News and Research Update

December 2, 2008, 12:00 PM - Data Source: UBS Wealth Management Research

Research in focus:

Currencies: a delicate imbalance

The UBS research focus report entitled, "Asia's ascent," provides an assessment of the long-term economic growth outlook for several Asian countries and the corresponding implications for investment opportunities in the region. The report also shows the expected impact of Asia on global financial markets.

Daily Market News:

Economic News

Bank of Japan attempts to ease corporate financing (December 2, 2008, 9:41 AM)
The Bank of Japan (BoJ) has announced new measures designed to ease corporate financing. Banks will essentially be able to borrow unlimited funds from the BoJ, using investment-grade corporate debt as collateral. This should help to prevent companies from failing due to lack of liquidity.

Switzerland: CPI drops significantly in November (December 2, 2008, 8:17 AM)
Swiss consumer prices declined 0.7% m/m in November mainly due to the fall in energy prices. Annual inflation dropped to 1.5% from 2.6% in October. This was clearly below market expecations (+2.0%) but in line with our forecast (+1.6%). We expect inflation to retreat further going forward.

Reserve Bank of Australia cuts rates to 4.25% (December 2, 2008, 6:58 AM)
The Reserve Bank of Australia (RBA) cut rates by 100 basis points to 4.25%. Since September, they have now cut by a total of 300 basis points. The RBA stated that monetary policy is now expansionary and they also noted fiscal stimulus measures, suggesting that future rate cuts will be more gradual.

USA: NBER dates peak of last expansion (December 1, 2008, 8:24 PM)
The NBER dated the peak of the last expansion at December 2007 (4Q07). It said that most monthly data point to a peak in real activity at that point, most prominently payrolls. This means that the US recession has been ongoing for 11 months now. We expect a real GDP contraction through 2Q09.

USA: Construction spending plummets in October (December 1, 2008, 5:19 PM)
Construction spending fell by more-than-expected 1.2% m/m in October. The weakness was still dominated by private residential investment, which fell by 3.5%. Private non-residential investment fell by 0.7%. However, commercial real estate construction will likely come under much more pressure soon.

USA: ISM Manufacturing PMI plunges to new low (December 1, 2008, 5:16 PM)
The ISM Manufacturing PMI fell by more-than-expected from 38.9 to 36.2, its lowest reading since May 1982. The deterioration was broad-based. Furthermore, prices paid fell to 25.5, pointing to further deceleration in inflation pressures. The level of the PMI is consistent with a deep recession.

Sweden: Monetary policy meeting brought forward (December 1, 2008, 5:09 PM)
The Riksbank's policy announcement was brought forward to 4 December. Growth in Sweden in Q2 and Q3 was negative, indicating a technical recession. With forward looking indicators very weak and inflation expected to come down sharply, it is likely that the Riksbank will cut rates by at least 75 bps.

Canada: Q3 GDP stronger than expected (December 1, 2008, 2:37 PM)
The annualized GDP rose 1.3% in Q3 after a revised rise of 0.6% in Q2. This was higher than the expected rise of 1.1%. Goods production expanded for the first time in five quarters. Exports again fell by 1.4% as a result of weak US demand.

Switzerland: PMI drops to record low in November (December 1, 2008, 2:27 PM)
The Swiss Purchasing Managers' Index (PMI) in the manufacturing sector fell from 47.0 points to 35.2 in November. That has been the sharpest fall and the lowest level since the survey began in 1995 and indicates a sharp deterioration in industrial activity.

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Equity Markets EU

Daily European Equity Market Comment (December 1, 2008, 4:58 PM)
On Monday, European stocks declined on weaker economic data news flow reflecting global recession getting worse. Basic Resources, Banks, Utilities and Oil & Gas were amongst the worst performing sectors in the DJ STOXX 600 index. Metal and crude oil prices fell on increasing concerns of much lower demand due to slowing economic growth with Anglo American, ArcelorMittal, BHP Billiton, Rio Tinto, BP and Royal Dutch Shell amongst the top laggards. We have a moderate underweight stance on Materials as we still see some scope for further losses, with metal prices possibly falling further. Barclays and Lloyds TSB were down after the reports showed continued weakness in UK house prices along with drop in mortgage approvals. Credit Suisse, Deutsche Bank, HBOS, Dexia and Credit Agricole were some of the other worst performers amongst banks.

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Equity Markets USA

Equity Market Comment (December 2, 2008, 12:35 AM)
The national bureau of economic research (NBER) recently declared that the start of the US recession was December 2007; with both the consumer and industrial indicators consistent with prior recessions. While we expect discouraging economic data releases to continue, historically stock markets have been forward-looking and tend to bottom in advance of the trough in the economy. Looking back over the past 10 recessions, the S&P 500 tends to bottom one-to-three months before the steepest quarterly decline in real GDP (UBS WMR forecasts 4Q08 to be the trough), four months before the end of past recessions (UBS WMR forecasts the current recession to end in mid-2009) and two thirds of the way through a recession. Downside risk appears to be limited from here, with the S&P 500 currently trading at a P/E of 11x trailing one-year earnings. Since 1928, the worst subsequent 12-month return for the S&P 500 when its PE was under 12x was down 20%.

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Equity Markets Asia

Daily Asian-Pacific Market Comment (December 2, 2008, 10:44 AM)
Asian markets tumbled on Tuesday, as the deepening global recession drove down commodity prices and concerns grew that corporate profits will fall as manufacturing shrinks. In Japan, the Nikkei index ended below the 8000 mark, as export stocks like Toyota and Honda fell after the yen strengthened. The South Korean, KOSPI index fell as heavyweights like POSCO and Samsung Electronics ended lower. In Hong Kong, the Hang Seng index gave up Monday's gains as HSBC fell after the bank raised its mortgage rate by 500 basis points. In Taiwan the benchmark index closed down, with Taiwan Semiconductor Manufacturing Company falling after the company cut its earnings forecast for the fourth quarter.

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Forex Markets

AUDUSD: Stirred but not shaken (December 2, 2008, 6:48 AM)
The Reserve Bank of Australia (RBA) cut its key policy rate by 100bps on Tuesday to 4.25%. In view of the worsening economy, the RBA deems the rate cut as necessary, even though it risks undermining the Aussie dollar and reducing the decline in inflation. AUDUSD rose in the Asia trading session.

EURSEK: SEK approaching record low against EUR (December 1, 2008, 5:08 PM)
The announcement of the Riksbank, to move forward its regular meeting from December 16 to December 3 was negative for the SEK. Market participants are now looking for an interest rate cut of at least 75 bps. In our view, the very short term outlook of the SEK remains bleak.

EURCHF: dropping PMIs support franc (December 1, 2008, 3:28 PM)
The Swiss PMI reached its lowest level since the series started in 1995. The CHF benefited from the spike in risk aversion, as it is still perceived as a safe haven, following dropping European PMIs. In our view, the aggressive SNB easing should limit CHF's appreciation in risk averse periods.

CHF: SNB flooding banks with francs (December 1, 2008, 3:26 PM)
Domestic banks held in their "sight deposits" at the Swiss National Bank higher levels than since 1987. The data signals that the SNB is flooding banks with CHF liquidity to lower the 3m CHF LIBOR fixing. Banks could also be on-lending less. SNB's aggressive monetary response weighs on the franc.

EURSEK: Swedish PMI at lowest point since 1994 (December 1, 2008, 2:37 PM)
The Swedish PMI in free fall reached the lowest level since the series started in late 1994. The data signals an upcoming severe contraction of the GDP. Riksbank is likely to cut interest rates substantially. In the very short term, we expect the Swedish krona to remain weak against the euro.

GBP: Sold off after poor PMIs (December 1, 2008, 2:24 PM)
Not only was the UK Manufacturing PMI quite low, other PMIs came in lower than expected, pushing equity markets lower. All of this has put selling pressure on the pound. While we find pound cheap, we expect it to stay under pressure as markets adjust to a much worsened UK and global growth outlook.

USDINR: The dust has not settled (December 1, 2008, 1:28 PM)
The terrorist attack in Mumbai might have been brought under control, however the security concerns linger on. The currency opened sharply down upon reopening on Monday. This has added to the already heightened risk in the economic outlook. As a result, we expect the rupee to remain under pressure.

USDCNY: Renminbi broke free (December 1, 2008, 1:28 PM)
The pair ended up sharply on Monday, breaking free from the hard-peg with the US dollar seen in the past month. While investors expect a weaker renminbi to stimulate the slowing economy, we think the global nature of the recession makes depreciating out of the current crisis unlikely.

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