MACRO OVERVIEW FIXED INCOME EQUITIES COMMODITIES

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1 WEEKLY MARKET VIEW 1 June 2012 This reflects the views of the Wealth Management Group Contents Week in Review Pg 2 Week ahead Pg 2 Conclusion Pg 3 Technical analysis Pg 4 Economic & Market Calendar Pg month Market Outlook Pg 6 Line in the sand at 7% 10yr government bond yields Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Italy Spain % Risk appetite index turning up Standard Chartered Risk Appetite Measure (SCRAM) Risk Seeking Markets abhor a vacuum Markets are impatiently awaiting the Greek election outcome. We are, however, still over two weeks away and there is a sense that any policy response will be limited until a commitment from the new government, if any, is forthcoming. This risks further downside despite the oversold nature of risk assets/currencies. Focus this week will be on whether any central bank policy response is likely. Thursday s ECB meeting and Bernanke speech will be key. We believe that the coming weeks will provide an excellent opportunity to buy assets at discounted levels including equities, high yield debt and Asian local currency bonds. MACRO OVERVIEW Economic disappointments continued in the US and Europe There is no clarity as to the likely outcome in the Greek elections Spain s bank recapitalisation plans still uncertain FIXED INCOME US high yield sell-off presents an opportunity, in our opinion Asian currencies are approaching their 2011 lows, which makes local currency debt look attractive EQUITIES Near-term downside risks cannot be ignored, but opportunities being created for those who can see the woods for the trees Continue to like US IT and Consumer staples. Gold miners have bounced, but energy stocks may be vulnerable given weak oil prices despite compelling valuations Risk Aversion May-10 Nov-10 May-11 Nov-11 May-12 Source: Standard Chartered COMMODITIES Oil has broken through key support and the next key level for Brent is around USD 99 per barrel USD strength risks gold breaking below 1520 support nearterm Steve Brice Chief Investment Strategist Rob Aspin, CFA Senior Investment Strategist CURRENCIES Manpreet Gill Senior Investment Strategist Risk aversion supporting the USD, but net speculative long Suren Chelliah Investment Strategist positioning highlights risks EM currencies still on the back foot, but huge value being created China s stimulus plans crucial for commodity currencies outlook This commentary reflects the views of the Wealth Management Group of Standard Chartered Bank

2 Uncertainty to remain high Weekly Market View Benchmark (USD) performance w-o-w* DJ UBS Commodities *week of May 24 to May 31 Spanish deposits depleting Spain retail and corporate bank deposits Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 EUR mlns US continues to disappoint US Economic Surprise JP Morgan Cash Citigroup World BIG MSCI AC World DXY ADXY Source: Citi, Bloomberg, Standard Chartered % -160 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 The one thing financial markets hate is uncertainty. As such, this is almost a perfect storm at the moment as policymakers stay on hold awaiting Greek elections in Europe, the Fed FOMC in the US and any further policy stimulus in China. We may get some clarity on some of these issues in the coming week, but we might not like what we see: As the Greek election approaches, we would hope to get a better read of the likely tilt towards, or away from, pro-bailout parties. Greek election polls continue to fluctuate in terms of support for the pro-bailout New Democracy party and anti-austerity SYRIZA. The central scenario is that we still get a pro-bailout government being formed, but it is a closer call than we would like. The upcoming ECB meeting should give us a better view of its interpretation of recent economic and financial developments. Spanish debt concerns are rising, the plan to recapitalise the banks is unclear and recent economic data has taken a sharp turn for the worse. The pressure to deliver an effective recapitalisation plan for the periphery s banks will only grow with time given the current pace of deposit erosion. Funding costs of about 5-6% would likely mean Spain s debt is sustainable even after including banking recapitalisation requirements, but markets are unlikely to deliver lower yields without a strong European policy response. The US authorities have yet to articulate how they intend to deal with 1) the expiry of Operation Twist at the end of the month and 2) the so-called fiscal cliff in In our view, Bernanke is likely to leave little doubt as to the Fed s likely approach at its June 20 th FOMC meeting as Operation Twist is about to expire. We believe further monetary policy stimulus in China is likely soon. Recent measures being employed to boost the economy infrastructure spending and accelerated approval of private sector projects are likely to take longer to have an impact than a monetary policy response. Today s lower official PMI manufacturing number underscores the need to do more, sooner. Finally, there is no clarity as to how India will address stagflationary concerns. India reported its lowest quarterly GDP growth print since the current data series began in 2004 (including the Global Financial Crisis). What does this mean for investors? We believe current market conditions offer an opportunity to average into high conviction investments. Risk assets and currencies remain heavily oversold while safe-havens (particularly the USD and G3 government bonds) look either over-owned, expensive or both. Net speculative USD long positions are at extremely high levels, while the 2-year German government bond yield was negative at one point last week. Risk appetite remains in deeply risk averse territory, so it should not take much positive news to lead to a significant rally in the short term. 2

3 Weekly Market View Upcoming ISM data likely to have risen US ISM Manufacturing vs Barclays GlobalAgg BBB yield May-01 Dec-02 Jul-04 Feb-06 Sep-07 Apr-09 Nov-10 US ISM Manufacturing BarCap GlobalAgg BBB yield (RHS) Most investors are long USD and short EUR CFTC Net non-commercial positions Jan-05 Jan-07 Jan-09 Jan-11 EUR USD No of contracts 000 Asia ex Japan currencies are very attractive DXY and ADXY % Countering this positivism is that the news flow has remained negative for two months now and it is difficult to see when this will turn the corner. Further losses short-term cannot be ruled out, but nevertheless valuations across some assets are looking increasingly compelling. We continue to recommend investors consider averaging into riskier asset classes. 1) Equities have been sold heavily. Our recent Market Watch (European Scenarios: 29 May 2012), indicated that an anti-austerity government in Greece could hold short term losses for equities (our estimate would be towards the lows of 2010 and 2011 c.12% down from current levels). However, a significant policy stimulus to limit contagion risks from a Greek Euro area exit would likely lead to a sharp and sizeable rally, possibly towards the 2011 high (up a net 19%). However, if Greece were to form a pro-bailout government then a relief rally of around 15% could be seen. 2) High yield spreads have widened, particularly in the US. However, forecast default rates are expected to remain low as we remain in a muddle through scenario while funding costs have fallen around 80bps for BBB-rated companies so far this year. Therefore, there is increasing scope for spread compression once uncertainty falls, while the search for yield remains a key focus for investors. 3) Asian local currency debt has been one of the worst performing areas of the bond world in recent times as currencies have weakened sharply on the back of portfolio flows and broad-based USD strength. While USD strength is likely to remain the driving force in the near term, ADXY is already approaching the lows of 2011 which suggests support may be seen for Asian currencies not too far from here. Data and events to watch: Europe: Greek polls, news on Spain s bank recapitalisation plan and Thursday s ECB policy meeting will dominate sentiment. The 2 nd release of Q1 GDP data will be interesting to see if Europe has avoided recession thus far, as the preliminary release suggested. US: Manufacturing ISM/employment data today will show whether the string of negative surprises continues. Non-manufacturing ISM (Tues) and the Fed s Beige Book (Thurs) will also be scrutinised. Bernanke s testimony on the economic outlook and any policy hints will be critical to risk appetite. China: Non-manufacturing PMI data over the weekend is the only major scheduled data release this week Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 ADXY DXY Curncy (RHS) Conclusion: We caution against becoming too bearish at this juncture. Markets have already fallen significantly and while further losses short term cannot be ruled out, valuations look increasingly compelling for equities, high yield bonds and Asian local currency debt. 3

4 Technical Analysis Weekly Market View S&P 500 The S&P 500 bounced from 1290 (38% retracement level of ) after the sharp dip to oversold levels. It continues to consolidate and looks unlikely to climb above the previous support levels of 1340 (23.6% retracement of ) and 1380 (upward moving trend line). The momentum indicator has consistently made a new low after minor pullbacks Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 S&P dma 100 dma 200 dma HSCEI The HSCEI has corrected from the upward resistance channel trend line close to It may slip further below the trend channel down to the next support at 9040 the lows seen in last October. We expect the downtrend to continue until the medium term indicators are oversold Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 HSCEI 50 dma 100 dma 200 dma Euro Stoxx Financial The index slipped further after breaking the initial consolidation zone support line at 90. We expect further downside as prices have slipped below the 38.2% (Fibonacci projected) level. The next support is at 67 (50% of projected level) while the immediate resistance lies at Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Euro Stoxx Financials 50 dma 100 dma 200 dma 4

5 Weekly Market View Brent Crude Brent Oil breached the 106 falling trendline support connecting the previous short term tops since April The short term support is now at 99, the low witnessed in Sep-Oct 2011 and below this to The current fall has broken the weekly medium term support line running from 2009, which has weakened the medium term trend USD Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Brent oil 50 dma 100 dma 200 dma Gold Gold has found support at 1526 and is currently running a short term consolidation. We expect gold to breakdown from the consolidating triangle and slip lower once we get a weekly closing below However, we would review our short term outlook if we close above USD Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Golds 50 dma 100 dma 200 dma AUD-USD The AUD ended with losses for the 5th consecutive week, last seen back in It has sliced very easily through intermediate supports, suggesting the tone remains very bearish. It is likely, in our opinion, to consolidate before it slips below the 0.96 mark where it has found multiple supports. The support below 0.96 lies way down at (38.2% retracement of ) while resistance for a pullback is at and AUD-USD Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 AUD-USD 50 dma 100 dma 200 dma 5

6 MON Economic & Market Calendar Next Week: June 4 - June 8 This Week: May 28 - June 1 Weekly Market View Event Period Expected Prior Event Period Actual Prior EC Sentix Investor Confidence JUN TH Mfg. Production ISIC NSA (YoY) APR US ISM New York MAY TA Leading (MoM) APR 0.60% 0.70% US Factory Orders APR 0.30% -1.90% 1 June 2012 TUE EC PMI Composite MAY F US S&P/CS Composite-20 YoY MAR -2.57% -3.54% EC PMI Services MAY F US Consumer Confidence MAY EC Euro-Zone Retail Sales (YoY) APR % US Dallas Fed Manf. Activity MAY CA Bank of Canada Rate 5-Jun 1.00% 1.00% JN Jobless Rate APR 4.60% 4.50% US ISM Non-Manf. Composite MAY JN Retail Trade YoY APR 5.80% 10.30% TA CPI YoY% MAY 1.39% 1.44% JN Small Business Confidence MAY PH Consumer Price (YoY) MAY 3.00% 3.00% CH Leading APR AU Current Account Balance 1Q M CH China HSBC Services PMI MAY HK Purchasing Managers MAY AU RBA CASH TARGET 5-Jun 3.75% 3.75% SI Electronics Sector MAY SI Purchasing Managers MAY WED THUR IN India May Markit Services PMI JN Markit/JMMA Manufacturing PMI MAY AU Gross Domestic Product (YoY) 1Q % EC Euro-Zone M3 s.a. (YoY) APR 2.50% 3.10% MA Trade Balance APR 10.00B 10.45B CA Raw Materials Price MoM APR -2.00% -1.70% EC ECB announces interest rate 1.00% 1.00% CA Teranet/National Bank HPI YoY% APR 5.90% 6.00% US Fed's Beige Book US Pending Home Sales YoY APR 14.70% 10.50% SK Industrial Production (YoY) APR 0.00% 0.70% UK PMI Services MAY JN Industrial Production YOY% APR P 13.40% 14.20% UK BOE Asset Purchase Target JUN 325B 325B AU Private Sector Credit YoY% APR 3.80% 3.40% UK BOE ANNOUNCES RATES 7-Jun 0.50% 0.50% SI M2 Money Supply (YoY) APR 6.40% 9.70% US Initial Jobless Claims 2-Jun K PH GDP (YoY) 1Q 6.40% 4.00% SK GDP (YoY) 1Q F % JN Vehicle Production (YoY) APR % % AU Unemployment Rate MAY % IN Qtrly GDP YoY% 1Q 5.30% 6.10% JN Leading CI APR P TH Total Exports YOY% APR -3.50% -6.80% TA Total Exports (YoY) MAY -5.20% -6.40% MA M3 Money Supply (YoY) APR 15.00% 15.00% US Bernanke briefs US policymakers on US economic outlook FRI US Consumer Credit APR $10.000B $21.355B EC PMI Manufacturing MAY F US Trade Balance APR -$49.4B -$51.8B UK PMI Manufacturing MAY CA Unemployment Rate MAY % EC Euro-Zone Unemployment Rate APR % JN GDP Annualized 1Q F % CA Gross Domestic Product YoY MAR % JN Current Account Total y y APR 426.0B B US Change in Nonfarm Payrolls MAY K SK Committee Meeting US Unemployment Rate MAY % SK South Korea 7-Day Repo Rate 8-Jun % US Underemployment Rate (U6) MAY % AU Trade Balance APR M US Personal Income APR % US Personal Spending APR % US PCE Core (YoY) APR % US Markit US PMI Final MAY US ISM Manufacturing MAY US ISM Prices Paid MAY SK Consumer Price (YoY) MAY 2.50% 2.50% SK Core Consumer Price (YoY) MAY 1.60% 1.80% SK HSBC Manufacturing PMI MAY SK Ext Trade - Export (YoY) MAY -0.40% -4.80% NZ ANZ Commodity Price MAY -4.20% -4.50% CH PMI Manufacturing MAY TA HSBC Manufacturing PMI MAY CH HSBC Manufacturing y PMI g MAY ID PMI ID Inflation (YoY) MAY % IN India May Markit Manufacturing PMI AU RBA Commodity SDR YoY% MAY % TH Consumer Price (YoY) MAY % Previous data are for the preceding period unless otherw ise indicated Data are % change on preivous period unless otherw ise indicated Data are % change on preivous period unless otherw ise indicated p- preliminary data, f- final data, sa - seasonally adjusted p- preliminary data, f- final data, sa - seasonally adjusted YoY - year on year, MoM - month-on-month YoY - year on year, MoM - month-on-month 6

7 Weekly Market View 3-12 Month Market Outlook Central bank policy rates Spot Q Q Q Q Q Q US Europe UK Japan Australia China Taiwan Malaysia Indonesia South Korea India Philippines Thailand Forex Spot Q Q Q Q Q Q EUR/USD GBP/USD USD/JPY USD/CAD USD/CHF AUD/USD NZD/USD USD/CNY USD/SGD USD/MYR USD/IDR USD/KRW USD/TWD USD/INR USD/THB USD/PHP Commodities Spot Q Q Q Q Q Q Gold Silver WTI Crude Oil Copper Aluminium Corn Soybeans Wheat Global Research (1June 2012 Economics Weekly publication) * Period averages for each quarter. 7

8 Weekly Market View Disclosure Appendix This document is not research material and it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not represent the views of Standard Chartered Bank, particularly those of the Global Research function. Standard Chartered Bank is incorporated in England and Wales with limited liability by Royal Charter 1853, Reference number ZC 18. The Principal Office of the Company is situated in England at 1 Aldermanbury Square London EC2V 7SB. Standard Chartered Bank is authorised and regulated by the Financial Services Authority under FSA register number In Dubai International Financial Centre ( DIFC ), the attached material is circulated by Standard Chartered Bank DIFC on behalf of the product and/or Issuer. Standard Chartered Bank DIFC is regulated by the Dubai Financial Services Authority (DFSA) and is authorised to provide financial products and services to persons who meet the qualifying criteria of a Professional Client under the DFSA rules. The protection and compensation rights that may generally be available to retail customers in the DIFC or other jurisdictions will not be afforded to Professional Clients in the DIFC. Banking activities may be carried out internationally by different Standard Chartered Bank branches, subsidiaries and affiliates (collectively SCB ) according to local regulatory requirements. With respect to any jurisdiction in which there is a SCB entity, this document is distributed in such jurisdiction by, and is attributable to, such local SCB entity. Recipients in any jurisdiction should contact the local SCB entity in relation to any matters arising from, or in connection with, this document. Not all products and services are provided by all SCB entities. 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Accordingly, SCB, its affiliates and/or subsidiaries may have a conflict of interest that could affect the objectivity of this document. This document must not be forwarded or otherwise made available to any other person without the express written consent of SCB. Copyright: Standard Chartered Bank Copyright in all materials, text, articles and information contained herein is the property of, and may only be reproduced with permission of an authorised signatory of, Standard Chartered Bank. Copyright in materials created by third parties and the rights under copyright of such parties are hereby acknowledged. 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EUR-USD USD-JPY AUD-USD USD-SGD. Spot Support

EUR-USD USD-JPY AUD-USD USD-SGD. Spot Support FX STRATEGY 4 May 0 The comments represented in this publication are made on the basis of a 4 week outlook Contents EUR USD Pg USD JPY Pg AUD USD Pg 4 USD SGD Pg 5 GBP USD Pg 6 Interest rate differentials