Weekly Markets

Perspectives

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

n

Oct

ob

er

15

th,

20

12

4 weeks after the FED announced QE3, equity

markets are showing some weakness. Last week,

S&P 500 had the biggest weekly retreat since

June.

Bank stocks sold off on JPM/WFC earnings. JPM

usually sets the tone for the rest of the bank

earnings season. So, we’ll watch closely market

reaction to Citigroup, Goldman and Bank of

America’s earnings reports. For the second quarter

in a row, S&P 500, (excluding Financials) earnings

are expected to contract compared to prior year

levels. EPS expectations have fallen substantially,

especially following Q2 2012 reports. Q3 estimates

are 4.6% below June-end levels.

The IMF published its World Economic Outlook.

The global economy is expected to maintain a

sluggish growth rate. Meanwhile, the IMF’s Lagarde

backed giving Greece two more years to hit fiscal

targets.

Weekly FocusThe Fed’s latest Beige Book indicated that activity

has still “expanded modestly”. However, it

frequently mentioned the ‘fiscal cliff’.

There were some encouraging signs that credit

markets in the periphery are continuing to open

up with some issuers tapping bond markets

during last week.

Equity and bond markets market largely

shrugged off S&P’s downgrade of Spain.

Nonetheless, with regional elections on the

October 21st and large redemptions at the end of

the month, markets should remain focused in

Spain.

Galp has released its Q3 trading update.

Production on an entitlement basis rose 4% q/q

and 60% y/y. Refining margins were strong.

Natural gas sales increased 26.9% y/y.

EcoFin Meeting – ESM and a

Financial Transaction Tax• ESM becomes operational - The ESM was ratified

by all the 17 Euro area members. The mechanism

has a capital base of €700bn. The initial

maximum lending capacity will be €500bn;

• The ESM should replace the EFSF (European

Financial Stability Facility) and the EFSM

(European Financial Stabilization Mechanism).

But, during the next 9 months, it will operate

alongside with the EFSF;

• The ESM will only provide financial assistance to

countries under strictly economic policy

conditionality;

• 11 Member States agreed to back a financial

transactions tax: Belgium, Germany, Greece,

France, Austria, Slovenia, Portugal, Estonia,

Spain, Italy and Slovakia.

• According to the Ecofin: “… good track in

implementing policy conditionality and the fiscal

impact of the faster than expected rebalancing of

the Portuguese Economy, the Eurogroup conjures

with the agreement reached between the

authorities and the Troika on revised fiscal

budgets, in conjunction with the proposed revised

recommendation of the Council regarding the

excessive deficit procedure.”;

• The Eurogroup approved the next tranche of

support to Portugal (€800mn from the EFSF). This

should now allow the Ecofin and IMF to approve

their shares of €2bn (from the EFSM) and €1.5bn,

respectively;

• The Eurogroup has welcomed the “government´s

active preparation of a return to the financial

markets in 2013”.

Portugal is still complying

with its program…

IMF: WEO points to sluggish growth… were you surprised?• According to IMF’s latest World Outlook, global

growth is expected to be 3.3% and 3.6% in 2012

and 2013, respectively. This marks a downward

revision from 3.5% and 3.9% back in July;

• There’s still tail risks for the global economy, such

as the viability of the euro area and possible major

US fiscal policy mistakes;

• The IMF warned of an high risk of a stronger

global slowdown given US fiscal issues. In China,

the IMF doesn’t see a hard landing. It warned that

delays in resolving the Eurozone crisis could see

European banks balance sheet contract severely;

• Regarding Europe, the report says that “the

recession in most of the periphery is increasingly

spilling into other economies in the region”;

• According to the IMF, the OMT program was a

step in the right direction. A moderate pickup is

expected in 2013. Is it a reasonable expectation?

• Regarding the US: “… a modest recovery with

weak job creation continues... although the

housing market is stabilizing…”

Source: World Economic Outlook, October 2012 , IMF

October Projections

Region 2012 2013 2012 2013

World Output 3.5% 3.9% 3.3% 3.6%

Advanced Economies 1.4% 1.8% 1.3% 1.5%

US 2.1% 2.2% 2.2% 2.1%

Euro Area -0.3% 0.7% -0.4% 0.2%

Germany 0.9% 1.4% 0.9% 0.9%

France 0.3% 0.9% 0.1% 0.4%

Italy -1.9% -0.3% -2.3% -0.7%

Spain -1.4% -0.6% -1.5% -1.3%

United Kingdon 0.2% 1.4% -0.4% 1.1%

Japan 2.4% 1.5% 2.2% 1.2%

Canada 2.1% 2.2% 1.9% 2.0%

Emerging Markets 5.6% 5.8% 5.3% 5.6%

Russia 4.0% 3.9% 3.7% 3.8%

China 8.0% 8.4% 7.8% 8.2%

India 6.2% 6.6% 4.9% 6.0%

Brazil 2.5% 4.7% 1.5% 4.0%

Mexico 3.9% 3.7% 3.8% 3.5%

July Projections

0%

2%

4%

6%

8%

10%

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Spain: NPLs

S&P cut Spain to BBB-• S&P downgraded the sovereign 2 notches to BBB-.

The outlook remains negative;

• S&P had a higher rating relative to Moody’s

(Baa3/review for possible downgrade) and Fitch

(BBB/Negative);

• S&P said that “The negative outlook on the long-

term rating reflects … the significant risks to Spain’s

economic growth and budgetary performance, and

the lack of a clear direction in euro-zone policy”;

• How close Spain will get to its growth and budget

targets next year will probably be decisive for S&P;

• Moody’s will announce the results of their review

this month. Will Moody´s downgrade Spain to HY?

Source: Bank of Spain

• August´s rise in Eurozone industrial points to a

less downbeat economy in Q3;

• The 0.6% rise in August was the 3rd monthly

increase in the past 4 months;

• Most Eurozone economies recorded monthly

gains;

• Nonetheless, key Eurozone business surveys

have been suggesting a economic contraction

in Q3.

Is the euro economy

recovering?

Source: Eurostat

Durable Non-Durable

Capital GoodsCons. Goods Cons. Goods

m/m % y/y % m/m % m/m % m/m %

May 1.0 -2.6 1.3 0.5 2.0

Jun -0.5 -2.0 -1.1 0.4 -0.7

Jul 0.6 -2.8 2.0 -0.4 -0.4

Aug 0.6 -2.9 0.7 3.9 1.3

Industrial Production

9.90%

3%

7%

11%

15%

19%

23%

2005 2007 2009 2011 2013

China: overseas shipments(y/y change)

US households confidence

increase to a five-year high• The monthly trade deficit increased to $44.2bn in

August, due to a drop in exports and an increase in

the value of petroleum-related imports;

• Exports fell 1.0% m/m, the second consecutive

monthly decline, as the impact of the global

slowdown feeds through;

• The University of Michigan’s measure of US

consumer confidence reached a 5-year high of 83.1

in October. The index is now inching closer to the

historical average of 85.4;

• Households’ one-year ahead inflation expectations

fell to a four-month low of 3.1%.

• Overseas shipments increased 9.9% y/y . The

fastest pace could suggest some encouraging

signs on the external front. Imports rose 2.4%

y/y, leaving a $27.7bn trade surplus, the

biggest since June 2012;

• China’s M2 gained 14.8% in September.

Foreign-exchange reserves rose to $3.29tr at

the end of September;

• Copper imports rose to a 4-month high.

Purchases of iron ore where the biggest in

volume terms since January 2011.

China’s exports rose 9.9%

y/y in September

University of Michigan Consumer Confidence (Balances)

Jun Jul Aug Sep Oct

Consumer confidence 73.2 72.3 74.3 78.3 83.1

Present situation 81.5 82.7 88.7 85.7 88.6

Expectations 67.8 65.6 65.1 73.5 79.5

Inflation Expectations 1-yr ahead 3.1 3.0 3.6 3.3 3.1

Source: U. of Michigan Survey Research CenterSource: Bloomberg

5%

10%

15%

20%

25%

30%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Brazil's SELIC

70

80

90

100

110

120

130

2007 2008 2009 2010 2011 2012

JP

Y p

er 1

US

D

JPYUSD Exchange Rate

Brazil: Has the easing cycle

ended?• The COPOM (Central Bank Monetary Policy

Committee) cut the policy rate by 25 basis points

to 7.25%. The decision was not unanimous;

• The post meeting policy statement seems to

point to the end of the easing cycle and an

unchanged Selic for a prolonged period of time;

• But, the central bank is still concerned with the

external backdrop…

Source: Bank of Brazil

Bank of Korea, Turkey and

Japan• Bank of Korea cut interest rates by 25 basis

points, from 3% to 2.75%;

• Instability continues around Turkey and Syria;

• BOJ's Shirakawa said yen strength is hurting

exporters. The government downgraded its

economic assessment for a third month. Japan’s

Economic Minister said “It’s necessary to take a

proper response on both fiscal and financial

fronts”.

Source: Bloomberg

-3.02%

3.73%

1.30%

-0.58%

2.03%

-0.55%

0.16%0.43%

1.71%

0.36%

1.07%0.87%

-0.50%-0.32%

2.23%1.94%

-0.38%

-1.33%

1.41%

-2.21%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

1-Ju

n

8-Ju

n

15-J

un

22-J

un

29-J

un

6-Ju

l

13-J

ul

20-J

ul

27-J

ul

3-A

go

10-A

go

17-A

go

24-A

go

31-A

go

7-Se

t

14-S

et

21-S

et

28-S

et

5-O

ut

12-O

ut

S&P500: Weekly Returns

114.64

80

90

100

110

120

130

Jan Feb Mar Apr May Jun Jul Aug Sep Oct

USD

per

Bar

rel

Brent

4.673

3.50

4.00

4.50

5.00

5.50

June-12 July-12 August-12 September-12 October-12

Pric

e in

€

STMicroelectronics

• Last week, S&P 500 had the biggest weekly retreat

since June. All 10 sectors in the index fell. AMD cut

sales forecast. Alcoa reduced its global aluminum

outlook. IMF reduced its global growth estimate for

2012. Apple showed a third straight weekly loss;

• Brent oil price remains in focus due to increasing

Middle East tensions. Europe could tighten sanctions

on Iran, because of the country’s nuclear program.

Moreover, There’s heightening fears that Syria's civil

war would drag in Turkey. Last Friday, the International

Energy Agency reduced its forecast for global demand,

saying slower economic growth may limit fuel

consumption;

• STMicroelectronics (STM FP) shares rose after the

company said that it is evaluating a breakup of its

analog business from its digital assets. It may lead to

the sale of its struggling mobile-phone chip business.

A final decision could come before year-end. The

company plans to announce Q3 earnings on October

23rd.

Last week’s market highlights

Source: Bloomberg

What we are watching this week:• China will release a lot of economic

data: CPI (today), Q3 GDP, retail sales

and industrial production (all

Thursday);

• In the US, retail sales (Sep.) will be

announced today. It could give some

more signs about private consumption

in Q3;

• This week, Spain will tap again the

bond market. It could be important for

market sentiment;

• European leaders will hold a two-days

summit in Brussels (starting next

Thursday). Greek Prime Minister

Antonis Samaras expects to agree a

new austerity package with the troika

by the time EU leaders meet on

October 18-19th;

• In Portugal, next Friday will be held the

Extraordinary General Meeting for

shareholders of Teixeira Duarte.

CALENDAR - Event Date (GMT) Hour Survey Prior

CPI Y/Y, China 10-15-2012 02:30 1.90% 2.00%

Industrial Production MoM, Japan 10-15-2012 05:30 Not Available -1.30%

General Government Debt, Italy 10-15-2012 09:30 Not Available 1,967.5B

Empire Manufacturing, US 10-15-2012 13:30 -48 -10.41

Advanced Retail Sales, US 10-15-2012 13:30 0.80% 0.90%

France issues €7bn in 3, 6 and 12M TB 10-15-2012 14:00 Not Available Not Available

CPI Y/Y, UK 10-16-2012 09:30 2.10% 2.10%

Spain issues 12 and 18M TB 10-16-2012 09:30 Not Available Not Available

Greece issues €1.25bn in 3M TB 10-16-2012 10:00 Not Available Not Available

CPI Y/Y, Euro Zone 10-16-2012 10:00 2.70% 2.70%

Trade Balance, Euro Zone 10-16-2012 10:00 10B 15.6B

Zew Survey Current Situation, Germany 10-16-2012 10:00 11.8 12.6

Zew Survey Economic Sentiment, Germany 10-16-2012 10:00 -14.9 -18.2

CPI M/M, US 10-16-2012 13:30 0.50% 0.60%

Bank of Italy Releases Quarterly Economic Bulletins 10-16-2012 14:00 Not Available Not Available

Industrial Production, US 10-16-2012 14:15 0.20% -1.20%

Machine Tool Orders Y/Y, Japan 10-17-2012 07:00 Not Available -3.00%

Bank of England Minutes 10-17-2012 09:30 Not Available Not Available

Retail Sales Ex Auto Fuel M/M, US 10-17-2012 09:30 0.30% -0.30%

Germany issues €5bn in 2Y GB 10-17-2012 10:30 Not Available Not Available

Portugal issues 3, 6 and 12M TB 10-17-2012 10:30 Not Available Not Available

German Government Releases Macro-Economic Forecasts 10-17-2012 11:00 Not Available Not Available

MBA Mortgage Applications, US 10-17-2012 12:00 Not Available -1.20%

Housing Starts, US 10-17-2012 13:30 770K 750K

Building Permits, US 10-17-2012 13:30 810K 803K

EU Leaders start 2 days Summit in Brussels 10-18-2012 Not Available Not Available Not Available

Spain issues 3, 4 and 10Y 10-18-2012 09:30 Not Available Not Available

France issues 2 ,3 , 4 and 5Y Notes 10-18-2012 09:50 Not Available Not Available

Real GDP YoY China 10-18-2012 02:30 7.40% 7.60%

Industrial Production YoY China 10-18-2012 02:30 9.00% 8.90%

COPOM Meeting Minutes, Brazil 10-18-2012 12:30 Not Available Not Available

Initial Jobless Claims, US 10-18-2012 13:30 365K 339K

Philadelphia Manufacturing FED, US 10-18-2012 15:00 0.4 -1.9

Leading Indicators, US 10-18-2012 15:00 0.20% -0.10%

Bank of Portugal releases Monthly Economic Indicators Report 10-19-2012 Not Available Not Available Not Available

Existing Home Sales, US 10-19-2012 15:00 4.72M 4.82M

Next Week Preview: Q3 European results • The European Q3 results season kicks

in this week with several big

companies expected to report;

• Nestle will announce Thursday its 9M

sales. The stock is at a all-time high;

• Roche is expected to report Q3 sales

tomorrow;

• BHP Billiton and Rio Tinto will release

production updates this week;

• Besides Nestle, in the consumer

staples sector, Diageo, SABMiller and

Danone should announce trading

updates. Will the sector continue to

show resilience in the current

environment?

• In the European technology sector,

we’ll have ASML and Nokia. Nokia is

obviously a highlight. The company is

probably still losing market share to

Apple and Samsung, driving down

earnings.

Next week's key results: Consensus

Monday 15th

H&M September Sales Total sales growth +14% y/y; LFL growth +4%

LVMH Q3 Sales Sales €6.875bn

Casino Q3 Sales Sales €11.66bn

Tuesday 16th

Accor Q3 Sales

Roche Q3 Sales Sales CHF11.1bn. Will the company raise its guidance?

Rio Tinto Q3 Production

Wednesday 17th

Danone Q3 Sales Sales €5.226bn (+8.8%). Will FY guidance be confirmed?

Diageo Q1 Trading update

Wartsila Q3 Results Sales €1.017bn (+19.5%), adj EBIT €104m,

Net profit €71.1m. Order intake €1.09bn.

ASML Q3 Results Revs €1.21bn, EBITDA €360.48mn,

Net income €277.18m, EPS €0.67.

BHP Billiton Production Update

TeliaSonera Q3 Results

Thursday 18th

Valeo Q3 Sales Sales €2.783bn (4.5% y/y).

FY 2012 guidance (EBIT) is expected.

Nestle Q3 Sales 9M organic growth of 6.5%, RIG 3.1% and

price growth 3.4%.

SABMiller Q2 trading update

SCA Q3 Results Sales of SEK22.195bn (+6.9%), adj. EBIT SEK2.131bn,

adj. net profit of SEK 1.301bn

Nokia 9M Results Sales €6.971bn, operating loss €266m, net loss €390m,

loss per share €0.11, ASP at €43.20.

D&S sales €3.53bn, non-IFRS operating loss €314m.

Cairn Energy Trading Update

Akzo Nobel Q3 Results Revs €4.28bn, EBITDA €545.91bn, EBIT €367.9m,

net income €188.36m, normalised EPS €0.99.

Tele2 Q3 Results Sales SEK11.073bn (+6.2%), EBITDA SEK3.001bn,

EBIT SEK1.315bn, net profit SEK860m.

Friday 19th

Telenor Q3 Results

Yara Q3 Results

Fortum Q3 Results

Next Week Preview: US earnings season• JP Morgan (JPM) reported Q3 2012 EPS of

$1.40. Capital markets were strong, given

good revenues in investment banking and

fixed income. Mortgage banking was also

strong. Loan balances declined. NII pressure is

expected going forward. Wells Fargo (WFC)

reported Q3 2012 of $0.88 vs. consensus of

$0.87. Mortgage banking was weaker than

expected and margin pressure was above

guidance;

• Bank stocks sold off on JPM/WFC earnings.

This week, Citigroup (Monday), Goldman

Sachs (Tuesday) and Bank of America

(Wednesday) will report;

• AMD cut its sales forecasts, last week.

Tomorrow, Intel is expected to report its Q3

results;

• With uncertainty surrounding election results,

the fiscal cliff and global growth, we should

probably expect tepid guidance for 4Q and

2013.

Next week's key results: Consensus

Monday 15th

Citigroup Q3 Results $0.98

Tuesday 16th

Coca-Cola Co Q3 Results $0.50

CSX Q3 Results $0.43

Forest Labs Q3 Results $0.02

Goldman Sachs Q3 Results $2.22

IBM Q3 Results $3.61

Intel Q3 Results $0.50

Jonhson & Jonhson Q3 Results $1.20

Mattel Q3 Results $0.99

Wednesday 17th

Abbott Labs Q3 Results $1.28

American Express Q3 Results $1.09

Bank Of America Q3 Results -$0.01

Halliburton Q3 Results $0.68

Thursday 18th

AMD Q3 Results $0.01

Boston Scientific Q3 Results $0.11

Source: Bloomberg

4.82

3

4

4

5

5

6

6

7

7

8

1999 2001 2003 2005 2007 2009 2011 2013

Existing Home Sales(Millions, Annualised)

7.6%

6%

7%

8%

9%

10%

11%

12%

13%

2000 2002 2004 2006 2008 2010 2012

China GDP (y/y change)

1.02%

0.64%

0.30%

-0.13%

0.14%

-0.26%

0.80%

-0.10%

-0.4%

0.0%

0.4%

0.8%

1.2%

Jan-11 Abr-11 Jul-11 Out-11 Jan-12 Abr-12 Jul-12 Out-12 Jan-13

US Retail Sales m/m(excl. autos, gas and building materials)

Next Week Preview: Economics • Today, US retail sales should be released (13.30

GMT, consensus 0.7% m/m). Higher gasoline

prices and sales of building materials (clean up

after Hurricabe Isaac) should support the

headline number. Let’s see what we’ll be the

effect from the release of the iPhone 5;

• In the US, NAHB Index (Oct.), Housing Starts

(Sep.) and Existing Home Sales (Sep.) will also be

announced. Homebuilder confidence rose to a

six-year high in September. August’s gain in

existing home sales could now justify a slight fall.

Nevertheless, all three indicatores will probably

not detract from the underlying upward trend.

The US housing market is recovering from the

financial crisis...

• China Q3 GDP should be released next Thursday.

Activity likely remained at a low level, as seen

from the latest oficial and HSBC/Markit PMI

indices. The lack of a decisive domestic policy

stimulus should probably keep China growing at a

moderate pace. Source: Bloomberg

1.5%

1.7%

1.9%

2.1%

2.3%

2.5%

2.7%

2.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Jan-11 Mai-11 Set-11 Jan-12 Mai-12 Set-12

US breakeven inflation rates

10 years (right scale)

2 years

4.18%

1%

2%

3%

4%

5%

6%

7%

Jan-11 Mai-11 Set-11 Jan-12 Mai-12 Set-12

Yie

ld t

o m

atu

rity

Spain-Germany 10y Government

bond yield spread

Charts we are watching

• Markets are still expecting Spain to request

aid. With the ECB liquidity program on standby,

Spain-Germany 10yr Government bond yield

spread barely moved after S&P downgraded

Spain’s sovereign debt rating to BBB-. But, will

market's patience slowly run out if they don't

request the aid soon?

• The breakeven inflation rate components of

both 2-year and 10-year Treasury yields are

still higher than they were a few months ago.

Nonetheless, they have declined after spiking

when the FED annnounced QE3. With nominal

short-interest rates at zero, the only way to

lower real interest rates is by increasing

inflation expectations...

Source: Bloomberg

Source: Bloomberg

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