China port sector: July throughput beat expectations

- "China’s container throughput gained further ground in June, 6% ahead of our expectations, though leading indicators are pointing to softer growth ahead: June’s throughput growth further advanced to 23% Y/Y, possibly driven by inventory re-stocking. With an average run rate of 371K TEUs per day, the month’s volume was 8% above the run rate in 1H10 and 15% above 2H09. Key highlights: 1) By region, PRD recorded the strongest gains, +28% Y/Y. 2) Among the top 8 ports, Shenzhen surged the most on a sequential basis, +9% M/M. On the other hand, new order growth momentum under China PMI continued softening, possibly pointing to softer growth ahead."

JPMorgan China Port Sector 20100810

Is patience a virtue?

- No FOMC action expected, but statement should express shift in risk bias
- BoE leaves QE door open as UK expansion lags Western European lift
- BoJ unlikely to act to try and stem upward pressure on yen
- After strong first quarter, global consumer spending gains moderate
- Brazilian soft patch prompts dovish shift from COPOM

China: Implications of rising wages (Part II)

- Capital – labor substitution to accelerate "Rising wages should lead firms to to substitute labor for capital over time."
- Migration of investment to inland will intensify "Some manufacturers will choose to diversify their production across Asia as labor costs in China increase."

DBS Economics 20100804

China Property: Precautious Measures Good for Sustainable Recovery

- Speculation on new wave of tightening measures led to recent mini sell-off —
"Given improving sales performance and expected lower policy risk, the China property sector had recorded a strong share price rally since mid-June. However, this week caution has returned due to recent speculation the government may introduce a new wave of tightening targeting: 1) development schedules, 2) crack down on land hoarding, and 3) further tightening of mortgage loans for third-unit purchase. Moreover, it has been reported by the local press that China banks have been asked to stress-test for a 60% home-price fall. The above news got a lot of market attention, resulting in a mini sell-off in the China property sector, though most of the news has not yet been made official."
- Policy side neutral, precaution is good for sustainable recovery — "As for recent
speculation of new tightening, we don’t think it is likely, instead believing that in 2H the Central Government will mainly focus on the implementation of existing tightening measures. Moreover, it should shift more focus onto the construction of social welfare housing and monitoring developers’ construction schedule, to prevent a potential construction slippage. The Central Government must balance property market tightening with overall economic growth. However, relative to the recent strong volume rebound and significant improvement in market sentiment, we view the Central Government is wise to introduce precaution measures before property/land prices revert to an upward trend. For us, these kinds of precautions are positive for a sustainable recovery of the China property market outlook."
- Leading developers’ life is not so tough, likely become market consolidators —
"The leading developers have seen sales improving significantly in 3Q given better brand names, product quality, and flexible pricing strategies. We estimate profitability would still be decent (GP>30%) even if they cut prices by c.20% from the peak. In June/July, the land market overshot the property market significantly, with achieved land price down 30% from the peak vs. property price only mildly correcting by 10% in key cities. As for leading developers, if they can use the opportunity to replenish prime land reserves at a reasonable price, this should be positive for sustainable growth. This has led to leading developers hungry for capital raisings, which are unrelated to concerns on their own financial positions. We prefer low cost capital raisings, such as share placement, syndicated loan etc."
- Selectively focus on beta – Shimao and Agile — "If we expect the physical market
turning point to emerge in 1Q2011, a further opportunity to buy into the China property sector should emerge in early 3Q 2010, which is also the reason why investors should selectively focus on higher-beta names in 3Q to hunt for returns. Moreover, second tier market developers – such as our top picks Shimao and Agile – offer defensive valuations. We believe these names not only have higher beta but also have specific catalysts that could result in outperformance."

Citigroup China Property 20100806

UK: British upswing running out of steam

- "British GDP has advanced for three consecutive quarters after plummeting in 2008-09. However, OECD's leading indicator for UK has fallen in the past two months, indicating that the economic upswing is losing steam."
- "Perception of the overall economic situation is also worsening. The output gap has not been closed and spare capacity remains."
- "Retail sales are getting weaker, trend in disposable income is declining. Consumer sentiment is
deteriorating, business confidence is fading."
- "We expect only a slow recovery, the robust Q2 numbers were a one-off affair. Exports, private consumption and investments remain well below trend. In our view, economic growth will undershoot government projections."

DenDanske UK Outlook 20100806

China banks: We expect solid interim results and stable operating trend in 2H10

- Expect solid 2Q10/1H10 profits. "We expect the 10 banks under our coverage to post 5% q/q (and 28% y/y) profit growth during 2Q10. We expect their aggregate net income in 1H10 to grow 30% y/y and 38% h/h, thanks to strong balance sheet growth, NIM recovery, robust fees as well as improving asset quality. Our forecasts are about 5% above consensus."
- Solid operating performance continues so far into 3Q10. "1) NIM further expanded in 2Q10 despite rising competition for deposits and pressure to lower L/D ratios at some medium-sized banks. We expect stable NIM in 2H10. 2) Fees were robust on the back of strong corporate bills/paper issuance and bank wealth management sales. We however
expect fee growth to soften to 30% for FY10. 3) Solid asset quality improvement. Likely NPL formation may only pick up in 4Q10."
- Our model assumes NPL formation pick-up in 2H10. "The market may focus predominantly on policies and trend in LGFV asset quality, as well as the property market. In our current model, we factor in about Rmb78bn gross new NPLs in 2H10, enough to include 1-1.5% of outstanding LGFV and property development loans to be downgraded to NPL during 2H10. We believe LGFV NPL ratios should stay at 1% or below. Meanwhile, our
models also reflect some dynamic provisioning in 2010."
- Modest earnings revisions: "We now factor in fewer rate hikes, leading to a modest cut in NIM assumptions, particularly in 2011-2012E. Except for a 6-7% downward earnings revision for Citic in 2010-2012E, our earnings cuts are in general insignificant for 2010 and modest at 3-4% in 2011-2012E. Our estimates however remain above consensus mean estimates."
- Undemanding valuations. "We believe the sector may continue to enjoy some re-rating. We still expect 30% earnings growth for FY10E, and 20% plus CAGR growth in 2011-2012E. At 1.75x forward PB and 9x forward PE, valuations appear undemanding. Top pick in H-share remains Citic-H, BOC-H and to less extent BoComm-H. In A-share, we upgrade Minsheng-
A to OW. In A-shares, although big state-owned banks are better value, we prefer Minsheng-A and CMB-A."

JPMorgan China Banks 20100808

A very important point: Is it possible that the crisis has changed potential growth in some countries?

- "Actual growth in certain countries may have been changed by the crisis, while potential growth has not: the halt in indebtedness, in the real estate boom and in immigration, as well as the rise in unemployment, have led to a halt in actual growth, which has been very impressive for instance in Spain."
- "But the question is whether potential growth may have been changed by the crisis. We start off from potential growth to assess the quality of the countries’ growth, their capacity to stabilise their public and private debt ratios, to cope with ageing, to have sufficient return on capital to attract savings, etc."
- "Now, one may think that potential growth is affected by the crisis; if there is for instance a change in the investment rate, in the sectoral structure of the economy, or in taxes or government expenditure that have an effect on the supply of goods and services."
- "When looking at the large OECD countries, we believe that these developments can be seen everywhere, and seemingly to a great extent in certain Southern European countries (Spain, Portugal)."

Natixis Flash Economics 380 20100727

Does stock market valuation take into account the international diversification of listed companies?

- "Large companies have diversified their turnover internationally. We seek to ascertain whether investors associate these companies too closely with the countries where they are quoted. This would create an abnormally close link between the trend in these companies’ share prices and changes in the macroeconomic situation of the countries where they are quoted, while stock
market prices ought to react far more to the international macroeconomic situation."
- "We show:
• that the financial markets do not take into account the geographical structure of the turnover of listed companies;
• but that they give significant weight to the trend in the country’s exchange rate compared with these markets of listed companies."

Natixis Flash Economics 379 20100727

Europe’s problem today: Economic policies should reduce neither demand nor supply

- "European countries (euro zone, United Kingdom) have decided to rapidly trim their fiscal deficits. This is being done in a situation where the balance sheet adjustment is not completed, and where private demand accordingly is sluggish."
- "It therefore seems logical to avoid reducing private demand by reducing fiscal deficits, which would lead to even more pronounced underemployment."
- "But the key problem for most European countries is weak long-term (potential) growth, due to population ageing and low productivity gains. So the countries must also avoid a negative impact on supply (of goods and labour) when reducing their fiscal deficits."
• "They must therefore be able to reduce their fiscal deficits without reducing demand and without reducing supply; which leaves them with only two options:
• cutting useless government expenditure;
• taxing saved incomes, as these savings are not used to finance useful investments (but rather speculative investments)."

Natixis Flash Economics 378 20100727

QE2?

- "We have had a lot of questions recently on the possibility of renewed quantitative easing – and, in particular, on:
■ When the Fed will restart QE 2;
■ Whether it would work;
■ How the market would react – and what should investors buy if QE is restarted."

CreditSuisse Global Equity Strategy 20100809

FX Strategy Weekly

- "Dollar weakness continues to characterise G10 fx markets as doubts over the US economy multiply and all-time lows for US yields boost the attractiveness of carry. With the Fed running out of policy options and evidence of macro economic decoupling in the G10 prevailing, we look for the AUD to remain a desirable G10 destination. A test of 85.0 in USD/JPY now looks probable. Though next week will be dominated by the FOMC, all eyes in the UK will be on the latest BoE Inflation Report (QIR) on Wednesday. The QIR has proved a hurdle for GBP in the past and could again prove the proverbial ‘bridge too far’ that forces GBP/USD bulls to rein in their exuberance. Special notes on GBP/USD and AUD/ZAR are included in this week’s publication."
- "GBP/USD closed up 1.7% at 1.5962 and just fell short of 1.60. GBP lost 0.04% vs the EUR as EUR/USD (+1.7%) kept track of GBP/USD. GBP/CAD burst through the 1.64 level (1.65 target) after a shock 139,000 drop in Canadian employment in July. The MPC left Bank Rate on hold at 0.50% and the APF at £200bln, but suspense is set to stay elevated over the next two weeks and leaves GBP vulnerable to possible profit taking after a stellar run. Elsewhere, we note the gains for the JPY and the fall in USD/JPY blow 0.8550. A test of the Nov-09 low now looms, prompting possible intervention to weaken the yen."
- "US payrolls dropped 131,000 in July, double the consensus estimate. Data for June was revised down to -221,000 from -125,000. The unemployment rate held unchanged at 9.5%. UK data highlights were the 4.3pt drop in the construction PMI in July, and smaller falls in the manufacturing (-0.2pts) and services (-1.3pts) PMIs. The three PMIs have now declined simultaneously for two consecutive months, pointing to a slower rate of expansion in Q3. The NIESR reported a rise in GDP of 0.9% in the three months to July vs 1.1% in June. The ECB left its interest rate on hold at 1.0% but reined in optimism over the economy and declared no recovery victory. Strong Q2 GDP data are expected from Germany next week."
- "Backed by bullish seasonals and weaker macro data, gilts logged an impressive week with yields dropping markedly across the curve, but with the long end outperforming. 10y yields descended below 3.25% to a 3.23% close. Support for a further decline towards 3% could be on the cards. 5y swaps dropped 7bp to 2.35% and the 10y closed 11bp down at 3.27%, causing the 2y/10y spread to flatten below 190bp. The 2y/10y gilts spread tightened below 250bp and closed the week at 245bp. The 3mth Libor/Ois spread held steady at 25bp. The 10y swap spread was also unchanged at 5bp. The 5y gilt auction drew solid demand and was covered 1.99 times (0.7bp tail)."

LLoydsTSB FX Strategy Weekly 20100806

Non-commercial investors add to short USD positions

- "The latest IMM data cover the week from 27 July to 3 August."
- "Non-commercial investors added further to short USD positions, which have now reached USD17bn. The dollar has lost close to 10% since its early July peak and with Friday’s disappointing US labour market report (released after the collection of IMM data) positioning is likely to have turned even more against the dollar. As short USD positioning becomes more stretched so does the upside risk to USD from a potential position squeeze."
- "Coinciding with the strong rebound in EUR/USD over the past month speculative investors have unwound their short EUR positions. EUR positions are now back at neutral levels (net shorts at 3% of open interest) for the first time since December last year."
- "Net long positions in the commodity currencies (AUD, CAD and NZD) have become even more stretched with NZD looking most vulnerable with net longs at 62% of open interest. A position squeeze, potentially driven by oil prices correcting fast back below USD80 per barrel (watch Wednesday’s IEA oil market report), could see AUD, CAD and NZD correct lower."
- "Net long JPY positions have now reached 36% of open interest despite the current strong JPY level fuelling speculation in the market about the potential for interventions by the Bank of Japan."

DenDanske IMM Positioning 20100809

‘Risk-On’ Returns To Commodity Markets

- DBLCI Commodity Returns: "Commodity index returns continue to be strongly positively correlated with the S&P500. This has led some investors to questions the diversification benefits of commodities. We find this is encouraging a new generation of commodity indices to emerge, namely the Risk Parity Commodity Index."
- Crude Oil: "Oil prices in 2007-08 seemed linked to shifts in the value of the dollar. Since 2009, the S&P500 appears to be the main driver. We are not convinced that recent dollar weakness and S&P strength can be relied upon to consistently drive oil prices upward over the next six months particularly in an environment where crude oil and product inventories have been slow to fall."
- Refined Products: "From a demand perspective, the US summer driving season has been stronger than expected. June-July gasoline demand is up 1.9% yoy. However, demand continues to be insufficient to eat through the high level of inventories."
- Natural Gas: "The continuing surge in shale gas production in the US raises the possibility that the US might export LNG rather than import it. A minimum spread of USD3.62/mmBtu on top of HH prices would likely be required to generate a positive netback on a sustained basis.
- Precious Metals: The positive correlation of gold prices to EUIRUSD is reestablishing
itself. Given our bearish outlook for the US dollar we believe this will trigger further gains in the gold price. We expect the liberalisation in China’s gold market will sustain the country’s rising market share of gold consumption relative to the rest of the world."
- Industrial Metals: "The industrial metals sector has dismissed fears of a slowdown in China and instead focused on the possibility that monetary authorities will do all that is needed to underpin economic recoveries. Copper rose to a three month high supported by China’s rural electrification program and production challenges in Chile."
- Agriculture: "Russia’s decision to ban wheat exports threatens hoarding and further price advances. However, we believe the relatively high level of US and global inventories in wheat and possibly upgrades to the Australian wheat harvest during the fourth quarter will limit price advances beyond October."

DeutscheBank Commodities Weekly 20100806

LatAm: Inflation below expectations

- "Inflation data took center stage this week. It was low in Peru and in line with expectations. Although high in Chile, it was still below expectations, as it was in Brazil, Colombia and Venezuela. In Brazil and Colombia the trend was also down."
- "The indicators of economic activity have maintained their trend of pervious weeks: very strong in nearly all the region, but with clear indicators of a slowdown in Brazil and Mexico. The decision by the Central Bank of Peru to raise its policy rate by 50 bps in response to the persistent increase in domestic demand surprised markets and makes clear the complex risk balance faced by the monetary authorities in the region."
- "Global markets show divergent movements, with LatAm assets demonstrating a positive trend in general."
- "After the easing of financial tension and the region's favorable economic performance, financial assets in Latin America have maintained their positive trend in the medium term, but adjustments in the next few days cannot be ruled out, with investors taking up technical positions."

BBVA Latin Weekly Observatory 20100806

Emotional stress test for underweighted investors?u

- No new world: "Peak in ifo growth optimism urges caution. In past cycles over the last 20 years, the reward/risk ratio for equities has deteriorated at an upper turning point in the growth expectations. Overall, the leading indicators point to a slowdown in the growth dynamic looking to 2011."
- Reporting season: "Positive interim track record for Germany. In July, the German equity index reported positive earnings revisions for the index earnings estimates for 2010 and 2011. In the other large EMU countries, the negative revisions predominate."
- Outlook: "Bet on the expected direction of the leading indicators. Falling leading indicators mean a headwind for the equity market and argue for a sideways move in 2H10. The equity market is currently trading near the upper edge of the sideways movement."
- STOXX sectors: "Predominantly negative earnings revisions. Since the beginning of the 2Q10 earnings reporting, the earnings expectations were raised in only two sectors but reduced in 17 sectors."
- Hedge within the defensives: "Firmer EUR supports Telecom versus Food & Beverage. The relative performance of Telecom/Food & Beverage is closely correlated at the moment with the EUR development."

Unicredit Market Outlook 20100805

Not time to fade the wheat rally yet

- Weather-related supply shocks have compounded to send wheat prices soaring higher "Wheat prices have rallied dramatically over the past month, with the Sep-10 CBOT contract up more than 76% and trading near $7.80/bu from a $4.40/bu level at the end of June. The main driver behind this rally has been growing concerns for the Russian 2010/11 crop as hot and dry weather is significantly damaging grain production. This supply shock,
combined with a low planted acreage in Canada due to excessive rain, has led the market to swiftly reprice its expectation for an inventory build into a deficit for the 2010/11 crop year."
- Prices have likely overshot as high beginning stocks and feed substitution should absorb some of this supply shock… "The velocity and magnitude of this price rally have been exacerbated by a near-record net short positioning coming into this weather shock and we expect ongoing production uncertainty to continue to lend support to prices in the near term. However, the current situation is very different from the 2006-08 wheat bull market as we are coming into this production disruption with elevated wheat inventories, especially in the US. Accordingly, barring further major deterioration in crop production, we
would expect lower wheat prices once the market gains a better grasp on this year’s wheat production and deficit. Acknowledging the current production issues we are revising our forecasts higher to 650 cents/bu from 550 cents/bu previously."
- … but still too early to fade this wheat rally "We would look to implement our bearish wheat view with low-cost option strategies such as put spreads, but expect near-term price action to offer better entry levels. These developments in the wheat market comfort us in our long-held constructive corn view as wheat-to-corn feed substitution will likely further support already strong expected corn demand."

GoldmanSachs Agriculture Update 20100806

Japan: Cautious FY guidance despite strong 1Q

- Strong 1Q earnings "TSE1 1Q recurring profits had increased more than 3.0-fold yoy as of
August 5, when about 70% of companies had reported (including financials and February and March year-ends). The results peak was July 30 and some 90% of TSE1 companies had reported by market cap. Sales were up 12% yoy and recurring profits up 214%. The progress
toward 1H guidance was ahead of the historical average, at 58.5%."
- But poor visibility for 2H "Upward revisions far exceed downward revisions. However,
companies seem cautious on 2H. Only 12% have raised full-year recurring profit guidance vs. 21% that have raised 1H guidance. (Downward revisions are 2.2% for 1H and 2.6% for the full year.) This could be explained by the yen’s appreciation since June and concerns of a global economic slowdown led by the US."

GoldmanSachs Japan Portfolio Strategy 20100806

A Stronger Commitment to Low Rates

- "Recovery’s loss of momentum coupled with less secure financial supports to growth has set the stage for Fed officials to signal a stronger commitment to accommodation efforts next week. Policymakers are expected to reinforce language that encourages lower forward rates in an attempt to seal off tail risks of renewed recession and deflation."
- "We do not expect a new wave of asset purchases but reinvesting the proceeds of MBS redemptions would reinforce the policy duration commitment. The earlier focus on exit strategies probably dulled the credibility of the Fed’s low rate commitment but highlights the difficulties of achieving policy success with unconventional strategies."
- "Financial conditions improved slightly in July, and there are encouraging signs that consumer credit is loosening. A slow rebound in car sales continues and a gradual lift in sales of pickup trucks hints that small businesses are spending more. Nonetheless, overall financial conditions remain too weak to support a solid recovery."
- "Many industries continue to add to headcount and working hours consistent with modest economic growth around 2% near term. But overall employment gains are being held back in part by downsizing in construction, finance and state and local government. The latter group lost 66,000 jobs in July. Factory employment gains likely are nearing an end."

Citigroup Comments on Credit 20100806

Higher wages have not led to higher inflation and, so far, have not impaired China’s international competitiveness

- "We have found no clear evidence that nominal wage increases have caused higher inflation in China in the past decade, or even in the past few months. Wage growth has largely been offset by labor productivity gains. Furthermore, China’s labor costs in the manufacturing sector were actually lower in 2009 than in 2001 on a per real unit output basis."
- "We expect CPI inflation to trend lower as the policy-induced slowdown in domestic
demand growth weakens further in the near term. We believe the inflation trend beyond the short term will be determined by monetary policy management."
- "Our analysis also suggests that the relative competitiveness of China’s manufacturing sector vs. the US is at approximately the same level now as in 2002, lowering the need for further significant currency appreciation (as indicated by our GSDEER model)."
- "China’s looming demographic constraints are likely to increase the upward pressure on
money wages, but we think this will at least partly be offset by the improvement in labor
quality and the release of surplus labor from the agricultural sector."
- "In our view, an increase in labor compensation as a share of total output would support domestic demand, and this is likely to be achieved through a reduction (rather than an increase) in government restrictions on the labor market."
GoldmanSachs Asia Economics Analyst 20100805

China: Trip Notes-After the Slowdown

- We visited Beijing, Chongqing, Changsha and Shanghai during July 27-30 – "We
discussed the slowdown, the 12th Five-Year Plan, property, energy efficiency and local government financing from the perspective of regulators, experts, banks and local authorities. Here is a summary of key takeaways."
- Officials are certain of a 2H slowdown, but also confident in meeting targets –
"Policymakers target 9% growth for the whole year and above 8% for 4Q, in line with our forecasts. Investment in economic housing is expected to make up for some of the shortfalls elsewhere."
- Policy to curb speculative property demand would likely remain in place – "Many are waiting to buy after prices correct deeper. Thus, policy would avoid a major
correction but would keep the pressure on demand, while increasing supply."
- Principal near-term risks are energy efficiency and external weakness – "To
reduce carbon intensity, authorities are clamping down on heavy industry, reducing export VAT rebates and curbing housing investment, adding some risk of over-tightening. External demand is still the greatest near-term risk."
- Monetary policy and banking policy on hold in 2H – "There would unlikely be any rate hikes this year. The Rmb7.5 trillion loan target leaves sufficient credit supply in 2H, though effective credit demand may be questionable. Low NPL ratio and high coverage should prevent further tightening from the CBRC."
- The 12th Five-Year Plan still focuses on investment – "Local development plans
remain aggressive, with cities like Chongqing planning railways to Europe and the Indian Ocean and the 10 million urbanization plan in 10 years. Though the growth target may be set lower at 7%, most ministries believe that at least 9% growth can be achieved."
- UDIV debt: It’s much more about the land than the project – "We provide some
detail on the creation and operation of a UDIV. The key is that the capital gains from developing a UDIV’s land pays the loans much more than any income stream of a project. This obviously is predicated on a robust property market, which our hosts expect can still last a while due to urbanization. But with the aggressive investment plan, fast urbanization would be a necessity."
- Standardizing UDIV finance – "The banking regulator has required all banks to
standardize their UDIV loan portfolios by Sep 30, so that every loan is backed either by a specific asset or by project revenue. No government guarantees are allowed. So banks are seeking additional collateral or guarantors. Some local governments are finding innovative ways to attract private capital."

Citigroup China Macro View 20100803

Market rewards “revenue beaters” more than “cost cutters” during strong earnings season

- "The results are in: with 443 stocks and 89% of market cap reporting, the S&P 500 closed out a strong first half as 52% of companies beat estimates by at least 1 standard deviation, in-line with 1Q 2010, but above the historical average of 41%. The market rewarded those firms positively surprising on both top and bottom line (“revenue beaters”) more than just bottom-line surprises (“cost cutters”)."

GoldmanSachs US Weekly Kickstart 20100806

Introducing the EMEA Inflationary Pressure Index

- Market movers ahead: GDP and inflation numbers "Next week will be busy in terms of economic releases. On Monday we will get industrial production in Turkey, which should show that industrial production growth has dropped to 9.6% y/y in June from 15.6% y/y in May. This will be yet another sign that Turkish economic growth is decelerating. On Friday we will get a bunch of GDP numbers for Q2. In general we expect the Q2 GDP numbers in EMEA to show gradual improvement. In Czech Republic we expect Q2 GDP growth of 1.4% y/y compared to 1.2% y/y in Q1. We are, however, more concerned about a possible setback in growth in Q3. There is also a lot of inflation numbers due next week in EMEA. Overall, we expect the numbers to show that inflationary pressure remains limited. Our new EMEA Inflationary Pressure Index (see more on page 3 and 4) shows that EMEA inflation is decelerating. Finally, Hungarian Minutes on Wednesday could prove interesting."
- FX Outlook: Stronger EUR/USD supports CEE currencies "The recent move up in EUR/USD is especially supportive for the euro-sensitive EMEA currencies CZK, PLN and HUF, while it is negative for the dollar-sensitive currencies TRY and ZAR. As the euro might continue to outperform the dollar we are looking for CZK, PLN and HUF to outperform TRY and ZAR in the short term. We are therefore quite comfortable with the Scorecard continuing to recommend to be long in CZK/ZAR."
- Fixed Income Outlook: Decelerating inflation "The calendar is fully booked with inflation numbers next week. It will be especially interesting to watch the outcome of Polish inflation on Friday. Although we expect Polish inflation to ease slightly to 2.1% y/y in July from 2.3% y/y in June, our new EMEA Inflationary Pressure Index (see more on page 3 and 4) shows that Polish inflation is still accelerating."
- Scorecard-based trade of the week Buy CZK/ZAR "For a fourth week in a row the Scorecard-based trade of the week is CZK/ZAR with the Czech koruna still the highest scoring currency on our EMEA FX Scorecard and the South African rand the lowest. A further move up in EUR/USD will support this trade which has performed rather well for most of this week."

DenDanske EMEA Weekly 20100806

Rally has more legs; Greater China led the run again among major markets

- MXAPJ +2.4%, Hong Kong (+4%), Phils (+3%) and Taiwan (+2%) led the rally; Indonesia (-2%) was in red
- MXAPJ 12M forward P/E at 12.4X, 12M trailing P/B at 2X
- Asian earnings tracking 54% of full year estimates
GoldmanSachs Asia Pacific Weekly Kickstart 20100806

Saving private payrolls

- Macro viewpoint: Saving private payrolls "Upward revisions to the saving rate suggest a faster pace of household rebalancing."
- Fed watch: Slippery slope
"Expectations for the Federal Reserve to step in with additional easing are growing, but we think it is a little too soon for the Fed to embark on a significant shift in its policy stance."
- The week ahead: All eyes on the FOMC
"All eyes will be on the Fed. The FOMC delivers its policy decision on Tuesday and even though the payroll report was a disappointment, we believe it was not such a disappointment that the Fed is about to reboot quantitative easing. In addition, we’ll be watching for consumer price inflation (CPI) and retail sales. On CPI, we expect a donut on core, which would take the YoY rate to 0.9% in July from 1.0% in June - well below the Fed's implicit target. On retail sales, we are expecting an auto-driven 0.4% increase on the headline. The core retail control measure, which strips out autos, gas, and building materials is also expected to rise 0.4%, which is consistent with a modest recovery in consumer spending from
the current pace."
Merrill Lynch US Economic Weekly 20100806

S&P 500 up in July on great earnings and fading global risks; US macro headwinds remain

- "In July, the S&P 500 rebounded +7% off its 2010 low as global risks receded and 2Q
earnings surprised strongly to the upside. Stocks that generated positive earnings
surprises through better-than-expected sales outperformed firms posting positive
EPS surprises achieved through better margins. Macro headwinds remain in the
form of decelerating US economic growth and persistently high unemployment rate."

GoldmanSachs US Monthly Chartbook 20100804

China: “The Leading Indicator of the Leading Indicators?”

- Leading Indicator? — "The Chinese equity market has shown signs of ‘leading’ global equity markets at turning points over the past three years (the late-2007 peak, the late-2008 trough and the recent peak in markets at end-2009/start-2010); as a result, the 13% rally in the Shanghai Composite since early-July has been a major support for improved overall global sentiment over the past month."
- Biggest GEM — "Not surprisingly, China is now the biggest emerging market in the world, accounting for 18.6% of MSCI GEMs currently, up from 6.5% in mid-2000."
- Structural Change — "The big rise in China’s weight in global markets over the past decade is unrelated to market performance and is explained mainly by definitional changes to the shares included in the major indices (the Red Chips entered MSCI GEMs in June 2000) and to a huge rise in new listings over recent years."
- Why? — "China’ s leading indicator role may be explained by: i) the sheer size of its economy; ii) China’s role as, by far, the biggest consumer of commodities in the world (around 40% for some and close to 70% for iron ore); and iii) the recent tendency of the large Chinese equity market to move to extremes."
- Normalization — "The slowdown in the Chinese economy should continue, cutting year-on-year GDP growth to a trough of around 8% in 2011 Q1 – still, not a ‘hard landing’. Given that and inflation at around 3%, our China macro team expects policy to move to Neutral in the second half of 2010 with no rate hikes at all."
- China Strategy — "Our Chinese strategist, Minggao Shen, has turned more positive and expects the Shanghai Composite to rally by a further 5-15% to 2,800-3,100 by end-2010, based on: i) the economic slowdown being largely priced in; ii) policy headwinds are easing; iii) the massive liquidity drain in H1 2010 from the flood of IPOs etc. has likely ended; and iv) margin squeeze may have peaked."
- Asia Strategy — "Our Asian strategist, Markus Rosgen, has cut the size of his Underweight in China, on more attractive valuations and a slightly more bullish view on regional real estate; he looks to add to the market over the summer."
- GEMs Strategy — "We are currently Neutral in China in our GEMs portfolio. Given the analysis in this report, the recent strong rally in Chinese equities is important for global equities as a whole. However, with emerging markets looking somewhat overbought short-term, we also look to add to China mainly on weakness."
- Bullish — "Based on ‘no double-dip’ scenario, solid growth in emerging markets, low interest rates ‘for longer’ and attractive valuations, we remain bullish on emerging markets for the long-term (including on Chinese equities)."

Citigroup Global Emerging Markets Strategy 20100803