Marketoutlook_29Jul11

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Market Outlook

Market OutlookBond Markets Weekly

29 July 2011weekly

Technical analysis

Forecasts USA cur.** Sep-11 Dec-11 Jun-12 Key rate 0.13 0.25 0.25 0.75Libor 3M 0.26 0.30 0.40 0.90Yield 5Y 1.48 1.90 2.00 2.80Yield 10Y 2.91 3.30 3.50 3.70Eurozone Key rate* 1.50 1.75 2.00 2.00Euribor 3M* 1.61 2.00 2.20 2.25Yield 5Y* 1.77 2.70 2.80 2.80Yield 10Y* 2.59 3.20 3.30 3.20Swaprate 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

Please find our „recommendations“ on page 5.

Weekly QTYc1,Q/TYc1 20/03/2011- 28/08/2011(CHG)

120*25.17121*7.13

121*29.71

119*8.45119*4.56118*30.28

121*30.37

128*20.93

127*5.3

128*15.71Cndl,QTYc1,Last Trade31/07/2011,124*4,124*23, 123*25,124*21

Cndl,Q/TYc1,Last Trade31/07/2011,124*4,124*23, 123*25,124*21

Cndl,QTYc1,Last Trade31/07/2011,124*4,124*23, 123*25,124*21

Cndl,Q/TYc1,Last Trade31/07/2011,124*4,124*23, 123*25,124*21

Cndl,QTYc1,Last Trade31/07/2011,124*4,124*23, 123*25,124*21

PriceUSD

1/32

118

120

122

124

126

PriceUSD

1/32

118

120

122

124

126

Vol,QTYc1,LastTrade31/07/2011,4.6917M

VolumeUSD

.1234

20 27 03 10 17 24 01 08 15 22 29 05 12 19 26 03 10 17 24 31 07 14 21 28

Mar 11 Apr 11 May 11 Jun 11 Jul 11 Aug 11[Delayed]

US T-Note Future

Source: Thomson Reuters, Raiffeisen RESEARCH

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

USA In terms of the data, the highlightthis last week was today’s flashestimate for Q2 GDP.With an annualised quarterly gain of 1.3%,the US economy expanded even more sluggish than had beenexpected (consensus +1.7%, Raiffeisen RESEARCH +2.2%). Dueto high energy prices and supply difficulties in the automobile sec-tor private consumption expenditures literally stagnated (+0.1%qoq annualised) in the April to June period. Government spendingalso was dampening economic expansion by declining the thirdquarter in a row. The expansion in economic output was mainlyborne by investment both in plant and equipment and construc-tion. Net exports contributed positively as well. Along with theflash estimate for the Q2 data, GDP figures going all the wayback to 2003 were revised. Basically, the revisions had two mainresults: first, economic output decreased in the years 2008 to2009 more strongly than previously assumed. Furthermore, theincrease in economic output in H2 2010 and Q1 2011 was re-vised 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 dur-ing the week were overshadowed by the debt dispute betweenthe Democrats and the Republicans. According to theConference Board survey, consumer confidence improved surprisingly in July,

275

340

405

470

535

600

665

730

Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

-800

-600

-400

-200

0

200

400

600

Initial jobless claims, thsd.NFP, thsd., mom, inverted (r.h.s.)

Distortions due to Census

Room for improvement


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


Daily QFGBLc1 29/06/2011 - 04/08/2011 (FFT)

129.76129.96130.28

131.54

132.64Cndl, QFGBLc1, Last Trade29/07/2011, 129.86, 130.12, 129.81, 129.9Cndl, QFGBLc1, Last Trade29/07/2011, 129.86, 130.12, 129.81, 129.9Cndl, QFGBLc1, Last Trade29/07/2011, 129.86, 130.12, 129.81, 129.9Cndl, QFGBLc1, Last Trade29/07/2011, 129.86, 130.12, 129.81, 129.9SMA, QFGBLc1, Last Trade(Last), 2629/07/2011, 127.66SMA, QFGBLc1, Last Trade(Last), 1229/07/2011, 128.67SMA, QFGBLc1, Last Trade(Last), 2629/07/2011, 127.66Cndl, QFGBLc1, Last Trade29/07/2011, 129.86, 130.12, 129.81, 129.9Cndl, QFGBLc1, Last Trade29/07/2011, 129.86, 130.12, 129.81, 129.9Cndl, QFGBLc1, Last Trade29/07/2011, 129.86, 130.12, 129.81, 129.9Cndl, QFGBLc1, Last Trade29/07/2011, 129.86, 130.12, 129.81, 129.9SMA, QFGBLc1, Last Trade(Last), 1229/07/2011, 128.67

PriceEUR

.12

125

126

127

128

129

130

131

132

PriceEUR

.12

125

126

127

128

129

130

131

132

Vol, QFGBLc1, Last Trade29/07/2011, 84,697

VolumeEUR

.1234

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

EUR Bund Future

Key figures USA RBI Cons. prior Mon, 1. 16:00 ISM Manufacturing Index Jul. 54.5 55.0 55.3Tue, 2. 14:30 Personal income, mom Jun. 0.2% 0.2% 0.3%Tue, 2. 14:30 Personal spending, mom Jun. 0.4% 0.2% 0.0%Tue, 2. 14:30 PCE deflator, yoy Jun. n.a. n.a. 2.5%Tue, 2. 14:30 PCE core inflation, yoy Jun. n.a. 1.4% 1.2%Wed, 3. 14:15 ADP Employment, mom, thsd Jul. 125 100 157Wed, 3. 16:00 ISM Non-Manufacturing Index Jul. n.a. 54.0 53.3Fri, 5. 14:30 Nonfarm payrolls, mom, thsd Jul. 120 95 18Fri, 5. 14:30 Unemployment rate Jul. 9.1% 9.2% 9.2%Europe Mon, 1. 09:45 IT: PMI Manufacturing Jul. 48.5 49.0 49.9Tue, 2. 08:00 IR: PMI Manufacturing Jul. 48.0 n.a. 49.8Wed, 3. 09:15 SP: PMI Services Jul. 50.0 49.9 50.2Wed, 3. 09:45 IT: PMI Services Jul. 48.0 46.8 47.4Thu, 4. 08:00 IR: PMI Services Jul. 50.0 n.a. 52.4Thu, 4. 12:00 GE: Factory orders, mom Jun. -3.0% -0.2% 1.8%Fri, 5. 09:00 SP: Industrial output, yoy Jun. -1.0% -0.7% -0.4%Fri, 5. 10:00 IT: Industrial production, mom Jun. -1.5% 0.2% -0.6%Fri, 5. 11:00 IT: GDP, qoq, prelim. Q2 0.2% 0.3% 0.1%Fri, 5. 12:00 GE: Industrial production, mom Jun. -0.5% 0.1% 1.2%Events Thu, 4. 13:45 ECB announces interest rate decision 1.50% 1.50% 1.50%Source: Bloomberg, Raiffeisen RESEARCH



2

Market Outlook

Technical analysis

Forecasts CHF cur.* Sep-11 Dec-11 Jun-12 Libor 3M 0.18 0.25 0.50 1.00Yield 10Y 1.43 1.75 1.90 2.00YEN Key rate 0.10 0.10 0.10 0.10Libor 3M 0.38 0.20 0.20 0.25Yield 10Y 1.09 1.20 1.30 1.40FX EUR/USD 1.42 1.50 1.45 1.30EUR/JPY 111 120 120 125

USD/JPY 78 80 83 96EUR/CHF 1.14 1.20 1.25 1.25Crude Brent 116.8 115 110 105*as of 29 July 2011, 12:51 p.m. CET Source: Thomson Reuters, Raiffeisen RESEARCH


Quarterly QEURJPY= 31/12/2006- 31/12/2011(GMT)

38.2%

50.0%

61.8%

100.0%

38.2%

50.0%

61.8%

100.0%

120.05

111.29

97.11

38.2%

50.0%

61.8%

100.0%

38.2%

50.0%

61.8%

100.0%

38.2%

50.0%

61.8%

100.0%

38.2%

50.0%

61.8%

100.0%

38.2%

50.0%

61.8%

100.0%

38.2%

50.0%

61.8%

100.0%Cndl,QEURJPY=,Bid30/09/2011,116.76, 117.73,109.56, 110.63Cndl,QEURJPY=,Bid30/09/2011,116.76, 117.73,109.56, 110.63Cndl,QEURJPY=,Bid30/09/2011,116.76, 117.73,109.56, 110.63Cndl,QEURJPY=,Bid30/09/2011,116.76, 117.73,109.56, 110.63

PriceJPY

.12

90

100

110

120

130

140

150

160

PriceJPY

.12

90

100

110

120

130

140

150

160

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

Yearly QEURCHF= 31/12/1999- 31/12/2012(GMT)

38.2%

50.0%

61.8%

100.0%

38.2%50.0%61.8%

1.2846

1.1864

1.35881.34321.3178

1.1913

1.1141

1.2803

1.2528

1.20841.1966

1.1496

1.0734

38.2%

50.0%

61.8%

100.0%

38.2%

50.0%

61.8%

100.0%

38.2%

50.0%

61.8%

100.0%

38.2%50.0%61.8%

Cndl,QEURCHF=,Bid31/12/2011,1.2924,1.3236, 1.1377,1.1435Cndl,QEURCHF=,Bid31/12/2011,1.2924,1.3236, 1.1377,1.1435

Cndl,QEURCHF=,Bid31/12/2011,1.2924,1.3236, 1.1377,1.1435Cndl,QEURCHF=,Bid31/12/2011,1.2924,1.3236, 1.1377,1.1435

PriceCHF

.1234

1.1

1.2

1.3

1.4

1.5

1.6

PriceCHF

.1234

1.1

1.2

1.3

1.4

1.5

1.6

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

1990 2000 2010

EUR/JPY


Last: 1.1434; Rectangle’s (1999 - 2009) target, i.e. 1.15,has failed to prove firm, so parity hardly will do either.

July 29th, 2011, 09:24 CET

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

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

1.4007

1.45511.4529

Cndl,QEUR=,Bid29/07/2011,1.4327,1.4363, 1.4262,1.4274Cndl,QEUR=,Bid29/07/2011,1.4327,1.4363, 1.4262,1.4274Cndl,QEUR=,Bid29/07/2011,1.4327,1.4363, 1.4262,1.4274Cndl,QEUR=,Bid29/07/2011,1.4327,1.4363, 1.4262,1.4274

PriceUSD

.1234

1.39

1.4

1.41

1.42

1.43

1.44

1.45

PriceUSD

.1234

1.39

1.4

1.41

1.42

1.43

1.44

1.45

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

EUR/USD


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

durables orders showed a steep drop of 2.1% mom in June andpending house sales increased for the second month in a row. TheBeige Book revealed that economic performance in June and Julywas slightly more subdued than previously, but no pronouncedweakening was registered in the twelve districts.

Looking ahead to the coming week,two key releases are on theagenda, with the manufacturing sector ISM index (Mon) and thelabour market report (Fri). Based on the three regional purchas-ing managers’ indices (the Empire State Index, the Richmond FedIndex and the Philadelphia Fed Index) which are available, weexpect a slightly larger drop in the ISM compared to consensus.With regard to the labour market report, however, we are a bitmore optimistic. In particular, we are looking for a net gain of 120K jobs, based on the further decline in initial claims for job-less benefits in July. Other labour market indicators such as theemployment sub-index in the ISM indices also continue to suggestthat the disappointing job creation figures in May and June weredownside outliers. Disregarding the government, which probablycontinued to cut jobs massively, employment should have grownmore strongly. With regard to the rate of unemployment, however,we project a mild decline to 9.1%. Above and beyond this, nextweek’s 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 furthervotes 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 highlyunlikely that the USA will default on its government bonds. At thesame time, with every week that passes, the risk of a recessionwould increase, due to the cuts in other public spending (cf. ourlatest Special Report). If no agreement is reached, we thus do notexpect a sharp increase in US yields, as the risks of recession willprobably be seen by the markets as outweighing the (highly theo-retical) risk of default. As soon as there is an agreement, which isultimately unavoidable (and will probably turn out to be too smallto prevent a downgrade of the US credit rating), economic datashould come to the forefront again. Accordingly, with an eye toour expectations of improvement on the labour market, our quar-terly recommendation for US bonds is Sell.

EUR/CHF



3

Market Outlook

Eurozone The market continues to be driven bythe topic of sovereign debt.The decisions of the EU Council Summit hardly helped to improvethe mood. For example, on Thursday Italy saw yields rise on itsissues along the entire maturity curve. Ten-year bonds were placedon 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 sus-tainable intervention on the secondary market, and insufficient toavert market tensions or even outbreaks of panic in relation toSpanish or Italian government bonds. Additionally, the procedureto 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 andmaking their use more flexible would not solve the underlyingproblem. In its entirety, the southern parts of the Eurozone cannotbe financed by the rest of the countries, without the creditworthi-ness of the other countries suffering from this. Italy alone is too bigfor this. In other words, a (budget) hole cannot be stopped up withanother (budget) hole. At the end of the day, it’s only the centralbank which has the necessary funds (as it has unlimited funds) tofinance the large stock of debts, if investors refuse to. Viewed inthis light, the decisions at the EU council summit can be seen as aset-back, as the ECB was released of its responsibility to interveneon the secondary market in an emergency.

Along with these considerations, the rating agencies’ negative as-sessments are weighing on sentiment, and the agencies’ criticalassessments on the situation are based in part by the poor market

sentiment. A perfect vicious circle! No sustained improvement inthe sovereign debt crisis can be expected during this summer, asthe political situation will grow even more unclear in the weeksto come, as the efforts to contain the crisis must be approved bynumerous national parliaments. With all of this in mind, we put our

yield forecasts for German government bonds under revision - sig- nificantly lower forecast values may be expected for September.

The data: in most of the EUR countries, thePMI indicators willprobably decline. Our prognosis of very weak performance inQ3, coupled with contraction the GDP figures of some EUR coun-tries, is now beginning to take shape. Before that, however, wewill have a chance to look at the GDP data for Q2.These shouldshow a gain of 0.2% qoq for Italy, for example. Thursday’spress conference by the ECB should shed some light on when the centralbank is planning to move forward with its next rate hike. We areforecasting a 25bp increase in the autumn and believe that evena 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 plan-ning a bond issue, whereas the Netherlands, France, Belgium andPortugal are planning money market issues.

Debt issuance calendar Issuer Date Maturity Coupon

(%)Vol.

(EUR bn.)

Bonds

SP Thu, 4. 2014 3.4 n.a.Bills NE Mon, 1. 9M n.a. 2NE Mon, 1. 6M n.a. 2.5FR Mon, 1. n.a. n.a. n.a.BE Tue, 2. n.a. n.a. n.a.PO Wed, 3. 4M n.a. 0.75

Source: Bloomberg



4

Market Outlook

Market OutlookEquity Markets Weekly

weekly

-4 -3 -2 -1 0

DJIAS&P 500

SMICAC

DJ ES 50MSCI World

Nasdaq Comp.ATXDAXAEX

NikkeiDJ Stoxx 50

FTSE

Market performance (%, 1week)

Source: Thomson Reuters

Forecasts current** Sep-11 Dec-11

DJ ES50 2,660 2,850 2,950DAX 7,121 7,500 7,600FTSE 5,815 5,900 6,050SMI 5,779 6,300 6,500DJIA 12,240 12,200 12,400S&P 500 1,301 1,310 1,350Nasdaq Comp, 2,766 2,850 2,950

Nikkei 9,833 9,100 10,000ATX 2,605 2,850 3,000**as per 22 July, 2:00 p.m. CET Source: Bloomberg, Raiffeisen RESEARCH

-5 -4 -3 -2 -1 0

IndustrialsFinancials

Health CareMaterials

MSCI WorldEnergy

Cons. DiscretionaryUtilities

TelecomsIT

Cons. Staples

Sector performance (%, 1 week)*

* weekly performance of global MSCI sector indicesSource: Thomson Reuters

Recommendations Markets: Hold: Europe, USA

Sell: JapanFavoured sectors: Consumer staples, Energy, Materials, Industrials,

Financials, IT

Expected corporate releases USA Tue 2 NYSE Euronext, PfizerWed 3 Mastercard, Time WarnerFri 5 Procter & Gamble

Europe Tue 2 BMW, BNP Paribas, Deutsche Post, Fresenius Medical Care, MetroWed 3 Enel, Societe Generale, UnicreditThu 4 adidas, Beiersdorf, Deutsche Telekom, ING, Münchener Rück., UnileverFri 5 Allianz, Generali, Intesa Sanpaolo, RBS, Prudential

JapanTue 2 Toyota Motor

Source: Bloomberg

USA The US equity markets as well as the global capital markets asa whole are under the spell of the debt ceiling quarrels betweendemocrats and republicans. We think that market participants

have not yet full priced in the possible consequences of the coun-try’s potential insolvency. However, the current earnings seasonfor the second quarter has predominantly produced clearly posi-tive surprises so far. Thus the originally predicted 12.7% yoy earn-ings growth will probably be beaten again (17% so far).

Europe The effect of the second rescue package for Greece has beendisappointing so far. Rising yields for Eurozone’s peripheral coun-tries and the paralysing debate over raising the US debt ceilingacknowledge that the sovereign debt crisis is acute and far frombeing solved. However, not even the Q2 earnings season could

give markets support as corporate results are not convincing sofar. Hence we reckon that European stocks will be having a hardtime in the weeks to come.

Japan Japan’s leading stock index slipped beneath the 10,000 markand its 200 day moving average in the course of the recent week.Although there are signs of a recovering economy (e.g. strongretail sales) power shortages could dampen production duringthe coming months as only 16 out of 54 nuclear reactors arein operation at the moment. Moreover companies struggle withthe strong Yen and the aftermaths of the Great East Japan Earth-quake. Therefore it comes as no surprise that the current earningsseason is somewhat disappointing. So far half of corporate Japanmissed consensus estimates and forward earnings expectationshave been revised downwards. “Sell”.



5

Market Outlook

Market Outlook Recommendations

weekly

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

Recently closed trades

RecommendationEntry date

Entry level

Close date

Close level

Total return

Comment

Sell US T-Note Future, Buy German Bund Future 29/04/2011 -4 bp 18/07/2011 -30 bp 26 bp Target reached

Sell Bund Future 29/06/2011 125.86 11/07/2011 127.6 -1.38% Stopped outSell Schatz Future 29/06/2011 107.68 11/07/2011 108.15 -0.44% Stopped outSell Schatz Future 13/05/2011 107.45 27/05/2011 107.81 -0.30% Stopped outSell Schatz Future 01/04/2011 107.07 12/05/2011 107.52 -0.42% Stopped outSell Bund Future 29/04/2011 122.69 05/05/2011 123.9 -0.98% Stopped outSell T-Note Future 29/04/2011 121.03 05/05/2011 122.1 -0.88% Stopped outSell Conf-Future 19/04/2011 136.8 05/05/2011 138 -0.88% Stopped outBuy EUR, sell USD 24/06/2011 1.420 06/07/2011 1.437 1.18% Closed earlyBuy USD/JPY 17/05/2011 81.4 06/06/2011 80 -1.72% Stopped outBuy EUR, sell CHF 09/05/2011 1.26 24/05/2011 1.24 -1.59% Stopped outBuy EUR, sell USD 09/05/2011 1.4403 13/05/2011 1.41 -2.10% Stopped outBuy USD/JPY 19/04/2011 82.5 26/04/2011 81.7 -0.97% Closed earlyBuy EUR/CHF 01/03/2011 1.286 15/03/2011 1.275 -0.86% Stopped out

Source: Thomson Reuters, Bloomberg

Short-term trading ideas

RecommendationEntry date

Entry level

Current level* Target Stop

Carry (ann. %) Comment

Sell T-Note Future 29/06/2011 123.20 124.6 119.00 125.50 - Greek parlament backs reform agendaBuy GE 10Y (DE0001135424),Sell GE 2Y (DE0001137339)

18/03/2011 156 bp 137.91 bp 120 bp 156 bp 156 bp Rate hikes trigger curve flattening

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

FX* Recommendation

Entry date

Entry level

Current level Target Stop

Carry (ann. %) Comment

Buy EUR, Sell USD 22/07/2011 1.436 1.427 1.48 1.416 - Progress on Greece, hawkish ECB

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



6

Market Outlook

This report was completed on 29 July 2011

Editor Raiffeisen RESEARCH GmbHA-1030 Vienna, Am Stadtpark 9Tel: +43 1 717 07-1521

Head: Peter Brezinschek (1517)

Research Sales:

Werner Weingraber (5975)Economics, Fixed Income, FX: Valentin Hofstätter (Head, 1685), Jörg Angelé (1687), Wolfgang Ernst (1500), Gunter Deuber (5707), Julia Neudorfer (5842), Matthias Reith (6741), Andreas Schwabe (1389), Gintaras Shlizhyus (1343), GottfriedSteindl (1523), Martin Stelzeneder (1614)

Credit/Corporate Bonds: Christoph Klaper (Head, 1652), Christoph Ibser (5913), Igor Kovacic (6732), Martin Kutny (2013), PeterOnofrej (2049), Gleb Shpilevoy (1461), Alexander Sklemin (1212), Jürgen Walter (5932)

Stocks: Helge Rechberger (Head, 1533), Aaron Alber (1513), Christian Hinterwallner (1633), Jörn Lange (5934),Hannes Loacker (1885), Richard Malzer (5935), Johannes Mattner (1463), Christine Nowak (1625),Leopold Salcher (2176), Andreas Schiller (1358), Connie Schümann (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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Market Outlook Acknowledgements

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Marketoutlook_29Jul11