Weekly Market Perspectives

September 24th, 2012

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Spain – Another week ended…and Spain hasn’t submitted a formal request for external support.• Bailout speculation - According to some

news, Spanish’s policy makers could, this week, unveil an economic reform program that would allow it to seek a bailout. Nonetheless, last Saturday, Spain’s Economic Minister said They will not rush to seek external aid;

• ECB Governing Council member Luc Coene said “If Spain does not submit to conditionality we will not buy its bonds… I don’t think it will take for the Spanish spreads to rise (if Spain doesn’t submit to the program)”;

• The performance of short-dated Spanish bonds since late July suggests that the market has probably priced in ECB buying;

• Critical week? - Spain will announce the final results of an expected audit to its banking sector. Its draft budget plan for 2013 and new structural reform will also be unveiled.

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

1-Aug 8-Aug 15-Aug 22-Aug 29-Aug 5-Sep 12-Sep 19-Sep

2Y Bond Yields Spain

“The Euro is Irreversible” Draghi Speech

OMT announcemennt

Source: Bloomberg

Greece – Will the EU/ECB/IMF report be delayed?• The mission in Athens will take a brief pause. It

expects to return to Athens after about a week.• Troika demands additional €11.5bn in austerity

measures;• The local Government is divided in how to achieve

it. Fotis Kouvelis, Leader of the Democratic Party, said that “The troika must stop attacking Greek society. The Troika must understand there are limits”. Several Government members stated that they intend to negotiate a 2 years delay to achieve the established budget targets. The Greek economy is expected to stay trapped in a recession during 2012/13;

• OPAP, Greece’s biggest gambling company, declined 19 percent during last week, after the government reached an agreement with the European Commission to increase taxes on the company;

• Without an agreement with Troika, Greece won’t receive its next tranche of aid.

Source: Bloomberg

2,25%

5,55%

3,08%

-0,15%

-3,28% -3,38%

-6,95% -6,50%

-2,30%

2005 2006 2007 2008 2009 2010 2011 2012F 2013F

Greece: GDP Growth

The Italian Government has revised Its fiscal targets.

• 2012 public spending will exceed revenues by 2.6% of GDP. The previous forecast was 1.7%. The 2013 budget target has now more than tripled to 1.8% from 0.5%;

• 2012 GDP is now expected to contract -2.4%, while the previous forecast pointed to an economic contraction of -1.2%. The economy is forecast to contract by 0.2% next year;

• The 2012 debt-to-GDP forecast was raised to 126.4% from 123.4% previously. The 2013 forecast was hiked to 126.1% from 121.5%;

• The Government announced an austere belt-tightening budget with tax increases and spending cuts. Prime Minister Mario Monti stated that “only a fool could think it’s possible to act on a decades long Italian structural problem without bringing about a short-term reduction in demand.”

Source: Bloomberg

Source: Bloomberg

0,90%

2,20%1,70%

-1,20%

-5,50%

1,8%

0,40%

-2,25%

0,40% 0,50%

2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F

Italy: Real GDP

4,40%

3,40%

1,60%

2,70%

5,40%

4,60%

3,90%

2,50%

1,70%

1,10%

2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F

Italy: Government Deficit as GDP %

Europe – Economic data still points to a recession.

25

30

35

40

45

50

55

60

65

70

2006 2007 2008 2009 2010 2011 2012

PMI Manufacturing

Eurozone

Germany

France35

40

45

50

55

60

65

2006 2007 2008 2009 2010 2011 2012

PMI Services

Eurozone

Germany

France

Purchasing Managers Index indices still showing a contraction (below 50).

Source: Bloombergc Source: Bloomberg

France: €16.968bnGermany: €4.0844bnSpain: €9.465bnPortugal: €2bnGreece: €3.557bn

• Spain issued last week a large amount of government bonds. However, only €859m were issued with a 10 year maturity, which is negligible. All the other auctions were done with maturities shorter than 3 years;

• Portugal’s cost of borrowing dropped to the lowest since 2010. The debt management agency sold 18-month notes at an average yield of 2.967%. 6-month bills were also auctioned, with its average yield falling to a one-year low.

• Luc Coene said that the European Central Bank still has a large number of options to ease monetary policy: “you could further lower interest rates, you can also try to extend the LTRO to some extent, you can also do some LTRO with private credit claims as collateral”;

• Chinese Prime Minister said that his country is investing in sovereign bonds from the region to diversify its assets and support the European fight against the Sovereign Crisis.

Europe – Week highlighted by Bond Auctions

The ECB still has fire-power.

US - The recovery in the US Housing Market continues to gain traction…• Data released last week showed that the US housing market recovery is becoming more convincing.

Existing home sales reached the highest pace since May 2010;• The FED will keep low interest rates until 2015 and will start buying every month $40B in Mortgage

Backed Securities.

Source: Bloombergc Source: Bloomberg

450

500

550

600

650

700

750

800

850

900

in t

hou

san

d

Housing Starts

3

3,5

4

4,5

5

5,5

6

in m

illi

on

Existing Home Sales

US – But other indicators showed some weakness.

13.48

19.53 20.21

6.56

17.09

2.29

7.39

-5.85

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12

Empire Manufacturing

200

300

400

500

600

700

2004 2005 2006 2007 2008 2009 2010 2011 2012

in th

ou

san

d

Initial Jobless Claims

0

0.7

0.2

-0.1

0.3

-0.5

0.5

-0.1

Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12

Leading IndicatorsSource: BloombergSource: Bloomberg

Source: Bloomberg

Will QE3 be effective for an economic recovery?

• FED’s Dallas President said that he was unsure that QE3 would bring any positive outcome to the employment data. On the other hand, he revealed his concern over inflation. Richard Fisher is a non-voting member of the FED;

• PIMCO’s El-Erian told in a speech that Central Banks will face unstable periods, due to the increased holdings on their Balance Sheets. Long-Term Consequences of this posture will be hard to quantify.

BOJ increases its QE program.• The Bank of Japan launched a round of

monetary stimulus;• The BOJ will increase its asset-purchasing

program to a total of Y80tn, by buying another Y10tn of government bonds until the end of 2013;

• BOJ’s interest rates are already near zero;• Guido Mantega, Brazil’s finance minister,

warned that FED’s QE3 could reignite the currency wars.

Conflicts are Erasing in the rest of the World• US and other 28 countries started military

exercises in the Persian Gulf. Iranian officials have threatened to close the waterway in response to threats to force the Islamic Republic to abandon its suspected nuclear weapons program.

• Tensions between China and Japan rising. The dispute over the islands, known as Diaoyu in China and Senkaku in Japanese, seems to have produced a diplomatic crisis between China and Japan.

-20%

-15%

-10%

-5%

0%

5%

10%

1999 2001 2003 2005 2007 2009 2011 2013

Japan Real GDP growth rate(Annualized QoQ %)

Source: Bloomberg

PortugalBCP Rights Issue:• Today will be the last trading day for BCP’s rights. During last week, they were down 10%, while BCP’s

stock only lost 3%. If you wish to engage on arbitrage opportunities on the stock, please contact us.

A merger between Sonaecom and Zon – Is it going to happen this time?• Optimus CEO, a subsidiary of Sonaecom, gave an interview to a Portuguese newspaper, Last Friday. He

underlined the benefits of a merger between the two companies. Are the two companies holding conversations regarding a possible deal?

Portuguese Politics:• After an eight-hour meeting of the presidential state council, Portugal's government has agreed to

negotiate alternative solutions to a social security tax hike that created the worst backlash to austerity since last year's EU/IMF bailout.

Weekly Preview

US • In the US, durable good orders, GDP, and the U. of Michigan Consumer Sentiment will be published during this week.

Europe • Will Spain ask for external support this week? Next Friday, it should be released the Banking Audit for the Spanish banking sector;

• Some experts from the EC/ECB/IMF mission will remain in Athens to assist the authorities with further technical work.

• Italy and Germany will auction 10Y Government Bonds. Germany’s unemployment data is expected.

Rest of the World

• In Asia, we will follow the increasing geopolitics risk in the region. Will the markets take notice?

Market IndicatorsThis week, we remain positive for the markets, due to action that have been deployed by the various Central Banks. A formal request for external support by Spain and a positive news flow from Greece should be well received by the markets.

Weekly Preview

Vicious Cycle of Europe. We are still on level 2.

1.2

1.22

1.24

1.26

1.28

1.3

1.32

2-Jul 17-Jul 1-Aug 16-Aug 31-Aug 15-Sep

EURUSD

3.00%

4.00%

5.00%

6.00%

7.00%

Mar Apr May Jun Jul Aug Sep

10Y Bond Yields: Spread vs Germany

Spain

Ideas for the week: Portugal Zon and Sonaecom. Short Term Buy. Reasons to buy:

• From a intrinsic valuation perspective, both companies seems attractive;• The probability of a merger between the two companies seems to be increasing, after the latest news

flow. • The deal could generate attractive synergies (€250 million). • This would create a bigger player to compete in the Residential and Mobile markets;• Zon is the market leader in Portugal in the Residential sector, a sector that has proved to be resilient in

the current economic backdrop;• Sonaecom has the appropriate infrastructure, market positioning and experience on the Mobile Sector

that Zon doesn’t have; • Zon can expand to new markets, as its leading shareholder Isabel dos Santos mentioned in the past. Zon’s

Angolan JV is showing an interesting evolution. This is probably not priced currently in the stock;• Isabel dos Santos has a 28.8% stake in Zon. She also enjoys close ties with Sonae’s retail arm;• Some other issues should be considered:

• France Telecom has announced its intention to divest Sonaecom;• It is important to now BES’s position on the possible M&A deal;• French group Altice recently acquired Portuguese cable operator Cabovisão. What will Altice do, if

anything?

Weekly Preview

Disclaimer

Disclaimer

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