Weekly Focus: China drops peg - will it be appreciated?

- "We have not made any major changes to our CNY forecast. We still expect CNY to appreciate by about 4% against USD over the next year, which is a bit more than the
market currently expects. This will not be enough to have any substantial macroeconomic impact."
- "The combined effect of fiscal tightening and euro depreciation is thus to increase
growth by 1.0 percentage point in 2010, while growth is dampened by 0.2 percentage
points in 2011 and 0.1 percentage points in 2012."
- "One of our concerns remains deflation in output prices which could erode corporate
earnings in the coming months if it continues."
- "After a short-lived recovery during which oil rose close to USD80 again, commodities have in general again been sold off in the past week. We look for prices to remain relatively steady around newfound levels in the near term."

DenDanske Weekly Focus 20100625

EMEA Weekly: Volatility is back

- "The Turkish economy has been one of the major positive surprises in the EMEA region and the outlook is quite positive."
- "The new Hungarian government has not been able to convince the markets (or us) that it will achieve its announced target for the public finance deficit."
- "We are somewhat puzzled by the strong performance of the South African rand. Undoubtedly the World Cup has attracted some well-deserved positive attention, but we
doubt there will be any major positive effects economically and most short-term
indicators are in fact still negative."
- "The positive outlook for the current account situation combined with the outlook for a continued recovery in both the Polish and the Czech economy is good news for the
longer-term outlook for the Polish zloty and the Czech koruna."

DenDanske EMEA Weekly 20100625

Weekly Credit Update

- "Spreads drifting wider"
- "Issuance picking up again from low levels"
- "Bank levy on the agenda"
- "Rating changes on SEB, Swedbank, UPM and Statkraft"
DenDanske Weekly Credit Update 20100625

BRIC Capital Markets Monitor

- "The economic performance of the BRIC countries throughout the 2008-09 global economic and financial crisis was mixed. While China and India continued to grow rapidly in 2009, Brazilian GDP remained flat and Russia suffered a large contraction."
- "In terms of economic fundamentals, the BRICs have largely emerged unscathed from the global crisis. While many developed economies are struggling with large fiscal deficits and rising government debt levels, there are no near-term sustainability concerns in the BRICs."
- "The BRIC economies should continue to register solid economic growth, while many developed economies struggle with elevated private-and/or public-sector debt burdens and greater economic and financial uncertainty."

DeutscheBank BRIC Capital Markets Monitor June2010

Asian property markets: No significant bubbles – yet!

- "After house price bubbles burst in many OECD countries, investors are keeping a very watchful eye for price developments on asset markets that signal a bubble."
- "Office demand is picking up strongly; rents are starting to rise after falling heavily in many cities."
- "Overvaluation in housing and, to a much lesser extent, also in office markets is not an Asia-wide phenomenon."
- "While the risk of a downward adjustment has obviously risen on some residential markets, we do not expect that this can trigger severe macroeconomic distortions."
DeutscheBank Asian Property Markets 20100623

International Interest Rate Strategist

- Overview: "While there appears little value in rates markets at current levels, the
absence of any stimulus for higher yields and seemingly endless supply of cash
continue to fuel the bond rally."
- "We see no value in bond yields at current levels, but think cross-market trades
are a better cyclical reversal trade given their superior sustainability relative to
duration trades."
- US Rates Strategy: "The announcement of the re-float of the Yuan is supportive
of higher US Treasury yields at the margin, but uncertainties elsewhere will
probably offset the upward pressure on yields."
- Euro Rates Strategy: "10yr US-EUR spreads are testing support. We see scope
for Europe to recoup lost ground, although near-term concerns remain
regarding the outlook for money market rates."
- "We use the latest 2010 fundamental forecasts to update our Sovereign Risk
Index and calculate how the envisaged fiscal progress in 2011 would affect
countries’ relative SRIs. We also examine swap spread curve opportunities."
- Sterling Rates Strategy: "The emergency UK Budget delivered strong and early
fiscal tightening. Issuance looks set to decline sharply in the coming years
which is a positive for the market, but many other challenges lie ahead."
- APAC Rates Strategy: "Incentives for the Japanese to retain their home bias
remain but carry is becoming increasingly difficult to find."
- "We expect AUD rates to remain in their recent ranges despite the RMB and
Australian political developments."
- Global Inflation Strategy: "Euro linkers should find support in the coming weeks
from positive cash-flows and reduced issuance. This should help break-evens
catch up with the rally in risk assets."
- Euro Flow Analysis: "The dominant flows in Europe over the last month have
been buying of 10yrs and selling of 30yrs, mostly in swaps. There has been a
clear duration extension bias to bond flows and with a focus on the larger liquid
markets of Germany (30yr), France (10yr), Italy (5yr) and the Netherlands
Citigroup International Interest Rate Strategist June2010

Emerging Markets Macro and Strategy Outlook

- "There are three possible explanations for this big change in view about the path
of interest rates."
- "Growth prospects are not a major part of our story of diminished rate hikes."
- "Diminished inflation risks offer a better explanation of the collapse in our rate
views, but even this isn’t quite convincing."
- "Perhaps the strongest argument in favour of disinflationary forces in EM comes
from the food market."
- "Putting this altogether: a low interest-rate environment in the G3, together with
an EM story that combines closing output gaps and few inflationary pressures,
should be pretty supportive for capital flows to EM in our view."
-"For these reasons we remain relatively optimistic about emerging markets
currencies, albeit that we are in a “one-trade” world."

Citigroup Emerging Markets Macro and Strategy Outlook June2010

Global Economic Outlook and Strategy

- Global "The recent strains in equity and credit markets create some headwinds for the global recovery. Nevertheless, we do not expect these pressures to derail our long-held view of a “sustained but uneven” global recovery, led by Asia and with Europe lagging."
- United States "Weaker financial conditions and fresh signs of a pullback in housing activity have prompted downward revisions to near-term growth estimates. Federal Reserve officials have reaffirmed the primary focus on promoting financial stability and likely will leave rates near zero well into 2011. Recovery does not appear threatened as business and consumer spending have held up and increased labor usage is bolstering household incomes. Barring a serious financial setback, a challenging fiscal outlook will raise crowding out concerns as recovery matures."
- Euro Area "We have left our euro area growth forecast unchanged, but expect an even larger gap between the growth of
the fiscally strained countries and the core countries. In addition to the activation of the European Financial Stability Facility (EFSF), the euro area countries have also made some progress in setting up new fiscal rules. While we expect the ECB to leave rates unchanged until 2Q or 3Q next year, it requires additional ECB action to prevent a significant increase in money market rates near term."
- China "The economy is moderating as fixed asset investment flattens and industrial output weakens but inflation inches up to above 3%. Revived renminbi appreciation suggests Chinese authorities are willing to advance structural rebalancing, but moves will likely be gradual to reflect the cautious macro backdrop."
- Japan "The economy likely will maintain above-trend growth under a combination of a continued uptrend in
exports, a pick-up in business and housing investment and a modest improvement in labor and income conditions. The new administration focuses more on fiscal reform than the previous administration and we have revised down our forecasts for long-term interest rates accordingly."
- United Kingdom "The UK is better placed to return to fiscal sustainability than many realise, and we expect the fiscal deficit to fall quite rapidly, thanks to fiscal consolidation measures plus the underlying pick-up in revenues."
- Canada "We maintain our call for a 25bp rate hike in July, and a year-end policy rate target of 1.50%. However, given the intensification of certain downside risks of late, we have further moderated our growth forecasts and now anticipate a terminal policy rate of 3.00% in 3Q 2011."
- Australia "We have slightly lowered our GDP forecast for this year, and now expect growth to be around trend rather than above by year-end. As a result, we have pushed back the timing of further rate rises by the RBA to the December qtr this year. We expect one further rate rise before year-end and 100bp of additional tightening by the end of next year, taking the cash rate to 5.75%."
- Emerging Asia (ex China) "Recovery remains on track, but momentum may be peaking, with exports and investment upturn likely to taper off on global uncertainties. Inflation is gradually rising, but we don't see strong impetus for central banks to hike imminently. Robust long-term growth prospects remain intact, hence managing capital flows will likely remain a lingering issue. We think Asia’s REER appreciation will persist in the longer term."
- Latin America "The assessment that events in Europe will have only a limited impact in the region has turned attention to cyclical factors again. As activity continued to gain momentum, several Central Banks hiked rates and will likely continue hiking them in coming months."
- CEEMEA "In Emerging Europe, the region closest to the eurozone turmoil, we expect growth to stay moderate in H2, but we have cut by 0.2 ppts our GDP forecast for 2011 as CEE feels the impact of tighter policy in Western Europe. Meanwhile the CPI outlook is tamer, allowing central banks to remain accommodative in the face of uncertainties. We have pushed back our rate hike expectations for Hungary and Turkey."
Citigroup Global Economic Outlook and Strategy June2010

Comments on Credit

- "Economic growth has been far short of what business cycle
historians would have anticipated based on the severity of the recession. In the
U.S. case, the near 4% drop in output should have produced a 6%-7% recovery.
But with only a few bits of data left to fill in the blanks, estimates suggest GDP
will have expanded by roughly 3½% in the year ending this month."
- "With household savings rates creeping irregularly higher and credit use and access being resized, income will be an all-important governor on demand growth. At the same time, near-term pressures on state and local governments to close budget gaps, point to drag of roughly a half percentage point on GDP for the next couple of
- "From this perspective, we marked down near-term growth estimates to reflect
both the recent setback in financial conditions and the notion that its
underlying causes are unresolved at this stage. But like the Fed this week, we
see recovery continuing. The Fed’s statement acknowledged as much by characterizing recovery as “proceeding” instead of “strengthening”."

Citigroup Comments on Credit 20100625