Weekly Markets Perspectives

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

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Spain's holdout on aid continues to dominate European equity markets. It seems the process lacks an immediate catalyst or someone to lead the parties to an agreement. Last Friday, Spain´s Economy Minister repeated that the country doesn’t need a bailout.

Portuguese Finance Minister announced new tax increases… to replace the previous proposal to increase the employee contribution to social security to fund a reduction in the employer contribution. Should we expect a stronger economic downturn next year?

… while in Greece, talks between the Greek government and the Troika continue: The budget deficit should narrow to 6.6% of GDP in 2012 and 4.2% in 2013.

In the US, President Obama and Mitt Romney faced off in their first debate: As expected, taxes

and the budget deficit were the main focus of the debate. Mitt Romney´s electoral hopes seem to have bounce back.

US Economy still stronger than Europe… The September Eurozone manufacturing PMI came in at 46.1, an increase from the prior month, but still pointing to a weak economy. In the US, we had an unexpected move to above 50.

… with an encouraging Employment Report: The unemployment rate fell to 7.8% in September. The improvement is probably not enough from the FED point of view but it will be important to election momentum. It was the penultimate report before polling day on November 6th.

New QE policy from the FED continued to support the US equity market. Monsanto started the US earnings season.

Weekly Summary

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63 US: ISM Manufacturing Index

2012

2011

2010

US ISM manufacturing rises in September…• The ISM Manufacturing Index in September

rebounded to a 4-month high of 51.5 from 49.6 in August. The forward-looking new orders component increased to 52.3 from 47.1;

• The employment index rose to 54.7 from 51.6;• Although it is positive surprise, a higher headline

ISM will probably be needed to suggest a pick-up in the economy’s growth rate.

Source: Bloomberg

… and the services sector also showed strength.• The ISM non-manufacturing index in September

increased to 55.1 from 53.7 in August. The index is now back to a level last seen in March;

• The best sectors were transport, retail and construction;

• The US economy seems to have gained some momentum.

55.1

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

US: ISM non-manufacturing

Source: Bloomberg

US unemployment rate drops to 7.8%.• September’s US non-farm payrolls was 114,000.

The numbers for the two months before were revised upward by 86,000;

• The unemployment rate fell to a three-and-a-half-year low. The unemployment rate has fallen by 0.5% in two months;

• Average weekly hours worked increased to 34.5, from 34.4 the previous month.

Source: Bloomberg

• The minutes detailed the justification for why the FOMC opted for an aggressive easing step. The decision to launch QE3 seems to have been a fairly brief one;

• "Many" participants believed that additional asset purchases would support the economy through lower interest rates and easier financial conditions;

• “Many participants thought that more-effective forward guidance could be provided by specifying numerical thresholds for labor market and inflation indicators" . It is surprising to see how close the FOMC came to tying its forward guidance to an explicit numerical threshold for the unemployment rate and/or inflation. Reaching an agreement on the exact numbers was not possible;

• The minutes contained no discussion of other policy tools.

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300 EUA: Non-farm Payrolls (000s)

Mid-September minutes were released.

Royal Bank of Australia cut interest rates.

Source: Bloomberg

• On October 3rd, in an unexpected move, RBA reduced cash rate by 25bps to 3.25%;

• 19 of the 28 economists surveyed by Bloomberg expected the Central Bank to leave interest rates on hold;

• Accordingly with Central Bank’s Governor Stevens “the outlook for growth in the economy has softened over recent months, with estimates for global GDP being edged down”;

• The rationale behind this decision could be RBA´s concern over China’s growth and the resilience of the Australian Dollar;

• The Central Bank seems to expect a benign inflation outlook;

• In the local economy, credit growth is now weaker and the investment cycle is probably near its peak;

• Main commodities prices for Australia are below levels recorded at the beginning of the year.

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Australia: GDP (YoY change)

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Australia: Cash Rate Target

1%

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7%

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Australia: Consumer Price Index (YoY)

Portugal: new tax hikes were announced for 2013.• Government acknowledged deficit slippage of

1.2% in 2012 over the current target of 5% of GDP;

• Increases in capital gains, property and income taxes were announced;

• The number of brackets would be cut from eight to five. The new tax thresholds have yet to be announced. An additional 4% tax surcharge will be levied on incomes next year;

• The Portuguese Finance Minister said that the combined impact of these measures should lead to an average increase of 7pp in household income tax;

• According to the government the measures (including spending cuts) amount to 3% of GDP;

• The unemployment rate is expected to reach 16.4%, from the current record level of 15%. Portugal’s youth unemployment rate stood at 35.9% in August;

• CGTP, one of Portugal’s main unions, called for a general strike on November 14th. Protests and strikes have risen in recent weeks;

• The country’s recession could worsen if these measures further undermines consumer confidence.

Source: Bloomberg

15.0%

11.3%

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Unemployment rate: Portugal vs Eurozone

Eurozone

Portugal

Debt swap helps Portuguese funding needs for 2013.• The Portuguese government swapped €3.75bn of

government bonds maturing in Sep13 for new ones maturing in Oct15. The swap (probably done with the help of domestic investors) is not particularly large but does reduce Portuguese financing needs for next year. However, because the deficit-to-GDP ratio were changed for 2012 and 2013, funding needs could increase when compared to initial estimates;

• The ability to access the market will be decisive for the ECB to intervene with its OMT program. Portugal is supposed to partially go back to the markets in Q3 2013 and regain full access to funding by mid-2014;

• Portugal released information on non-financial accounts by the institutional sector for Q2:o The current account deficit was 1.3% of

GDP (SA), the lowest since 1995;

o Net International Investment Position worsened slightly to -111% of GDP;

o The household accounts show that disposable income fell 3.1% yoy in Q2;

o Households’ investment (mainly investment in new houses) was down 5.7% yoy, after a 6.2% yoy drop in the previous quarter.

Source: Bloomberg

4.7%

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2008 2010 2012

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Portugal: GovernmentBond Yields

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3 years

ECB: Waiting for governments…• Key ECB interest rates were left unchanged. No

major new policy initiatives were announced;• Regarding the Outright Monetary Transactions

Program (OMT) Draghi said “Our decisions as regards OMT have helped to alleviate tensions over the past few weeks, thereby reducing concerns about the materialization of destructive scenarios”. “It is now essential that Governments continue to implement the necessary austerity steps to reduce both fiscal and structural imbalances and proceed with financial restructuring measures”;

• Draghi indicated that a range of indicators would be examined to assess the degree of disruption to normal monetary policy channels, when deciding whether intervention is appropriate;

• The ECB might consider cutting interest rates again, but a reduction had not been discussed at the Governing Council meeting.

Is Spain edging closer to asking for financial aid?• Spain continues to deny that it will ask for aid.

The waiting game continues;• The head of the government of the Spanish

region of Catalonia said his administration does not agree with the 2013 deficit targets that Spanish government is planning to set for the regions;

• Moody's will announce this month the results of its review of Spain's sovereign debt rating, which is currently just one notch above junk;

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Set-12 Out-12 Nov-12 Dez-12 Jan-13 Fev-13 Mar-13

Spain: Bond and bill redemptions(€million)

Bonds BillsSource: Bloomberg

Greece: 2013 GDP could fall 5% according to the Troika.• Government’s three coalition partners agreed on

a new 2013/14 €13.5bn austerity package. €10.5bn will come from spending cuts, with the remaining coming from revenue increases;

• Talks between the Greek government and the Troika continued ahead of today’s Eurogroup meeting;

• The draft budget showed that the Government expects the economy to contract 6.5% this year and 3.8% in 2013. The budget deficit should narrow to 6.6% of GDP in 2012 (from 9.1% last year) and 4.2% in 2013. The primary budget is forecasted at -1.4% in 2012 and +1.1% in 2013;

• The two sides have showed some disagreement regarding the expected contraction of GDP next year and, thus, the spending cuts needed to meet the fiscal targets. Accordingly, the Troika wants to increase the amount of cuts to be implemented in 2013 to €9.2bn from €7.8bn;

Main new fiscal measures currently negotiatedwith the troika for 2013 (€mn)Total Expenditure 7,308of which:

Wage bill 1,000Pensions bill 3,799Restructuring of public sector 483Social benefits 347Healthcare costs 803National defense 304

Total Revenues 492of which:

Streamlining of family allowances 427Source: FinMin of Greece

• Reportedly, the Troika also casts doubts on €2bn worth of revenue-raising measures that should be implemented next year;

• In a interview to a German newspaper, Greek Finance Minister stated that he hopes to get disbursement of next tranche by end of October.

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2008 2009 2010 2011 2012

PMI Manufacturing

Euro Zone

Germany

France

Italy

UK

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2008 2009 2010 2011 2012

PMI Services

Euro Zone

Germany

France

Italy

UK

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2005 2006 2007 2008 2009 2010 2011 2012

Euro Zone

Employment YoY

PMI Composite (right scale)

Euro Zone – An economy stuck in a recession…

Source: Bloomberg

• Revisions to earlier months revealed that the unemployment rate has been at a new record high of 11.4% since June. Spain (25.1%), Greece (24.4%) and Portugal (15.9%) show the highest rates;

• The unemployment increase probably reflects the cost of economic adjustment taking place in the Eurozone and, in particular, in the peripheral economies;

• Notwithstanding the small recovery, PMI indices for manufacturing and service sectors still point to a downturn;

• The downturn remains more severe in the region’s periphery.

Source: Bloomberg

PMI Composite is advanced 6 months

49.8

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2008 2009 2010 2011 2012

China: Manufacturing PMI

China: manufacturing PMI rose modestly in September.• China September official manufacturing PMI

came in at 49.8 vs. 49.2 in August. This was the first rise since last May. Is the economy stabilizing?

• The new orders component rose to the highest figure since May this year. That component is above 50 for 9 of the total 21 sectors. The orders to inventory ratio rose to 1.04 in September (1.01 in August). The PMI component on new export orders also showed decent gain to 48.8 in September.

Source: Bloomberg

Syria – Are we reaching a tipping point?• There has been an exchange of artillery fire

between Turkey and Syria;• For the last 18 months, there has been a huge

death toll in Syria caused by a civil war;• In Turkey, the Parliament approved the

deployment of troops to Syria;• Will the conflict escalate? Do not forget that

Turkey is a member of Nato.

Source: Financial Times

1.82%

-0.21%-0.04%

-0.27%

1.83%

0.27%0.09%

0.36%

0.72%

-0.03%-0.50%

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1-Out 2-Out 3-Out 4-Out 5-Out

Euro Stoxx 50 and S&P 500 (Daily Changes)

Euro Stoxx 50 S&P 500

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Jan Fev Mar Abr Mai Jun Jul Ago Set Out Nov Dez

HPQ US: Stock Price

• Last week was positive for European (Euro Stoxx 50) and US equity markets (S&P 500). An expansionary global monetary policy is still creating “asset price inflation”;

• Monsanto announced Q4 2012 of -$0.44 vs. Street estimates of -$0.43. Revs $2.11bn vs. Street estimates $2.23bn. The company provided initial FY2013 guidance of $4.18-$4.32 vs. Street estimates of $4.38, which implies 13%-17% EPS growth. Monsanto expects “significant earnings growth” in Q1 2013;

• In its analyst meeting, Hewlett-Packard issued a below-consensus FY2013 outlook. The company announced a 4-5 year plan for its transformation. FY2013 EPS range of $3.40 to $3.60 was well bellow consensus of $4.18;

• With Spain still undecided regarding accepting aid, Spain’s Government bond yields continued falling during last week.

Last week market´s Highlights:

Source: Bloomberg

Source: Bloomberg

What we are watching this week:• We´ll highlight the Ecofin meeting

(will Spain and Greece be discussed?) and the IMF’s World Economic Outlook. US Trade Balance, PPI and consumer will probably show the cost of imported oil;

• In the US, Chevron, Alcoa (Tuesday), Safeway (Thursday), Wells Fargo, Google, JP Morgan (Friday) are expected to report. In Europe, Lufthansa should release September traffic data on Wednesday. A trading update is expected from Burberry on Thursday and Carrefour will report its Q3 Sales;

• In Portugal, Banif will hold its General Shareholders Meeting. Industrial sales (August) and Employment Report will be announced. Finally, The Bank of Portugal release data on the banking sector (all Monday).

CALENDAR - Event Date (GMT) Hour Survey Prior

EcoFin Meeting 10-08-2012 Not Available Not Available Not Available

US Columbus Day (Some markets closed) 10-08-2012 Not Available Not Available Not Available

Germany issues €4bn in 6M TB 10-08-2012 10:30 Not Available Not Available

Industrial Production MoM SA, Germany 10-08-2012 11:00 -0.50% 1.30%France issues €3.8bn in 3M, €1.6bn in 6M and €1.6bn in 12M TB 10-08-2012 14:00 Not Available Not Available

IMF releases World Economic Outlook 10-09-2012 Not Available Not Available Not Available

Current Account, Japan 10-09-2012 00:50 JPY421.1bn JPY625.4bnChancellor Merkel meets PM Samaras in Athens 10-09-2012 Not Available Not Available Not Available

UK Bank of England Governor King speech 10-09-2012 Not Available Not Available Not Available

EcoFin Meeting 10-09-2012 Not Available Not Available Not Available

Industrial Production MoM, UK 10-09-2012 09:30 -0.50% 2.90%Greece issues €1bn in 6M TB 10-09-2012 10:00 Not Available Not Available

Industrial Production MoM, France 10-10-2012 07:45 0.00% 0.20%President Hollande and PM Rajoy meet in Paris 10-10-2012 Not Available Not Available Not Available

Brazil Copom monetary policy decision 10-10-2012 Not Available Not Available Not Available

US's Federal Reserve's Beige Book 10-10-2012 Not Available Not Available Not Available

Germany issues €4bn in 5Y and €1.5bn in 11Y GB 10-10-2012 10:30 Not Available Not Available

MBA Mortgage Applications, US 10-10-2012 12:00 Not Available 16.60%

Machine Orders MoM, Japan 10-11-2012 07:00 -2.30% 4.60%CPI YoY, Germany 10-11-2012 07:00 2.00% 2.00%CPI YoY, France 10-11-2012 07:45 2.30% 2.10%Korea BOK monetary policy meeting 10-11-2012 Not Available Not Available Not Available

Italy issues Bonds 10-11-2012 10:00 Not Available Not Available

Trade Balance, US 10-11-2012 13:30 -$44bn -$42bnInitial Jobless Claims, US 10-11-2012 13:30 365K 367K

Gabinet Offi ce Monthly Economic Report, Japan 10-12-2012 Not Available Not Available Not Available

Industrial Production MoM SA, Euro Zone 10-12-2012 10:00 -0.40% 0.50%PPI MoM, US 10-12-2012 13:30 0.70% 1.70%U. of Michigan Confidence, US 10-12-2012 14:55 77.9 78.3IMF, World Bank Meeting 10-12-2012 Not Available Not Available Not Available

What should we expect from this week’s EcoFin meeting?• The EcoFin/Eurogroup meeting on October 8-9th

should be a preamble to the European Council meeting on October 18-19th;

• We should probably not be too ambitious:o The Troika negotiations with Greece are yet

not concluded;o Germany is entering a pre-electoral period

(good reason to stall the European integration process?).

• However, further work should be done on the “compact for growth and jobs” (agreed at the June summit);

• An “integrated financial framework” should probably be a topic in this meeting too (a single supervisory mechanism, deposit guarantee scheme, direct bank recapitalization). Will some progress toward a Banking Union occur?

• Some discussions should be held regarding “an integrated budgetary and economic policy framework”.

• Will Spain ask for ESM/EFSF support during the meeting? Probably not. Sentiment is not deteriorating. Market is not pressuring. Nevertheless, some progress could happen in this week’s EcoFin/Eurogroup meeting. The country’s new budget measures seems to satisfy most of Europe’s demands. But, the Spanish regional election calendar should probably be taken into account.

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