Newsletter Issue 12July 2010

Economic Overview

Key notes from Last Week

There was a moderate easing of investor risk aversion last week leading to significant rebounds in global equity markets that lifted bond yields off their recent low.

• While investors assessed the risks of a double-dip, the lack of detail on the pending EC bank stress tests scope and procedures added to investor anxiety. By week’s end, the fears of a double dip had eased thanks to stronger than expected German and UK May industrial production data, an upward revision to 2010 growth in the IMF’s latest forecasts (global growth +4.6% vs. +4.2%) plus strong employment gains in Australia and Canada. The RBA, BoE and ECB left their policy rates unchanged last week. EC sovereign debt and banking concerns were also eased after Spain found strong demand for its 10yr bonds and the EC Committee of European Bank Supervisors (CEBS) released some basic details on the EC bank stress tests -- scope: 91 banks covering 65% of the EC banking system. The findings of the stress tests are due by July 23.

• After a fizzled equity rally at the beginning of the week, bargain hunting and easing risk aversion resulted in long awaited equity gains. The Asian markets rose about 4.3% on the week. The Stoxx 600 was up 5.4% and the S&P 500 headed for a 4.9% gain. The MSCI world equity index ended the week up about 4.8%, the largest weekly gain in about a year. The European market also posting the best weekly performance in about a year. While the VIX and Vstoxx have come down to their 200 day moving averages this week (VIX at 23.443, Vstoxx at 27.466), both are still elevated and look vulnerable to retreating again on a negative surprise. Corporate earnings season gets underway this week and add a new dimension of risk to the markets.

Regional Markets

A committee overseeing state-owned conglomerate Dubai World, which is in a deal with core lenders to restructure $23.5 billion in debt, has handed responsibility of property unit limitless to Nakheel, Dubai said on last Saturday. It added that the move would also help take advantage of technical and administrative personnel of Nakheel and limitless so as to achieve the best result for developers, the construction sector and project investors.

Forex

EUR:  

1. The Euro fell on Friday on technical factors, with some investors betting the recent move up by the euro was too far, too fast.
2. Despite the recent rally in the European single currency, the euro zone's debt problems have discouraged most investors from taking long positions in the euro.
3. The Euro, however, was supported by strong German factory data, a positive U.S. jobs report and more clarity on European bank stress tests.

GBP:  

1. Sterling fell against the dollar on Friday, retreating from early gains and tracking a slide in the euro, which failed to break above key resistance levels against the dollar.
2. The pound has rallied in the past month as optimism that strict measures to cut the UK budget deficit will improve Britain's fiscal position has prompted investors to pare back massive short positions in the currency.

JPY:  

1. The yen came under pressure as strong European and U.S. data boosted hopes of a firmer global economic recovery and investors shifted their positions from the low yielding yen to high-beta currencies like the Aussie and New Zealand dollar.
2. Currency analysts at Citigroup Inc said in a note a sharp shift in positioning and a decisive move higher in rate differentials in favor of the United States suggests dollar/yen is poised for an up move in the near term.

Derivatives

We continue to offer structured solutions for hedging FX Risk through FX Options and Interest Rate Risk through Interest Rate Swaps. Kindly advise us your exposures and requirements, so we may provide a suitable hedging strategy

 ECONOMIC INDICATORS (12-Jul-2010/16-Jul-2010)