INDEX. Credit spreads widen, government bonds regain some composure supported by recovery concerns. Contents. Analysts. Friday, October 30, 2009

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1 Friday, October 3, 29 Credit spreads widen, government bonds regain some composure supported by recovery concerns INDEX Contents Credit Bonds Foreign Exchange...4 Emerging Markets...5 Recovery concerns push credit spreads wider. Credit risk indicators kicked-off this week on a firmer tone after a fresh string of stronger-than-expected US Q3 earnings results for S&P 5 companies, increased market optimism that the global economic recovery is gaining pace. Yet, market sentiment worsened somewhat in the sessions ahead after several macro releases in the US and the Eurozone reinforced concerns that a sustained economic recovery is not yet assured. But with investors taking some comfort from the tronger-than-expected US Q3 GDP report released late this week, the ensuing widening in credit spreads proved limited Government bonds regain some composure supported by recovery concerns. After falling over the last few weeks, major government bond markets regained some composure lately supported by flightto-safety flows driven by renewed recovery concerns. Subdued inflation pressures and the more dovishthan-expected tone on the RBNZ s statement, also favored. In this environment, inflation concerns failed to exert a lasting negative impact Analysts Platon Monokroussos Head of Financial Markets Research PMonokrousos@eurobank.gr Paraskevi Petropoulou G1 Markets Analyst ppetropoulou@eurobank.gr FOMC to set the tone next week. USD gains following a string of disappointing US macro data in the fist half of this week, proved short-lived. The greenback came under renewed broad pressure over the last few sessions after US Q3 GDP data surprised positively on Thursday, prompting a fresh bout of risk appetite. Improved market sentiment and higher oil prices, dented the US currency s safe-haven appeal Emerging stock markets firmed over the last couple of sessions halting a 3-day losing streak after data showed that the US economy bounced from the deepest recession in decades. Nonetheless, CEE assets remained under pressure amid lingering fiscal and political concerns about the region. Galatia Phoka Emerging Markets Analyst gphoka@eurobank.gr

GLOBAL RISK MONITOR Recovery concerns push credit spreads wider Credit risk indicators kicked-off this week on a firmer tone after a fresh string of stronger-than-expected US Q3 earnings results for

2 GLOBAL RISK MONITOR Recovery concerns push credit spreads wider Credit risk indicators kicked-off this week on a firmer tone after a fresh string of stronger-than-expected US Q3 earnings results for S&P 5 companies, increased market optimism that the global economic recovery is gaining pace. Yet, market sentiment worsened somewhat after several macro releases from the US reinforced concerns that a sustained economic recovery is not yet assured. Among other weak data released earlier this week, US CB consumer confidence fell more-than-expected in October while the jobs-hard-to-get component rose to its third highest level of the year, underscoring that consumer spending outlook remains a source of concern especially in view of higher oil prices and the expiration of the cash for clunkers measure. Several press reports which raised market talk that the Fed might embark on a tightening cycle earlier than expected, added to market concerns given that the world economic stabilization seems to relay heavily on Central Banks support. Separately, ING, one of Europe s biggest financial groups, was forced by European Commission to be split into two as part of a plan to pay back government bailout funds, a development that is likely to have repercussions for state-aided banks in the US and the Eurozone. But with investors taking some comfort from the stronger-than-expected US Q3 GDP report released on Thursday, the ensuing widening in credit spreads proved limited. itraxx Crossover (Junk-rated) Apr-6 Apr-6 Jul-6 Jul-6 Apr-7 Apr-7 Oct-7 Oct-7 Oct-8 Oct-8 itraxx Europe index (Investment grade credits) US 3M Libor-OIS (in bps) Apr-9 Apr-9 Jul-9 Jul-9 Apr-6 Jul-6 Apr-7 Oct-7 Oct-8 Apr-9 Jul-9 Oct-9 Oct-9 After touching a year-to-date low of bps on Monday, the itraxx Crossover index - which is composed of 45 mostly junk related bonds- was trading close to 54.2bps in early European trade on Friday. Despite its up move, the index stood below levels near 535bps seen a couple of sessions earlier ahead of the US Q3 GDP data. In a similar tone, the itraxx Europe was hovering around 85.8 at the time of writing, after easing close to 83bps a week earlier. Elsewhere, the S&P 5 implied volatility index, VIX ended at on Thursday, up from a yearto-date low of 2.9 recorded last week. Renewed recovery concerns were also reflected in money markets with the 3- month US Libor-Overnight Indexed Swap spread ending at 12.66bps on Thursday vs. a nearly one-month low of 11.3bps hit a few sessions ago Apr-6 Jul-6 Apr-7 Oct-7 Oct-8 Apr-9 Jul-9 Oct-9 The unfolding Q3 earnings season is expected to continue luring market attention in the sessions ahead. With the announcements from major US financials now out of the way, the spotlight next week turns to the non-financial corporate sector. If positive surprises continue to outweigh negative ones, we might see some renewed narrowing in credit spreads especially if upcoming data help contain recovery concerns (according to Bloomberg, 318 of the S&P 5 companies that have reported thirdquarter results so far, 256 or 8.5% have beat market expectations, 12.9% were below estimates and 6.6% were in line). But with investors expected to adopt a cautious tone ahead of the FOMC and the ECB meeting next week, any improvement is likely to prove measured. On the macro front, next week s calendar is quite heavy highlighted by US ISM manufacturing (Monday), ISM nonmanufacturing (Wednesday) and US non-farm payrolls for October (Friday) with the latter expected to confirm that the pace of lay-off has slowed considerably over the last few months. Meanwhile, the G2 finance ministers twoday meeting kicks off in Scotland on November 6 where the state of the global economy is expected to be the main topic of discussion. 2

3 GOVERNMENT BONDS Government bonds regain some composure supported by recovery concerns After falling over the last few weeks, major government bond markets regained some composure lately supported by flightto-safety flows driven by renewed recovery concerns. Subdued inflation pressures and the more dovish-than-expected tone of the RBNZ s statement, also favored. In this environment, inflation concerns failed to exert a lasting negative impact. In the US, short-dated government bonds outperformed supported by a number of weaker-than-expected real economic activity and sentiment indicators (i.e. CB s October consumer confidence, September new home sales) which suggested that a Fed funds rate hike is still some way off. A record $44bn auction on 2-yr notes which drew a bid-to-cover ratio of 3.63, the highest in two years, also helped. Against this background, the yield on the 2-yr note eased close to.96% in European trade on Friday after rising temporarily above 1.% a few sessions ago for the fist time since late August. Meanwhile, the 1-yr Benchmark was yielding 3.47% after hitting a two-month high of 3.57% on Monday as investors braced themselves for a record $123bn in new government debt supply this week. Meanwhile, the 2/1-yr segment of the UST curve undertook some bullish steepening this week with the spread standing close to 251bps on Friday, ca 4bps wider compared to levels a week earlier and close to a two-month high of 253bps touched at some point earlier this week. Next week is highlighted by the FOMC meeting. Investors are expected to scrutinize closely the accompanying statement for clues about the committee s policy deliberations especially after several press reports released over the last few sessions raised market talk that the Fed will likely remove the phrase of" an extended period for retaining low interest rates. Until the FOMC meeting is out of the way, investors will probably be reluctant to establish fresh sizable positions. Therefore, rangetrading for the 1-yr yield within 3.35%-3.55% is likely to prevail in the coming sessions. Technically, strong resistance for the 1-yr Treasury cash yield lies at 3.58% recent high (Oct. 26) ahead of 3.75% (August 6 high) and the more crucial 4.% (Oct. 15, 28 high). On the downside, major support stands at 3.28% (Oct. 2 low) ahead of 3.11% (Oct. 1 low). Elsewhere, Moody s placed Greece s A1 rating under review for a possible downgrade due to a sharp deterioration in Greece s fiscal position. The 1-yr Greek/German yield spread widened to a two-month high of 143bps at some point on Thursday soon after the Moody s announcement, before easing to levels near 139.5bps the day after Jan Jan- Jan- Oct- Jul-1 1YR Government Bond Yields Apr-2 US Jan-3 Oct-3 Germany Jul-4 Apr-5 2/1YR Government Bond Yield Spreads Jan-1 Jan-1 US Jan-2 1YR Government Bond Yields Italy Greece Jan-2 Jan-3 Jan-3 Jan-4 Jan-4 GERMANY Jan-5 Jan-5 Oct-9 In Eurozone government bond markets, long-dated Bunds outperformed favored by a well-received 5-yr German bonds auction. Eurozone CPI for October which underscored that inflation pressures remain well contained, also exerted a positive impact. Against this background, the 2/1 German yield spread was hovering around 195bps in early European trade on Friday, some 2bps narrower compared to levels last week, after widening at some point on Monday at 21bps, its highest level in nearly a moth. Meanwhile, the 1-yr Bund was yielding 3.29% after hitting one-month highs near 3.39% a few sessions ago with investors eagerly awaiting the upcoming ECB meeting next week. Technically, strong resistance for the 1-yr Bund yield stands at 3.43% high touched on Aug. 13 while on the downside, notable support lies at 3.25 (Oct. 21 low). Eurozone government bond markets will see around EUR 6.5bn of new bond supply next week though it will offset by sizeable coupon and redemption payments totaling nearly EUR 28.5bn US Treasuries underperformed Bunds weighed by a disappointing $31bn auction on 7-yr US notes. The 1-yr US Treasury note/bund yield widened to 19.7bps on Friday after falling to a two-week low of 6.6bps early last week. Elsewhere, gilts underperformed Bunds over the last few sessions on lingering uncertainty on whether the BoE will expand its GBP 175bn asset purchases program at next week s meeting. The corresponding spread stood close to 36.8bps at the time of writing, ca 4bps wider compared to levels late last week. 3

CURRENCIES FOMC to set the tone next week USD gains following the release of several disappointing US macro data in the fist half of this week, proved short-lived.

4 CURRENCIES FOMC to set the tone next week USD gains following the release of several disappointing US macro data in the fist half of this week, proved short-lived. The greenback came under renewed broad pressure over the last few sessions after US Q3 GDP data on Thursday, surprised positively prompting a fresh bout of risk appetite. Advance Q3 GDP data showed that the US economy grew by a slightly higher-than-expected 3.5%qoq annualized, marking an end to a string of four consecutive quarters of contraction mainly supported by strong private consumption and a turnaround in housing investment. Improved market sentiment and higher oil prices, dented the US currency s safe-haven appeal. Meanwhile, market discussion regarding reserve diversification away from US dollars was again in the headlines. Several press reports released this week suggested that, although the dollar should remain the principal currency in China's foreign exchange reserves, the share of the euro and yen should increase. The GBP/USD was hovering around 1.654/45 at the time of writing on Friday, not far from 1.66 multisession high hit soon after the release of the US Q3 GDP report. Some further GBP/USD appreciation can not be ruled out in the coming sessions, especially if global equity markets retain a firm tone. But with QE concerns continuing to mount ahead of the BoE meting next week, any fresh gains are likely to prove limited and short-lived unless the BoE confounds expectations for an increase of at least GBP 25bn in its asset purchases. Technically, a sustainable move below recent low (Oct. 26) would open the way for further weakness towards 1.58 (June 8 low). On the upside, strong resistance lies at 1.67 high touched on Oct. 23. Against this background, the US dollar index, DXY, a gauge of its performance against six major currencies, fell to in European trading on Friday after rising to a twoweek high of in the prior session, coming close to a 14-month low of recorded a week earlier. USD s renewed weakening helped the EUR/USD resume its uptrend, bouncing above 1.48 in European trade on Friday after falling to a two-week low of earlier this week. A higher-than-expected increase in Eurozone s October economic sentiment and the release of the latest ECB baking lending survey which pointed to an easing in credit conditions for loans to enterprises and private households in Q3, also favored the common currency. Despite the EUR s upside attempt, the pair remained below year-to-date high of recorded on Monday. With investors eagerly awaiting the FOMC meeting next week, there seems scope for consolidation within in the coming sessions with the tone of the policy statement expected to have an impact on the EUR/USD s short-term outlook (following recent press reports suggesting that the Fed is considering an adjustment to its wording at the November statement, we are of the view that any change will likely prove subtle, doing nothing to alter the view that the Central Bank will not rush to exit from its accommodative monetary policy as long as a sustained economic recovery is not assured). Technically, a spike above recent highs could provide momentum for a move towards 1.52/5 or higher levels especially if the FOMC policy statement reflects a more-dovish-than expected tone. On the downside, only a sustainable move below the region could trigger a bearish signal for the EUR/USD s short-term outlook Mar-8 May-8 EUR/USD Rate Sep-8 Nov-8 Mar-9 May-9 Jul-9 Sep-9 After coming under pressure early this week following an unexpected contraction in UK Q3 GDP, the GBP regained some composure against its major peers over the last few sessions assisted by the most recent improvement in market sentiment. Renewed signs of stabilization in the UK domestic housing market, also favored. 4

EMERGING MARKETS CEE assets remain under pressure amid fiscal, political concerns Emerging stock markets firmed over the last couple of sessions halting a 3-day losing streak after data showed that

5 EMERGING MARKETS CEE assets remain under pressure amid fiscal, political concerns Emerging stock markets firmed over the last couple of sessions halting a 3-day losing streak after data showed that the US economy bounced from the deepest recession in decades. The MSCI benchmark index of emerging equities trimmed part of earlier losses but remained weaker on a weekly basis on Friday as well as below a 14-month high of touched on October 2. Meanwhile, emerging external debt yield spreads over US Treasuries on the EMBI+ index stood 12bps wider compared with their level a week earlierat 316bps on Friday. Gains in CEE stock markets proved shortlived with Turkey s main stock index XU1 reversing an earlier 3% rally on Friday to slide by more than 1% from Thursday s close with its losses exacerbated by concerns about weaker profits by financials in the months ahead. CEE currencies remained under pressure this week as widening fiscal deficits, potential for further monetary easing in the imminent future and lingering political instability continue to unnerve investors. Backing the region s trend on Friday, the EUR/RON hovered around levels of 4.36/4.316, remaining marginally unchanged on the day. With the current uncertain political environment in Romania being contradictive of the leu s regional outperformance, it was rumored that the central bank may have intervened to support the currency. Poland's central bank held its key policy rate unchanged at a record low of 3.5% on Wednesday, in line with expectations, with October marking the fourth consecutive month of stable interest rates. The bank s accompanying statement read that the probabilities of inflation in the medium term running below or above the inflation target are balanced, signaling a move towards a more neutral stance. At the press conference that followed the NBP s policy announcement, MPC member Dariusz Filar suggested that although there are no formal biases in policy, the statement s wording may be signaling the end of the monetary easing cycle. The Council also adopted on Wednesday the October Inflation Report. Assigning a 5% probability, the NBP expects CPI to stand at a mid-point of 3.4% in 29, (vs. 3.2% in June), 1.5% in 21 (vs.2.2% previously) and 2.2% in 211 (vs. 2.1% in June). Under the same assumptions, annual GDP growth is seen at a mid-point of 1.3% (vs..4% in June) this year, 1.8% in 21 (vs. 1.4% in June) and 3.2% in 211 (vs. 3.5% in June). In local rates, CEE bonds broadly weakened this week, with Hungary being amongst the major underperformers in the region. On a weekly basis, the 3- and 1-year Hungarian benchmark yields jumped 5bps and 38bps to close at 7.5% and 7.71%, respectively on Thursday. However, lower yields ahead, particularly in Hungary s case, can not be ruled out given that the door is open for further monetary easing in the coming months against a background of a deep recession. Depecting the troubles in the domestic labour market, the three-month rolling unemployment rate spiked to a 13-year high of 1.3% in July-September from 9.9% in June-August. In other news, Serbia's Finance Minister Diana Dragutinovic said on Thursday that the government agreed with the IMF to extend the current EUR 3bn Stand-By Arrangement through to the end of 211. She also said she expected the 29 fiscal deficit to outperform the 4.5%-of-GDP target agreed with IMF adding that the Fund agreed to a 4% deficit for next year, when the domestic economy is likely to grow by %yoy. Separately, central bank governor Radovan Jelasic signaled that further rate cuts were on the cards in 21 under the 4% 21 budget deficit target but underscored that the pace and size of these cuts will depend on how fast the government imposes regulated prices hikes. Earlier this week, the central bank held its key policy rate unchanged at 11.%, waiting to see the upcoming developments on the fiscal front as negotiations between the government and the IMF continue over the 21 budget. In Bulgaria, the government approved and sent to parliament on Thursday the 21 budget draft. The draft, which is expected to be approved by parliament by the end of November, envisages a fiscal deficit of.7%-of- GDP for next year but the cabinet said it would aim for a balanced budget in order to protect the country's currency board arrangement. Under the draft s key economic assumptions, the domestic economic contraction is seen easing from -6.3%yoy this year to -2.%yoy in the next, year-end HICP is projected to rise to 2.2%yoy in 21 from 1.8%yoy in 29, while the current account shortfall is expected to shrink to 8.%-of-GDP from an expected 11% gap this year. Elsewhere, an IMF mission began on Wednesday its second review on Romania under the country s Stand-By Arrangement. In Turkey, the central bank released its inflation report earlier this week, assigning a 7% probability that year-end CPI would come in at a mid-point of 5.5%yoy in 29, 5.4%yoy in 21, 4.9%yoy in 211 and 4.8%yoy in end-q

6 Research Team: Gikas Hardouvelis, Chief Economist and Director of Research Platon Monokroussos, Head of Financial Markets Research Paraskevi Petropoulou, Economist Galatia Phoka, Economist Sales Team: Fokion Karavias, Treasurer Nikos Laios, Danai Manoussaki, Kostas Karanastasis EFG Eurobank Ergasias, 8 Othonos Str,GR 15 57, Athens,Tel:(321) , , Fax:(321) , Reuters Page: EMBA,Internet Address: Disclaimer: This report has been issued by EFG Eurobank Ergasias S.A and may not be reproduced or publicized in any manner. The information contained and the opinions expressed herein are for informative purposes only and they do not constitute a solicitation to buy or sell any securities or effect any other investment. EFG Eurobank Ergasias S.A., as well as its directors, officers and employees may perform for their own account, for clients or third party persons, investments concurrent or opposed to the opinions expressed in the report. This report is based on information obtained from sources believed to be reliable and all due diligence has been taken for its process. However, the data have not been verified by EFG Eurobank Ergasias S.A. and no warranty expressed or implicit is made as to their accuracy, completeness, or timeliness. All opinions and estimates are valid as of the date of the report and remain subject to change without notice. Investment decisions must be made upon investor s individual judgement and based on own information and evaluation of undertaken risk. The investments mentioned or suggested in the report may not be suitable for certain investors depending on their investment objectives and financial condition. The aforesaid brief statements do not describe comprehensively the risks and other significant aspects relating to an investment choice. EFG Eurobank Ergasias S.A., as well as its directors, officers and employees accept no liability for any loss or damage, direct or indirect, that may occur from the use of this report. 6

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