Market Outlook

Market Outlook Bond Markets Weekly

weekly 29 July 2011 Please find our recommendations on page 5.
29/06/2011 - 04/08/2011 (FFT) 132.64 Price EUR 131.54

Technical analysis EUR Bund Future

Daily QFGBLc1
Price EUR

132 131 130 129 128 127 126 125

.12

Cndl, QFGBLc1, Last Trade 29/07/2011, 129.86, 130.12, 129.81, 129.9 Cndl, QFGBLc1, Last Trade 29/07/2011, 129.86, 130.12, 129.81, 129.9 Cndl, QFGBLc1, Last Trade 29/07/2011, 129.86, 130.12, 129.81, 129.9 Cndl, QFGBLc1, Last Trade 29/07/2011, 129.86, 130.12, 129.81, 129.9 SMA, QFGBLc1, Last Trade(Last), 26 29/07/2011, 127.66 SMA, QFGBLc1, Last Trade(Last), 12 29/07/2011, 128.67 SMA, QFGBLc1, Last Trade(Last), 26 29/07/2011, 127.66 Cndl, QFGBLc1, Last Trade 29/07/2011, 129.86, 130.12, 129.81, 129.9 Cndl, QFGBLc1, Last Trade 29/07/2011, 129.86, 130.12, 129.81, 129.9 Cndl, QFGBLc1, Last Trade 29/07/2011, 129.86, 130.12, 129.81, 129.9 Cndl, QFGBLc1, Last Trade 29/07/2011, 129.86, 130.12, 129.81, 129.9 SMA, QFGBLc1, Last Trade(Last), 12 29/07/2011, 128.67

132 131 130 129 128 127 126 125

.12 Volume EUR .1234

130.28 129.96 129.76

USA

Vol, QFGBLc1, Last Trade 29/07/2011, 84,697

29

30

01

04

05

06

07

08

11

12

13

14

15

18

19

20

21

22

25

26

27

28

29

01

02

03

04

June 2011

July 2011

August 2011

Last: 129.90; 130.60 - 130.91 should soon be hit, but also 131.55 and 132.65 come into reach, stop 129.30 -> 125.85. July 29th, 2011, 09:15 CET

Source: Thomson Reuters, Raiffeisen RESEARCH

US T-Note Future
Weekly QTYc1, Q/TYc1
Price 128*20.93 Cndl, QTYc1, Last Trade USD 31/07/2011, 124*4, 124*23, 123*25, 124*21 Cndl, Q/TYc1, Last Trade 31/07/2011, 124*4, 124*23, 123*25, 124*21 Cndl, QTYc1, Last Trade 31/07/2011, 124*4, 124*23, 123*25, 124*21 Cndl, Q/TYc1, Last Trade 31/07/2011, 124*4, 124*23, 123*25, 124*21 Cndl, QTYc1, Last Trade 31/07/2011, 124*4, 124*23, 123*25, 124*21 128*15.71 20/03/2011 - 28/08/2011 (CHG) Price USD 127*5.3

126 124

126 124 122 120

121*29.71 122 121*30.37 121*7.13 120*25.17

120
119*8.45 119*4.56 118*30.28

118
1/32 Vol, QTYc1, Last Trade 31/07/2011, 4.6917M 20 27 03 10 17 24 01 08 15 22 29 05 12 19 26 03 10 17 24 31 07 14 21 28

118
1/32 Volume USD .1234

Mar 11

Apr 11

May 11

Jun 11

Jul 11

Aug 11

[Delayed]

last: 124-21 Bullish Flag, hitting of 127-05 expectable, stop 123-16 -> 122 . July 29th, 2011, 09:10 CET

In terms of the data, the highlight this last week was todays flash estimate for Q2 GDP. With an annualised quarterly gain of 1.3%, the US economy expanded even more sluggish than had been expected (consensus +1.7%, Raiffeisen RESEARCH +2.2%). Due to high energy prices and supply difficulties in the automobile sector private consumption expenditures literally stagnated (+0.1% qoq annualised) in the April to June period. Government spending also was dampening economic expansion by declining the third quarter in a row. The expansion in economic output was mainly borne by investment both in plant and equipment and construction. Net exports contributed positively as well. Along with the flash estimate for the Q2 data, GDP figures going all the way back to 2003 were revised. Basically, the revisions had two main results: first, economic output decreased in the years 2008 to 2009 more strongly than previously assumed. Furthermore, the increase in economic output in H2 2010 and Q1 2011 was revised down. This has implications for our GDP forecast for this year. The detailed effects of the revisions will be discussed in a special short note later today. The rest of the data released during the week were overshadowed by the debt dispute between the Democrats and the Republicans. According to the Conference Board survey, consumer confidence improved surprisingly in July,

Source: Thomson Reuters, Raiffeisen RESEARCH

Room for improvement

730 665 600 535 470 405 340 275 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Distortions due to Census -800 -600 -400 -200 0 200 400 600 Initial jobless claims, thsd. NFP, thsd., mom, inverted (r.h.s.)

Key figures
USA Mon, 1. Tue, 2. Tue, 2. Tue, 2. Tue, 2. Wed, 3. Wed, 3. Fri, Fri, 5. 5. 16:00 ISM Manufacturing Index 14:30 Personal income, mom 14:30 Personal spending, mom 14:30 PCE deflator, yoy 14:30 PCE core inflation, yoy 14:15 ADP Employment, mom, thsd 16:00 ISM Non-Manufacturing Index 14:30 Nonfarm payrolls, mom, thsd 14:30 Unemployment rate 09:45 IT: PMI Manufacturing 08:00 IR: PMI Manufacturing 09:15 SP: PMI Services 09:45 IT: PMI Services 08:00 IR: PMI Services 12:00 GE: Factory orders, mom 09:00 SP: Industrial output, yoy 10:00 IT: Industrial production, mom 11:00 IT: GDP, qoq, prelim. 12:00 GE: Industrial production, mom 13:45 ECB announces interest rate decision Jul. Jun. Jun. Jun. Jun. Jul. Jul. Jul. Jul. Jul. Jul. Jul. Jul. Jul. RBI 54.5 0.2% 0.4% n.a. n.a. 125 n.a. 120 9.1% 48.5 48.0 50.0 48.0 50.0 Cons. 55.0 0.2% 0.2% n.a. 1.4% 100 54.0 95 9.2% 49.0 n.a. 49.9 46.8 n.a. prior 55.3 0.3% 0.0% 2.5% 1.2% 157 53.3 18 9.2% 49.9 49.8 50.2 47.4 52.4 1.8% -0.6% 0.1% 1.2%

Europe Mon, 1. Tue, 2. Wed, 3. Wed, 3. Thu, 4. Thu, 4. Fri, Fri, Fri, Fri, Events Thu, 4. 1.50% 1.50% 1.50% Source: Bloomberg, Raiffeisen RESEARCH 5. 5. 5. 5.

Source: Thomson Reuters, Raiffeisen RESEARCH

Forecasts
USA cur.** Sep-11 Dec-11 Jun-12 Key rate 0.13 0.25 0.25 0.75 Libor 3M 0.26 0.30 0.40 0.90 Yield 5Y 1.48 1.90 2.00 2.80 Yield 10Y 2.91 3.30 3.50 3.70 Eurozone Key rate* 1.50 1.75 2.00 2.00 Euribor 3M* 1.61 2.00 2.20 2.25 Yield 5Y* 1.77 2.70 2.80 2.80 Yield 10Y* 2.59 3.20 3.30 3.20 Swaprate 5Y* 2.47 3.20 3.35 3.35 * under revision; **as of 29 July 2011, 12:51 p.m. CET Source: Thomson Reuters, Raiffeisen RESEARCH

Jun. -3.0% -0.2% Jun. -1.5% Q2 0.2% Jun. -0.5% 0.2% 0.3% 0.1%

Jun. -1.0% -0.7% -0.4%

Market Outlook

Technical analysis EUR/CHF

Yearly QEURCHF=
Price Cndl, CHF 100.0% QEURCHF=, Bid 31/12/2011, 1.2924, 1.3236, 1.1377, 1.1435 Cndl, QEURCHF=, Bid 31/12/2011, 1.2924, 1.3236, 1.1377, 1.1435 Cndl, QEURCHF=, Bid 61.8% 31/12/2011, 1.2924, 1.3236, 1.1377, 1.1435 Cndl, 50.0% QEURCHF=, Bid 31/12/2011, 1.2924, 1.3236, 1.1377, 1.1435 38.2% 61.8% 50.0% 38.2% 31/12/1999 - 31/12/2012 (GMT) Price CHF

durables orders showed a steep drop of 2.1% mom in June and pending house sales increased for the second month in a row. The Beige Book revealed that economic performance in June and July was slightly more subdued than previously, but no pronounced weakening was registered in the twelve districts. Looking ahead to the coming week, two key releases are on the agenda, with the manufacturing sector ISM index (Mon) and the labour market report (Fri). Based on the three regional purchasing managers indices (the Empire State Index, the Richmond Fed Index and the Philadelphia Fed Index) which are available, we expect a slightly larger drop in the ISM compared to consensus. With regard to the labour market report, however, we are a bit more optimistic. In particular, we are looking for a net gain of 120K jobs, based on the further decline in initial claims for jobless benefits in July. Other labour market indicators such as the employment sub-index in the ISM indices also continue to suggest that the disappointing job creation figures in May and June were downside outliers. Disregarding the government, which probably continued to cut jobs massively, employment should have grown more strongly. With regard to the rate of unemployment, however, we project a mild decline to 9.1%. Above and beyond this, next weeks data feature construction spending (Mon), and the service sector ISM index and the ADP employment report (both Wed). With the further escalation of the US debt crisis, US government bonds continued to enjoy good support last week (with 10-year yields under 3%). Today and/or tomorrow, there will be further votes in the Congress, with the massive pressure for a successful solution suggesting that a deal will be reached at the last minute. If however no agreement is reached by August 2, it is still highly unlikely that the USA will default on its government bonds. At the same time, with every week that passes, the risk of a recession would increase, due to the cuts in other public spending (cf. our latest Special Report). If no agreement is reached, we thus do not expect a sharp increase in US yields, as the risks of recession will probably be seen by the markets as outweighing the (highly theoretical) risk of default. As soon as there is an agreement, which is ultimately unavoidable (and will probably turn out to be too small to prevent a downgrade of the US credit rating), economic data should come to the forefront again. Accordingly, with an eye to our expectations of improvement on the labour market, our quarterly recommendation for US bonds is Sell.

1.6 1.5 1.4

1.6 1.5 1.4

1.3588 1.3432 1.3178 1.2846 1.2803 1.2528

1.3 1.2 1.1

.1234 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

1.3 1.2 1.1

1.0734 .1234 2011 2012

1.1864

1.2084 1.1913 1.1966 1.1496 1.1141

2009

2010

1990

2000

2010

Last: 1.1434; Rectangles (1999 - 2009) target, i.e. 1.15, has failed to prove firm, so parity hardly will do either. July 29th, 2011, 09:24 CET

Source: Thomson Reuters, Raiffeisen RESEARCH

EUR/JPY
Quarterly QEURJPY=
Price JPY Cndl, QEURJPY=, Bid 100.0% 100.0% 30/09/2011, 116.76, 117.73, 109.56, 110.63 Cndl, QEURJPY=, Bid 30/09/2011, 116.76, 117.73, 109.56, 110.63 Cndl, QEURJPY=, Bid 61.8% 30/09/2011, 116.76, 117.73, 109.56, 110.63 50.0% QEURJPY=, Bid Cndl, 30/09/2011, 116.76, 117.73, 109.56, 110.63 38.2% 31/12/2006 - 31/12/2011 (GMT) Price JPY

160 150 140 130 120 110 100 90

.12

160 150 140 130

120.05

61.8%

50.0%

38.2%

120 110 100 90

.12

111.29

97.11

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2006

2007

2008

2009

2010

2011

Last: 110.64; 105.41 will hardly prove firm another time, so a slump towards 97.10 is expectable. July 29th, 2011, 09:27 CET

Source: Thomson Reuters, Raiffeisen RESEARCH

EUR/USD
Daily QEUR=
01/07/2011 - 04/08/2011 (GMT) Price USD

1.45 1.44 1.43 1.42 1.41

Price Cndl, USD 1.4551 QEUR=, Bid 1.4529 29/07/2011, 1.4327, 1.4363, 1.4262, 1.4274 Cndl, QEUR=, Bid 29/07/2011, 1.4327, 1.4363, 1.4262, 1.4274 Cndl, QEUR=, Bid 29/07/2011, 1.4327, 1.4363, 1.4262, 1.4274 Cndl, QEUR=, Bid 29/07/2011, 1.4327, 1.4363, 1.4262, 1.4274

1.45 1.44 1.43 1.42 1.41 1.4 1.39

.1234

1.4 1.4007 1.39

.1234 01 04 05 06 07 08 11 12 13 14 15 18 19 20 21 22 25 26 27 28 29 01 02 03 04

July 2011

August 2011

Last: 1.4276; Still bullish and rebound 1.4550 likely as long as in beyond of 1.42, else: 1.4190 -> 1.4125 - 1.41 to follow. July 29th, 2011, 09:20 CET Source: Thomson Reuters, Raiffeisen RESEARCH

Forecasts
CHF cur.* Sep-11 Dec-11 Jun-12 Libor 3M 0.18 0.25 0.50 1.00 Yield 10Y 1.43 1.75 1.90 2.00 YEN Key rate 0.10 0.10 0.10 0.10 Libor 3M 0.38 0.20 0.20 0.25 Yield 10Y 1.09 1.20 1.30 1.40 FX EUR/USD 1.42 1.50 1.45 1.30 EUR/JPY 111 120 120 125 USD/JPY 78 80 83 96 EUR/CHF 1.14 1.20 1.25 1.25 Crude Brent 116.8 115 110 105 *as of 29 July 2011, 12:51 p.m. CET Source: Thomson Reuters, Raiffeisen RESEARCH

Market Outlook

The market continues to be driven by the topic of sovereign debt. The decisions of the EU Council Summit hardly helped to improve the mood. For example, on Thursday Italy saw yields rise on its issues along the entire maturity curve. Ten-year bonds were placed on the market with a yield of almost 5.8%. Commentators were particularly critical of the inadequate financial resources of the EFSF. The EUR 220 bn which is still available is too little for sustainable intervention on the secondary market, and insufficient to avert market tensions or even outbreaks of panic in relation to Spanish or Italian government bonds. Additionally, the procedure to undertake market interventions appears to be too unwieldy, in light of the very quick developments on the financial markets. But even doubling the funds available to the aid mechanism and making their use more flexible would not solve the underlying problem. In its entirety, the southern parts of the Eurozone cannot be financed by the rest of the countries, without the creditworthiness of the other countries suffering from this. Italy alone is too big for this. In other words, a (budget) hole cannot be stopped up with another (budget) hole. At the end of the day, its only the central bank which has the necessary funds (as it has unlimited funds) to finance the large stock of debts, if investors refuse to. Viewed in this light, the decisions at the EU council summit can be seen as a set-back, as the ECB was released of its responsibility to intervene on the secondary market in an emergency. Along with these considerations, the rating agencies negative assessments are weighing on sentiment, and the agencies critical assessments on the situation are based in part by the poor market sentiment. A perfect vicious circle! No sustained improvement in the sovereign debt crisis can be expected during this summer, as the political situation will grow even more unclear in the weeks to come, as the efforts to contain the crisis must be approved by numerous national parliaments. With all of this in mind, we put our yield forecasts for German government bonds under revision - significantly lower forecast values may be expected for September. The data: in most of the EUR countries, the PMI indicators will probably decline. Our prognosis of very weak performance in Q3, coupled with contraction the GDP figures of some EUR countries, is now beginning to take shape. Before that, however, we will have a chance to look at the GDP data for Q2. These should show a gain of 0.2% qoq for Italy, for example. Thursdays press conference by the ECB should shed some light on when the central bank is planning to move forward with its next rate hike. We are forecasting a 25bp increase in the autumn and believe that even a hike already in September may be possible. On the primary market, the summer break is getting underway, and activity has tapered off quite noticeably. Only Spain is planning a bond issue, whereas the Netherlands, France, Belgium and Portugal are planning money market issues.

Eurozone

Debt issuance calendar

Issuer Date Maturity Bonds SP Thu, 4. 2014 Bills 3.4 n.a. Coupon Vol. (%) (EUR bn.)

NE NE FR BE PO

Mon, Mon, Mon, Tue, Wed,

1. 1. 1. 2. 3.

9M 6M n.a. n.a. 4M

n.a. n.a. n.a. n.a. n.a.

2 2.5 n.a. n.a. 0.75

Source: Bloomberg

Market Outlook

Market Outlook
weekly

Equity Markets Weekly

Hold: Europe, USA Sell: Japan Consumer staples, Energy, Materials, Industrials, Financials, IT

Market performance (%, 1 week)

FTSE DJ Stoxx 50 Nikkei AEX DAX ATX Nasdaq Comp. MSCI World DJ ES 50 CAC SMI S&P 500 DJIA -4 -3 -2 -1 0

Recommendations
Markets: Favoured sectors:

USA

Source: Thomson Reuters

The US equity markets as well as the global capital markets as a whole are under the spell of the debt ceiling quarrels between democrats and republicans. We think that market participants have not yet full priced in the possible consequences of the countrys potential insolvency. However, the current earnings season for the second quarter has predominantly produced clearly positive surprises so far. Thus the originally predicted 12.7% yoy earnings growth will probably be beaten again (17% so far).

Europe Sector performance (%, 1 week)*

Cons. Staples IT Telecoms Utilities Cons. Discretionary Energy MSCI World Materials Health Care Financials Industrials -5 -4 -3 -2 -1 0

The effect of the second rescue package for Greece has been disappointing so far. Rising yields for Eurozones peripheral countries and the paralysing debate over raising the US debt ceiling acknowledge that the sovereign debt crisis is acute and far from being solved. However, not even the Q2 earnings season could give markets support as corporate results are not convincing so far. Hence we reckon that European stocks will be having a hard time in the weeks to come.

Japan

* weekly performance of global MSCI sector indices Source: Thomson Reuters

Japans leading stock index slipped beneath the 10,000 mark and its 200 day moving average in the course of the recent week. Although there are signs of a recovering economy (e.g. strong retail sales) power shortages could dampen production during the coming months as only 16 out of 54 nuclear reactors are in operation at the moment. Moreover companies struggle with the strong Yen and the aftermaths of the Great East Japan Earthquake. Therefore it comes as no surprise that the current earnings season is somewhat disappointing. So far half of corporate Japan missed consensus estimates and forward earnings expectations have been revised downwards. Sell.

Forecasts
current**
DJ ES50 DAX FTSE SMI DJIA S&P 500 Nasdaq Comp, Nikkei ATX 2,660 7,121 5,815 5,779 12,240 1,301 2,766 9,833 2,605

Expected corporate releases

2 3 5 2 3 4 5 2 NYSE Euronext, Pfizer Mastercard, Time Warner Procter & Gamble

Sep-11
2,850 7,500 5,900 6,300 12,200 1,310 2,850 9,100 2,850

Dec-11
2,950 7,600 6,050 6,500 12,400 1,350 2,950 10,000 3,000

USA
Tue Wed Fri

Europe
Tue Wed Thu Fri BMW, BNP Paribas, Deutsche Post, Fresenius Medical Care, Metro Enel, Societe Generale, Unicredit adidas, Beiersdorf, Deutsche Telekom, ING, Mnchener Rck., Unilever Allianz, Generali, Intesa Sanpaolo, RBS, Prudential Toyota Motor

**as per 22 July, 2:00 p.m. CET Source: Bloomberg, Raiffeisen RESEARCH

Japan
Tue Source: Bloomberg

Market Outlook

Market Outlook Recommendations

weekly

Short-term trading ideas

Recommendation
Sell T-Note Future Buy GE 10Y (DE0001135424), Sell GE 2Y (DE0001137339)

Entry date
29/06/2011 18/03/2011

Entry level
123.20 156 bp

Current level*
124.6 137.91 bp

Target
119.00 120 bp

Stop
125.50 156 bp

Carry (ann. %)
156 bp

Comment
Greek parlament backs reform agenda Rate hikes trigger curve flattening

*as of 29 July, 10:53 a.m. CET Source: Thomson Reuters, Bloomberg

FX*
Recommendation
Buy EUR, Sell USD

Entry date
22/07/2011

Entry level
1.436

Current level
1.427

Target
1.48

Stop
1.416

Carry (ann. %)

Comment
- Progress on Greece, hawkish ECB

*as of 29 July, 10:53 a.m. CET Quelle: Thomson Reuters, Bloomberg

Recently closed trades

Recommendation
Sell US T-Note Future, Buy German Bund Future Sell Bund Future Sell Schatz Future Sell Schatz Future Sell Schatz Future Sell Bund Future Sell T-Note Future Sell Conf-Future Buy EUR, sell USD Buy USD/JPY Buy EUR, sell CHF Buy EUR, sell USD Buy USD/JPY Buy EUR/CHF Source: Thomson Reuters, Bloomberg

Entry date
29/04/2011 29/06/2011 29/06/2011 13/05/2011 01/04/2011 29/04/2011 29/04/2011 19/04/2011 24/06/2011 17/05/2011 09/05/2011 09/05/2011 19/04/2011 01/03/2011

Entry level
-4 bp 125.86 107.68 107.45 107.07 122.69 121.03 136.8 1.420 81.4 1.26 1.4403 82.5 1.286

Close date
18/07/2011 11/07/2011 11/07/2011 27/05/2011 12/05/2011 05/05/2011 05/05/2011 05/05/2011 06/07/2011 06/06/2011 24/05/2011 13/05/2011 26/04/2011 15/03/2011

Close level
-30 bp 127.6 108.15 107.81 107.52 123.9 122.1 138 1.437 80 1.24 1.41 81.7 1.275

Total return
26 bp -1.38% -0.44% -0.30% -0.42% -0.98% -0.88% -0.88% 1.18% -1.72% -1.59% -2.10% -0.97% -0.86%

Comment
Target reached Stopped out Stopped out Stopped out Stopped out Stopped out Stopped out Stopped out Closed early Stopped out Stopped out Stopped out Closed early Stopped out

Note: This list contains only the strongest trading ideas for the markets that we cover. Therefore not every market forecast that implies a buy recommendation is also listed as a trading idea! Trading ideas may also differ from our quarterly forecasts, as the time horizon can be different. The time horizon of the trade is at least two weeks, but not more than 3 months.

Market Outlook

Market Outlook
This report was completed on 29 July 2011

Acknowledgements

Editor
Raiffeisen RESEARCH GmbH A-1030 Vienna, Am Stadtpark 9 Tel: +43 1 717 07-1521 Head: Peter Brezinschek (1517) Research Sales: Werner Weingraber (5975) Economics, Fixed Income, FX: Valentin Hofsttter (Head, 1685), Jrg Angel (1687), Wolfgang Ernst (1500), Gunter Deuber (5707), Julia Neudorfer (5842), Matthias Reith (6741), Andreas Schwabe (1389), Gintaras Shlizhyus (1343), Gottfried Steindl (1523), Martin Stelzeneder (1614) Credit/Corporate Bonds: Christoph Klaper (Head, 1652), Christoph Ibser (5913), Igor Kovacic (6732), Martin Kutny (2013), Peter Onofrej (2049), Gleb Shpilevoy (1461), Alexander Sklemin (1212), Jrgen Walter (5932) Stocks: Helge Rechberger (Head, 1533), Aaron Alber (1513), Christian Hinterwallner (1633), Jrn Lange (5934), Hannes Loacker (1885), Richard Malzer (5935), Johannes Mattner (1463), Christine Nowak (1625), Leopold Salcher (2176), Andreas Schiller (1358), Connie Schmann (2178), Magdalena Wasowicz (2169) Quant Research/Emerging Markets: Veronika Lammer (Head, 3741), Mario Annau (1355), Lydia Kranner (1609), Nina Kukic (1635), Albert Moik (1593), Manuel Schuster (1529) Technical analysis: Stefan Memmer (1421), Robert Schittler (1537)

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