chaytor_sept8

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8 September 2010

GlobalStra

tegy

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: Dj-vu

It's a pretty familiar theme in the European morning: modest weakness in

equities, decent strength in bonds. We also have periphery widening again. I am

surprised that this is considered 'new' just because the Wall Street Journal

decided to run with it yesterday. Regular readers of RBS research will know that

when the results were announced we said they would likely not work and then

over a week ago we declared that they had definitively failed. What the market

should focus on NOW is what is going to be done about it. I think that because

peripheral spreads are widening in a 'benign' way (with 1-2 exceptions it's a

question of non-Germany not rallying as much as Germany, rather than yields

rising) there is a greater chance that the ECB do not step in with more shock-and-awe buying, but instead allow these spreads to push up to new wide levels;

a cause for renewed jitters in coming days. Andy Chaytor

RBS Economics team has revised down world growth estimate for 2011, for the

second time. 2011 global growth is now seen sub 4% and down about half a

point since our first downgrade in July. The downward revision is mostly the

result of a further downgrade to US outlook (to below 3% next year from 3.6%

previously) and the knock on effect this will have on the rest of the world,

particularly Europe. The European outlook has also deteriorated as the policy

response to address the periphery is unlikely to bring about the sustained

rebound in confidence policy makers hoped for. Forecast is for euro area growth

for 2011 of 1% (from 1.3% previously) and UK growth of 1.9% (down three tenths

from our previous forecast). See the latest Global Economic Forecasts: Slippery

slope for more details (the document includes detailed views across regions as

well as a full update of our macro economic forecast tables).

Ahead today

Bank of Canada policy rate decision (09:00 EDT): the BoC is expected to raise

rates today by 25bp to 1.0%. Last time the central bank said that while US

demand was picking up it was doing so in an uneven manner. Policy was said to

be "weighed carefully against domestic and global economic developments".

Little has happened to change this and hence a significant change in guidance

is unlikely.

G10 data calendar

EM data calendar

Overnight news

ECB Governing Council member, Axel Weber: said with real economy

developing better than expected at the beginning of the year, does not see fears

of a double-dip recession or deflation.
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The Royal Bank of Scotland

Japan Ministry of Finance Ogushi: FX intervention should be conducted

effectively if deemed necessary.

GlobalStrategy|8September2010

China property market heating: government may introduce a second-round of

measures to curb the property market (noted in the 21st Century Business

Herald). The measures may include stopping loans to real estate developers,

compulsory lowering of home prices and a ban on third-home purchases,

according to the newspaper.

UK Industrial production, Jul): IP was up 0.3% on the month, marginally below

consensus rise of 0.4%. The annualized rate moved up to 1.9% from 1.3% in

June, also marginally below forecast of 2.0%. Manufacturing production bang in

line with expectations +0.3% mom and +4.9% yoy.

German Industrial production, Jul: IP disappointed, up 0.1% mom vs. 1.0%

expected, though it improved from Junes 0.6% fall. The annualized growth was

again soft +10.9%, followed by a downward revision to last months to 10.7%.

UK Halifax house price, Aug: prices were up 0.2% on the month, stronger than

the 0.5% fall expected. Last months rise of 0.6% revised upwardly to 0.7%.

German trade balance, July: trade surplus narrowed to EUR 13.5bn from

14.2bn in June, as exports were down 1.5% over the month and imports down

2.2%.

Sweden GDP, Q2 (Final): strong upward revision from 3.7% to 4.6% yoy. The

quarterly growth rate also moved up from 1.2% to 1.9%.

Japan Machinery orders, Jul: Machinery orders surged nearly 9% in Jul after a

1.6% gain in June.

Todays views

FX: Periphery spreads look set to widen further as the ECB is less likely to

intervene as the widening is driven by lower core yields rather than higher

periphery yields (as the core can still access the market at favourable rates).

Currency markets could easily miss this subtlety and are therefore likely to

continue to sell the EUR on widening spreads. For now, EUR/USD remains in the

range. Its therefore hard to get too bearish while were above 1.2590/2610.

Despite increased worries about the international picture, the Bank of Canada

should still raise rates Wednesday. An increase isnt fully priced, so the CAD

should find some support. Whether it can build on these gains (ceteris paribus)

will depend on the guidance given. Last time the Bank of Canada said that whileUS demand was picking up it was doing so in an uneven manner. Policy was

said to be weighed carefully against domestic and global economic

developments. Little has happened to change this and hence a significant

change in guidance is unlikely.

Commodities: Metals to continue wrestling with supply surpluses. RBS has just

published its latest Global Economic Forecasts entitled Slippery Slope. Our

economists have downgraded global growth to 3.9% driven mainly by lower

expectations for the US and euro zone. For commodities this plays into my price

relapse theme that I have been running for the past 11 months. I already have a

flat price profile for the metals in 2011 reflecting enduring supply surpluses,

onerous inventory levels plus the overhang of idled capacity and a parade ofnew projects due on-stream. This year will see hefty supply surpluses notably

for aluminium, zinc and nickel which will need robust growth to erode. Lower

economic demand growth in 2011 reinforces my view that only copper will be in

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supply shortfall in 2011 hence it remains my top base metal pick. I still

advocate precious metals exposure but with gold tickling its record high, I would

prefer to not chase gold but skew exposure towards silver, platinum and

palladium.


Emerging markets CEEMEA: Hungary: (FT) The EU has expressed concerns

and requested clarity on the matter of the Hungarian government capping public

sector wages to HUF 2mn. This was effected in July and saw to a 75% pay cut

for the NBH governor. The PM Orban has persisted and insisted on towing this

hard-line with the EU, and is already on unconstructive terms with the IMF. What

is the end-game? Municipal elections in early October? At this juncture, all logic

points to the PM posturing for these elections. If he is not, it is very likely that

market reaction will be brutal and the best way to express that (if the time

comes) will be buying the CDS. Moving on to data, we continue to see

moderation in manufacturing production / industrial production data, which is in

line with market expectations for easing global economic momentum. Yesterday

we had moderation in Turkey's July print (but better than expected), today we

have a moderation in Hungary's July print (by a bit more than expected). Later

(1200hrs) we have the same indicator for South Africa, the market continues to

expect moderation. Easing economic momentum appears to be in the price.

Emerging markets NJA: Asian currencies were supported in morning trading

on Wednesday, with EUR/USD stabilizing at around 1.27. The USD/CNY

midpoint was set higher at 6.7907, reflecting EUR weakness overnight. Officials

orchestrated a rigorous defence of the glacial pace of CNY appreciation into the

final day of Larry Summers' visit to China. We expect the PBOC to continue its

current strategy of following moves in EUR/USD. In Korea, foreign ownership in

Korean bonds was reported to be 7% at end-August with scope for this to rise,

this should be KRW supportive. The fall in Asian rates on Wednesday morning

was more subdued than in US treasuries, presumably because the sell-off post

non-farm payrolls data last week was also milder. The BoK meets on Thursdayand a 25bp hike in the 7d repo policy rate is widely expected. We also expect

two further hikes of 25bp thereafter, bringing the policy rate to 3% by end Q1 11.

While this is largely priced in, there is scope for front end rates to rise particularly

if the BoK's rhetoric is on the hawkish side. We stay paid on the 1y IRS heading

into the policy meeting.

Emerging markets latAm: CLP struggled for most of Tuesday on the back of

renewed concerns over Europes stress tests and the weakness in global

equities. But the bounce in USDCLP lost steam towards the end of the session

and a bottom has yet to fully consolidate. Pension funds remain on the bid as

they continue to increase their holdings abroad and this is likely to delay short-

term gains. We still think, however, directionally its lower once pension demandstarts to fade. In spite of renewed concerns of a global slowdown and Chiles

relative openness to the external sector and particular vulnerability to Europe,

leading indicators in Chile all remain strong, highlighted by Julys IMACEC. This

underpins a stronger cyclical and structural flexibility in Chile relative to peers

and a natural resilience to another hit from abroad as long as the epicentre of the

double dip remains the US. We would use rallies in USDCLP closer to 500 to

build short positions outright against the USD.

Media

SEC signals shake-up of equity market rules FT

German banking weaknesses come to light FTWindsor at odds with Labor over mining tax review The Sunday Morning Herald

New Global-Bank Rules Could Require Bigger Cushions WSJ

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