Saxo Bank - Quarterly Outlook Report

Quarterly OutlookQ1 2012

MARKET COMMENTPERFECT STORM BREWING?page 4

MACRO OUTLOOKNAVIGATING THE ROUGH SEASpage 7

EQUITY OUTLOOKACCEPT THE UNCERTAIN FUTUREpage 10

FX OUTLOOKTHE SONG REMAINS (MOSTLY) THE SAME page 13

MONETARY POLICYMAJOR CENTRAL BANKSpage 19

ASIA OUTLOOKFASTEN YOUR SEATBELTSpage 22

COMMODITY OUTLOOKMARKETS BRACED FOR HEADWINDSpage 24

FX OPTIONSMORE UPSIDE POTENTIAL FOR VOLATILITIESpage 26

2 QUARTERLY OUTLOOK l Q1 – 2012

– Quarterly Outlook Q1-2012 –

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social tension. These factors will leave no nation untouched and could result in the most pivotal year by far since the global

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We feel that the onrushing Crisis 2.0 will however prove constructive in the sense that it forces the hands of policymakers and

politicians so that 2012 will be a year in which we fundamentally alter our assumptions not only about economics and monetary

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2012 will be a year of great change

QUARTERLY OUTLOOK l Q1 – 2012 3

– Quarterly Outlook Q1-2012 –

STEEN JAKOBSENCHIEF ECONOMIST RIM�R@WNA@MJ BNL

MADS KOEFOEDMACRO STRATEGISTLJNE�R@WNA@MJ BNL

JOHN J. HARDYHEAD OF FX STRATEGYIIG�R@WNA@MJ BNL

NICK BEECROFTSENIOR MARKETS CONSULTANTWMAD�R@WNA@MJ BNL

ANDREW ROBINSONFX STRATEGIST@VQ�R@WNA@MJ BNL

OLE SLOTH HANSENSENIOR COMMODITY STRATEGISTNKG�R@WNA@MJ BNL

GUSTAVE RIEUNIERGLOBAL HEAD OF FX OPTIONSFQ�R@WNA@MJ BNL

PETER GARNRYEQUITY STRATEGISTOF�R@WNA@MJ BNL


M A R K E T C O M M E N T: P E R F E C T S T O R M B R E W I N G ?

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sions are mounting unbearably. The key ingredients

are already clear: the combination of the ongoing

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ing social tensions. These factors will leave no na�

tion untouched and could result in the most pivotal

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That crisis unleashed the combined forces of govern�

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unconventional reaches – to intervene massively at

every turn to keep the economy and its zombie bal�

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NE� jBNKK@ORDk � 3GD� +DGL@M� A@MJQTOSBX� DWODQHDMBD��

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ing and will soon no longer be able to respond to

government and central bank manipulations. The

EU is in the hottest water at the moment due to

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rest of the developed world and possibly also China

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which ever mounting intervention from the public

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other name for this point is Crisis 2.0 – the needed

destruction of the old order that allows the con�

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considered a bad thing and inevitably brings with it

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rather than pretending that we can pay for all of

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2012 will be a year for the optimists as we might

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tion again – towards the future and away from the

tired and misguided efforts of the interventionists.

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that will conspire to make a perfect storm in the New

Year:

EU CRISISThe EU crisis has not been solved after the endless

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proach a solution unless we see a combination of an

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bined with debt restructuring for the periphery and

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tioning smoothly as those debt restructurings take

place. The “peripheral” crisis has even spread to core

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EU summits has merely shown us that the EU as it

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something more dramatic from EU leadership – but

more on that below.

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cious and is thoroughly entwined with the sovereign

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over the printing press will ensure a particularly se�

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gether under the sway of the austerity impulse.

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by its reliance on over investment in infrastructure

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even if nominally not so.


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wards a larger gap between rich and poor and high�

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the potential for strife have popped up in the Occupy

movements starting in the US and spreading rapidly.

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timent that will represent a serial challenge as the

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ly in 2012 in France. The rise of True Finns of Finland

in 2011 might be a strong indication of what kinds

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got an election year in the US. Could this one be the

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begin running out?

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about the potential for geopolitical strife in the Mid�

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fate of Iran and its nuclear programme and how will

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and dramatic is actually far more likely than simply

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EU CRISISAs the EU leaders have failed to address the fact that

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that particularly well) a renewed crisis is inevitable.

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toward EUR 300 billion by the end of January and

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-DV�8D@Q �3GHR�SHLD�@QNTMC��VD�L@X�ÖM@KKX�RDD�@�SQTD�

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dropping 25 percent or more in short order. Basi�

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somewhat like how cardinals select a new pope at a

papal conclave. A new EU would likely mean massive

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sibly two or more nations dropping out of the 17 na�

tion EMU. It would also almost have to mean a new

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Federal Reserve and the Bank of England. Despite the

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the European Stability Mechanism rescue funds (or

plans to have funds…) never really take off and Euro

Bonds are never issued and it becomes clear that the

United States of Europe was always a mirage. The

good news? The new EU establishes a more worka�

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issue and offers a fresh start.

ECONOMIC GROWTHThe growth outlook for Europe is clearly very nega�

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may hammer together some kind of deal with the

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ity cat is out of the bag and all the talk will be of off�

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progress. US growth will likely be somewhat stronger

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lifting on rebalancing its economy. Uncertainty is

great there because the regime is capable of forc�

ing activity and behaviour to a degree not attainable

elsewhere.

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cord levels and given our outlook for weak demand

growth. The tensions around the world from the on�

going EU crisis and possibly from higher interest rates

could increase the risk premium for owning stocks.

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overreact.


INTEREST RATES(MSDQDRS�Q@SDR�VHKK�FN�TO�HM�� ESDQ�@KK��SGD�BQDCHS�

cake is getting smaller as the ongoing balance sheet

recession around the world is already seeing the pri�

vate sector deleveraging in most areas. Banks must

move towards compliance with Basel 2.5 and Basel

3.0 to reduce the leverage on their balance sheets.

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ingly force the public sector to at least curtail its

growth if not begin to shrink outright. The most in�

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outlook.

CURRENCIES LNMF� SGD� L@INQ� BTQQDMBHDR�� SGD� 42#� HR� KHJDKX� SN�

ODQENQL�UDQX�VDKK��O@QSHBTK@QKX�CTQHMF�ODQHNCR�NE�QHRJ�

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)/8� NTSKNNJ� HR� SQHBJX� CTD� SN� HMSDQDRS� Q@SDR�� ATS� SGD�

JPY could continue stronger for the initial part of the

year. Other strong currencies might include NOK and

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ance sheets and distance from EU strife. The curren�

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CDU@KT@SHNM�B@M�AD�CNMDâ��@MC�"-8�@MC�HSR�R@SDKKHSDR��

like AUD and NZD.

A COUPLE OF ALTERNATIVE SCENARIOSWith so much potential energy in the still overlever�

aged and limping economies of the world and with

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there are an endless variety of paths the markets may

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We have simply outlined here the scenario we judge

to have the higher odds. Outcomes could look far

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SN� JDDO� SGD� CDAS� AN@S� @×N@S� E@Q�LNQD� RTBBDRRETKKX�

than we anticipate (likely in the short term with fancy

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and perfect storm could see a surprising delay and

not materialise until beyond Q2.

CONCLUSIONThe perfect storm is coming but there is no need to

panic. We feel that the onrushing Crisis 2.0 will prove

constructive in the sense that it forces the hands of

the policymakers and politicians. Ultimately we need

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rather as a warning sign of the alternative.

Only through accountability and owning up to reality

can economic renewal and growth return. We are

optimistic that 2012 will be a year of great change –

a year in which we fundamentally alter our assump�

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but also about our way of life. But before we get

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KHJDKX�OQNUD�BNTMSDQOQNCTBSHUD�@MC�KD@C�TR�PTHBJKX�SN�

SGHR�MDV�BQHRHR � MC�GDQD�VD�LD@M� BQHRHR� HM� HSR�ÖQRS�

CDÖMHSHNM� HM� SGD� ,DQQH@L�6DARSDQ� CHBSHNM@QX�� j@�

turning point” – not a state of cowering in fear or

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mistakes for so long before being forced to make

better choices. Therein lies the hope for the balance

of 2012.

2HMBDQDKX�

Steen Jakobsen


M A C R O O U T L O O K : N A V I G A T I N G T H E R O U G H S E A S O F T H E P E R F E C T S T O R M

The world economy eased off the accelerator in 2011

as foreign trade growth and government stimuli fad�

ed and the prospects for 2012 are for more of the

same. The developed economies will struggle with

weak domestic demand as austerity programmes

and soft labour markets take their toll while emerg�

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which will see central banks swinging into action

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world growth to slow further in 2012 to 3 percent.

US – THE OUTPERFORMER AMONG DE�VELOPED ECONOMIESThe Great Recession was an entirely different animal

to previous recessions as the impact on the economy

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asperated by a still ongoing private sector delever�

aging process. The US economy has struggled with

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for the better part of a decade now and while the

deleveraging process is slowing down that it is still

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noughties when debt and a growing economy went

hand in hand. The process continues to put a damper

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sion and with a mostly uncooperative Congress the

public sector will not receive much additional help

in 2012. With these two factors combined you have

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ket. Though the risks from the Eurozone sovereign

debt crisis and a weaker Asia (China) loom so large

that a recession cannot be ruled out it is not our pre�

ferred scenario; rather we look for the US to ‘muddle

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EUROPE – ON THE RECEIVING END OF THE PERFECT STORM6GHKD�VD�DWODBS�SGD�42�SN�LTCCKD�SGQNTFG�SGD�R@LD�

cannot be said about Europe where public sector

austerity prevails to a degree not seen across the

Atlantic. The US and Europe share many of the same

� QUARTERLY OUTLOOK l Q1 – 2012

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countries would kill for presently as they see yields

shoot up to untenable levels; illustrated by Italy in

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percent level several times recently (though we note

that real rates are not too high on a historical basis).

With Germany adamant (for now) that the European

Central Bank should not engage in unsterilised sov�

ereign bond purchases this is not an option for the

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Q@SGDQ�O@HMETK�DWDQBHRD�NE�BTSSHMF�OTAKHB�RDBSNQ�BNRSR�

just enough for the economy to remain in a state of

OQNKNMFDC�QDBDRRHNM��ATS�MNS�DMNTFG�SN�CD@K�PTHBJKX�

@MC�DEÖBHDMSKX�VHSG�SGD�QD@K� HRRTDR �3GD�$TQNYNMD�HR�

DWODBSDC� SN� SHO� HMSN�MDF@SHUD�FQNVSG� HM� SGD� ENTQSG�

PT@QSDQ� NE� �� @MC� RS@X� SGDQD� HM� SGD�ÖQRS� PT@QSDQ�

NE�� SGDQDAX�BNMÖQLHMF� SGD� QDBDRRHNM �3GD�4*��

VGHBG�HR�HM�@�RHLHK@Q�ONRHSHNM�SN�SGD�42��HR�DWODBSDC�SN�


NTSODQENQL�SGD�$TQN�@QD@�MDWS�XD@Q�SGNTFG�SGD�4*�

has plenty of rough seas to steer clear of itself.

ASIA – HURT BY THE SLOWDOWN IN THE DEVELOPED WORLDThe headwinds faced by Western economies are

ÖMCHMF�SGDHQ�V@X�SN� RH@ �$UDM�SGD�"GHMDRD�jFQNVSG�

LHQ@BKDk�� VGHBG� G@R� A@RDC� HSR� DBNMNLX� NM� HMUDRS�

LDMSR�@MC�DWONQSR��G@R� SN�BNOD�VHSG�VD@JDQ� SQ@CD�

growth as evidenced by its trade balance which is

down 19 percent in the twelve months through No�

vember compared to the year before. The decline

in global trade growth is bound to continue and

QDPTHQDR�"GHM@�SN�ÖMC�FQNVSG�DKRDVGDQD��@M�TMCDQ�

S@JHMF�VD�DWODBS�SGD�"GHMDRD�@QD�NMKX�O@QSKX�@AKD�SN�

achieve – hence our below consensus forecast for

"GHMDRD�&#/�NE��ODQBDMS

China however has a weapon that most developed

DBNMNLHDR� CN� MNS� ONRRDRR�� M@LDKX� Q@SD� BTSR � 3GD�

SHFGSDMHMF�OG@RD��VGHBG�ADF@M�HM��@R�SGD�DBNM�

NLX�QDF@HMDC�SQ@BSHNM�@MC�HM×@SHNM�OQDRRTQDR�RS@QSDC�

SN�ATHKC��G@R�ADDM�NM�GNKC�@S� SGD�/DNOKDiR�!@MJ�NE�

China lately. Indeed we have already witnessed the

ÖQRS� BTS� HM� QDRDQUD� Q@SHN� QDPTHQDLDMSR � 3GD� SHFGSDM�

HMF�OG@RD�SGTR�ONHMSR�SN�OKDMSX�NE�@U@HK@AKD�ÖQDONVDQ�

should the central bank deem it necessary to stimu�

late more to keep Chinese growth at a respectable

KDUDK�@MC�VHSG�HM×@SHNM�NM�QDSQD@S�SGD�ÖQRS�GTQCKD�HR�

out of the way. We look for a succession of cuts to

QDRDQUD�Q@SHN�QDPTHQDLDMSR�@MC�HMSDQDRS�Q@SDR�SGHR�XD@Q�

as China moves to strengthen the investment side

of its economy to compensate for the weakness in

foreign trade.


Life is like an ocean voyage. Some days the sun

RGHMDR�� NSGDQR� HS� Q@HMR� @MC� HM� Q@QD� B@RDR� /NRDHCNM�

demonstrates his wrath. In order to navigate in this

world we need a compass. As we head into the per�

EDBS�RSNQL��VD�HMSQNCTBD�@M�HMUDRSLDMS�BNLO@RR�SN�

better embrace the uncertainty and avoid the white

noise clouding our minds. Instead of trying to fore�

B@RS�SGD�MDWS�SGQDD�LNMSGR�VD�VHKK�HMRSD@C�OQNUHCD�@�

��EDDS�ODQRODBSHUD�NM�DPTHSHDR

EQUITIES ARE HISTORICALLY CHEAP BUT ARE THEY WORTH BUYING?&KNA@K� DPTHSHDR� LD@RTQDC� AX� NTQ� U@KT@SHNM� LNCDK�

are relatively cheap in a historical perspective due

to record low debt leveraging in companies and be�

nign valuations. One factor that is dangerously high

HR� QDSTQM�NM�@RRDSR�CQHUDM�AX�GHRSNQHB@KKX�GHFG�OQNÖS�

margins as high returns on assets normally precede

@�OKTMFD�HM�@FFQDF@SD�OQNÖSR �&HUDM�SGD�L@RRHUD�DW�

cess capacity in the labour force and recent down�

V@QC�OQDRRTQD�NM�BNLLNCHSHDR��VD�ADKHDUD�BNLO@�

MHDR�B@M�L@HMS@HM�BTQQDMS�OQNÖS�L@QFHMR� HM�SGD�ÖQRS�

RHW�LNMSGR�NE��

!@RDC� NM� BTQQDMS� U@KT@SHNMR�� @� RDSA@BJ� HM� SGD� ÖQRS�

G@KE�NE��CTD�SN�ONKHSHB@K�@MC�DBNMNLHB�CDUDKNO�

LDMSR� HM� $TQNOD��VNTKC�MNS�AD�NTSQHFGS�AKNNCX� @R�

DPTHSX�L@QJDSR�G@UD�@KQD@CX�@CITRSDC�U@KT@SHNMR�ENQ�

E Q U I T Y O U T L O O K : A C C E P T T H E F U T U R E I S U N C E R T A I N A N D E M B R A C E I T

a low growth scenario and more turmoil in Europe.

.TQ� HMCDW� U@KT@SHNM�LNCDK� NM� SGD� 2�/� �� ADKNV�

HMCHB@SDR� @�� XD@Q�DMC� KDUDK� NE� ��A@RDC�NM�

an Earnings Per Share (EPS) of 104.5 and Price Earn�

HMFR� �/�$�� NE� �� &HUDM� SGD� BTQQDMS� C@S@� DPTHSHDR�

@QD�HM�@FFQDF@SD�SDQLR�ONHRDC�ENQ�@�×@S�XD@Q� HM�NTQ�

A@RD�B@RD�RBDM@QHN�VHSG�LNRS�CNVMV@QC�OQDRRTQD�DW�

ODBSDC�HM�SGD�ÖQRS�RHW�LNMSGR�@R�SGD�D@QMHMFR�XHDKC�HR�

KHJDKX� SN� HMBQD@RD� QD×DBSHMF�@�BNMSQ@BSHNM� HM�FQNVSG�

DWODBS@SHNMR

However with historically decent earnings yields and

other asset classes providing no income stream to

ROD@J�NE��VD�ADKHDUD�@�MDS�MDTSQ@K�DPTHSX�ONRHSHNM1 is

attractive going into 2012.

ARE EQUITIES CLOSE TO A LOW POINT BEFORE A SECULAR BULL MARKET?Investors are in a thick fog with low visibility and

L@MX�@QD�RB@QDC�@ANTS�SGD�ETSTQD�NE�DPTHSHDR �6GHKD�

humans can certainly be too optimistic and they can

@KRN�BDQS@HMKX�AD�SNN�ODRRHLHRSHB��VD�CDÖMHSDKX�SHKS�SN�

wards the latter at this point in time.

3GD� BG@QS� NM� SGD� MDWS� O@FD� BNLO@QDR� SGD� BTQQDMS�

CAPE (cyclically adjusted price earnings – price over

SGD�K@RS�ÖUD�XD@QRi�NE�D@QMHMFR��NM�SGD�2�/��VHSG�


SGD�ENKKNVHMF��XD@Q�@MMT@KHRDC�QDSTQM�RHMBD��

It shows that we have entered a valuation range that

is normally a very good starting point for a secular

bull market with good probability of delivering more

SG@M�@�ÖUD�ODQBDMS�@MMT@KHRDC�QDSTQM

The chart below shows the prediction interval of the

QDFQDRRHNM�� VGHBG� RGNVR� SG@S� RHMBD� �� DPTHSHDR�

have never returned below zero percent (annualised

over 10 years) if investors bought at these current

U@KT@SHNMR � (M� NSGDQ�VNQCR�� HE�VD� DMSDQ� SGD� ODQEDBS�

storm and stock prices plunge even more we might

AD�HM�@�ODQEDBS�KNV�ONHMS�ADENQD�SGD�MDWS�RDBTK@Q�ATKK�

market.

6'(3$�-.(2$��(-5$23.12i�-4,!$1�.-$�ENEMY(MUDRSNQR� SDMC� SN� ENQFDS� SG@S� DPTHSHDR� QD×DBS� SGD�

underlying nominal growth of the economy.

Thus as the monetary base and productivity are


BNMSHMTNTRKX� FQNVHMF�VD�VNTKC� DWODBS� DPTHSHDR� SN�

SQDMC� TO�� @CITRSDC� ENQ� SGD� ATRHMDRR� BXBKD� NUDQ� SGD�

KNMF�SDQL �2SNBJR�B@M�SDLONQ@QHKX�DWODQHDMBD�MDF@�

tive real rate returns though.

The chart above shows the helicopter perspective

NM�SGD�SQDMC�HM�D@QMHMFR��OQHBD�SN�BXBKHB@KKX�@CITRSDC�

D@QMHMFR� @MC� ENQV@QC� ��XD@Q� @MMT@KHRDC� QDSTQMR �

#DROHSD� DMDQFX� BQHRDR��V@QR�� SDQQNQHRL�@MC�ÖM@MBH@K�

crises the human race and asset markets continue to

move forward. What we want to demonstrate with

the chart is that given the current earnings cycle in

QDK@SHNM�SN�OQHBD��SGDQD�HR�@�GHFG�OQNA@AHKHSX�NE�FNNC�

KNMF�SDQL�QDSTQMR ��(M�SGD�RGNQS�SDQL�SGNTFG�UNK@SHK�

ity can be high which is why we recommend a neu�

tral position at this point. Yes the Eurozone is seeing

BQ@BJR�@MC�"GHM@�LHFGS�AD�DWODQHDMBHMF�@�ATRS�HM�QD@K�

DRS@SD�ATS�SGDRD�VNTKC�MNS�AD�SGD�ÖQRS�@RRDS�L@QJDSR�

hiccups in history.

The biggest risk to our compass (built on data since

��HR�SG@S�SGD�BTQQDMS�CDKDUDQ@FHMF�HR�@�QDOK@X�NE�

the 1930s Great Depression where the economy and

RSNBJR�VHKK�RHFMHÖB@MSKX�CDUH@SD�EQNL�SGD�SQDMC�SN�SGD�

downside.

IF THE STORM HITS HOW DEEP CAN EQUITIES GO?According to our investment compass going back to

��SGD�KNVDRS��ODQBDMS�NARDQU@SHNMR�NM�OQHBD�SN�

cyclically adjusted earnings have been between eight

and thirteen. If the markets enter the perfect storm

could stock valuations fall into that range? Yes it is

OK@TRHAKD�@MC� SGD�@FMNRSHB�ADS�VNTKC�AD�LHC�ONHMS�

in the range which is 11.5 times cyclically adjusted

D@QMHMFR �6HSG�SGD�BTQQDMS�ÖUD�XD@QRi�D@QMHMFR�BXBKD�

NE��ODQ�RG@QD�HM�SGD�2�/��SG@S�VNTKC�HLOKX�@M�

HMCDW�OQHBD�NE��NQ�@�CDBKHMD�NE�QNTFGKX��ODQBDMS

,NQD� QD@KHRSHB@KKX�VD� ADKHDUD� SGD� TKSHL@SD� ×NNQ� KHDR�

around the price point when the present value of

FQNVSG�NOONQSTMHSHDR�HR�YDQN�SGTR�SGD�2�/��U@KT@�

tion is the present value of a perpetual stream of cur�

rent cyclically adjusted earnings discounted with an

DHFGS�ODQBDMS�QDPTHQDC�QDSTQM�NM�DPTHSX�� SGHR�VNTKC�

HLOKX�@�×NNQ�QNTMC��HM�SGD�2�/��NQ�@�CDBKHMD�

of 23 percent from current levels. Put very simply if

VD�FN�ADKNV��HM�SGD�2�/��HMUDRSNQR�RGNTKC�

OQNA@AKX� ADFHM� SN� @FFQDRRHUDKX� HMUDRS� HM� DPTHSHDR� @R�

the future will most likely deliver more than zero

economic growth.

1 A net neutral equity position means holding a quality portfolio of long positions expected to relatively outperform the market and hedge

the market risk (beta) equally, meaning hedging the long position value 1:1.


F X O U T L O O K : T H E S O N G R E M A I N S ( M O S T LY ) T H E S A M E

With a perfect storm in sight for the beginning of

��NMD�VNTKC�DWODBS�VD�G@C�RNLDSGHMF�CQ@L@SHB�

and new to say about the currency outlook relative

SN� NTQ� LNRS� QDBDMS� PT@QSDQKX� LTRHMFR � !TS� VHSG� @�

BNTOKD�NE�MNS@AKD�DWBDOSHNMR��NTQ�RNMF�ENQ�SGHR�NTS�

look remains mostly the same for the majority of the

&��BTQQDMBHDR �(M�AQN@C�RSQNJDR��VD�DWODBS�SGD�42#�

rally to pick up further steam in early 2012 on global

uncertainty and continued deleveraging and on the

×HORHCD�NE�SG@S�CDUDKNOLDMS��VD�DWODBS�SG@S�SGD�OQN�

cyclical currencies will generally face an uphill battle.

The Euro is likely to continue to weaken against the

42#��)/8�@MC�&!/�@R�SGD�$4�BQHRHR� KNNJR�SN�QD@BG�@�

crescendo some time in Q1.

EURO TO CONTINUE STRUGGLING3GD� #DBDLADQ� �� RTLLHS� NTSBNLD� NMBD� @F@HM�

E@HKDC� SN� RGNQD� TO� BNMÖCDMBD� SG@S� SGD� $TQNYNMD� HR�

LNUHMF�SNV@QC�ÖRB@K�@MC�ONKHSHB@K�RTRS@HM@AHKHSX �3GD�

agreement on a new EU treaty by March will be a

BQHSHB@K� ENBTR� HM� 0�� SGNTFG� SGD� BQ@BJR� NM� ONKHSHB@K�

resolve were already beginning to show merely days

after the summit. And any refusal of various mem�

ADQR�NE�SGD�$4��SN�RHFM�NM�SN�SGD�OQNONRDC�SQD@SX�

could render their connection to the EU potentially

tenuous to say the least.

,D@MVGHKD��ENQ�SGD�$TQNOD@M�"DMSQ@K�!@MJ��VDiKK�

paraphrase Forrest Gump and say that “easy is as

D@RX�CNDRk��LD@MHMF�SG@S��VGHKD�SGD�$"!�RS@MBD�

is far different from that of the Federal Reserve or

!@MJ�NE�$MFK@MC��VGHBG�@QD�G@OOX�SN�LNQD�CHQDBSKX�

LNMDSHRD�CDAS��SGD�#DBDLADQ��$"!�@MMNTMBD�

ments did see further ECB easing moves of a kind.

The lowering of reserve ratios and the launch of

��XD@Q�+NMF�3DQL�1DÖM@MBHMF�.ODQ@SHNMR��+31.iR��

@QD�@�ONRRHAKD�A@BJ�CNNQ�ENQ�RTEÖBHDMS�KHPTHCHSX�SN�

ease some of the pressure on the banks and EU

ODQHOGDQ@K�RNUDQDHFM�CDAS�HM�SGD�RGNQS�SDQL��DUDM�HE�

this is yet another delaying tactic and does not ad�

dress the overall longer term problem of insolvency.

1DF@QCKDRR��@R�VD�G@UD�R@HC�HM�SGD�O@RS�QDF@QCHMF�SGD�

$TQN�m� SGD� RHST@SHNM� HR�jKNRD�KNRDk �2BDM@QHN�.MD� HR�

simply more of the same: as long as the EU dithers on

ÖRB@K�TMHNM�@MC�SGD�$"!�CHSGDQR�NM�SQTD�0T@MSHS@SHUD�

$@RHMF�� SGD� BQHRHR�VHKK� AD� QD�@FFQ@U@SDC� @MC� SGD� $4�

VHKK�SHKS�PTHBJKX�SN�SGD�AQHMJ�NE�@�G@QC�CDE@TKS�@MC�NQ�

$,4�DWHSR�NQ�VGNKDR@KD�O@QSH@K�CDU@KT@SHNMR�NE�CDAS�

back into local currencies and the prominent risk of

widespread bank nationalisations. Scenario Two is

one in which the ECB either overtly or covertly pro�

UHCDR�RTEÖBHDMSKX�L@RRHUD�KHPTHCHSX�SN�JDDO�SGD�RXRSDL�

out of a crisis for the near term while the solvency

PTDRSHNM� HR�NMBD�@F@HM�JHBJDC�CNVM� SGD� QN@C � 3GHR�

would be de facto QE and bearish for the Euro.

3GD�SVN�RBDM@QHNR�@ANUD�@QD�MNS�CHRBQDSD��ATS�LNQD�

a description of two dynamics that are working at all

SHLDR��@MC�SN�SGDL�VD�LTRS�@CC�SGD�ONKHSHB@K�CHLDM�

RHNM�� RTBG� SG@S� SGD�LNRS� KHJDKX� DUDMST@K� RBDM@QHN� HR�

@KNMF�SGD�KHMDR�NE��SGD�$"!�OQNUHCDR�BNUDQS� KHPTHCHSX�

SG@S�JDDOR�SGD�BQHRHR�@S�A@X�ENQ�@�SHLD��ATS�SGD�ONKHSHB@K�

EQ@FHKHSX�HR�VG@S�HM�SGD�DMC�TMCDQLHMDR�L@QJDS�BNMÖ�

dence and we end in a serious reorganisation of the

$4��@KNMF�VHSG�R@HC�A@MJ�M@SHNM@KHR@SHNMR��O@QSH@K�CD�

E@TKSR��DSB �m�SGD�SQTD�"QHRHR�� VD�G@UD�CHRBTRRDC�HM�

this publication and previously. However reality plays

NTS� HM� �� SGD� $TQN� HR� KHJDKX� SN� E@CD� @F@HMRS� SGD�

42#��&!/��SGD�)/8��@MC�ONRRHAKX�SGD�2B@MCHDR�@R�VDKK

THE USD RALLY TO EXTEND FURTHER(M� NTQ� ENTQSG� PT@QSDQ� NTSKNNJ�� VD� RTFFDRSDC� SG@S�

SGD�42#�Q@KKX�VNTKC�DWSDMC�HM�0��@R�FKNA@K�L@QJDSR�

faced uncertainty and as we might see a new US

BNQONQ@SD�OQNÖS�QDO@SQH@SHNM�RBGDLD�HM��RHLHK@Q�

to the one that boosted the USD back in 2005. We

were both right and wrong in that outlook. While

L@QJDSR�G@UD�YHFFDC�@MC�Y@FFDC��SGD�FDMDQ@K�QHRD�HM�

global growth uncertainty has increasingly plagued

L@QJDSR�@MC�JDOS�SGD�42#�VDKK�AHC��RTBG�SG@S�HS�AQNJD�

SN�MDV��LNMSG�GHFGR�@GD@C�NE�XD@Q�DMC �.M�SGD�

NSGDQ�G@MC��VDiUD�RDDM�MN�RHFMR�SG@S�@�MDV�BNQON�

Q@SD�OQNÖSR�QDO@SQH@SHNM�AHKK�HR�HLLHMDMS �

3GD�42�DBNMNLX�G@C�@� QHO�QN@QHMF�0��DUDM�@R� SGD�

EU sank into a funk and Chinese growth worries

LNTMSDC � &NHMF� ENQV@QC�� SGNRD� QDK@SHUD� RSQDMFSGR�

@QD� KHJDKX� SN�ODQRHRS��VHSG� SGD�42�ODQG@OR�NMKX� QDK@�

SHUDKX�QDRHKHDMS��HE�MNS�O@QSHBTK@QKX�RSQNMF �,D@MVGHKD��


the compelling political rewards to be reaped from a

MDV�OQNÖS�QDO@SQH@SHNM�RBGDLD�@R�VD�FN�HMSN�DKDBSHNM�

year still offer compelling odds that new legislation

comes to pass early in 2012. That and the continued

deleveraging in the world economy and shrinking

carry as the other central banks have kicked off a

MDV�D@RHMF�BXBKD��@QD�E@BSNQR� KHJDKX�SN�ANNRS�SGD�42�

CNKK@Q��@M�@BBNLLNC@SHUD�%DC�MNSVHSGRS@MCHMF

THE POUND STERLING – STRONGER THAN IT OUGHT TO BE?There is nothing at all to like about the pound sterling

from an objective standpoint. The currency sports a

UHQST@KKX�MNM�DWHRSDMS�XHDKC��SGD�DBNMNLHB�NTSKNNJ�HR�

ONNQ��SGD�BNTMSQXiR�SVHM�CDÖBHSR�QDL@HM�L@RRHUD��@MC�

its central bank has an overtly bearish and dovish

president willing to offer endless helicopter drops of

cash. Even some of the more determined efforts at

@TRSDQHSX�@QD�E@HKHMF�SN�RGNQD�TO�ATCFDS�CDÖBHS�BQDC�

HAHKHSX� @R�LTBG� @R� GNODC � MC� XDS�� SGD� ONTMC� G@R�

been recovering slowly in recent months and that

CDL@MCR�@M�DWOK@M@SHNM �/@QS�NE�SGD�QD@RNM�B@M�AD�

found in shrinking carry disadvantage as other cen�

tral banks began easing in the second half of 2011.

MC�EQNL�@�B@OHS@K�×NV�RS@MCONHMS��@MC�DUDM�EQNL�@�

ONRHSHNMHMF�RDMSHLDMS�RS@MCONHMS��VD�G@UD�SN�VNM�

der whether the currency might actually do relatively

VDKK� HM�NTQ�E@UNTQDC�RBDM@QHN�NUDQ�SGD�MDWS�PT@QSDQ�

NQ�SVN � ESDQ�@KK��@R�KNMF�@R�SGD�RNUDQDHFM�CDAS�SHLD�

ANLA�HR�MNS�CDSNM@SDC�HM�SGD�BNLHMF�RDUDQ@K�LNMSGR��

the ongoing risks of balance sheet deleveraging and

safe haven seeking are possibly sterling positive. (Not

NMKX�BNTKC�RSDQKHMF�BNMSHMTD�SN�ÖMC�@�AHC�@R�SGD�$4�

seems to be doing everything in its power to drive

HMUDRSNQR�@V@X��SGD�FDNONKHSHB@K�@MFKD�HR�HMSDQDRSHMF�@R�

VDKK��VHSG�SGD�RSHKK�GTFD�4*�ÖM@MBH@K�RDBSNQiR�SHDR�SN�

VNQKC�ÖM@MBH@K�×NVR��MNS�SGD�KD@RS�EQNL�NHK�OQNCTB�

ing nations.) It is clear from the EU debate that the

UK has no interest in signing on to the new EU treaty

OQNONR@KR��ANSG�ADB@TRD�NE�HMSNKDQ@MBD�ENQ�SGD�KNRR�NE�

RNUDQDHFMSX��ATS�@KRN�ADB@TRD�SGD�4*�QDBNFMHRDR�SGD�

HLONQS@MBD�NE�HSR�ÖM@MBH@K�RDQUHBDR�RDBSNQ�@MC�V@MSR�

MN�O@QS� HM�ONRRHAKD�MDV� S@WDR�NM�ÖM@MBH@K�BTQQDMBX�

transactions.

SWISS FRANCThe Swiss National Bank and Swiss government must

AD�PTHSD�G@OOX�VHSG�SGDLRDKUDR�@ESDQ�SGDHQ�CQ@L@SHB�

efforts to halt an aggravated rise in the Swiss Franc

in 2011 took EURCHF from collapse to parity all the

way back to 1.20 and higher once the new EURCHF

×NNQ� V@R� HMSQNCTBDC� @MC� RN�B@KKDC� RHFGS� CDONRHSR�

VDQD� DLOKNXDC� SN� ENQBD� L@RRHUD� KHPTHCHSX� HMSN� SGD�

A@MJHMF�RXRSDL �(M��VD�RGNTKC�DWODBS�LNQD�NE�

SGD�R@LD��SGD�PTDRSHNM�NMKX�ADHMF�NMD�NE�SHLHMF�@MC�

whether the SNB will act forcefully in the midst of EU

turmoil early on in the year and possibly bide its time

TMSHK�0��NQ�K@SDQ �1DF@QCKDRR��SGD�OQDRRTQD�NM�$41"'%�

is generally higher as the central bank and govern�

ment will simply not tolerate damage to the Swiss

economy from an overvalued currency. Additional

DWO@MRHNMR� HM� RHFGS� CDONRHSR� @QD� @� FHUDM� HM� ��

but other measures that are already having an ef�

fect are Swiss agreements with the UK and Germany

NM�BQ@BJHMF�CNVM�NM�S@W�CNCFDQR�@MC�ONRRHAKX�DUDM�

the application of negative interest rates on foreign

CDONRHSR �(M��SGD�BNLAHMDC�ENQBDR�NE�SGD�2VHRR�

government and the SNB will show that intervention

B@M�VNQJ��HE�HS�HR�CNMD�jSGD�QHFGS�V@Xk

JAPANESE YEN – WILD CARD OF THE &��The Japanese Yen seems interminably associated with

the carry trade – always strengthening when risk is

off and weakening against higher yielding currencies

VGDM�SGD�L@QJDS� HR� QHRJ�RDDJHMF � (M�D@QKX��SGD�

)/8�L@X�ITRS�L@M@FD�SN�BNMSHMTD�HSR�O@RS�ADG@UHNTQ��

VHSG�AQ@JDR�@OOKHDC�AX�SGD�,HMHRSQX�NE�%HM@MBD�!@MJ�

of Japan intervention on market attempts to push

42#)/8�ADKNV�� 3GD�PTDRSHNM�VD�G@UD�@RJDC�ENQ�

RN�KNMF��GNVDUDQ��HR�VG@S�G@OODMR�VGDM�VNQKC�FNU�

DQMLDMS� HMSDQDRS� Q@SDR� QHRD�� )@O@M� G@R� SGD� VNQKCiR�

GD@UHDRS� OTAKHB� CDAS� KN@C�� @� RGQHMJHMF� BTQQDMS� @B�

BNTMS� RTQOKTR�� @MC�@�CDLNFQ@OGHB� RSQTBSTQD� SG@S� HR�

tilting Japan towards a nation of net spenders rather

SG@M� MDS� R@UDQR�� RN� SGDQD� HR� @� ONSDMSH@KKX� DWOKNRHUD�

direction change in store for the JPY from strength

SN�VD@JMDRR�HE�VGDM�SGD�FNUDQMLDMS�B@M�MN�KNMFDQ�

roll its debt at virtually free rates and the population

loses faith in its paper. The Japanese Yen will not be a


currency for the faint hearted trader once it reaches

SGHR�HM×DBSHNM�ONHMS

3'$�".,,.#(38�#.++ 12�� 4#��" #��NZD)6DiQD�SGQNVHMF�SGD�jBNLLNCHSX�CNKK@QRk�NE�SGD�&��

SNFDSGDQ�GDQD� HM�NMD�O@Q@FQ@OG��ATS� SGDHQ� ENQSTMDR�

are likely to diverge considerably in the New Year. The

TRRHDiR�@AHKHSX�SN�M@UHF@SD�SGD�STQLNHK�NE� K@SD��

VHSG�QDK@SHUD�@OKNLA�E@RBHM@SDR �-NQL@KKX��NMD�VNTKC�

DWODBS�SG@S�SGD�ANTSR�NE�QHRJ�@RRDS�RDKKHMF��BNLLNCHSX�

OQHBDR�OKTMFHMF�@MC�1DRDQUD�!@MJ�NE� TRSQ@KH@�DWODB�

S@SHNMR�MNRD�CHUHMF�CTD�SN�SGD�VD@J�CNLDRSHB�DBNM�

omy would have resulted in a far weaker currency.

3GHR�CDL@MCR�@M�DWOK@M@SHNM�m�@MC�SG@S�DWOK@M@SHNM�

might just be that the Aussie has been a kind of safe

G@UDM�ENQ�B@OHS@K�×HFGS�×NVR�EQNL�"GHM@��VGDQD�VNQ�

QHDR�@QD� HMBQD@RHMF�SG@S�@�G@QC��ONRS�ATAAKD� K@MCHMF�

HR� HM� SGD�L@JHMF � 'NV� KNMF� RTBG� ×NVR�LHFGS� RTR�

S@HM�SGD� TRRHD�HR�TMBKD@Q��ATS�SGD�L@RRHUD�DQNRHNM�NE�

fundamental support for the currency could mean a

UDQX�RHFMHÖB@MS�QD@KHSX�BGDBJ�Q@SGDQ�D@QKX�NM�HM��HE�

@�ODQEDBS�RSNQL�HR�AQDVHMF �1DK@SHUDKX�ROD@JHMF��-9#�

@MC�" #�VHKK� KHJDKX�AD� RSQNMFDQ� SG@M� 4#��@R� SGDX�

CNMiS�G@UD� SGHR�OQDLHTL�ATHKS� HM �" #�L@X�AD� SGD�

ADRS�ODQENQLDQ�NE�SGD�SGQDD�ADB@TRD�NE�HSR�OQNWHLHSX�

to the relatively strong US dollar and more resilient

42�DBNMNLX��SGNTFG�"@M@C@�RSHKK�E@BDR�@M�DWSDMRHUD�

CDKDUDQ@FHMF� HM� HSR�OQHU@SD� RDBSNQ��DUDM�@R� HSR�OTAKHB�

RDBSNQ�G@R�QDL@HMDC�ÖRB@KKX�UDQX�OQTCDMS

THE SCANDIES (NOK AND SEK) – SAFE HAVENS BY DEFAULT?The European investor is desperate for a safe place

to park capital. The SNB after all is bent on devalu�

HMF�SGD�ENQLDQ�EQ@MB�R@ED�G@UDM��@MC�$4�A@MJR�@MC�

EU sovereign debt are in a parlous state and possible

A@MJ�M@SHNM@KHR@SHNMR��CDU@KT@SHNMR�@MC�CDAS�G@HQBTSR�

NM�SGD�@FDMC@ � R�HE�SG@S�V@RMiS�DMNTFG��$4�ONKHSH�

cians are also pounding the table on the need for

ÖM@MBH@K� @MC� BTQQDMBX� SQ@MR@BSHNM� S@WDR � $MSDQ� SGD�

2B@MCHDR� @MC� SGDHQ� QDK@SHUDKX� NODM�� B@OHS@K� EQHDMCKX�

The wild-card of the year is the Japanese Yen. The fate of the JPY is clearly bound up with the direction of inter-

est rates, as the above chart shows. The two lines are the average US and German government 10-year yield

vs. the spot (carry-free) level of the JPY vs. an evenly weighted basket of the remainder of the G-10 currencies.

If interest rates remain very low, the JPY may strengthen further, but the currency’s days of strength will be

numbered if the 30-year bull market in government bonds comes to an end in the New Year.


DBNMNLHDR��VHSG� KNV�RNUDQDHFM�CDAS� KN@CR�SN�ANNS �

%NQ� SGNRD�VHKKHMF� SN�AQ@UD� SGD� KNV� KHPTHCHSX�NE�-.*�

and SEK (one of the main reasons we rejected their

ONSDMSH@K�@R�R@ED�G@UDM�BTQQDMBHDR�HM�SGD�O@RS��SGDQD�

L@X� AD� ETQSGDQ� @OOQDBH@SHNM� @GD@C � 3GD� KHPTHCHSX�

ONHMS� HR� RSHKK� @� BG@KKDMFD� ENQ� RSQNMF�@OOQDBH@SHNM��@R�

HR�SGD�2VDCHRG�JQNM@iR�MNQL@KKX�LNQD�OQN�BXBKHB@K�AD�

G@UHNTQ�CTD�SN�HSR�CDODMCDMBD�NM�DWONQSR �!TS�FHUDM�

SGD�DWSDQM@K�DMUHQNMLDMS�� SGDRD� SVN�BTQQDMBHDR�@QD�

unlikely to replay the sharp weakening they saw in

��@MC�HMRSD@C�L@X�CDE@TKS�SN�SGD�RSQNMF�RHCD�

in early 2012. Another potential source of trouble for

2VDCDM�HR�HSR�GNTRHMF�ATAAKD��VGHBG�ÖM@KKX�@OOD@QR�

to be unwinding and could drag on the health of the

BNTMSQXiR�A@MJHMF�RXRSDL

Who will be the relative winner in early 2012 - the generally pro-cyclical, but resource-backed commodity

dollars, or the possible European safe havens known as the Scandies? Odds lean to the latter given our overall

scenario for the coming quarter.

QUARTERLY OUTLOOK l Q1 – 2012 ��

2 7.�! -*�31 #(-&�%+..1��#$"$,!$1��


US The statement released after the last meeting of the

Federal Open Market Committee on December 13

reveals a Federal Reserve which is somewhat sur�

prisingly concerned about the economic landscape

SG@M�LHFGS�ODQG@OR�G@UD�ADDM�DWODBSDC��FHUDM�SGD�

moderate upside surprises which can be said to have

BG@Q@BSDQHRDC�DBNMNLHB�QDKD@RDR�HM�SGD�ENTQSG�PT@QSDQ�

of 2011.

The statement made reference to only “some im�

OQNUDLDMSk� SN� SGD� K@ANTQ� L@QJDS�� ODQG@OR� VHRDKX�

spurning the euphoria which greeted the fall in the

GD@CKHMD�TMDLOKNXLDMS� Q@SD� SN�� ODQBDMS� HM�-N�

UDLADQ�� @R� SGD� %.,"� QD@KHRDC� SGD� GHRSNQHB@KKX� KNV�

participation rate of 64.0 percent means the report

×@SSDQR�SN�CDBDHUD�@MC�RSHKK�O@HMSR�@�OHBSTQD�NE�@�CHR�

BNTQ@FDC�VNQJENQBD��L@MX�NE�VGNL�G@UD�FHUDM�TO�

DUDM�RDDJHMF�DLOKNXLDMS��SGD�VHCDQ�j4��k�LD@R�

TQD��VGHBG�HMBKTCDR�SGD�CHRBNTQ@FDC�@MC�SGD�TMCDQ�

DLOKNXDC�� QDL@HMR� CDOQDRRHMFKX� GHFG�� @S� �� ODQ�

BDMS �3GD�RS@SDLDMS�V@R�@KRN�BNMÖCDMS�SG@S�HM×@SHNM�

“has moderated”.

%DCDQ@K�LD@RTQDR�VGHBG�@QD�@KQD@CX�A@JDC�HM��BNL�

AHMDC� VHSG� RS@SD�KDUDK� BTSA@BJR�� LD@M� ÖRB@K� ONKHBX�

VHKK�HLONRD�@�RL@KK�CQ@F��HE�@MXSGHMF��HM��@MC�HS�

VHKK�DRRDMSH@KKX�QDL@HM�O@Q@KXRDC�TMSHK��@R�/QDRH�

dential and Congressional candidates struggle to

devise the stance they believe will please the voters

LNRS �6HSG� SGD� Q@SHMF�@FDMBHDR�ONHRDC�VHSG�ÖMFDQR�

NM�SQHFFDQR��SGD�MHFGSL@QD�NTSBNLD�VNTKC�OQNA@AKX�

AD�@M�.A@L@�QD�DKDBSHNM��VHSG�1DOTAKHB@M�BNMSQNK�NE�

the House and Senate. All of this will do nothing for

BNMRTLDQ�BNMÖCDMBD� ��DUDM� SGD�AHF�ANTMBD� HM� SGD�

Conference Board survey in November still left the

GD@CKHMD�ÖFTQD�ADKNV�SGD� KNVR�RDDM� HM� SGD�CDB@CD�

preceding the Financial Crisis.

%HM@KKX��SGD�$KDOG@MS�HM�SGD�1NNL��$TQNOD �2TEÖBD�HS�

SN�R@X�SGD�$4�HR�SGD�42i�MN ��SQ@CHMF�O@QSMDQ��VHSG��

percent of the revenue of the Top 500 US companies

coming from Europe. It is also highly likely that Euro�

OD@M�A@MJRi�CDRODQ@SD�@SSDLOSR�SN�LDDS�B@OHS@K�Q@SHN�

QDPTHQDLDMSR�VHKK�LD@M�SGDX�BTS�A@BJ�NM�KDMCHMF�SN�

42�ÖQLR��VGHBG�BTQQDMSKX�@LNTMSR�SN�@OOQNWHL@SDKX�

US$2 trn. We would estimate that US growth will be

at least 1 percentage point lower as a result of the

recession in Europe that we may well see in 2012.

(S�HR�UHS@K�SN�MNSD�SG@S��CTD�SN�SGD�@MMT@K�QNS@SHNM�NE�

UNSHMF� LDLADQR�� SGD� TADQ�CNUHRG� ODQL@MDMS� UNSDQ�

ruling class on the FOMC will be joined in January by

SGQDD�KHJD�LHMCDC�1DFHNM@K�%DC�/QDRHCDMSR��@MC�NMD�

BNLOKDSDKX� HRNK@SDC� G@VJ� �� +@BJDQ�� VGDQD@R� SGQDD�

hawks and only one dove will depart.

It therefore seems probable that the Fed will be

predisposed towards further easing; certainly in the

DUDMS�VD�RDD�NMD�NQ�LNQD�NE�SGD�ENKKNVHMF��@�VD@J�

RSNBJ�L@QJDS��CDBKHMHMF�HM×@SHNM��NQ�@�RSQNMF�CNKK@Q �

(M�E@BS��@KK�NE�SGD�@ANUD�RDDL�DLHMDMSKX�KHJDKX�@MC�RN�

VD�VNTKC�DWODBS�SN�RDD�ETQSGDQ�0T@MSHS@SHUD�$@RHMF��

�0$�� HM��VHSG� SGD� OQHK��LDDSHMF�@�GHFGKX�

KHJDKX� @MMNTMBDLDMS� C@SD�� FHUDM� SG@S� SGHR�LDDSHMF�

VHKK�AD�ENKKNVDC�AX�@�"G@HQL@MiR�OQDRR�BNMEDQDMBD

EUROZONE 3GD��SG�$4�RTLLHS�SN�DMC�@KK�RTLLHSR��NM�#DBDL�

ADQ��L@QJDC�SGD�RS@QS�NE�SGD�KNMF�L@QBG�SNV@QCR�

ÖRB@K�TMHNM��HS�C@QD�MNS�XDS�ROD@J�HSR�M@LD��VD�G@UD�

SN�B@KK�HS�@�hÖRB@K�BNLO@BSi��ATS�SGD�OQNAKDL�HR�SGD�

L@QBG� VHKK� HMCDDC� AD� KNMF� @MC� C@MFDQNTR�� S@JHMF�

SVN�XD@QR�SN�BNLOKDSD��@R�@�BNMRDQU@SHUD�DRSHL@SD

The trouble is that way before then the market will

CDL@MC�AKNNC��HE�ENQ�MN�NSGDQ�QD@RNM�SG@M�SGD�BNL�

pletely understandable fear that the march will never

QD@BG�HSR�CDRSHM@SHNM��ENQ�SGD�INTQMDX�SN�ÖRB@K�TMHNM�

will inevitably enjoy unpleasant travelling compan�

ions in the form of austerity and soaring unemploy�

LDMS�� KD@CHMF�SN�RNBH@K�TMQDRS�@MC�OQNA@AKD�QDFHLD�

changes.

3GD�L@QJDSiR�ED@QR�VHKK�BDMSQD�TONM�SGD�QD�ÖM@MBHMF�

MDDCR�NE�(S@KX�@MC�2O@HM��$TQN��AM�ENQ�(S@KX�@KNMD��

�DWBKTCHMF� @MX� RS@SD� RTOONQS� ENQ� A@MJR�� VHSG� SGD�

combined needs of Italy and Spain amounting to

Euro 500bn a year between 2012 and 2015.

M O N E T A R Y P O L I C Y : M A J O R C E N T R A L B A N K S


The probability is we will see yet another crisis sum�

LHS�HM�0��@MC�&DQL@MX�VHKK�B@UD�HM��L@XAD�@FQDDHMF�

to the issuance of Eurobonds with joint and several

KH@AHKHSX��B@TRHMF�ATMC�XHDKCR�SN�RN@Q �.MD�V@X�NQ�@M�

NSGDQ�VD�VHKK�ÖM@KKX�RDD�SGD�$TQNOD@M�"DMSQ@K�!@MJ�

R@SHRÖDC� SG@S� HR� G@R� VQTMF� DMNTFG� ÖRB@K� PTHC� OQN�

PTN�NTS�NE�ONKHSHBH@MR�@MC��GHCHMF�ADGHMC�HSR�RS@STSNQX�

QDPTHQDLDMS� SN� hDMRTQD�LNMDS@QX� RS@AHKHSXi�� BNLHMF�

SN�SGD�QDRBTD�AX�DWOKHBHSKX�ATXHMF�CHRSQDRRDC�RNUDQDHFM�

bonds. In fact one can argue that they have already

implemented this policy via the back door; Decem�

ADQiR� @MMNTMBDLDMS� NE� TMKHLHSDC�� XD@Q� KHPTHCHSX�

DM@AKDR�A@MJR�SN�ANQQNV�EQNL�SGD�$"!�@S��ODQBDMS��

�NQ�KNVDQ�HM�SHLD�OQNA@AKX��@MC�HMUDRS�HM�SGD�ANMCR�

of their mother country at maybe 6 percent or more.

Thus we see the classic mechanism by which banks

B@M� QDATHKC� B@OHS@K�� VHSGNTS� DPTHSX� HRRT@MBD�� @MC�

SGD� RS@SDR� B@M� @OO@QDMSKX� RS@X� KHPTHC �#HC� RNLDNMD�

say Ponzi?

(M� @CCHSHNM� SN� SGHR�NUDQS�NQ� BNUDQS�PT@MSHS@SHUD�D@R�

HMF��VDiC�DWODBS�SGD�L@HM�1DÖM@MBD�1@SD�SN�GHS��

ODQBDMS�HM�0��VHSG�@�ETQSGDQ�BTS�SN�� ODQBDMS�K@SDQ�

in the year.

JAPANJapan continues to represent a casebook study in the

C@MFDQR� NE� SGD� KHPTHCHSX� SQ@O��VHSG�LNMDS@QX� ONKHBX�

apparently emasculated and unable to improve eco�

MNLHB� BNMCHSHNMR �3G@S�ADHMF� SGD�B@RD�� SGD�ATKJ�NE�

SGD�GD@UX�KHESHMF�E@KKR�NM�SGD�RGNTKCDQR�NE�ÖRB@K�ONKHBX�

and new Prime Minister Noda seems to be displaying

an encouraging level of activism in this regard.

(M� SGD�E@BD�NE�DWSQDLD�FKNA@K�TMBDQS@HMSX�� SGD�!@MJ�

of Japan will probably keep its powder dry during

0��V@HSHMF�SN�RDD�VGDSGDQ�DUDMSR�HM�$TQNOD�@MC�NQ�

a strengthening of the yen mean they feel the neces�

sity to either increase the amount or duration of JGB

OTQBG@RDR�NQ�QDLNUD�SGD�� ODQBDMS�O@HC�NM�DWBDRR�

bank reserves.

UK 4*� "G@MBDKKNQ� &DNQFD� .RANQMDiR� TSTLM� !TCFDS�

Statement could hardly have made for more depress�

HMF�QD@CHMF��SGD�4*�KNNJR�RDS�SN�DMCTQD�@S�KD@RS�@M�

NSGDQ�ÖUD�XD@QR�NE�KNV�FQNVSG��GHFG�TMDLOKNXLDMS�

@MC�ÖRB@K�@TRSDQHSX

Whereas the UK economy managed to grow by 1.9

ODQBDMS�HM��NEÖBH@K�OQNIDBSHNMR�EQNL�SGD�.EÖBD�

NE�!TCFDS�1DRONMRHAHKHSX��.!1��MNV�ENQDB@RS�FQNVSG�

NE�� ODQBDMS��@MC�� ODQBDMS� HM��@MC��

QDRODBSHUDKX��ADENQD�@�hAKHRSDQHMFi�� ODQBDMS�QDBNUDQX�

in 2013.

(M�KHFGS�NE�SGD�@ANUD��SGD�!@MJ�NE�$MFK@MC�VHKK�BNM�

tinue to feel that the government is sticking to its

RHCD� NE� SGD� hA@QF@HMi� QD � ÖRB@K� ONKHBX� @MC� SGD� !@MJ�

will therefore respond with further QE in Q1. The

purchase of the additional £75bn of Gilts announced

NM�.BSNADQ��VHKK�AD�ÖMHRGDC�AX�%DAQT@QX��@MC�HS�

is therefore possible that additional QE will be an�

MNTMBDC� @ESDQ� SGD� %DAQT@QX� �� LDDSHMF�� ATS� VD�

VNTKC�OTS�NTQ�LNMDX�NM�,@QBG�� 1@SDR�VHKK�AD�GDKC�

at 0.5 percent throughout 2012.

SWITZERLAND#DROHSD� SGD� HMSQNCTBSHNM� NE� HSR� � �� h×NNQi� ENQ� $41�

"'%�� VHSG� HSR� @BBNLO@MXHMF� BNLLHSLDMS� SN� OQHMS�

@R�L@MX�%Q@MBR�@R�MDBDRR@QX��2VHSYDQK@MC�QDL@HMR�HM�

C@MFDQ� NE� RKHOOHMF� HMSN� @� CD×@SHNM@QX� PT@FLHQD� HM�

2012. A danger that will only be compounded by the

$4iR� SQHATK@SHNMR � 3GD� 2VHRR� -@SHNM@K� !@MJiR�� 2-!��

K@SDRS�HM×@SHNM�ENQDB@RSR��QDKD@RDC�@S�HSR�#DBDLADQ��

LDDSHMF��MTCFDC�HSR��DWODBS@SHNM�CNVM�SN��

percent from 0.5 percent and even at the end of its

ENQDB@RS�GNQHYNM��HM�0��HS�RDDR�NMKX�� ODQBDMS�

��RTQDKX�SNN�BKNRD�SN�CD×@SHNM�ENQ�BNLENQS

&HUDM�VG@S�VD�DWODBS� SN�G@OODM� HM� SGD�$4�m�@TR�

SDQHSX� BTADC�@MC� YDQN�FQNVSG� HM��@S�ADRS� �� AX�

DMC�0��VD�VNTKC�DWODBS� SGD�VQHSHMF� SN�AD�NM� SGD�

V@KK�@MC�DWODBS�SGD�2-!iR�$41�"'%�×NNQ�SN�AD�Q@HRDC�

to 1.3.

FIXED INCOME MARKETS��L@X�TRGDQ�HM�@�MDV�O@Q@CHFL�ENQ�ÖWDC�HMBNLD�

L@QJDSR�VHSG�HMSDMRD�BNLODSHSHNM�ENQ�B@OHS@K��LD@M�

ing we have seen the bottom in yields in most mar�


JDSR �+DSiR�AD�BKD@Q��SGHR�HR�MNS�SGD�hNKC�MNQL@Ki�VNQKC�

VGDQD�QHRJ�EQDD�RNUDQDHFM�ANMC�XHDKCR�ENQLDC�@�A@RD�

ENQ�QDSTQMR��OQDCHB@SDC�OTQDKX�TONM�SGD�BK@RRHB�HMFQD�

CHDMSR��M@LDKX�DWODBS@SHNMR�ENQ�RGNQS�Q@SDR�@MC�HM×@�

SHNM�NUDQ�SGD�KHED�NE�SGD�ANMC��@MC�SGD�XHDKC�NM�KNVDQ�

FQ@CD�ANMCR�@KRN�QD×DBSDC�SGD�OQHBD�NE�BQDCHS�QHRJ

The new normal means that virtually no sovereign

ANMCR� B@M� SQTKX�AD� QDF@QCDC�@R� QHRJ�EQDD�@MC�L@MX�

factors point to higher yields:

l� !@MJ�CDKDUDQ@FHMF�SN�LDDS�MDV��OTMHSHUD�B@OHS@K�

Q@SHN�QDPTHQDLDMSR�VHKK�LD@M�KDRR�KDMCHMF�SN�BNQ�

porates and therefore more corporate issuance.

l� .MD�NE�SGD�VNQKCiR�OQHLD�ANQQNVDQR��&DQL@MX��

faces a potentially huge bill to ensure the sur�

UHU@K�NE�SGD�$TQN��@MC� HS� HR�@�R@ED�ADS�SG@S�SGD�

German people will eventually decide to pay this

AHKK��@R�SGDX�QD@KHRD�GNV�ADMDÖBH@K�SGD�$TQN�G@R�

been for Germany and what a cataclysm its de�

mise would bring.

l� The market can stay irrational longer than gov�

DQMLDMSR� B@M� RS@X� RNKUDMS�� HE� ED@Q� CNLHM@SDR�

greed.

R�DUDQ�� HM�@M� HMBQD@RHMFKX�BNQQDK@SDC�FKNA@K�DBNMN�

LX��SGD�JDX�SN�RTBBDRR�VHKK�AD�SGD�@M@KXRHR�NE�ROQD@CR�

ADSVDDM� HRRTDQR��@MC�OTQD�BNQONQ@SD�BQDCHS�@M@KXRHR�

will also have to be overlaid with country risk. For

HMRS@MBD��SGD�4*�G@R�BNLD�SN�AD�RDDM�@R�RNLDSGHMF�

NE�@� R@ED�G@UDM��CTD� SN� SGD�BN@KHSHNM�FNUDQMLDMSiR�

DWSQDLD�BNLLHSLDMS�SN�ÖRB@K�OQNAHSX��@MC�RN�BNQON�

Q@SD�HRRT@MBD�G@R�DWOKNCDC �� BBNQCHMF�SN�#D@KNFHB��

2SDQKHMF�CDMNLHM@SDC�MNM�ÖM@MBH@K� BNQONQ@SD� ANMC�

R@KDR��@BQNRR�@KK�FQ@CDR��@QD�TO��ODQBDMS�CTQHMF�SGD�

ÖQRS��LNMSGR�NE��VGHKD�DTQN�@MC�CNKK@Q�L@Q�

JDSR�G@UD�BNKK@ORDC�@MC�RS@FM@SDC��QDRODBSHUDKX �6,�

,NQQHRNM�� SGD� 4*� RTODQL@QJDS� BG@HM�� BNTKC� G@UD�

RNKC�v� �AM�NE� HSR� QDBDMS��XD@Q� HRRTD�� Q@SGDQ� SG@M�

the £400m it looked to raise. QE has probably also

helped.


While our recent commentaries on the macro situ�

ation in the developed world have drawn the anal�

NFX�NE�@�OK@MD�×XHMF�NM�NMD�QDL@HMHMF�DMFHMD�� RH@iR�

DBNMNLHDR�G@UD�SGD�ADMDÖS�NE�RSHKK�×XHMF�NM�@KK�DM�

gines but with tremendous hope placed in the hands

NE�SGD�OHKNS�m�SGD�ONVDQR�SG@S�AD�HM�"GHM@�m�SN�CDSDQ�

LHMD�SGD�RLNNSGMDRR�NE�SGD�MDWS�K@MCHMF

There is no doubt that the Chinese economy is com�

HMF� HM� SN� K@MC� m� DWONQS� FQNVSG�G@R�ADDM� HM� RSD@CX�

CDBKHMD� RHMBD� LHC�� @ESDQ� SGD� GD@KSGX� QDANTMC�

@ESDQ� SGD� �� BQHRHR� @R� FKNA@K� CDL@MC� E@KSDQR � (L�

port growth is dead in the water as manufacturing

slows and both industrial production and PMI data

DBGN�SGD�R@LD�SGDLD �3GD�LTBG�U@TMSDC�RVHSBG�SN�

CNLDRSHB� BNMRTLOSHNM� Q@SGDQ� SG@M� QDKH@MBD� NM� DW�

port markets has yet failed to materialise as efforts

SN� BG@MFD� @� LTBG�HMFQ@HMDC� LHMCRDS� L@JD� LHMHR�

cule steps forward. Yet we are still talking of above

��ODQBDMS�FQNVSG�ENQ��SGNTFG�LNRS�NE�SGHR�V@R�

EQNMS�KN@CDC�HMSN�SGD�ÖQRS�G@KE�NE�� %QNL�GDQD�NM�

HM��SGD�NTSKNNJ�@OOD@QR�AKD@J�@MC�NTQ�@M@KXRHR�RTF�

FDRSR�VD�BNTKC�E@BD�FQNVSG�NE�@�LDQD��ODQBDMS�ENQ�

��VDKK�ADKNV�LDCH@M�L@QJDS�ENQDB@RSR�NE�@QNTMC�

� ��ODQBDMS

With no change in the current dismal global outlook

HM�RHFGS��VG@S�@QD�SGD�@TSGNQHSHDR�CNHMF�SN�LHSHF@SD�

SGD� LTBG�ED@QDC� G@QC� K@MCHMF�� 3GD� /DNOKDiR� !@MJ�

of China recently initiated a shift in monetary policy

VHSG�SGD�ÖQRS�D@RHMF�RSDO� HM�SGQDD�XD@QR�@MMNTMBDC�

DMC�-NUDLADQ�� @� �� A@RHR� ONHMS� BTS� HM� SGD� QDRDQUD�

Q@SHN� QDPTHQDLDMS�� VHSG� LNQD� DWODBSDC� MD@Q�SDQL�

�-NSD�@��AO�BTS�HR�DWODBSDC�SN�ANNRS�SNS@K�KHPTHCHSX�

by about Yuan 400 bn (USD 63 bn)). With time run�

ning out for an additional cut this year (though in the

past the PBOC has announced moves during western

L@QJDS� GNKHC@XR�� HS� HR� NCCR�NM� ENQ� ETQSGDQ� BTSR� �� @S�

KD@RS�SVN�VD�OQDCHBS��CTQHMF�0��VHSG�SGD�ÖQRS�

ADENQD�SGD�+TM@Q�-DV�XD@Q�GNKHC@XR�HM�K@SD�)@MT@QX

6G@S� @ANTS� SGD� ATAAKDR�� /QNODQSX�QDK@SDC� ATA�

bles were very much the talk of the markets in the

ÖQRS� G@KE� NE� �� @MC� SGD� FNUDQMLDMS� G@R� ADDM��

consistent in applying measures to cool this sector

�ENQ�DW@LOKD��GHFGDQ� KDMCHMF�Q@SDR��OTQBG@RHMF� KHL�

its and a ban on mortgages for third homes). While

SGDQD�G@UD�ADDM�AQN@C�RHFMR�NE�@�BNNKHMF�NEE��K@SDRS�

data for November shows that there are still hot�

spots recording 6 percent annualised price increases

so this issue is still not completely and uniformly re�

solved.

Another issue for China is the Yuan. Despite con�

tinued pressure from the US (and more lately from

SGD�$TQNOD@M�"DMSQ@K�!@MJ��@�QDRTQFDMS�42�#NKK@Q�

@MC�@�RGHES�HM�HMUDRSLDMS�×NVR�G@UD�RDDM�SGD�8T@M�

weaken some 0.6 percent versus the US dollar from

HSR�OD@J�LHC�-NUDLADQ �3G@S�LNMSG�R@V�@M�@KLNRS�

��ODQBDMS�CQNO�HM�%NQDHFM�#HQDBS�(MUDRSLDMS��%#(��

SGD�ÖQRS�CQNO�HM��LNMSGR��@MC�LNRS�KHJDKX�B@TRDC�

by the grim and complicated global outlook. At the

R@LD�SHLD��.UDQRD@R�#HQDBS�(MUDRSLDMS�HM�MNM�ÖM@M�

cial sectors originating from China rose to over $50

AM� HM� SGD�ÖQRS��LNMSGR�NE� SGHR� XD@Q��@M� HMBQD@RD�

NE�� ODQBDMS�X�X��@FFQ@U@SHMF�SGD�MDF@SHUD�HLO@BS�

NM�SGD�BTQQDMBX�NE�RTBG�ONQSENKHN�×NVR �&HUDM�RTBG�

×NVR�HS�VNTKC�S@JD�FQD@S�DEENQS�SN�BNMSHMTD�SGD�RN�

B@KKDC� O@SG� NE� jRKNV�� FQ@CT@K� @OOQDBH@SHNM� NE� SGD�

8T@Mk� SG@S�G@R�ADDM�@CUNB@SDC�CDL@MCDC�AX� SGD�

Western world (which leads to our Outrageous Pre�

CHBSHNM�MTLADQ��SG@S�42#"-8�QHRDR��ODQBDMS�SN�

7.00).

SO WHAT ARE THE IMPLICATIONS FOR THE REST OF ASIA?We all know how much the Australian resource sec�

SNQ�CDODMCR�NM�DWONQSR� SN�"GHM@ � (MCDDC� SGD�"GH�

nese thirst for natural resources has produced one

of the biggest mining booms in decades for the

BNTMSQX �4MENQSTM@SDKX��HE�VD�S@JD�@V@X�SGD�LHMHMF�

RDBSNQiR�BNMSQHATSHNM�SN�SGD�DBNMNLX�SGDQD�CNDR�MNS�

appear to be much left. The manufacturing sec�

tor has been struggling during the second half of

2011 (manufacturing PMI languishing below the 50

mark since July) and the service sector is depend�

ent on the recycled dollars from the mining sector. A

marked slowdown for China will undoubtedly cause

HRRTDR�ENQ�SGHR�NMD�SQHBJ�ONMX �

2 ( � . 4 3 + . . * � � % 2 3 $ - � 8 . 4 1 � 2 $ 3 ! $ +3 2 � � 6 $ � 1 $�A B O U T T O L A N D


Singapore has had a great emphasis on electronics

DWONQSR� HM� HSR� RSQNMF�FQNVSG�GHRSNQX��ATS� SGD� QNKKDQ�

BN@RSDQ�M@STQD�NE�SGHR�RDBSNQ�RHMBD�DMC��HR�BTQ�

QDMSKX� RSQTFFKHMF� ENQ� SQ@BSHNM�� DRODBH@KKX� FHUDM� SGD�

backdrop of weak global growth. There has been

RNLD�CHUDQRHÖB@SHNM�HMSN�SGD�OG@QL@BDTSHB@K�RDBSNQ�

ATS� SGD� NUDQ@KK� SQDMC� ENQ� MNM�NHK� CNLDRSHB� DWONQSR�

remains weak. With the global economy in dramatic

RKNVCNVM��MN�BG@MFD�HM�SGHR�SQDMC�HR�DWODBSDC�HM�SGD�

MD@Q�SDQL �(MCDDC��2HMF@ONQDiR�/,�+DD�G@R��PTHSD�QD�

@KHRSHB@KKX��V@QMDC�SG@S�FQNVSG�NE�ADSVDDM��ODQ�

cent (compared with 5 percent on average over the

K@RS�ENTQ�XD@QR��L@X�ADBNLD�SGD�MNQL�NUDQ�SGD�MDWS�

few years.

R� ENQ�'NMF�*NMF�� SGD� PTDRSHNM� QDL@HMR�VGDSGDQ�

"GHM@�KD@CR�'NMF�*NMF�NQ�UHBD�UDQR@ �(M�-NUDLADQ��

,@CR�*NDENDCiR�QDRD@QBG�ONHMSDC�NTS�SG@S�SGD�SVN�

DBNMNLHDR� @QD� BNHMBHCDMS� @MC�@R� RTBG� BN�CDODMC�

DMS � .TQ� DWODBS@SHNMR� NE� RKNVDQ� "GHMDRD� FQNVSG��

LHWDC�VHSG� HMCDODMCDMS� DWSDQM@K� BG@SSDQ� NE� 'NMF�

*NMF� GD@CHMF� SNV@QCR� YDQN� FQNVSG�� RTFFDRSR� SGD�

prospects for Hong Kong are not healthy.

(M� SGD� DUDMS� NE� @� G@QC� NQ� DUDM� BQ@RG� K@MCHMF��VD�

VHKK�ÖMC�NTS�NUDQ�SGD�MDWS�EDV�PT@QSDQR�HE�HS�L@SSDQR�

VGDSGDQ�XNT�@QD�RHSSHMF�HM�ÖQRS��ATRHMDRR��NQ�DBNMN�

my class with the risk increasing that we are all at

the back of the plane.


C O M M O D I T Y O U T L O O K : M A R K E T S B R A C E D F O R H E A D W I N D S

Against the backdrop of an uncertain global eco�

MNLHB�NTSKNNJ��VHSG�$TQNOD� KNNJHMF�UDQX�A@C�� RH@�

probably worse than consensus and the US improv�

HMF� RNLDVG@S�� BNLLNCHSX� SQ@CDQR� VHKK� AD� KNNJHMF�

SNV@QCR��VHSG�RNLD�BNMETRHNM �3GD�ÖQRS�PT@QSDQ�

will most likely produce a great amount of uncertain�

ty as the market will be looking for clarity on many of

SGD�TM@MRVDQDC�PTDRSHNMR�KDES�EQNL��DRODBH@KKX�

SGD�@KK�HLONQS@MS�TMJMNVM�NE�VGDSGDQ�VD�VHKK�E@BD�

another global recession in 2012.

6HSG�NTQ�DWODBS@SHNMR�ENQ�ETQSGDQ�CNKK@Q�@OOQDBH@SHNM�

CTQHMF�SGD�D@QKX�RS@FDR�NE��SGD�TORHCD�ENQ�SGD�

major commodity indices seems to be limited dur�

HMF� SGD�ÖQRS�PT@QSDQ�VHSG� HMUDRSNQR� KHJDKX� SN�AD�UDQX�

RDKDBSHUD � 'NVDUDQ� VD� ADKHDUD� SG@S� SGD� LTKSH�XD@Q�

TOSQDMC��@KRN�B@KKDC�SGD�BNLLNCHSX�RTODQ�BXBKD��G@R�

MNS�XDS�QTM�HSR�BNTQRD�@MC�KNMF�SDQL�HMUDRSNQR�RGNTKC�

UHDV�SGD�MDWS�EDV�LNMSGR�@R�@M�NOONQSTMHSX�SN�@BBT�

LTK@SD��@�UHDV�SG@S�VHKK�AD�ETQSGDQ�RTOONQSDC�RGNTKC�

the central banks of emerging markets (EM) and de�

veloped markets (DM) engage in simultaneous ag�

gressive monetary easing.

/QDBHNTR�LDS@KR�KHJD�FNKC�@MC�SN�@�BDQS@HM�DWSDMS�RHKUDQ�

VHKK�BNMSHMTD�SN�ADMDÖS�EQNL�BNMSHMTDC�QHRJ�@UDQRHNM ��

Supporting factors also include the negative yield

DMUHQNMLDMS��BTQQDMSKX�RDDM�@LNMF�LNQD�SG@M�G@KE�

NE� SGD�&��M@SHNMR��BNLAHMDC�VHSG�RSQNMF�OGXRHB@K�

demand from central banks and emerging market

investors. We see prices stabilising after a late 2011

BNQQDBSHNM� VHSG� EQDRG� HMUDRSLDMS� ×NVR� CQHUHMF� SGD�

OQHBD�SNV@QCR��CTQHMF�0��@MC�DUDM�GHFGDQ�K@SDQ�

in the year.

!@RD�LDS@KR�VHKK��CDROHSD�@�CDSDQHNQ@SHMF�NTSKNNJ�ENQ�

MDV�RTOOKX��BNMSHMTD� SN�RSQTFFKD� SGQNTFG� SGD�D@QKX�

parts of 2012 on growing concern of a recession in

CDUDKNODC�L@QJDSR�� BNLAHMDC�VHSG� DLDQFHMF�L@Q�

JDSR�RKNVHMF�CNVM �3GD�KNMF�SDQL�OQNRODBS�GNVDUDQ�

remains positive as lower prices should meet restock�

HMF� CDL@MC�� DRODBH@KKX� EQNL� BNTMSQHDR� KHJD� "GHM@ �

However with industrial metals being viewed as an

economic indicator for growth any traction during

the early parts of 2012 remains limited as focus will

AD�ÖQLKX�NM�SGD�CDL@MC�RHCD

The agricultural sector suffered a major setback dur�

ing 2011 on a combination of normalised weather

and farmers across the globe reacting to the high

OQHBDR�CTQHMF��AX�OK@MSHMF�QDBNQC�@LNTMSR�NE�

MDV�BQNOR �3GD�RSQNMFDQ�CNKK@Q�GTQS�OQHBDR�@MC�42�DW�

ONQSR�@R�ATXDQR�STQMDC�SN�NSGDQ�RTOOKHDQR��DRODBH@KKX�

in the Former Soviet Union and South America. The

accumulative speculative long position held by hedge

funds across the sector has fallen to the lowest level

in two and half years and on that basis (combined

with the potential challenges of weather related sup�

OKX� HRRTDR��VD�RDD�FNNC�ONSDMSH@K� ENQ�GHFGDQ�OQHBDR��


especially among commodities with constrained sup�

OKX��RTBG�@R�BNQM�@MC�RNXAD@MR �+HUDRSNBJ�RGNTKC�@KRN�

hold up well due to strong fundamentals combined

with its defensive character.

3GD�DMDQFX�RDBSNQ��DWBKTCHMF�42�M@STQ@K�F@R�VGHBG�HR�

stuck in a bear market amid ample US supply from

RG@KD�F@R�� KNNJR� RDS� SN� QDL@HM� Q@MFD�ANTMC�CTQHMF�

the early parts of 2012. Such is the uncertainty about

the direction that fat tails on the options curve have

emerged with investors buying out of money pro�

tection in both directions. The renewed slowdown

in 2011 largely occurred due to the spike in energy

OQHBDR��VGHBG�R@V�SGD�@UDQ@FD�OQHBD�NE�!QDMS�BQTCD�

rising by more than one third from 2010.

Increased energy demand from EM looks set to con�

tinue to outweigh the slowdown in DM and this com�

AHMDC�VHSG�L@MX�NHK�OQNCTBHMF�M@SHNMR�MNV�QDPTHQHMF�

GHFGDQ� OQHBDR� SN� O@X� ENQ� HMBQD@RDC� RNBH@K� RODMCHMF��

DRODBH@KKX�@ESDQ�SGD� Q@A�2OQHMF��RGNTKC�JDDO�OQHBDR�

supported despite slowing economies. Brent crude

has the potential of making a low around 95 dollars

and should average 100 dollars during Q1 before ris�

ing later in the year.


Options´ implied volatilities give an insight into both

SGD�BTQQDMS�ADG@UHNTQ�NE�ÖM@MBH@K�L@QJDSR�@MC�SGDHQ�

DWODBSDC�UNK@SHKHSX�@MC�SGD�%7�NOSHNMR�L@QJDS�HR�MNV�

at a crucial juncture.

.M� SGD�NMD�G@MC�� RNLD� BTQQDMBX�O@HQR� @QD�LNUHMF�

@�FQD@S�CD@K��VHSG� ENQ� HMRS@MBD�$4142#�BKNRHMF� SGD�

XD@Q�NM�SGD�KNVR �.M�SGD�NSGDQ�G@MC�SGNTFG��RNLD�

pairs such as USDJPY or GBPUSD remain lacklustre.

As for CHF a long period of low volatility could be

ENKKNVDC� AX� @� RGNQS� ODQHNC� NE� DWSQDLD�LNUDLDMSR�

(from intervention or other). It is therefore important

SN�KNNJ�@S�UNK@SHKHSHDR�HM�SGD�BNMSDWS�NE�VG@S�G@R�ADDM�

happening and what could happen over a short to

LDCHTL�SDQL�GNQHYNM

3GD�ADKNV�BG@QS�CHROK@XR�SGQDD�LNMSG� S�SGD�,NMDX�

HLOKHDC�UNK@SHKHSHDR�ENQ�ÖUD�L@INQ�BTQQDMBX�O@HQR�RHMBD�

LHC�� "KD@QKX��HLOKHDC�UNK@SHKHSHDR�G@UD�HMBQD@RDC�

NUDQ�SGHR�ÖUD�XD@Q�ODQHNC��ROHJHMF�SN�QDBNQC�GHFGR�HM�

SGD�E@KK�NE��ATS�HS�HR�HLONQS@MS�SN�MNSD�SG@S�UNK@�

tilities themselves have become a lot more volatile!

3GHR� HR�NE�BNTQRD�MNS�RTQOQHRHMF�� SGD�FKNA@K�ÖM@MBH@K�

crisis has made markets a lot more uncertain and li�

PTHCHSX�G@R�CQHDC�TO�@�FQD@S�CD@K

3G@S�R@HC��@�EDV�SGHMFR�CN�RS@MC�NTS��CDROHSD�SGD�QD�

BDMS�CDUDKNOLDMSR�HM�SGD�$TQNOD@M�RHST@SHNM��HLOKHDC�

UNK@SHKHSHDR� HM� $41�BDMSQHB� O@HQR� �$4142#�� $41"'%��

EURGBP for instance) still seem to provide decent

F X O P T I O N S : M O R E U P S I D E P O T E N T I A L F O R V O L A T I L I T I E S

TORHCD�ONSDMSH@K � �OQDLHRD�SN�SGD��STQLNHK�V@R�

@�GTFD�VHCDMHMF�HM�BQDCHS�CDE@TKS�RV@OR�ENQ�ÖM@MBH@K�

institutions and the failing of many of those institu�

SHNMR �1DOK@BD�jÖM@MBH@K�HMRSHSTSHNMRk�VHSG�j$TQNOD�

an countries” or “sovereign entities” and you have

a somewhat valid statement describing the situation

today. It is therefore easy to imagine that a worsening

NE�SGD�ÖM@MBH@K�BQHRHR�VNTKC�KD@C�SN�HLOKHDC�UNK@SHKHSHDR�

QD@BGHMF� @MC� RTQO@RRHMF� SGD� DWSQDLD� KDUDKR� RDDM� HM�

��

(M�@CCHSHNM��RNLD�BTQQDMBX�O@HQR�RTBG�@R�42#)/8��&!�

PUSD or USDCAD are actually seeing their volatilities

at a relatively low level compared to the last three

years. This is symptomatic of the crisis being per�

BDHUDC�@R�$41�BDMSQHB � �E@HKHMF�$TQNOD�VNTKC�G@QCKX�

KD@UD�SGD�QDRS�NE�SGD�VNQKC�TMRB@SGDC � R�RTBG��KNMF�

NOSHNM�ONRHSHNMR��HM�R@X�42#)/8��BNTKC�OQNUHCD�@�FQD@S�

deal of leverage to the astute investor: offering great

potential whilst facing a somewhat limited downside.

Owning options could prove to be an invaluable ad�

CHSHNM�SN�@M�HMUDRSLDMS�ONQSENKHN��LNQD�RN�MNV�SG@M�

DUDQ��@R�VD�BNMSHMTD� SN� E@BD�VG@S�BNTKC�ADBNLD�@�

ODQEDBS�RSNQL�ÖM@MBH@KKX��DBNMNLHB@KKX��ONKHSHB@KKX�@MC�

RNBHNKNFHB@KKX � +DSiR�MNS�AD�CDSDQQDC�AX�VG@S�LHFGS��

@S� ÖQRS� FK@MBD�� @OOD@Q� SN� AD� GHFG� HLOKHDC� UNK@SHKHSX�

levels; those could easily prove to be cheap entry

levels.


SN�SGD�@TSGNQ�@MC�L@X�MNS�QD×DBS�SGD�NOHMHNM�NE�2@WN�!@MJ�

@MC�@KK�DWOQDRRHNMR�NE�NOHMHNM�@QD�RTAIDBS�SN�BG@MFD�VHSG�

NTS�MNSHBD��MDHSGDQ�OQHNQ�MNQ�RTARDPTDMS�

This communication refers to past performance. Past per�

formance is not a reliable indicator of future performance.

Indications of past performance displayed on this commu�

nication will not necessarily be repeated in the future. No

representation is being made that any investment will or is

KHJDKX�SN�@BGHDUD�OQNÖSR�NQ�KNRRDR�RHLHK@Q�SN�SGNRD�@BGHDUDC�

HM�SGD�O@RS��NQ�SG@S�RHFMHÖB@MS�KNRRDR�VHKK�AD�@UNHCDC

Statements contained on this communication that are not

historical facts and which may be simulated past perfor�

mance or future performance data are based on current

DWODBS@SHNMR��DRSHL@SDR��OQNIDBSHNMR��NOHMHNMR�@MC�ADKHDER�

NE�SGD�2@WN�!@MJ�&QNTO �2TBG�RS@SDLDMSR�HMUNKUD�JMNVM�

@MC�TMJMNVM� QHRJR�� TMBDQS@HMSHDR� @MC�NSGDQ� E@BSNQR�� @MC�

TMCTD�QDKH@MBD�RGNTKC�MNS�AD�OK@BDC�SGDQDNM � CCHSHNM@KKX��

SGHR� BNLLTMHB@SHNM�L@X� BNMS@HM� hENQV@QC�KNNJHMF� RS@SD�

LDMSRi � BST@K�DUDMSR�NQ�QDRTKSR�NQ�@BST@K�ODQENQL@MBD�L@X�

CHEEDQ�L@SDQH@KKX� EQNL� SGNRD� QD×DBSDC�NQ� BNMSDLOK@SDC� HM�

RTBG�ENQV@QC�KNNJHMF�RS@SDLDMSR

3GHR�L@SDQH@K�HR�BNMÖCDMSH@K�@MC�RGNTKC�MNS�AD�BNOHDC��CHR�

SQHATSDC��OTAKHRGDC�NQ� QDOQNCTBDC� HM�VGNKD�NQ� HM�O@QS�NQ�

disclosed by recipients to any other person.

Any information or opinions in this material are not in�

SDMCDC�ENQ�CHRSQHATSHNM�SN��NQ�TRD�AX��@MX�ODQRNM�HM�@MX�IT�

risdiction or country where such distribution or use would

be unlawful. The information in this document is not di�

rected at or intended for “US Persons” within the meaning

NE� SGD�4MHSDC�2S@SDR�2DBTQHSHDR� BS�NE��@R�@LDMCDC�

@MC�SGD�4MHSDC�2S@SDR�2DBTQHSHDR�$WBG@MFD� BS�NE��@R�

amended.

3GHR�CHRBK@HLDQ�HR�RTAIDBS�SN�2@WN�!@MJiR�%TKK�

#HRBK@HLDQ�@U@HK@AKD�@S�VVV R@WNA@MJ BNL�CHRBK@HLDQ

2NTQBD�ENQ�@KK�FQ@OGR�@MC�S@AKDR��!KNLADQF�@MC�2@WN�!@MJ�

2SQ@SDFX��1DRD@QBG

NON-INDEPENDENT INVESTMENT RESEARCH DISCLAIMER

This investment research has not been prepared in ac�

BNQC@MBD� VHSG� KDF@K� QDPTHQDLDMSR� CDRHFMDC� SN� OQNLNSD�

the independence of investment research. Further it is not

subject to any prohibition on dealing ahead of the dissemi�

M@SHNM�NE� HMUDRSLDMS�QDRD@QBG �2@WN�!@MJ�� HSR�@EÖKH@SDR�NQ�

RS@EE��L@X�ODQENQL�RDQUHBDR�ENQ��RNKHBHS�ATRHMDRR�EQNL��GNKC�

KNMF� NQ� RGNQS� ONRHSHNMR� HM�� NQ� NSGDQVHRD� AD� HMSDQDRSDC� HM�

SGD�HMUDRSLDMSR��HMBKTCHMF�CDQHU@SHUDR��NE�@MX�HRRTDQ�LDM�

tioned herein.

None of the information contained herein constitutes an

NEEDQ��NQ�RNKHBHS@SHNM�NE�@M�NEEDQ��SN�ATX�NQ�RDKK�@MX�BTQQDMBX��

OQNCTBS�NQ�ÖM@MBH@K� HMRSQTLDMS��SN�L@JD�@MX�HMUDRSLDMS��

or to participate in any particular trading strategy. This ma�

SDQH@K�HR�OQNCTBDC�ENQ�L@QJDSHMF�@MC�NQ�HMENQL@SHNM@K�OTQ�

ONRDR�NMKX�@MC�2@WN�!@MJ� �2�@MC�HSR�NVMDQR��RTARHCH@QHDR�

@MC� @EÖKH@SDR� VGDSGDQ� @BSHMF� CHQDBSKX� NQ� SGQNTFG� AQ@MBG�

NEÖBDR��j2@WN�!@MJk��L@JD�MN�QDOQDRDMS@SHNM�NQ�V@QQ@MSX��

@MC�@RRTLD�MN�KH@AHKHSX��ENQ�SGD�@BBTQ@BX�NQ�BNLOKDSDMDRR�

of the information provided herein. In providing this mate�

QH@K� 2@WN�!@MJ�G@R�MNS� S@JDM� HMSN� @BBNTMS� @MX�O@QSHBTK@Q�

QDBHOHDMSiR�HMUDRSLDMS�NAIDBSHUDR��RODBH@K�HMUDRSLDMS�FN@KR��

ÖM@MBH@K� RHST@SHNM�� @MC� RODBHÖB� MDDCR� @MC� CDL@MCR� @MC�

nothing herein is intended as a recommendation for any

QDBHOHDMS�SN�HMUDRS�NQ�CHUDRS�HM�@�O@QSHBTK@Q�L@MMDQ�@MC�2@WN�

Bank assumes no liability for any recipient sustaining a loss

from trading in accordance with a perceived recommenda�

tion. All investments entail a risk and may result in both

OQNÖSR� @MC� KNRRDR � (M� O@QSHBTK@Q� HMUDRSLDMSR� HM� KDUDQ@FDC�

OQNCTBSR��RTBG�@R�ATS�MNS�KHLHSDC�SN�ENQDHFM�DWBG@MFD��CDQH�

U@SDR�@MC�BNLLNCHSHDR�B@M�AD�UDQX�RODBTK@SHUD�@MC�OQNÖSR�

@MC�KNRRDR�L@X�×TBST@SD�ANSG�UHNKDMSKX�@MC�Q@OHCKX �2ODBT�

lative trading is not suitable for all investors and all recipi�

DMSR�RGNTKC�B@QDETKKX�BNMRHCDQ�SGDHQ�ÖM@MBH@K�RHST@SHNM�@MC�

BNMRTKS�ÖM@MBH@K�@CUHRNQ�R��HM�NQCDQ�SN�TMCDQRS@MC�SGD�QHRJR�

involved and ensure the suitability of their situation prior

SN�L@JHMF�@MX�HMUDRSLDMS��CHUDRSLDMS�NQ�DMSDQHMF�HMSN�@MX�

SQ@MR@BSHNM � MX�LDMSHNMHMF�GDQDHM��HE�@MX��NE�@MX�QHRJ�L@X�

MNS�AD��@MC�RGNTKC�MNS�AD�BNMRHCDQDC�SN�AD��MDHSGDQ�@�BNL�

prehensive disclosure or risks nor a comprehensive descrip�

SHNM�RTBG�QHRJR � MX�DWOQDRRHNM�NE�NOHMHNM�L@X�AD�ODQRNM@K�

2@WN�!@MJ� �2��/GHKHO�'DXL@MR� KK°��'DKKDQTO��#DML@QJ��3DKDOGNMD��VVV R@WNA@MJ BNL

Saxo Bank - Quarterly Outlook Report

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