Markets Presentation Sep.2011

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    CJs

    Markets Discussion

    September 2011

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    Table of Contents

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    Section 1 The Current Situation

    Section 2 Implications

    Markets Discussion

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    Section 1

    The Current Situation

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    Fixed Income & Currency

    Euro Debt Crisis In the bond market, market anxiety about asovereign bond is measure against the spread againstthe safest bond (the German bund in this instance)and credit default swaps (cost of insuring the bond)

    Irelands Vicious Cycle: Mortgage bubble burst in 2007 Investors

    stopped trusting Irish banks Dublinguarantees all bank debts in 2008 Bank lossesmount Dublin puts in more money Financesare stretched Investors dont trust the govt Bond yields rise Dublin puts in more money tocover the interest

    In return for bailing out Greece and Ireland,creditor nations are asking for tough restructuringcalled austerity measures What an austerity measure does:

    Increases tax = hurts consumer spending Cuts govt spending = hurts public projects and

    social benefit programs Restructuring the economy = massive layoffs

    (think: 1998 Korea)

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    German Bund 10yr Irish 10yr Yield Spread

    Around Christmas Last Year, This Is What I Had Said

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    Fixed Income & Currency

    Euro Debt Crisis (continued)

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    Italy 10yr

    Belgium 10yr

    Spain 10yr

    The Euros problem as a currency: European Central Bank(ECB) controls the overall monetary policy, but each nation getsto control its own fiscal policy

    This means that Euro countries cannot coordinate

    monetary+fiscal policies

    European Power Dynamics: Germany is the biggest nationin the Eurozone, followed by France, Italy, and Spain Germany, therefore, has the biggest voice, but needsFrances agreement to reach any conclusions

    Germany has made a move to take a haircut from investorsfrom any bailout funds starting from 2013

    Haircut: if govts were bailed out, ECB (or IMF) willprovide money to govt and they will pay out fully to theinvestors. Now, with haircuts, investors will not beguaranteed the full compensation for sovereign default

    This is making the investors nervous, as seen fromSpanish, Italian, Belgian bond yields, and this anxiety willcontinue into 2011, with Germany refusing to expand thebailout facility

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    Fixed Income & Currency

    Euro Debt Crisis:So What Does This Mean To Us?

    This years Korean equity market rally can bedefined by large buy-ups from foreign investors Always be reminded: foreign capitals enter Koreafor its strong fundamentals, but also a lot of them are

    speculative capital looking to cash in from liquidityfluctuations European banks are heavily loaded with debt ifinvestors in European assets have to write off theirlosses in Europe, they might have to pull back theirinvestments elsewhere to balance things out We have to pay close attention if EuropeanFinancial Stability Facility functions properly and if

    Portugal and Spain can hold its ground

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    KOSPI 200

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    The Great SelloffWhy?

    Markets DiscussionTHE CURRENT SITUATION

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    Outflow of foreign funds the

    biggest cause behind Augustscrash

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    Problems in the Eurozone

    Markets DiscussionTHE CURRENT SITUATION

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    The problem has persisted

    Greek debt problem has blownout of proportion since lastApril, when the Greekparliament narrowly passed theausterity plan

    Contagion is spreading tobigger economies because of

    the enormous amount ofexposure and complexinterconnectedness betweenthe Eurozone

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    Loss of Confidence in European Sovereigns

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    France has been Taking a Beating

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    Investors are speculatingFrance, with its 100% debt-to-GDP ratio, could be the nextone to collapse

    Belgium is also under threat butdue to its small economy, itsnot under the spotlight as muchas France

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    European Banks Under Fire

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    Problems in the U.S.

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    The last two QE programs haveput the Fed as the biggestdebtholder of its own countrysdebt

    Note that Chinas debt holdinghas flattened out since mid-2010: a result of adiversification of its foreign

    reserves

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    A Look at the Economic Forecasts

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    Economic indicators in Augusthave been very mixed

    Growth has come to a halt

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    A Jobless Recovery Cannot Last Long

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    The Obama administrationcould not come up with asolution to the unemploymentproblem

    For an economy largelydependent on consumerspending, the current level ofunemployment is unsustainable

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    Inflation is Creeping Up

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    Also Pushing Up Commodities Prices

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    Result: Stagflation

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    Concerns about American Financials

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    The Obama administrationcould not come up with asolution to the unemploymentproblem

    For an economy largelydependent on consumerspending, the current level ofunemployment is unsustainable

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    A Different Crisis, Increasingly Becoming Similar

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    A Different Crisis, Increasingly Becoming Similar

    Markets DiscussionTHE CURRENT SITUATION

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    Section 2

    Implications

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    Korea is Clearly Slowing Down

    Markets DiscussionIMPLICATIONS

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    Event

    Survey

    Actual

    Consumer Price Index (MoM) JUL 0.30% 0.70%

    Consumer Price Index (YoY) JUL 4.40% 4.70%

    Core Consumer Price Index(YoY) JUL - - 3.80%

    HSBC Manufacturing PMI JUL - - 51.3

    Unemployment Rate (SA) JUL 3.40% 3.30%

    Bank Lending to HH (KRW Tln) JUL - - 445.5T

    Industrial Production (MoM) JUL 0.50% -0.40%

    Industrial Production (YoY) JUL 6.20% 3.80%

    Industrial Production Mfg(YoY) JUL - - 3.80%

    Service Industry Output YoY JUL - - 3.80%

    Leading Index (YoY) JUL - - 2.00%

    Consumer Price Index (MoM) AUG 0.40% 0.90%

    Consumer Price Index (YoY) AUG 4.80% 5.30%

    Core Consumer Price Index(YoY) AUG - - 4.00%

    HSBC Manufacturing PMI AUG - - 49.7

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    Its Not Only Asia

    Markets DiscussionTHE CURRENT SITUATION

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