2012 Weekly Markets th, Perspectives8 nOctober For important disclosures, refer to the Disclosure Section, located at the end of this report.
Weekly SummarySpains holdout on aid continues to dominate and the budget deficit were the main focus of theEuropean equity markets. It seems the process debate. Mitt Romney´s electoral hopes seem tolacks an immediate catalyst or someone to lead the have bounce back.parties to an agreement. Last Friday, Spain´sEconomy Minister repeated that the country US Economy still stronger than Europe… Thedoesn’t need a bailout. September Eurozone manufacturing PMI came in at 46.1, an increase from the prior month, but stillPortuguese Finance Minister announced new tax pointing to a weak economy. In the US, we had anincreases… to replace the previous proposal to unexpected move to above 50.increase the employee contribution to socialsecurity to fund a reduction in the employer … with an encouraging Employment Report: Thecontribution. Should we expect a stronger unemployment rate fell to 7.8% in September.economic downturn next year? The improvement is probably not enough from the FED point of view but it will be important to… while in Greece, talks between the Greek election momentum. It was the penultimategovernment and the Troika continue: The budget report before polling day on November 6th.deficit should narrow to 6.6% of GDP in 2012 and4.2% in 2013. New QE policy from the FED continued to support the US equity market. Monsanto startedIn the US, President Obama and Mitt Romney the US earnings season.faced off in their first debate: As expected, taxes
US ISM manufacturing rises … and the services sectorin September… also showed strength.• The ISM Manufacturing Index in September • The ISM non-manufacturing index in September rebounded to a 4-month high of 51.5 from 49.6 increased to 55.1 from 53.7 in August. The index in August. The forward-looking new orders is now back to a level last seen in March; component increased to 52.3 from 47.1; • The best sectors were transport, retail and• The employment index rose to 54.7 from 51.6; construction;• Although it is positive surprise, a higher headline • The US economy seems to have gained some ISM will probably be needed to suggest a pick-up momentum. in the economy’s growth rate. 63 US: ISM Manufacturing Index US: ISM non-manufacturing 60 60 2010 58 57 56 55.1 54 54 51 2011 52 48 2012 50 45 48 Jan-11 Mai-11 Set-11 Jan-12 Mai-12 Set-12 Source: Bloomberg Source: Bloomberg
US unemployment rate Mid-September minutesdrops to 7.8%. were released.• September’s US non-farm payrolls was 114,000. • The minutes detailed the justification for why the The numbers for the two months before were FOMC opted for an aggressive easing step. The revised upward by 86,000; decision to launch QE3 seems to have been a• The unemployment rate fell to a three-and-a- fairly brief one; half-year low. The unemployment rate has fallen • "Many" participants believed that additional by 0.5% in two months; asset purchases would support the economy• Average weekly hours worked increased to through lower interest rates and easier financial 34.5, from 34.4 the previous month. conditions; 300 EUA: Non-farm Payrolls (000s) • “Many participants thought that more-effective forward guidance could be provided by specifying 250 numerical thresholds for labor market and 200 inflation indicators" . It is surprising to see how 150 close the FOMC came to tying its forward guidance to an explicit numerical threshold for 100 the unemployment rate and/or inflation. 50 Reaching an agreement on the exact numbers 0 was not possible; • The minutes contained no discussion of other policy tools. Source: Bloomberg
Royal Bank of Australia cut 6% Australia: GDP (YoY change)interest rates. 5% 4%• On October 3rd, in an unexpected move, RBA 3% reduced cash rate by 25bps to 3.25%; 2%• 19 of the 28 economists surveyed by Bloomberg 1% 0% expected the Central Bank to leave interest rates 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 on hold; Australia: Cash Rate Target• Accordingly with Central Bank’s Governor 8% Stevens “the outlook for growth in the economy 7% 6% has softened over recent months, with estimates 5% for global GDP being edged down”; 4%• The rationale behind this decision could be 3% RBA´s concern over China’s growth and the 2% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 resilience of the Australian Dollar; Australia: Consumer Price Index (YoY)• The Central Bank seems to expect a benign 7% inflation outlook; 6%• In the local economy, credit growth is now 5% weaker and the investment cycle is probably 4% 3% near its peak; 2%• Main commodities prices for Australia are below 1% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 levels recorded at the beginning of the year. Source: Bloomberg
Portugal: new tax hikes were announced for 2013.• Government acknowledged deficit slippage of • CGTP, one of Portugal’s main unions, called for a 1.2% in 2012 over the current target of 5% of general strike on November 14th. Protests and GDP; strikes have risen in recent weeks;• Increases in capital gains, property and income • The country’s recession could worsen if these taxes were announced; measures further undermines consumer• The number of brackets would be cut from eight confidence. to five. The new tax thresholds have yet to be announced. An additional 4% tax surcharge will Unemployment rate: be levied on incomes next year; Portugal vs Eurozone• The Portuguese Finance Minister said that the 16% 15.0% combined impact of these measures should lead 14% to an average increase of 7pp in household % workforce 12% Eurozone income tax; 10% 11.3%• According to the government the measures 8% (including spending cuts) amount to 3% of GDP; 6%• The unemployment rate is expected to reach 4% Portugal 2% 16.4%, from the current record level of 15%. 0% Portugal’s youth unemployment rate stood at 2000 2002 2004 2006 2008 2010 2012 35.9% in August; Source: Bloomberg
Debt swap helps Portuguese funding needs for 2013.• The Portuguese government swapped €3.75bn of o Net International Investment Position government bonds maturing in Sep13 for new worsened slightly to -111% of GDP; ones maturing in Oct15. The swap (probably o The household accounts show that done with the help of domestic investors) is not disposable income fell 3.1% yoy in Q2; particularly large but does reduce Portuguese o Households’ investment (mainly financing needs for next year. However, because investment in new houses) was down 5.7% the deficit-to-GDP ratio were changed for 2012 yoy, after a 6.2% yoy drop in the previous and 2013, funding needs could increase when quarter. compared to initial estimates; 25% Portugal: Government 2 years• The ability to access the market will be decisive for the ECB to intervene with its OMT program. Bond Yields 20% Portugal is supposed to partially go back to the Yield-to-maturity markets in Q3 2013 and regain full access to 15% funding by mid-2014;• Portugal released information on non-financial 10% accounts by the institutional sector for Q2: 3 years 4.9% o The current account deficit was 1.3% of 5% 4.7% GDP (SA), the lowest since 1995; 0% 2008 2010 2012 Source: Bloomberg
ECB: Waiting for Is Spain edging closer togovernments… asking for financial aid?• Key ECB interest rates were left unchanged. No • Spain continues to deny that it will ask for aid. major new policy initiatives were announced; The waiting game continues;• Regarding the Outright Monetary Transactions • The head of the government of the Spanish Program (OMT) Draghi said “Our decisions as region of Catalonia said his administration does regards OMT have helped to alleviate tensions not agree with the 2013 deficit targets that over the past few weeks, thereby reducing Spanish government is planning to set for the concerns about the materialization of regions; destructive scenarios”. “It is now essential that • Moodys will announce this month the results of Governments continue to implement the its review of Spains sovereign debt rating, which necessary austerity steps to reduce both fiscal is currently just one notch above junk; and structural imbalances and proceed with 35,000 Spain: Bond and bill redemptions financial restructuring measures”; (€million)• Draghi indicated that a range of indicators 30,000 25,000 would be examined to assess the degree of 20,000 disruption to normal monetary policy 15,000 channels, when deciding whether intervention 10,000 is appropriate; 5,000• The ECB might consider cutting interest rates 0 again, but a reduction had not been discussed Set-12 Out-12 Nov-12 Dez-12 Jan-13 Fev-13 Mar-13 Bonds Bills at the Governing Council meeting. Source: Bloomberg
Greece: 2013 GDP could fall 5% according to the Troika.• Government’s three coalition partners agreed • Reportedly, the Troika also casts doubts on €2bn on a new 2013/14 €13.5bn austerity package. worth of revenue-raising measures that should €10.5bn will come from spending cuts, with the be implemented next year; remaining coming from revenue increases; • In a interview to a German newspaper, Greek• Talks between the Greek government and the Finance Minister stated that he hopes to get Troika continued ahead of today’s Eurogroup disbursement of next tranche by end of October. meeting;• The draft budget showed that the Government Main new fiscal measures currently negotiated expects the economy to contract 6.5% this year with the troika for 2013 (€mn) and 3.8% in 2013. The budget deficit should Total Expenditure 7,308 of which: narrow to 6.6% of GDP in 2012 (from 9.1% last Wage bill 1,000 year) and 4.2% in 2013. The primary budget is Pensions bill 3,799 forecasted at -1.4% in 2012 and +1.1% in 2013; Restructuring of public sector 483• The two sides have showed some disagreement Social benefits 347 regarding the expected contraction of GDP next Healthcare costs 803 year and, thus, the spending cuts needed to National defense 304 meet the fiscal targets. Accordingly, the Troika Total Revenues 492 wants to increase the amount of cuts to be of which: implemented in 2013 to €9.2bn from €7.8bn; Streamlining of family allowances 427 Source: FinMin of Greece
Euro Zone – An economy stuck in a recession…• Revisions to earlier months revealed that the • The downturn remains more severe in the unemployment rate has been at a new record region’s periphery. high of 11.4% since June. Spain (25.1%), Greece PMI Manufacturing (24.4%) and Portugal (15.9%) show the highest 65 rates; 60• The unemployment increase probably reflects 55 Euro Zone the cost of economic adjustment taking place in 50 Germa ny the Eurozone and, in particular, in the peripheral 45 Fra nce Ita ly economies; 40 UK• Notwithstanding the small recovery, PMI indices 35 30 for manufacturing and service sectors still point 2008 2009 2010 2011 2012 to a downturn; Euro Zone PMI Composite is PMI Services 3% advanced 6 65 65 months 2% 60 60 1% 55 55 Euro Zone Germa ny 0% 50 50 Fra nce -1% Employment YoY 45 45 Ita ly -2% PMI Composite 40 UK (right sca le) 40 -3% 35 35 2005 2006 2007 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Source: Bloomberg Source: Bloomberg
China: manufacturing PMI Syria – Are we reaching arose modestly in September. tipping point?• China September official manufacturing PMI • There has been an exchange of artillery fire came in at 49.8 vs. 49.2 in August. This was the between Turkey and Syria; first rise since last May. Is the economy • For the last 18 months, there has been a huge stabilizing? death toll in Syria caused by a civil war;• The new orders component rose to the highest • In Turkey, the Parliament approved the figure since May this year. That component is deployment of troops to Syria; above 50 for 9 of the total 21 sectors. The orders • Will the conflict escalate? Do not forget that to inventory ratio rose to 1.04 in September (1.01 Turkey is a member of Nato. in August). The PMI component on new export orders also showed decent gain to 48.8 in September. China: Manufacturing PMI 65 60 55 50 49.8 45 40 35 2008 2009 2010 2011 2012 Source: Bloomberg Source: Financial Times
Last week market´s Highlights:• Last week was positive for European (Euro Stoxx Euro Stoxx 50 and S&P 500 (Daily Changes) 50) and US equity markets (S&P 500). An 2.00% 1.82% 1.83% expansionary global monetary policy is still 1.50% creating “asset price inflation”; 1.00%• Monsanto announced Q4 2012 of -$0.44 vs. 0.72% Street estimates of -$0.43. Revs $2.11bn vs. 0.50% 0.27% 0.36% 0.09% Street estimates $2.23bn. The company 0.00% provided initial FY2013 guidance of $4.18-$4.32 -0.21% -0.04% -0.03% -0.50% -0.27% vs. Street estimates of $4.38, which implies 13%- 1-Out 2-Out 3-Out 4-Out 5-Out 17% EPS growth. Monsanto expects “significant Source: Bloomberg Euro Stoxx 50 S&P 500 earnings growth” in Q1 2013; HPQ US: Stock Price• In its analyst meeting, Hewlett-Packard issued a 30 below-consensus FY2013 outlook. The company 28 announced a 4-5 year plan for its 26 24 transformation. FY2013 EPS range of $3.40 to 22 $3.60 was well bellow consensus of $4.18; 20• With Spain still undecided regarding accepting 18 aid, Spain’s Government bond yields continued 16 falling during last week. 14 Jan Fev Mar Abr Mai Jun Jul Ago Set Out Nov Dez Source: Bloomberg
What we are watching this week: CALENDAR - Event Date (GMT) Hour Survey Prior• We´ll highlight the Ecofin meeting EcoFin Meeting 10-08-2012 Not Available Not Available Not Available (will Spain and Greece be discussed?) 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 and the IMF’s World Economic Industrial Production MoM SA, Germany 10-08-2012 11:00 -0.50% 1.30% Outlook. US Trade Balance, PPI and 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 consumer will probably show the IMF releases World Economic Outlook 10-09-2012 Not Available Not Available Not Available Current Account, Japan 10-09-2012 00:50 JPY421.1bn JPY625.4bn cost of imported oil; Chancellor Merkel meets PM Samaras in Athens 10-09-2012 Not Available Not Available Not Available• In the US, Chevron, Alcoa 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 (Tuesday), Safeway (Thursday), Wells Industrial Production MoM, UK 10-09-2012 09:30 -0.50% 2.90% Greece issues €1bn in 6M TB 10-09-2012 10:00 Fargo, Google, JP Morgan (Friday) are Not Available Not Available Industrial Production MoM, France 10-10-2012 07:45 0.00% 0.20% expected to report. In President Hollande and PM Rajoy meet in Paris 10-10-2012 Not Available Not Available Not Available Europe, Lufthansa should release Brazil Copom monetary policy decision 10-10-2012 Not Available Not Available Not Available USs Federal Reserves Beige Book 10-10-2012 Not Available Not Available Not Available September traffic data on Germany issues €4bn in 5Y and €1.5bn in 11Y GB 10-10-2012 10:30 Not Available Not Available Wednesday. A trading update is 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% expected from Burberry on Thursday CPI YoY, Germany 10-11-2012 07:00 2.00% 2.00% and Carrefour will report its Q3 Sales; CPI YoY, France 10-11-2012 07:45 2.30% 2.10%• In Portugal, Banif will hold its General Korea BOK monetary policy meeting Italy issues Bonds 10-11-2012 10-11-2012 Not Available Not Available 10:00 Not Available Not Available Not Available Shareholders Meeting. Industrial Trade Balance, US 10-11-2012 13:30 -$44bn -$42bn Initial Jobless Claims, US 10-11-2012 13:30 365K 367K sales (August) and Employment Gabinet Office Monthly Economic Report, Japan 10-12-2012 Not Available Not Available Not Available Report will be announced. Industrial Production MoM SA, Euro Zone 10-12-2012 10:00 -0.40% 0.50% Finally, The Bank of Portugal release PPI MoM, US 10-12-2012 13:30 0.70% 1.70% U. of Michigan Confidence, US 10-12-2012 14:55 77.9 78.3 data on the banking sector (all IMF, 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 • Will Spain ask for ESM/EFSF support during the should be a preamble to the European Council meeting? Probably not. Sentiment is not meeting on October 18-19th; deteriorating. Market is not pressuring.• We should probably not be too ambitious: Nevertheless, some progress could happen in this o The Troika negotiations with Greece are yet week’s EcoFin/Eurogroup meeting. The country’s not concluded; new budget measures seems to satisfy most of o Germany is entering a pre-electoral period Europe’s demands. But, the Spanish regional (good reason to stall the European election calendar should probably be taken into integration process?). account.• 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”.
Disclosure SectionThis research report is based on information obtained from sources which we believe to be credible and reliable, but isnot guaranteed as to accuracy or completeness. All the information contained herein is based upon informationavailable to the public.The recipient of this report must make its own independent assessment and decisions regarding any securities orfinancial instruments mentioned herein.This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or relatedfinancial instruments. The investment discussed or recommended in this report may be unsuitable for investorsdepending on their specific investment objectives and financial position.The material in this research report is general information intended for recipients who understand the risks associatedwith investment. It does not take account of whether an investment, course of action, or associated risks are suitablefor the recipient.Investors should seek financial advice regarding the appropriateness of investing in any securities or investmentstrategies discussed or recommended in this research report and should understand that the statements regardingfuture prospects may not be realized. Investors may receive back less than initially invested. Past performance is not aguarantee for future performance.Fincor – Sociedade Corretora, S.A. accepts no liability of any type for any indirect or direct loss arising from the use ofthis research report.Recommendations and opinions expressed are our current opinions as of the date referred on this research report.Current recommendations or opinions are subject to change as they depend on the evolution of the company or maybecome outdated as a consequence of changes in the environment.Fincor - Sociedade Corretora, S.A. provides services of reception, execution, and transmission of orders.