8/8/2019 chaytor_aug31

http://slidepdf.com/reader/full/chaytoraug31 1/4

 

31 August 2010

   G   l  o   b  a   l   S   t  r  a

   t  e  g  y

 

Research Team

Global Strategy

www.rbsm.com/strategy

Global ViewsThis material should be regarded as amarketing communication and may have

been produced in conjunction with the RBS

trading desks that trade as principal in the

instruments mentioned herein.

The View Ahead: Double-Dip Decisions

It is hard to overstate the importance of this week. Data starts today with Chicago

Purchasing Manager and Consumer Confidence and via ADP and ISMs builds to

a NFP crescendo on Friday. Always an important number, it is more important

than usual this month given the uncertainties over the US economy. Rightly or 

wrongly (given the enormous revisions this series is subject to months and years

after its release) this could go a long way to settling the moderation vs. double-

dip debate which markets are currently engaging in.

One can easily argue that both scenarios are currently priced in; one could look

at how low bond yields are and argue that a double-dip is close to being pricedhere. Or one could look at equity markets still comfortably above their July lows

and argue that a mere moderation is priced in this market. Of the 45 economists

who have thus far submitted their expectations for private payrolls to Bloomberg,

8 are at 0k or a negative number. RBS stands below consensus but at +30k. This

is above the levels (negative) that are likely to be required to get the double-dip

properly priced into equity markets.

My views have been unchanged for some time, and I stick to them; long bonds

and the USD, short equities. My S&P target has been a move down to the old

lows at 1020 and I am happy to stick with that for now; the result of this week's

data will determine whether a more aggressive target is likely. Andy Chaytor 

Ahead today

Canada GDP, Q2: growth in second quarter is expected to slow to 2.5% yoy

from last quarter’s stellar growth of 6.1% yoy (this was the fastest pace in a

decade).

US Chicago PMI, Aug (9:45 EDT): PMI is expected to ease to 57.0 from last

month’s 62.3 print.

US Conference Board Consumer Confidence, Aug (10:00 EDT): Consumer 

confidence may have fallen for the third straight month in August, dropping to

around 47.5 which would mark the lowest reading since February.

US FOMC minutes (14:00 EDT): Despite a surprising decision to reinvest

proceeds from mortgage securities into Treasuries at the August 10 FOMC

meeting, the minutes from that gathering may be somewhat anticlimactic.

G10 data calendar  

EM data calendar  

8/8/2019 chaytor_aug31

http://slidepdf.com/reader/full/chaytoraug31 2/4

The Royal Bank of Scotland

Overnight news 

   G   l  o   b  a   l   S   t  r  a   t  e  g  y   |   3   1

   A  u  g  u  s   t   2   0   1   0German unemployment, Aug: unemployment fell by17k, broadly in line with

expectations of 20k fall; the unemployment rate was as expected: 7.6%

unchanged from July. The situation of the labour market in Germany has

improved steadily since July 2009 underpinning the strength of the cyclical

recovery. Currently the unemployment rate is at lowest since 1992.

UK Mortgage approval, Jul: approvals unexpectedly rose by 48.7k, followed by

an upwardly revised 48.6k in June. However, compared with a year ago, the

mortgage approvals stood at 53k.

Australia net exports & public demand, Q2: Net exports turned around sharply

in Q2, adding 0.4pp to GDP growth after a 0.5pp subtraction in Q1. This was

slightly smaller than we had expected and combined with weaker-than-expected

public sector spending (+1.3%qoq) has led us to trim our Q2 GDP forecast from

1.0% to 0.9%qoq ahead of tomorrow’s release.

Australia nominal retail trade, Jul: Retail sales rose a strong 0.7%mom sa inJuly, after an upwardly revised rise of 0.4% in June, suggesting that consumer 

spending got off to a good start in Q3.

Australia building approvals, Jul: After falling for three straight months,

building approvals rose a modest 2.3%mom in July as a strong rise in unit

approvals more than offset flat house approvals.

Today’s views

FX: I would like to think that Monday's EUR weakness and broad USD gains

were driven by a reassessment of the impact of a possible restart of Fed asset

purchases. In reality, it's far more likely to reflect month-end fixing flows, with alittle dose of risk aversion in summer thinned markets seeing a position squeeze.

EUR/CHF declines are more representative of hardening EUR worries. Periphery

bank debt rollover is getting a little more traction as we begin to leave summer 

markets behind. RBS Top Themes and Trades remains short EUR/CHF, targeting

1.28. Japanese FM Noda's repetition that he is watching and ready to take "bold"

action is getting stale. Further USD/JPY declines should be expected. The NZD

is weaker on news that New Zealand's South Canberbury Finance is to go into

receivership. Overall, the country's financial sector is in relatively good shape,

with non-performing loans of just 1.7% of total lending at end-2009. The failure,

while large in the context of the sector, is not large for the overall banking and

finance industry.

Emerging markets LatAm: On the latest bout of risk aversion it was somewhat

surprising that Venezuela outperformed Argentina with the 5Y CDS spread

differential narrowing from recent lows. This spread differential has typically

shown a high directionality with Argentina outperforming Venezuela for its

relative stronger (or less weak) credit risk perception on episodes of broader 

external risk aversion. We assume that the recent outperformance of Venezuela

versus Argentina is for the positioning risks with a dominant overweight position

of Argentina versus a dominant underweight position for Venezuela. The

absence of any adverse policy risk also in Venezuela also coincided with some

renewed political friction in Argentina. Under the context of stabilization in

external risk we assume that the spread premium Arg x Vene will continue to

narrow with investors forced to add the highest yielding Venezuelan bonds toavoid underperformance from the underweight positioning. We unwound this

relative value trade (sell 5Y Argentina CDS versus buy Venezuela 5Y CDS), but

2 

8/8/2019 chaytor_aug31

http://slidepdf.com/reader/full/chaytoraug31 3/4

The Royal Bank of Scotland

   G   l  o   b  a   l   S   t  r  a   t  e  g  y   |   3   1

   A  u  g  u  s   t   2   0   1   0

3

admit that we continue to prefer Argentina from a stronger (less weak) credit

perspective.

Emerging markets CEEMEA: On Hungary, it is worth noting that CHFHUF is

now above 220 on spot, concerns over Hungary’s FX loans exposure may

resume. In this particular regard, history tends to repeat itself, so herein, I

summarise the comments made by Julia Kiraly of the central bank. Their stress

test levels (for financial stability) imply a CHFHUF cross of 215 that is

“persistent”. Additionally, GDP needs to significantly underperform “…6.5

percentage points lower growth cumulatively in 2010 and 2011”. In my opinion, I

do not envisage HUF crashing through 300+, but there is scope for the CDS to

widen further (note that we like to sell Romania CDS vs. Hungary…see Tim Ash’s

note on this “Hungary/Romania | Credit fundamentals compared”). On South

Africa, President Zuma has indicated that a solution to the strikes needs to be

reached. On that basis, the government has upped its offer to the unions; a 7.5%

pay rise (from 7%), and a ZAR 800 per month housing allowance (from ZAR

700). The union wants an 8.6% wage increase and a ZAR 1000 allowance. It is

more likely that the unions will converge towards the government’s efforts than

the other way around. Thursday is a big day for the strike; some locals think it to

be over by then. We remain on watch. No significant data to highlight out of this

region today.

Emerging markets NJA: Asian currencies weakened as lower US equities

weighed heavily on the regional bourses, with risk off the table ahead of key US

data releases. USD/IDR continued to drift higher as August CPI data and Bank

Indonesia's policy meeting this week keep markets nervous. On the other hand,

USD/THB steadied as BOT is likely to take its key policy rates to 2% on 20 Oct.

In the rates markets, the overnight rebound in US treasuries paved the way for 

lower Asia rates on Tuesday. The main highlight, however, was BOK's

announcement that it will auction term deposits starting from October. These

deposits will mostly be in the 14d and 28d maturity bucket but will also include

the 91d tenor. Also in Korea, news that some local banks are withdrawing from

money market funds saw the 91d CD rate fix 2bp higher to 2.65% while the 72d

CD rate climbed by 12bp in the secondary market to 2.69%. 1y KRW IRS

followed suit and shifted 2bp higher while stronger receiving interesting was

seen for the rest of the curve. Separately, Indonesia aims to raise IDR3-6trn

equivalent from Samurai bond sales scheduled for November. Indonesia will

release its August inflation on Wednesday and our economist expects the data to

surprise to the upside. In China, the 7d repo rate surged 67bp to 2.92% and we

expect temporary relief after funds locked up in a major commercial bank's

convertible bond sale are returned to unsuccessful subscribers on Friday.

Thereafter, money market liquidity will become a concern again due to the long

Mid-Autumn holiday, as well as banks' quarter-end reporting in September. 

Media

Modest Measures Fail to Contain Yen - WSJ 

US housing woes compound labour concerns - FT 

Tokyo, Tech Stocks Hit Hard - WSJ 

Slumping Stocks Hit Oil Prices - WSJ 

8/8/2019 chaytor_aug31

http://slidepdf.com/reader/full/chaytoraug31 4/4

The Royal Bank of Scotland

   G   l  o   b  a   l   S   t  r  a   t  e  g  y   |   3   1

   A  u  g  u  s   t   2   0   1   0

 

4

Hhttp://strategy.rbsm.com/disclosuresH - View this page for additional Important Disclosure Information for Research Recommendations includin

Recommendation history.

g

This material has been prepared by The Royal Bank of Scotland plc (“ RBS”) for information purposes only and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in

any particular trading strategy. This material should be regarded as a marketing communication and may have been produced in conjunction with the RBS trading desks that trade as principal in the instruments mentioned

herein. This commentary is therefore not in dependent from the proprietary interests of RBS, wh ich may conflict with your in terests. Opinions expressed may differ from the opinio ns expressed by other divisions of RBS

including our investment research department. This material includes analyses of securities and related derivatives that the firm's trading desk may make a market in, and in which it is likely as principal to have a long or shortposition at any time, including possibly a position that was accumulated on the basis of this analysis prior to its dissemination. Trading desks may also have or take positions inconsistent with this material. This material may

have been made available to other clients of RBS before being made available to you. Issuers mentioned in this material may be investment banking clients of RBS. Pursuant to this relationship, RBS may have provided in the

past, and may provide in the future, financing, advice, and securitization and underwriting services to these clients in connection with which it has received or will receive compensation. The author does not undertake any

obligation to update this material. This material is current as of the indicated date. This material is prepared from publicly available information believed to be reliable, but RBS makes no representations as to its accuracy or 

completeness. Additional information is available upon request. You should make your own independent evaluation of the relevance and adequacy of the information contained in this material and make such other 

investigations as you deem necessary, including obtaining independent financial advice, before participating in any transaction in respect of the securities referred to in this material. Past performance is not necessarily

indicative of future results. Certain transactions, including those involving futures, options and products utilising futures and option s give rise to substantial risk and are not suitable for all investors.

THIS MATERIAL IS NOT INVESTMENT RESEARCH AS DEFINED BY THE FINANCIAL SERVICES AUTHORITY. 

United Kingdom. Unless otherwise stated herein, this material is distributed by The Royal Bank of Scotland plc (“RBS”) Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. Company No. 90312. RBS is

authorised and regulated as a bank and for the conduct of investment business in the United Kingdom by the Financial Services Authority. Australia. This material is distributed in Australia to w holesale investors only by The

Royal Bank of Scotland plc (Australia branch), (ABN 30 101 464 528), Level 22, 88 Phillip Street, Sydney NSW 20 00, Australia which is authorised and regulated by the Australian Securities and Investments Commission, (AFS

License No 241114), and the Australian Prudential Regulation Authority. France. This material is distributed in th e Republic of France by The Ro yal Bank of Scotland plc (Paris branch), 94 b oulevard Haussmann, 75008

Paris, France. Hong Kong. This material is being distributed in Hong Kong by The Royal Bank of Scotland plc (Hong Kong branch), 30/F AIA Central, 1 Connaught Road Central, Hong Kong, which is regulated by the Hong

Kong Monetary Authority. Italy. Persons receiving this material in Italy requiring additional information or wishing to effect transactions in any relevant Investments should contact The Royal Bank of Scotland plc (Milan

branch), Via Turati 18, 20121, Milan, Italy. Japan. This material is distributed in Japan by The Royal Bank of Scotland plc (Tokyo branch), Shin-Marunouchi Center Building 19F - 21F, 6-2 Marunouchi 1-chome, Chiyoda-ku,

Tokyo 100-0005, Japan, which is regulated by the Financial Services Agency of Japan. Singapore. This material is distributed in Singapore b y The Royal Bank of Scotland p lc (Singapore branch), Level 26, One Raffles Quay,

South Tower, Singapore 048583, which is regulated by the Monetary Authority of Singapore. RBS is exempt from licensing in respect of all financial advisory services under the (Singapo re) Financial Advisers Act, Chapter 110

(“FAA”). In Singapore, this material is intended solely for distribution to institution al investors, accredited investors, and expert investors as defined under the FAA.United States of America. RBS is regulated in the US by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in the document comply with an applicable exemption

from the registration requirements of the US Securities Act 1933. This material is on ly being made available to U.S. persons that are also Major U.S. institutional investors as defined in Rule 15a-6 of the Securities Exchange

 Act 1934 and the interpretative guidance promulgated there under. Major U.S. institutional investors should contact RBS Securities Inc., a member of FINRA (Financial Industry Regulatory Authority), if they wish to effect a

transaction in any Securities mentioned herein.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB.