Anti-inflation action saps confidence from good …...Anti-inflation action saps confidence from good earnings, Euro debt auctions Stocks made further progress on a robust start to

Anti-inflation action saps confidence from good earnings, Euro debt auctions Stocks made further progress on a robust start to the US earnings season and as fears over Europe’s debt crisis faded. But investors were left with inflation concerns to chew over the weekend as China tightened bank reserves for a fourth time in two months. Good results from major US technology and financial names buoyed sentiment, as did successful bond auctions by Portugal, Spain and Italy. Investors also found relief from signs that Europe’s policymakers are looking to expand and strengthen the region’s bailout fund. But Beijing’s move on Friday to raise the bank reserve requirement ratio has returned some edginess to markets over fears that China’s policymakers may over-adjust for the economy’s red-hot expansion. This week, earnings season is expected to continue supporting sentiment. But key data, including China’s GDP growth, US home sales, and the weekly jobless claims report, which disappointed last week, are expected to be watched closely as well. Investors are also likely to be kept busy with China President Hu Jintao’s Washington summit with US President Obama on Wednesday, as well as a meeting by European finance ministers to talk about augmentations to the region’s bailout fund and other measures to fix its sovereign debt problems.

Jan 14 Close

Last week’s return

YTD Return

YTD return (USD)

S&P 500: 1293.24 +1.71% +2.83% +2.83% DJ Euro STOXX: 284.59 +3.02% +3.69% +3.56% Nikkei 225: 10499.04 -0.40% +2.64% +1.14% MSCI Asia ex Japan: 481.58 +0.87% +0.56% +0.56%

In this issue:

• US economy: Recovery takes a step forward

• Europe economy: Sovereign crisis — Still many hurdles ahead

• Europe equities: Conditions for decent gains appear in place

Volume 11, Issue 3 January 17, 2011

1240

1260

1280

1300

1320

Monday Jan 10

Tuesday Jan 11

Wednesday Jan 12

Thursday Jan 13

Friday Jan 14

S&P: -0.14% S&P: +0.37% S&P: +0.90% S&P: -0.17% S&P: +0.74% STOXX: -1.52% STOXX: +1.46% STOXX: +2.39% STOXX: +0.57% STOXX: +0.13% Nikkei: Closed Nikkei: -0.29% Nikkei: +0.02% Nikkei: +0.73% Nikkei: -0.86% MSCI Asia ex Japan: -0.88% MSCI Asia ex Japan: +0.31% MSCI Asia ex Japan: +1.11% MSCI Asia ex Japan: +0.60% MSCI Asia ex Japan: -0.25%

US: Alcoa starts the earnings season with profits and sales beating forecasts on higher aluminium prices.

US: Duke Energy says it is buying Progress Energy for US$13.7b in stock, creating the largest power company in the country.

EU: The German government denies press reports saying Germany and France are raising pressure on Portugal to tap European and IMF rescue facilities. It might be down to semantics but markets anyway are likely to force Portugal to seek a bailout soon. Reuters reports a Euro zone source as saying a financial package for Portugal could amount to €60b-€80b, excluding possible financial needs of the country’s banks.

EU: The Swiss government is reportedly planning to meet key business representatives to discuss CHF’s strength, giving rise to speculation of new currency interventions.

AP: China’s trade surplus narrows slightly to US$63b in 4Q10, from US$65.7b in 3Q10. Export growth in Dec corrects more than expected from Nov’s 34.9% jump to 17.9%, while imports rise 25.6% after Nov’s 37.7% surge. The export slowdown is likely temporary. But imported inflation may prompt faster CNY appreciation, and keep domestic policy focused on controlling inflation.

AP: Retail sales in Australia rises 0.3% in Nov, reversing Oct’s 0.8% fall. This makes room for an investment boom, given the little spare capacity in the economy and may allow the policy rate to be kept at 4.75% up till 2Q11.

EU: A British Chamber of Commerce survey shows strong manufacturing growth but a sluggish service sector. A weak GBP is aiding exports but fiscal consolidation is hurting domestic demand for services.

JP: The coincident business condition index rises 1.4 points to 102.2, the 1st gain since Aug. The leading index rises for the 1st time since Jun, up 3.3 points to 101.

AP: China’s M2 money supply growth speeds up unexpectedly, up 19.7% in Dec. New yuan loans slide to US$481b from US$564b in Nov, but above forecasts. FX reserves rise to US$2.85t from US$2.65t. Monetary policy is still too loose, adding to inflation risks. More tightening is likely in 1Q11 after the Chinese New Year.

AP: Australia’s trade surplus narrows A$600m to A$1.9b in Nov due to a 3% gain in imports. Exports are flat and while imports are up 2.9%, due to one-off items. Flood damage to coking coal mines, agriculture and infrastructure in Queensland may reduce exports by over A$1b per month. But there may be some offset from higher commodity prices.

AP: The New Zealand Institute of Economic Research’s quarterly business opinion survey finds employment rising in the quake-hit Canterbury region even as labour markets weaken elsewhere in the country. The results suggest the economy is not gaining momentum in either direction. Monetary policy is likely to stay accommodative until recovery is certain.

US: The Fed Beige Book shows moderately improved economic conditions in recent months, with notable indications of rising employment in some sectors.

US: Treasury Secretary Geithner says the US is likely to grow at half the rate of emerging economies but twice that of Europe and Japan. He says US job and wealth creation depends more on the policies of Washington than Beijing.

US: The import price index rises 1.1% in Dec, after Nov’s 1.5% jump. Petroleum goods, food and beverages, and industrial supplies show continued price gains.

EU: Portugal’s bond auctions garner a good bid-cover of 3.2 on the 2020 issue and 2.6 on the 2014s. In total, €1.25b was sold, the top end of the planned range. Average yield was 5.4% for the 3-year and 6.72% for the 10-year.

EU: EU’s Rehn and Barroso call for the Euro zone’s debt crisis fund to be expanded, adding that talks with member states are underway.

EU: Euro zone industrial production rises 1.2% in Nov, beating expectations and Oct’s 0.7% gain.

EU: The flash estimate of Germany’s 2010 GDP shows a 3.6% jump, the strongest expansion since reunification. It follows the sharpest contraction since WWII.

AP: Thai policymakers raise the overnight rate by 25bps to 2.25% as widely expected, after core inflation spiked to 1.4% in Dec. Policy bias seems to be shifting from rate normalization to tightening.

US: Initial jobless claims rise 35,000 to 445,000, well above expectations. The 4-week average increases to 416,500 from 411,000.

US: Intel’s 4Q10 results beat forecasts. Its guidance for 1Q11 revenue and margins also surpass expectations.

US: Merck says it stopped giving one of its most important experimental drugs, a blood clot preventer, to patients in 2 trials.

EU: The ECB leaves rates unchanged but warns of short-term inflationary risks. It may start hiking rates in 2H11 instead of 1H12.

EU: Spain’s €3b bond sale elicits a good coverage ratio. Italy’s €6b bond auctions draw bid-cover ratios of 1.41 and 1.42 —in line with the country’s usual results.

EU: The Bank of England keeps the policy rate and quantitative easing target unchanged as expected.

JP: Machinery orders fall for a 3rd straight month in Nov. Core orders are down 3%, worse than expected.

AP: Australian employment increases 2,300 in Dec, well below expectations for a 25,000 rise. The jobless rate falls from 5.2% to 5% as the participation rate slips to 65.8% from 66%. Labour supply is likely stretched to capacity even as employment growth is may be easing.

AP: The Bank of Korea surprises with an earlier-than-expected 25bp hike that brings the policy rate to 2.75%. With the government prioritizing price stability this year, the central bank may hike rates again within 1H11.

US: Nominal retail sales rise 0.6% in Dec after Nov’s 0.8% gain. Sales ex-autos are up 0.5% after gaining 1% in Nov. Total real consumer spending likely grew roughly 4% in 4Q10, which may spur production and employment gains this year.

US: The CPI rises 0.5% in Dec, higher than expected, due to higher energy costs.

US: JPMorgan beats forecasts as smaller losses on bad loans drive profit up to US$4.8b from US$3.3b.

EU: Spain’s central bank says Spanish banks raised borrowings from the ECB from €64.5b in Nov to €70b in Dec, the highest since Sep.

EU: UK producer prices jump more than expected in Dec, up 3.4%, the biggest rise since Mar 10. This may raise concerns at the BOE as PPI feeds through to CPI, already above target, with a lag.

JP: The domestic Corporate Goods Price Index rises more than expected in Dec, up 0.4%, after Nov’s 0.1% gain.

AP: China announces it will raise the reserve requirement ratio on Jan 20, by 19% for large banks, and 17% for small banks. This is the 4th hike in 2 months and will lock up CNY340b in the banking sector. Liquidity may be stretched but only marginally. Another hike in Feb is likely. Rates still need to be higher, and 1 hike before Chinese New Year is anticipated.

AP: WPI inflation in India rises to 8.4% in Dec as expected, from 7.5% in Nov.

AP: Retail sales in Singapore fall 2.4% in Nov, in line with expectations.

Over the Weekend Jan 15 and Jan 16

AP: China President Hu Jintao urges in an interview with US newspapers an end to a "zero sum" Cold War relationship with the US, proposing new cooperation. But he resists US arguments about why China should let its currency strengthen faster. Hu is scheduled for a high profile visit this week to the White House.

Please note: Citi analysts' comments are in italics. Source: Bloomberg, Reuters, Associated Press, CIRA

S&P 500

S&P 500 (1/11/2010 to 14/1/2011)

1150

1200

1250

1300

1350

Nov-10 Dec-10 Jan-11

Source: Bloomberg

Economic Outlook Recovery takes a step forward

Surprising strength in final demand in late 2010 poses a strong challenge to the view that recovery would falter with weak housing and fading support from earlier fiscal measures. The recent agreement on taxes also provided somewhat greater tax relief than expected, albeit at the likely expense of growth in 2012. Nonetheless, rising energy costs are expected to slow consumer demand in the near term.

Meanwhile, the rise in business confidence appears to be penetrating the small business sector, perhaps a reflection of the acceleration in consumer discretionary spending. Although overall levels of confidence among small firms remain low, key measures such as job openings and hiring plans have begun to break out to the upside.

Nevertheless, Citi analysts continue expect monetary policy to remain highly accommodative and overnight rates to stay stable well into 2012. In the absence of a stronger financial tailwind or more compelling signs of recovery's durability, officials may be reluctant to lean against the first signs of self-sustaining growth.

The Week Ahead 19/1 • Citi analysts look for a modest rise in

December housing starts to 575,000, led by a rebound in multifamily dwellings.

20/1 • Initial jobless claims for the week

ending January 15 probably fell by 10,000 to 435,000 after a holiday and weather-related pop.

• Citi analysts expect the Philly Fed business barometer to post another elevated reading in January (15.0%).

• The Conference Board’s index of leading economic indicators probably jumped by 0.8% in December, following a likely downwardly revised 1.0% surge in November.

Equities Institutional investors envision another good year for stocks

Last week’sclose

Last week’sreturn

YTD return

S&P 500 1293.24 +1.71% +2.83%DJIA 11787.38 +0.96% +1.81%Nasdaq 2755.30 +1.93% +3.86%

Bonds Preference for longer duration maturities in high grade corporates

Jan 14 2010

Jan 7 2010

Dec 31 2010

2-yr Try: 0.569% 0.593% 0.593% 5-yr Try: 1.919% 1.959% 2.006% 10-yr Try: 3.323% 3.324% 3.294%

Currencies USD: Dollar likely to resume decline i n 2011

March 2011 forecasts EURUSD USDJPY USDCAD

1.37 83 0.99

Citi’s latest institutional survey of nearly 140 pension, hedge and mutual fund investors underscore a more upbeat investment community coming off a second straight year of equity market strength as they perceive an approximately 9.0% gain for the S&P 500 in 2011.

Roughly 64% called for USD to appreciate in the coming year, almost three times the proportion seen in July 2010, but more in line with the results of January 2010. In this context, it was not surprising that gold bulls were not broadly found. Indeed, the weighted average 2011 price target for gold was US$1,410/oz, with more respondents expecting gold to fall below US$1,300/oz versus those anticipating a rise above US$1,500/oz. Intriguingly, many considered commodity prices to be a substantive risk for the economy and markets in 2011.

Industry wise, portfolio managers still favour Tech stocks, maintaining a consistent preference for the sector, while still disliking the Utilities and Telecommunication Services sectors.

Treasuries: Although lighter trading volumes and lower liquidity typically occurs near year-end, a period of market weakness could be viewed as a window of opportunity. Low absolute short-term yields and a steep yield curve offer a reasonable entry point to add duration exposure. Citi analysts favour Treasuries in the 7- to 12-year maturity range.

High-grade corporates: Citi analysts prefer US dollar maturities (versus euro issues) in the 10- to 30-year range, where spreads and absolute yields offer better relative value and superior total return opportunities.

High-yield corporates: Citi analysts remain bullish on high yield as quantitative easing by the Federal Reserve bodes well for risk assets and further outperformance.

EMD: Citi continues to favour emerging market (EM) debt as additional qualitative easing by the Federal Reserve is likely to keep risk free rates low and EM bond inflows high.

The USD downtrend has been interrupted by profit-taking post the second round of quantitative easing (QE2) by the Fed and resumption of sovereign risk in peripheral Europe. Also contributing to the USD rally are higher US yields and a related perception that the US economic outlook is improving.

But the rebound is expected to be temporary and USD is likely to resume a downward trend in 2011. With CPI inflation still on a downtrend, higher US yields may not be sustainable.

Source: CIRA

STOXX (1/11/2010 to 14/1/2011)

240

260

280

300


Source: Bloomberg

Economic Outlook Sovereign crisis — Still many hurdles ahead

The respite for the European sovereign debt crisis only lasted for the two-week holiday period. Since then, Government bond spreads have returned to pre-Christmas high volatility and the news flow has intensified.

Citi analysts reckon the calendar of the next few weeks could get more and more intense, with potential actions from rating agencies, several issuance dates, and more decisions to be taken/or discussions to be held by European policymakers on the rescue facilities.

Indeed, 2010 may have just been the opening act of the sovereign debt crisis. In fact, developments in the fiscal balance have not been that bad in 2010, with deficits in many countries likely to turn out somewhat lower than expected at the beginning of the year. However, Citi analysts believe that the cyclical support may start to fade in 2011.

The Week Ahead 17/1 • Sweden: Citi analysts expect the

registered unemployment rate to rise by 0.1 percentage points to 4.4% in December.

18/1 • Germany: Citi analysts expect a third

consecutive increase in the ZEW business expectations in January, bringing the index to the highest reading since August 2010 (10).

20/1 • Euro Area: The implementation of

fiscal tightening measures, in most cases via higher indirect taxes at the beginning of the new year, coupled with higher energy prices probably contributed to the second consecutive fall in consumer confidence in January (-2).

21/1 • Germany: After making new record

highs in November and December, the ifo business climate likely remained roughly unchanged in January (110.0).

Equities Conditions for decent gains appear in place

Last week’sclose

Last week’sreturn

YTDReturn

STOXX 284.59 +3.02% +3.69%FTSE 100 6002.07 +0.30% +1.73%DAX 7075.70 +1.84% +2.34%

Bonds Prefer longer term maturities in Europe and UK

Jan 14 2010

Jan 7 2010

Dec 31 2010


Currencies EUR: Buoyed by rising rate differential GBP: Lower vs. EUR, higher vs. USD

March 2011 forecasts GBPUSD USDCHF EURGBP

1.59 0.94 0.86

Problems in the periphery of Europe have increased the perceived risk of owning European equities due to the high debt levels.

Citi analysts however believe that conditions for decent equity market gains appear to be in place given that European equities: 1) look cheap in absolute and relative terms, 2) has more Emerging Market (EM) exposure than the US or Japan, 3) highest dividend yields of any region in the world. Citi analysts expect double-digit dividend growth over the next two years.

Indeed, despite the bad press, it is worth pointing out that the performance of European equities broadly matched those of US equities in 2010 in local currency terms. Europe also beat Japan handsomely and only just lagged Global Emerging Markets (GEMs).

Nevertheless, Citi analysts still see four main downside risks: 1) European sovereign crisis, 2) EM over-heating, 3) US double dip and 4) margin squeeze.

In Europe, investors can find value in sovereigns that have been impacted by concerns in the periphery, but are unlikely to default, such as Italy and Belgium (despite continued political risks). Citi analysts prefer maturities in the 10 to 15 year range, which has the most attractive carry opportunities.

In the UK, the steep Gilt curve offers investors more attractive carry opportunities in longer term maturities. That said, Citi analysts maintain their long duration bias and find the greatest value in the 10-15 year range.

The Euro area sovereign debt crisis might have contributed to a small retreat by EUR versus USD but with EUR yields rising, the currency may not suffer as much from the crisis as in 2Q10. While the ECB is seen to keep policy rates unchanged in 2011, it is likely to continue normalising front-end rates. This in turn may cause the rate differential between USD and EUR to widen over the next 12 months – a positive for EURUSD.

GBP has been a beneficiary of not being perceived as vulnerable to strains in the Euro area periphery and on expectations that the UK is unlikely to engage in fresh quantitative easing. Key to the outlook is the likely impact of fiscal tightening. A severe hit may yet introduce QE2 and weaken GBP vs. EUR. Still, recent UK data looks relatively robust and inflation continues to be persistent. Thus, GBPUSD may continue to drift higher over the medium term as USD resumes its decline.

Source: CIRA

Nikkei 225 (1/11/2010 to 14/1/2011)

8500

9000

9500

10000

10500

11000


Source: Bloomberg

Economic Outlook

Higher commodity prices: 2007-2008 all over again?

Rising commodity prices are driving increases in retail prices for some foodstuffs and daily goods. Prices for instant coffee, sugar, and cotton buds rose in November 2010 and in 2011, commodity prices are likely to continue to increase and for some items, they may gradually be passed on to consumers.

However, the rise in import prices for food and energy so far has been far smaller than in 2007-2008, thanks in part to JPY appreciation. Unless food and energy-related commodity prices rise sharply from current levels or JPY depreciates sharply, the spill over to domestic retail prices is expected to be quite modest.

Significant rises in the price of foods and daily goods due to higher costs tend to have a negative impact on consumer spending, as they reduce the purchasing power of nominal household incomes. Given this, cost-driven rises in food and daily goods prices are unlikely to result in a sustained escape from deflation.

The Week Ahead 19/1 • The seasonally adjusted tertiary

industry activity index likely rose 1% MoM in November after gaining 0.5% in October. Driving this was probably the wholesale and retail trade sector where demand was boosted by consumers rushing to purchase eco-friendly home electrical appliances before a change in subsidies for such devices.

21/1 • The all-industry activity index

probably rose 0.9% MoM in November after three consecutive months of decline.

Equities 2011: Risks to watch for as share prices climb

Last week’sClose

Last week’sreturn

YTD return

Nikkei 10499.04 -0.40% +2.64%Topix 930.31 +0.42% +3.51%

Bonds JGB supply is problematic amid lack of will to improve fiscal situation

Jan 14 2010

Jan 7 2010

Dec 31 2010


Currencies JPY: Change in trend unproven so far

March 2011 forecast USDJPY EURJPY AUDJPY

83 112 84.1

Japanese stocks were global laggards for much of 2010 but started catching up at the end of the year. From the November low to the December high, the S&P Japan Index rose 13.3%, well above the S&P Global Index’s 6.2% gain. Positives for equities abound, including big tax breaks in the US, emerging economy strength, and Bank of Japan (BOJ) monetary easing.

Additional monetary easing may push up share prices, but investors should be cautious about being overly optimistic. Risks to the global economy – especially Europe;s financial crisis, rising long-term US interest rates, and overheating emerging economies – tend to be understated.

Thus, even if the BOJ does ease further, doubts linger about the sustainability of the rally because of the murky external environment. Citi forecasts the TOPIX to reach 1,050 by end-2011, but risks may be weighted to the downside rather than the upside.

Long term interest rates are expected to rise, albeit only modestly in 2011. As the economic growth recovers to exceed the trend rate, yields on 10-year Japanese Government Bonds (JGBs) may increase to 1.3% in 2H11.

Also driving up yields is the potential for increased JGB supply, necessitated by Japan’s fiscal burden. The government appears to lack the strong will to meaningfully improve the fiscal situation. Tax and social security reform plans are in doubt after the ruling coalition lost control of the Upper House last summer.

Citi analysts estimate the fiscal deficit as a percentage of GDP to stay between 8% and 9% in the coming years, sending the debt-to-GDP ratio to 250% in the mid-2010s. Thus, there is a rising risk that supply, rather than demand, may overwhelm the JGB market.

Despite the recent move higher in USDJPY following the November Federal Open Market Committee meeting, little has changed on the overall USDJPY trend. Japan seems set to remain mired in deflation with relatively high real yields. This suggests that the USDJPY trend could still be lower medium term.

Still, there is potential for some further upside in the short term, especially ahead of additional year end-related unwinds. Overall, general USD weakness is a negative, while valuation factors are possibly a positive. It may be that the lows may be in for USDJPY though this remains unproven.

Source: CIRA

MSCI Asia ex Japan (1/11/2010 to 14/1/2011)

420

440

460

480

500


Source: Bloomberg

Economic Outlook China: Tighter policy but not austere

Facing rapid inflation in recent months, Beijing has made a number of policy moves to absorb excess liquidity and manage inflation expectations. But even as the short-term focus has shifted to inflation, growth remains a top priority. The government appears confident that prudent monetary policy will be able to deliver inflation of 4 % in 2011. Given that, and out of concern over a possible slowdown in investment and trade surpluses, proactive fiscal policy has been adopted to ensure relatively fast growth. Recent policy moves also support rebalancing of the economic structure, another important objective for the 12th Five-Year Plan.

Citi analysts believe policies announced so far by Beijing for 2011 are tighter than those of the past two years, but the overall stance remains slightly expansionary. Neutral monetary policy on top of existing excess liquidity, combined with proactive fiscal policy, is friendlier to growth than inflation control. Inflation, anyway, may well be contained between 4% and 5% in the absence of exceptional domestic and external supply and demand shocks and if a recent trend of declining M2 money velocity continues. But risks to this benign scenario have increased. A recent warning of a potential global food price crisis underscores the difficulty of curbing food inflation. Signs of strengthening global manufacturing activity can also push up commodity prices significantly. Policy thus needs to get ahead of the curve to anchor inflation expectations and avoid forced policy tightening further down the road.

The Week Ahead 17/1 • Singapore: Non-oil domestic

exports likely rose 6.9% in December, down from November’s 10% jump.

18/1 • Hong Kong: The jobless rate may

have slid to 4% in December. 19/1 • Malaysia: CPI inflation probably rose

to 2.2% in December from 2%. 20/1 • China: GDP growth likely moderated

in 4Q10 to 9% from 9.6%. Industrial production growth in December probably eased to 13.1% from 13.3%, as did retail sales growth, from 18.7% to 18.5%. Fixed asset investment may also slow to a 24.6% increase from 24.9%. CPI inflation likely eased to 4.2% from 5.1%.

• Hong Kong: CPI inflation likely slowed to 2.5% in December.

• Taiwan: Export orders in December probably grew 11.9%, slowing from November’s 14.3% rise.

• Thailand: Export growth likely slowed in December to 15.2% from 28.5% in November.

Equities

Concerns about Asia’s earnings margins are overdone

Last week’s close

Last week’sreturn

YTD Return

MSCI Asia ex Japan 481.58 +0.87% +0.56%

Currencies AUD: More gains expected against USD EM Asia: Further appreciation likely

March 2011 forecasts AUDUSD NZDUSD USDSGD

1.01 0.76 1.29

Rising inflation is the main concern these days as investors fear how that may cause corporate profits in Asia to disappoint.

Yet in the past decade, profit margins have not been the key driver of Asian stocks’ return on equity or earning-per-share (EPS) growth. Asset turnover, the ratio of sales to assets, has been more important. Inflation may thus be a boon as it drives up sales volume, causes assets to be re-valued faster, and grants greater pricing power to cyclical exporters. Asian export prices are now rising at a rate of 2.3%, in contrast to declining 1.5% on average over the past 10 years.

In any case, consensus EPS expectations, at 13% for 2011, are not aggressive. An earnings shock is thus less likely to occur, unless global growth disappoints significantly. In this environment, Citi analysts favour asset plays and cyclicals, such as banks, real estate, energy, industrials and technology. Geographically, they prefer Hong Kong, Korea and Taiwan over Asean and India.

Bonds

Demand for yield amid low rates may see spreads grind tighter

Developments in Europe, including a consultation paper on an EU framework for bank recovery that may cause bondholders to face losses, as well as the announcement of a Portugal bond auction, caused Asian spreads to widen.

Asian credit markets have been strong after the Fed’s further quantitative easing (QE2) and as the US mid-term elections turned out largely in line with consensus expectations. High yield credits outperformed, confirming that the market is hungry for yield in light of the expectation that interest rates are likely to remain low for an extended period.

The market may continue to grind tighter. While valuations - after the strong rally last year - are not cheap and real money accounts may not be aggressive in chasing yields, a low rate environment and healthy corporate fundamentals are expected to continue to benefit the corporate bond market from a fund flows perspective, particularly in the emerging markets.

With easy money likely to persist in much of the G10, supporting risk appetite and boosting commodity prices, investors are likely to look to commodity-backed currencies. AUD remains the currency of choice and Citi analysts forecast further upside against a weaker USD. The main risk here is a big correction in market bullishness on China. Most EM Asian currencies are expected to strengthen further against USD. Rising inflation in China suggests the authorities are likely to look to CNY appreciation as part of their broad monetary policy tightening effort. If so, this may pave the way for renewed currency strength in other EM Asian economies. INR and KRW are the preferred currencies in the region given strong activity growth in the former and robust exports and prospective hikes in the latter (plus easing political tensions).

Source: CIRA

Source: Bloomberg (As at January 14, 2011)

Previous Week's Close

52-Week High

52-Week Low

Weekly Return

YTD Return

YTD Return (USD)

UNITED STATES Dow Jones Industrial Average 11787.38 11794.15 9614.32 +0.96% +1.81% +1.81% S&P 500 1293.24 1293.24 1010.91 +1.71% +2.83% +2.83% Nasdaq 2755.30 2755.30 2061.14 +1.93% +3.86% +3.86% EUROPE DJ Euro STOXX 284.59 285.75 234.19 +3.02% +3.69% +3.56% FTSE 100 6002.07 6090.49 4790.04 +0.30% +1.73% +3.63% DAX 7075.70 7087.84 5433.02 +1.84% +2.34% +2.99% JAPAN Nikkei 225 10499.04 11408.17 8796.45 -0.40% +2.64% +1.14% TOPIX 930.31 1001.77 799.64 +0.42% +3.51% +2.00% ASIA MSCI Asia ex Japan 481.58 485.39 354.75 +0.87% +0.56% +0.56% Hong Kong Hang Seng 24283.23 24988.57 18971.52 +2.52% +5.42% +5.40% Shanghai Composite Index 2791.34 3268.81 2319.74 -1.67% -0.60% -0.60% Taiwan Weighted Index 8972.51 9046.18 7032.40 +2.16% +0.00% +0.36% Korea KOSPI 2108.17 2118.86 1532.68 +1.05% +2.79% +4.10% Mumbai Sensex 18860.44 21108.64 15651.99 -4.22% -8.04% -9.38% Singapore Straits Times Index 3245.96 3313.61 2648.15 -0.47% +1.75% +1.42% Kuala Lumpur Composite 1569.89 1576.95 1224.37 -0.15% +3.36% +4.03% Thai Stock Exchange 1032.26 1056.44 679.45 -0.40% -0.05% -1.23% Jakarta Composite Index 3569.14 3789.47 2431.84 -1.72% -3.63% -4.37% Philippines Stock Exchange Index 4132.04 4413.42 2787.66 -1.68% -1.64% -2.45% Australia All Ordinaries 4908.60 5048.60 4194.40 +2.01% +1.27% -1.99% EMEA Russia MICEX Index 1744.74 1768.21 1194.96 +3.36% +3.36% +5.24% South Africa JSE All Shares Index 32661.06 32726.03 25733.31 +2.29% +1.69% -3.55% Turkey ISE National 100 Index 67879.62 71776.92 48080.16 -1.30% +2.84% +2.26% LATIN AMERICA Mexico Bolsa Index 37994.72 38876.76 29926.06 -1.57% -1.44% +0.88% Brazil Bovespa Index 70940.22 73103.28 57633.90 +1.26% +2.36% +0.94% COMMODITIES Gold 1361.72 1431.25 1044.85 -0.57% -4.16% -4.16% Oil 91.54 92.58 64.24 +3.99% +0.18% +0.18% FIXED INCOME

Citigroup World Government Bond Index 574.05 591.97 559.27 -0.09% -0.36% -0.36%

Currency 17-Jan-11 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12

G10-US Dollar

Euro EURUSD 1.33 1.34 1.37 1.39 1.40 1.41 1.4 1.38 1.37 1.36

Japanese yen USDJPY 83 84 83 83 84 84 84 85 85 85

British Pound GBPUSD 1.58 1.57 1.59 1.60 1.61 1.62 1.64 1.66 1.68 1.70

Swiss Franc USDCHF 0.96 0.96 0.94 0.94 0.95 0.95 0.97 0.99 1.01 1.03

Australian Dollar AUDUSD 0.99 1.00 1.01 1.03 1.04 1.04 0.99 0.95 0.90 0.86

New Zealand NZDUSD 0.77 0.75 0.76 0.76 0.76 0.75 0.72 0.69 0.66 0.63

Canadian Dollar USDCAD 0.99 1.00 0.99 0.99 0.98 0.98 0.99 0.99 1.00 1.00

Dollar Index DXY 79.25 79.29 77.79 77.29 76.79 76.46 76.89 77.31 77.76 78.13

G10 Crosses

Japanese yen EURJPY 111 112 112 114 116 117 118 118 117 116

Swiss Franc EURCHF 1.29 1.28 1.28 1.30 1.32 1.34 1.36 1.37 1.39 1.40

British Pound EURGBP 0.84 0.85 0.86 0.86 0.87 0.87 0.85 0.83 0.81 0.80

Swedish Krona EURSEK 8.92 9.09 9.07 9.01 8.95 8.90 8.87 8.85 8.82 8.80

Norwegian Krone EURNOK 7.81 7.90 7.90 7.90 7.90 7.90 7.87 7.85 7.82 7.80

Norwegian Krone NOKSEK 1.14 1.15 1.15 1.14 1.13 1.13 1.13 1.13 1.13 1.13

Australian Dollar AUDNZD 1.29 1.33 1.33 1.35 1.37 1.38 1.38 1.37 1.37 1.37

Australian Dollar AUDJPY 81.9 83.4 84.1 85.5 87.0 87.5 83.8 80.0 76.2 73.1

EM Asia

Chinese Renminbi USDCNY 6.60 6.60 6.50 6.42 6.30 6.25 6.18 6.10 6.05 6.00

Hong Kong Dollar USDHKD 7.78 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75 7.75

Indonesian Rupiah USDIDR 9073 9000 8950 8920 8850 8800 8750 8700 8650 8600

Indian Rupee USDINR 45.4 44.3 43.5 43.0 42.5 42.5 42.0 41.5 41.0 40.5

Korean Won USDKRW 1113 1120 1110 1080 1060 1040 1020 1020 1010 1000

Malaysian Ringgit USDMYR 3.06 3.09 3.04 3.01 2.98 2.95 2.94 2.92 2.88 2.86

Philippine Peso USDPHP 44.4 42.8 42.5 42.0 41.9 41.3 41.0 40.8 41.3 40.8

Singapore Dollar USDSGD 1.29 1.30 1.29 1.27 1.25 1.24 1.23 1.22 1.21 1.20

Thai Baht USDTHB 30.6 29.5 29.3 29.0 28.8 28.5 28.3 28.2 28.3 28.3

Taiwan Dollar USDTWD 29.0 30.6 29.8 29.6 29.5 29.3 29.3 29.1 28.9 28.8

EM Europe

Czech Koruna EURCZK 24.37 25.15 25.09 24.75 24.49 24.22 23.98 23.85 23.73 23.6

Hungarian Forint EURHUF 276 276 278 278 278 278 277 276 276 275

Polish Zloty EURPLN 3.87 3.96 3.85 3.83 3.81 3.79 3.71 3.64 3.56 3.50

Israeli Shekel USDILS 3.56 3.58 3.55 3.57 3.59 3.60 3.61 3.63 3.64 3.65

Russian Ruble USDRUB 30.1 30.5 29.5 29.5 29.4 29.5 29.7 30.0 30.3 30.5

Russian Ruble Basket 34.6 35.1 34.4 34.6 34.7 34.9 35.0 35.2 35.4 35.5

Turkish Lira USDTRY 1.55 1.52 1.55 1.57 1.59 1.60 1.61 1.63 1.64 1.65

South African Rand USDZAR 6.93 6.82 6.82 6.96 7.09 7.25 7.51 7.77 8.03 8.27

EM Latam

Brazilian Real USDBRL 1.69 1.69 1.65 1.67 1.67 1.67 1.69 1.70 1.70 1.70

Chilean Peso USDCLP 490 481 475 477 482 485 486 487 488 498

Mexican Peso USDMXN 12.0 12.3 12.2 12.3 12.4 12.5 12.6 12.7 12.9 13.0

Colombian Peso USDCOP 1872 1869 1850 1843 1855 1852 1858 1871 1883 1896

Source: CIRA, Bloomberg (As at January 17, 2011; Forecasts as of December 15, 2010)

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