end of August. The trend flattenedin September;

• Will Spain ask for EFSF/ESM support? TheSpanish Government seems to remainundecided regarding a bailout. Key regionalelections will be held on October 21st. Afterthese elections, the Spanish treasury faces largeredemptions on 29Th and 31st of October (totalof €20.3bn). Pressure from the market, otherEuropean countries or the ECB could ultimatelypush Spain to ask for EFSF/ESM support;

• Economic data from the US, the euro‐zone andChina will be followed closely.

October – What to expect?Event calendar for October

Oct 1 China Manufacturing PMIUS ISMEZ PMI Manufacturing

Oct 3 US First presidential debate elections

Oct 4 EZ ECB meeting

Oct 5 US Change in Non‐Farm Payrolls

Oct 8‐9 EU Eurogroup/Ecofin meetings

Oct 11 US US Elections‐Vice presidential debate

Oct 12‐14 IMF Annual meeting

Oct 15 US Advance retail sales

Oct 16 US Second presidential debate

Oct 18‐19 EU European Council meeting

Oct 22 US Third presidential debate

Oct 24 US FOMC meetingGER IFO ‐ Business Climate

13.59

0

5

10

15

20

25

30

35

NT

M P

/E (x

)

S&P 500: Historical NTM P/E

P/E

3-yr rolling average

• S&P 500 has risen 14.56% YTD;• Central Banks to the Rescue – Market’s

response to monetary policy stimulus is usuallypositive. QE3 and the extension of OperationTwist by the FED has allowed the “risk on” tradeto continue;

• What could stop the rally?o We continue to look carefully to economic

data and earnings growth;o The fiscal cliff and uncertain election

outcomes. These two issues couldprogressively become more important forthe market;

o A setback in Eurozone that increases riskaversion;

o QE side effects – Will long‐run inflationexpectations rise? Inflation expectationsare one of the main drivers of equitymultiples.

• Until one of these issues grab headlines, thecurrent market rally could continue.

US Equity Market… Unstoppable?

13.4%5.4%

15.1%

47.3%

14.8%

-40.0%

-5.9%

14.7%13.0%

23.8%18.8%

18.5%

-30.8%

8.6%

S&P 500: 12 month EPS growth rate(Operating earnings. Estimates are bottom up)

Source: Standard&Poors

Source: Standard&Poors

5 11

88

176

35

01-05 08-12 15-19 22-26 29-31

S&P500: Weekly Number of Companies Reporting Earnings

US Equity Market: Q3 earnings report will start.

Source: Standard&Poors

Operating EarningsPer Share 2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3by Economic Sector Change Est. Forecast

S&P 500 qoq 1.7% -6.2% 2.1% 4.9% -1.7%yoy 17.3% 8.2% 7.4% 2.3% -1.1%

Consumer qoq -3.7% 7.7% -12.0% 7.9% 1.1%Discretionary yoy 16.9% 10.5% 5.1% -1.5% 3.5%

Consumer Staples qoq 2.2% 0.9% -9.0% 8.3% 1.6%yoy 10.0% 5.7% 2.8% 1.7% 1.1%

Energy qoq 8.7% -28.8% 14.7% 6.0% -10.7%yoy 68.2% 10.3% 6.6% -5.9% -22.7%

Financials qoq 13.4% -9.6% -3.0% 11.5% -3.2%yoy 14.3% 18.1% 4.8% 10.9% -5.4%

Health Care qoq -6.9% -3.9% 12.8% -4.0% 3.6%yoy 3.5% 3.5% 8.4% -3.0% 7.9%

Industrials qoq -1.8% -0.4% 1.1% 12.6% -5.2%yoy 12.2% 3.4% 20.2% 11.4% 7.5%

Information qoq -4.8% 26.5% -10.7% -1.6% 1.5%Technology yoy 9.3% 17.2% 15.2% 5.9% 12.8%

Materials qoq -27.9% -52.3% 126.2% 5.4% -26.0%yoy 20.6% -45.3% -14.7% -18.0% -15.8%

Telecommunication qoq 9.6% -37.9% 57.0% 20.5% -19.2%Servies yoy 6.0% -25.8% -0.5% 28.7% -5.1%

Utilities qoq 43.9% -43.8% 28.4% -10.1% 49.3%yoy 0.5% 7.4% -5.4% -6.6% -3.1%

• Given the current macro environment, Q32012 report season will probably confirm thecurrent earnings slowdown trend;

• FedEx, Caterpillar and Intel have provided newand lower, earnings guidance;

• Q3 2012 EPS estimates have been falling,which should provide some cushion;

• The rally has been driven by a compression ofthe risk premium related to the Europeansovereign crisis. QE also became an importantdriver of return;

• Going forward, are more supportive data ongrowth and earnings going to be necessary tosustain the rally?

Source: Bloomberg

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.

Source: Bloomberg

Day Company Estimated EPS ($) 03 MONSANTO CO ‐ 0.44   09 CHEVRON CORP 2.99   

ALCOA INC 0.01   12 WELLS FARGO & CO 0.86   

GOOGLE INC‐CL A 10.52   JPMORGAN CHASE & CO 1.15   

15 CITIGROUP INC 0.97   16 INTEL CORP 0.50   

COCA‐COLA CO/THE 0.50   GOLDMAN SACHS GROUP INC 2.09   

17 HALLIBURTON CO 0.70   PEPSICO INC 1.16   BANK OF AMERICA CORP 0.15   

18 MICROSOFT CORP 0.60   YAHOO! INC 0.26   JOHNSON & JOHNSON 1.21   VERIZON COMMUNICATIONS INC 0.65   PHILIP MORRIS INTERNATIONAL 1.38   

Day Company Estimated EPS ($) 19 GENERAL ELECTRIC CO 0.36   

MCDONALD'S CORP 1.48   MORGAN STANLEY 0.23   AMERICAN EXPRESS CO 1.08   

23 APPLE INC 8.89   XEROX CORP 0.25   

24 BOEING CO/THE 1.12   CATERPILLAR INC 2.27   AT&T INC 0.63   

25 UNITED PARCEL SERVICE‐CL B 1.07   UNITED STATES STEEL CORP 0.01   COLGATE‐PALMOLIVE CO 1.38   AMAZON.COM INC ‐ 0.09   

26 FORD MOTOR CO 0.28   EXXON MOBIL CORP 1.89   MOTOROLA SOLUTIONS INC 0.73   PROCTER & GAMBLE CO/THE 0.96   CONOCOPHILLIPS 1.13   

30 PFIZER INC 0.53   Source: Bloomberg

Charts we are watching.

• The economic surprises indices showed apositive evolution during the last few months.This too has been a positive support for riskassets. After this upward movement, are wegoing to see a new deterioration?

-120

-80

-40

0

40

80

Jan-11 Jun-11 Nov-11 Apr-12 Sep-12

Citigroup Economic Surprise Indices

Major Economies

US

Eurozone

Source: Bloomberg

1500

2000

2500

3000

3500

4000

4500

5000

5500

600

800

1000

1200

1400

1600

1996 2000 2004 2008 2012

S&P 500 and Euro Stoxx 50

S&P 500 Euro Stoxx 50 (Right Scale)

Source: Bloomberg

• The US market is getting closer to its pre‐crisispeak. The European market (measured byEuro Stoxx 50 index) is clearly lagging. Thesovereign debt crisis is taking its toll.

Charts we are watching.

• China’s underlying growth momentum has notshown a meaningful recovery so far.

Source: Bloomberg

Source: Bloomberg

• The 4th quarter usually shows a positivereturn. However, one must not forget that S&P500 already displays significant gains since thebeginning of 2012. US Presidential election(November 6th) and the fiscal cliff issue couldincrease stock market’s volatility.

35

40

45

50

55

60

2005 2006 2007 2008 2009 2010 2011 2012

China: PMI Manufacturing

1.26%

-0.19%

0.55%

1.24%

-0.15%

0.75%

1.48%

0.74%

-1.11%

0.41%0.61%

1.44%

January February March April May June July August September October November December

S&P500: Monthly Average Return

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