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Global Views Weekly commentary on economic and financial market developments Economics > Corporate Bond Research Economic Statistics > Emerging Markets Strategy > Financial Statistics > Fixed Income Research Forecasts > Fixed Income Strategy > February 7, 2014 Foreign Exchange Strategy > Portfolio Strategy > Contact Us > 2-8 Economics 2-3 Yellen Going For Gold .....................................................................................................................Derek Holt 4-5 Are Canadians Managing Home Equity More Prudently Than Americans Did? .............................Derek Holt & Dov Zigler 6 Still Waiting On Canada’s Export Recovery .................................................................................. Adrienne Warren 7 Chile Retains Top-Credit Quality Status............................................................................................Pablo Bréard 8 U.S. Near-Term Federal Deficit Reduction ..........................................................................................Mary Webb 9-11 Emerging Markets Strategy 12-18 19 Fixed Income Strategy Eurozone Inflation — Or Lack Of It ................................................................................................... Alan Clarke UK: As Good As It Gets .................................................................................................................. Alan Clarke ECB February Decision — Waiting For Another Month! .................................................................... Frédéric Prêtet Foreign Exchange Strategy 20-21 Latin America Week Ahead: For The Week Of February 10 - 14 ........................................................ Eduardo Suárez Portfolio Strategy A1-A14 Are Investors Abandoning EM Bonds? ........................................................................ Araceli Espinosa & Joe Kogan Portfolio Strategy Asset Mix — February Update ..............................................................................Vincent Delisle Forecasts & Data Key Data Preview.................................................................................................................................... A1-A2 Key Indicators ......................................................................................................................................... A3-A5 Global Auctions Calendar ....................................................................................................................... A6-A7 Events Calendar ..................................................................................................................................... A8-A9 Global Central Bank Watch ........................................................................................................................ A10 Forecasts ................................................................................................................................................... A11 Latest Economic Statistics .................................................................................................................. A12-A13 Latest Financial Statistics........................................................................................................................... A14 Global Views is available on scotiabank.com, Bloomberg at SCOT and Reuters at SM1C THE WEEK AHEAD Global Views Economics Derek Holt (416) 863-7707 [email protected] Yellen Going For Gold Please see our full indicator, central bank, auction and event calendars on pp. A3-A10. Canada — Federal Budget To Be Hidden Behind Yellen The Federal Budget on Tuesday not only occurs during the first week of the Olympics, but perhaps more importantly on the very day planned long ago for Fed Chair Janet Yellen's first semi-annual testimony before Congress that will be repeated the next day before the House. Market effects are much more likely to arise from Yellen’s testimony earlier in the day. Canadian market effects are also likely to be subdued because the Budget is not expected to be a path-breaking one for two reasons. First, even at the best of times, most of the contents are typically floated in advance which limits the surprise factor on budgets these days. Budgets just are not the events they used to be before the age of instant scrutiny via newswires and the Internet, as the focus shifted toward risk management of the major initiatives. To that effect, guidance from Federal Finance remains to expect deficit elimination by fiscal year 2015-16. Second, the ruling Federal Conservative Party is likely to prefer waiting until the next annual budget before perhaps rolling out more significant initiatives in advance of the October 2015 Federal election. Scotiabank’s Mary Webb will be in the analyst lock-up in Ottawa and will share her perspectives shortly after the veil is lifted. Data risk will be subdued. Housing starts could show a negative weather effect when January's print lands on Monday. Friday's manufacturing shipments for December will be parsed for signs of moderation in the context of an otherwise upbeat second half of 2013 for that sector. Strength in manufacturing new orders might point to further gains, but export data for the same month suggests that the auto sector and petroleum products might exert a downward influence on the headline. Bank of Canada Deputy Governor John Murray speaks on “Promoting Canada’s Economic and Financial WellBeing” on Monday, and Canada auctions 30-year bonds on Wednesday. US — Yellen Meets Extraordinary Measures We've seen this play before. What does the Fed do when Washington is working in ways counter-productive to the recovery? Fortunately, Fed Chair Janet Yellen will have until March 19th to consider the answer to this question as that's the date of her first FOMC statement as leader. She won't need the answer in time for her semi-annual testimony before the House on Tuesday and the Senate on Thursday because of the fact that she doesn’t have to lead an actionable policy move until March 19th, unless developments turn considerably worse between meetings. She may well just flag it as an unknown that the Fed is aware of. By March 19th, we'll know whether the dual chambers were able to raise the debt ceiling, or have courted default risk. The US Treasury begins to employ emergency measures to avert such an outcome starting this coming week. Treasury Secretary Jack Lew has guided markets to believe that such emergency powers will be exhausted by the end of February. We doubt that this deadline will exhaust the full realm of imaginative ways of getting around the debt ceiling, but each option carries substantial risk and merely pursuing them would risk further unfavourable action by rating agencies and markets. Data risk will be dominated by Thursday’s retail sales print for January. Consensus is expecting a flat print, but the risk to retail sales is clearly skewed toward a drop given another decline in auto sales, a small rise in gasoline sales, and weaker chain store sales. The biggest risk, however, lies in terms of how weather fouls up spending on non-auto related categories as well as the volume of gasoline demanded as miles driven probably fell during a harsh month for winter snow storms. Industrial production may get a weather boost in Friday's release as utilities crank up output to meet electricity and heating demands during a very cold month of January, but an offset to this argument could be less industrial demand as bad weather disrupted activity in one of the coldest and snowiest months of January in recent memory. The University of Michigan's consumer sentiment reading will probably slip on deteriorating stock markets when the preliminary print for February is released on Friday. 2 February 7, 2014 THE WEEK AHEAD Global Views Economics Derek Holt (416) 863-7707 [email protected] … continued from previous page The US Treasury auctions 3s, 10s and 30s next week. In addition to Yellen, four other Fed speakers take to the podium and the tone from them is likely to be hawkish on balance. Philadelphia Fed President Charles Plosser (voting, hawk) is likely to remain steadfast in his support for further reductions in asset purchase by the Federal Reserve. Ditto from Dallas Fed President Richard Fisher (voting, hawk) who joins Plosser as the Fed’s two perennial hawks. Richmond Fed President Jeffrey Lacker (nonvoting, hawk) speaks on financial stability and is likely to do likewise. St. Louis Fed President James Bullard (nonvoting, moderate) speaks on a panel about the economy and monetary policy. Europe — Carney's Latest Guidance Revision Bank of England Governor Mark Carney has already revised the rate guidance he and the Monetary Policy Council of the Bank of England rolled out last August. He is expected to do so again on Wednesday in the form of the BoE's quarterly inflation report. Markets have tested the Governor in his first eight months on the job in no small part because the initial promise to keep rates on hold until late 2016 was made contingent upon a small difference between the 7.7% actual unemployment rate in August and a 7% policy threshold. The unemployment rate has dropped to 7.1% as at last November, and is likely at or below 7% now. This forced the BoE to revise its guidance once already, and next week will bring forth fresh forecasts for growth, inflation and the unemployment rate and thus with it the possibility of refreshed guidance as Carney recently flagged that “The MPC will consider a range of options to update our guidance”. Scotiabank’s London-based UK strategist Alan Clarke will share his immediate impressions with clients. Germany releases Q4 GDP and consensus expects a repeat of the Q3 gain of 0.3% q/q growth that would continue to demonstrate a fairly tepid rate of overall expansion in the German economy. Scotiabank’s Parisbased European strategist Frederic Pretet will provide his impressions of the print alongside other GDP figures on the docket from Italy and France. Lesser developments will include the release of industrial production figures for Italy and France, EC totals for industrial output and trade, and French nonfarm payrolls. Sweden’s Riksbank is expected to leave its key repo rate unchanged at 0.75% after cutting at the December meeting in light of housing risks. Asia — Are Chinese Policy Efforts To Cool Credit Excesses Working? Is the Chinese credit bubble finally slowing down? Data on Chinese credit growth and inflation are both due out this week, and one of the key questions is whether or not aggregate credit continued to expand to start 2014 at a pace similar to the very rapid expansion seen last year. Curtailing credit growth has been a stated policy of both the PBOC and the fiscal authorities — but the actual credit numbers haven’t really slowed down particularly severely. The other side of the coin is inflation, and whether or not overall Chinese CPI is due to break out at a rapid rate in light of the swell of credit unleashed. Consensus expects that inflation will remain anchored in the 2.5% area when the January figures are released early on February 14th. Trade figures on the 12th round out the Chinese data flow. In terms of central bank announcements in Asia, Bank Indonesia has a statement on the 13th, and while consensus is looking for stability, hawkishness leading into further rate hikes seems to be in the cards for the medium term as Indonesia continues to weather a major depreciation of the IDR. The Bank of Korea has a rate announcement on the 13th as well at which it is expected to remain on hold. 3 Chinese Aggregate Financing Very Strong in 2012-13... But Finally Slowing? 20000 CNY, Billions 18000 16000 14000 12000 10000 8000 6000 4000 Rolling 12-month sum 2000 0 08 09 10 11 12 13 Source: PBOC, Scotiabank Economics February 7, 2014 CANADIAN MACRO COMMENT Global Views Economics Derek Holt (416) 863-7707 [email protected] Dov Zigler (416) 862-3080 [email protected] Are Canadians Managing Home Equity More Prudently Than Americans Did? Canadian home equity cash-outs have been strong, but are more likely going toward paying off debt while preserving aggregate home equity than was the case in the US. During the glory days of the US housing boom, a commercial for a California bank unwittingly captured the essence of what was wrong within the financial system when it showed a man leaving the front door of his home only to go to an ATM installed on the side of his house and withdraw cash. The implication was that home equity cash-outs could be used as a way of securing funds for almost any purpose, including discretionary consumption. Chart 1 Home Equity Take-Out In Canada 70 $ billions 60 50 40 Are Canadians now doing the same thing? On the face of it, the answer would appear to be yes especially in proportionate terms (chart 1), but the reality beneath the surface appears to be rather different. The evidence is more supportive of a view that says Canadian home equity withdrawals (HEWs) are being used to facilitate constructive deleveraging while preserving home equity than was the case in the US. 30 20 10 0 07 08 09 10 11 12 13 Hard data on home equity cash-outs in Canada are difficult to come by, and so we're left to rely on survey-generated numbers Source: CAAMP, Scotiabank Economics. from the Canadian Association of Accredited Mortgage Professionals. That goes with the usual cautions regarding U.S. Household Credit and Withdrawals Chart 2 2000 y/y change, $bn survey-based evidence — but it's the best we have to go by. The $bn 100 numbers show nearly C$60 billion in gross home equity cash-outs by Canadians last year. After netting out estimates of what goes 1500 75 Household back in by way of home improvements, the net withdrawal was Credit just under $50 billion in 2013 but we cannot also break out how 1000 50 (LHS) much of the HEW flows also go toward paying down mortgage debt as opposed to total household debt. The survey 500 25 underestimates gross HEW amounts withdrawn over years prior to 2013 because the survey previously under-represented cash0 0 outs through home equity lines of credit (HELOCs) as opposed to Household Equity Withdrawals (RHS) mortgages. In the earliest years for the data, the withdrawal -500 -25 estimates only captured equity taken out at the time of renewal 94 96 98 00 02 04 06 08 10 12 and thus biased the estimates at the start of the available time Source: Federal Reserve Board, Freddie Mac, Scotiabank period even lower. Therefore, whereas it appears as though Canadians withdrew about $280 billion in equity from their homes Chart 3 Canadian Household Credit and over the past seven years (numbers are only available through Withdrawals 2007), the true amount might therefore have been considerably 140 y/y change, $bn $bn 70 larger. There is, however, a key distinction between the Canadian and US experiences. Whereas Americans’ survey responses claimed to be virtuous in their uses of such funds by way of using a fair portion to pay down often higher-cost debt, the broad macro evidence would suggest this was not the case — a point that has become well understood with the course of events over recent years. Actions speak louder than words, and Chart 2 shows that strong cash-out activity was accompanied by persistently strong growth in household debt in the US until both forms of activity skidded off the rails into the crisis. Chart 3 shows the opposite 4 120 60 Household Credit (LHS) 100 80 50 40 Gross Household Equity Withdrawals (RHS) 60 30 40 20 08 09 10 11 12 13 Source: Statistics Canada, CAAMP, Scotiabank February 7, 2014 CANADIAN MACRO COMMENT Global Views Economics Derek Holt (416) 863-7707 [email protected] Dov Zigler (416) 862-3080 [email protected] … continued from previous page case in Canada: as cash-out volumes have been strong, household debt growth has sharply decelerated. Slower debt growth has multiple drivers no doubt, including the impact of tightened macroprudential rules and more importantly a maturing point of the housing and consumer cycle in Canada that points to a waning interest in borrowing as heavily as was once the case. While cohort data that would examine whether those who are making home equity withdrawals really are the same ones paying off debt is not available, it would appear to be the case that withdrawals are at least partly going toward debt reduction in terms of the macro stylized facts for the Canadian household sector in aggregate. The concluding task entails expressing Canadian home equity cash-outs relative to variables that matter in order to give a sense of the relative magnitudes and exposures. Last year, gross cash-outs equalled about 6% of total consumer spending, 2% of total home equity, and 3% of total household debt. Chart 4 Canadians Have More Home Equity 80 real estate equity as % of real estate assets Canada 70 60 US 50 40 30 Includes households, non-profits and unincorporated business. 90 93 96 99 02 05 08 11 Since the evidence points to cash-outs displacing debt growth in Source: U.S. Federal Reserve, Statistics Canada, Scotiabank Economics. Canada, one could well conclude that the vulnerabilities associated with such activity are less acute than in the US at the peak of its boom. Indeed, doing as they say they are doing in CAAMP’s survey of the uses of such HEWs by way of using cash-outs partly to deleverage can be viewed as a constructive process by Canadian households. The cost thus far has been nothing like the erosion of home equity that occurred in the US (chart 4). As such, whereas IMF economists once perhaps under-estimated that home equity withdrawals (HEW) had a temporary negative effect on personal saving by US households equal to about one dollar of reduced saving for every five dollars of home equity withdrawals (go here), the effect is likely considerably less significant in Canada. 5 February 7, 2014 CANADA Global Views Economics Adrienne Warren (416) 866-4315 [email protected] Still Waiting On Canada’s Export Recovery A weaker Canadian dollar should lead to an improvement in Canada’s real net trade performance in 2014, though ongoing competitiveness issues combined with a potential softening in overall terms-of-trade will likely keep the nominal trade balance in deficit. Canada’s external trade performance continues to disappoint. Despite a modest but gradual strengthening in global industrial activity, and a moderate pace of domestic spending that has restrained import demand, external trade remains a drag on the Canadian economy. Based on revised data released this week, we estimate that net trade subtracted close to a percentage point from GDP growth in the fourth quarter of last year. Chart 1: Canadian Dollar & Net Export Volumes 1.70 $bns USDCAD 1.60 120 100 1.50 1.40 forecast Historically, there has been a strong inverse relationship between the value of the Canadian dollar and net export volumes (chart 1). All else equal, the lagged impact of the roughly 10% depreciation in the currency over the past year should lead to a gradual narrowing in Canada’s real net trade deficit in 2014, through improved export competitiveness and reduced import competition. At the same time, the declining export-orientation of many Canadian manufacturers over the past decade may have weakened this historical correlation. Our current forecast has the turnaround beginning in the first quarter of 2014. 40 1.20 Canadian Dollar (LHS) 1.10 Even with a positive turn in trade volumes, the overall impact on Canada’s nominal trade balance may be tempered by weakening terms-of-trade. Historically, there has been a modest positive correlation between the value of the Canadian dollar and Canada’s terms-of-trade (chart 2); commodity prices, especially energy, are a bigger determinant (chart 3). All else equal, Canadian dollar weakness should lower our terms-of-trade, with the rise in Canadian dollar export prices more than offset by a broader increase in import costs. Our forecast for key export commodities is flat to moderately higher prices in 2014. 20 0 1.00 0.90 Net Export Volumes (RHS) 0.80 81 86 91 96 01 06 -20 -40 11 Source: Scotiabank Economics Chart 2: Canadian Dollar & Terms-of-Trade 1.20 index CADUSD 1.10 1.20 1.10 Terms-of-Trade (RHS) 1.00 1.00 0.90 0.90 0.80 0.80 forecast 0.70 Sectors that stand to benefit the most from currency depreciation have a high export intensity (e.g. transportation equipment, machinery, chemicals) as well as a relatively low share of imported inputs (e.g. forestry products, agricultural products). Based on net exposure (exports minus imports), the wood & paper industry for one appears well positioned. Still, market-specific demand and supply factors will ultimately determine industry outcomes. 80 60 1.30 The combination of a softer loonie and the continuing cyclical recovery in U.S. consumer spending and housing construction should provide a boost to Canadian exporters this year. However, the potential for continued export underperformance in the face of ongoing competitiveness challenges, including market share losses to lower-cost emerging markets such as China and Mexico, remain a downside risk to our Canadian growth forecast for 2014. Weaker exports would in turn slow the growth trajectory for business hiring and capital investment. 140 0.70 Canadian Dollar (LHS) 0.60 0.60 81 86 91 96 01 06 11 Source: Scotiabank Economics Chart 3: Commodity Prices & Terms-of-Trade 3000 index index 2500 1.20 1.10 2000 1.00 Terms-of-Trade (RHS) 1500 0.90 1000 0.80 forecast 500 0.70 BoC Commodity Price Index, Energy (LHS) 0 81 86 91 96 01 06 0.60 11 Source: Scotiabank Economics 6 February 7, 2014 LATIN AMERICA Global Views Economics Pablo Bréard (416) 862-3876 [email protected] Chile Retains Top-Credit Quality Status Pro-growth policy mix to continue; new government takes office in March. The Chilean peso (CLP) has been immersed in a weakening phase against the US dollar (USD) since last October, mainly triggered by exogenous factors. Heightened global risk aversion affecting emerging-market assets combined with lower commodity prices and a concerted preference to increase USD holdings have all been factors weighing on the currency. Non-deliverable forward (NDF) markets point towards further weakness in line with our view for the first half of the year. Thereafter, we expect the CLP to enter a stabilization phase as Chile begins to benefit from renewed impetus in major advanced economies. Chile counts on a solid external debt profile, retaining the highest sovereign credit rating within Latin America. All international rating agencies maintain a “stable” outlook on the country’s long-term foreign-currency sovereign credit ratings, which are currently set as follows: Aa3 (Moody’s), AA– (Standard & Poor’s), and A+ (Fitch). Credit default swaps and yield spreads over US bonds position Chile at the top of the Latin American sovereign credit charts. Credible macroeconomic policies, a sound financial sector and a benign debt maturity profile are at the core of such favourable global perception of Chilean creditworthiness. The Chilean economy, which is estimated to have expanded by 4.0% in 2013 remains in a phase of gradual deceleration which will likely extend through the first half of 2014. However, we estimate that economic activity will begin to expand at a faster rate later in the year and reach 4.5% in 2014-15 supported by an improved external growth outlook and a gradual recovery of investment activity once the new administration takes over. The growth outlook remains extremely sensitive to external factors affecting metal markets developments. The central bank is immersed in a pro-growth monetary policy stance in the context of a somewhat contained inflation scenario. We estimate that consumer price inflation will remain in line with the official 3% +/- 1% target over the next 24 months. The monetary authorities reduced the policy-setting short-term interest rate by 50 basis points (bps) to 4.5% over the past four months; further cuts may be in store in the near term. Once the heightened financial market volatility associated with the normalization of US monetary policy subsides, we believe that Chilean consumer price inflation will also tend to stabilize within current levels. The Chilean external sector remains highly sensitive to economic developments in China and the US which will undoubtedly have an impact on the country’s terms of trade as well as on potential demand for the country’s main exports. We estimate that the current account deficit will range between 3.5% and 4% of GDP over the next 18 months on the back of a slight deterioration in the country’s trade balance (due to adjusting metal prices) while crude oil prices may decline. The incoming government reaffirmed its commitment to the structural fiscal rule which has allowed Chile to weather external shocks in the past. The political environment will be dominated by the transition to a new government. The coalition administration of President-elect Michelle Bachelet, with a simple majority in both houses of congress, will take office in March 2014. Following the appointment of a new Cabinet, the new government has hinted that the policy agenda will initially be centred on introducing major changes to the current educational regime to meet growing demands from society amidst escalating social tensions in this regard. Beyond educational reform, changes to the income tax regime and redefinition of the energy matrix (in favour of fostering the development of the hydroelectricity sector and boosting power production) will also be in the policy agenda. The Chilean financial sector remains sound and well capitalized, as indicated in the assessment by the World Economic Forum’s Global Competitiveness Report. Domestic credit growth by deposit-taking financial institutions remains in deceleration mode, yet at still attractive rates of around 10% per year. The internationalization of the Chilean banking sector is firmly advancing following the recent investment by a large Brazilian financial group. Local pension funds, which count on US$163 billion (equivalent to 59% of GDP) in assets under management (AUM), maintain a bias towards dollarization of investment portfolios, in line with increasing demand for better established equity securities issued in high-income economies. Foreign-currency portfolio investments (which accounted for 42% of total AUM) increased by 21% y/y during 2013. 7 February 7, 2014 FISCAL Global Views Economics Mary Webb (416) 866-4202 [email protected] U.S. Near-Term Federal Deficit Reduction Declining red ink trims net marketable borrowing, for now. The outlook through fiscal 2024 (FY24)1 released by the U.S. Congressional Budget Office (CBO) this week projects, under current policy settings, an FY14 federal deficit $46 billion narrower than its prior May 2013 outlook, followed by deficits from FY15 to FY23 that are a cumulative $1.05 trillion wider (top chart). The CBO’s forecast of an FY14 deficit of $514 billion (3.0% of GDP), improving upon the FY13 shortfall of $680 billion (4.1% of GDP), reflects revenue growth of 9.2% versus an expenditure increase of just 2.6%. In part, the decline in FY14 red ink reflects higher reported receipts from Fannie Mae and Freddie Mac and, as of FY14, no allocation for disaster relief after $48 billion was appropriated in FY13 for the Hurricane Sandy recovery efforts. The CBO’s February outlook relative to its May 2013 projection outlines wider deficits from FY15 to FY17, but the anticipated shortfalls still average less than $550 billion annually. Thus even with sizeable non-budgetary cash needs, for items such as student loans and other credit programs2, the publicly held debt is expected to edge lower relative to GDP (middle chart). With lower net marketable borrowing requirements over the next few years, and the introduction of a new borrowing instrument as of January — a two-year Floating Rate Note — the U.S. Treasury has indicated that the 2- and 3-year bond auction sizes will be trimmed, possibly as of May. In part this adjustment reflects that the FRNs are expected to raise at least $156 billion annually, depending upon the size of their two re-openings each quarter. CBO Projections of U.S. Federal Deficit 400 0 forecast -400 May 2013 -800 -1200 February 2014 US$ billions -1600 FY00 04 08 12 16f 20f 24f Source: Congressional Budget Office. U.S. Federal Publicly Held Debt 25 year-end, US$ trillions 20 84 % of GDP 72 forecast % of GDP, RHS 15 60 10 48 5 36 Publicly Held Debt, LHS After FY17, the CBO expects steadily larger deficits, widening from $655 billion in FY18 to more than $1 trillion annually as of FY22. While anticipated growth in output and the GDP price deflator are somewhat more moderate, the essential challenge remains escalating expenditures as the population ages, federal subsidies for health insurance expand, health care costs per beneficiary increase and the net interest expense climbs as interest rates, adjusted for inflation, rise back towards their historical averages on a substantially expanded debt burden. The cost pressures are reflected in the upward trajectory of mandatory spending relative to GDP (bottom chart) that includes Social Security, Medicare and Medicaid. Conversely, discretionary outlays relative to GDP are expected to fall to unrealistically low levels under current legislation. Entitlement restructuring — less painful if phased in over a number of years — remains elusive and progress before the mid-term elections on other key issues, such as immigration reform is uncertain, leaving difficult decisions to the second half of the decade. 24 0 FY00 03 06 09 12 15f 18f 21f 24f Source: Congressional Budget Office. Mandatory vs. Discretionary Spending 16 % of GDP Mandatory 12 Mandatory 40-Yr Avg Discretionary 40-Yr Avg 8 Discretionary 4 forecast 0 FY00 04 08 12 16f 20f 24f Source: Congressional Budget Office. 1 The U.S. federal fiscal year-end is September 30. All dollar data in the article are US dollars. 2 In FY14, the U.S. Treasury has reinvested the Thrift Savings Plan’s G Fund in Treasury securities after disinvesting in 2013 due to debt ceiling restraints. 8 February 7, 2014 Global Views Emerging Markets Strategy Araceli Espinosa (5255) 9179-5237 [email protected] Joe Kogan (212) 225-6541 [email protected] Are Investors Abandoning EM Bonds? The following article was published on February 5, 2014. While survey data has been showing large outflows from local currency bond funds since last May, more comprehensive data from 10 emerging market governments reveals a rosier picture. Although some countries have experienced moderate outflows in the last two quarters, countries with strong outlooks like Mexico have not lost any investors so far. Another week of large redemptions from funds investing in local currency emerging market debt, combined with the recent currency losses in many emerging market countries, likely scared many investors about the prospects for local currency fixed-income investments for 2014. But how much money is actually leaving emerging market countries, as opposed to leaving the funds that are typically surveyed? Differences between survey and government data Investors like to follow survey data because it tracks investor sentiment on a high-frequency basis, often daily or weekly. The methodology used by survey firms like EPFR has two problems, however. First, only certain investors such as mutual funds are included in the sample, since these investors are required to report daily inflows and redemptions for regulatory reasons. As a result, the sample is heavily weighted towards retail investors and away from long-term strategic investors like sovereign wealth funds. Second, and likely as a result of the focus on retail investors, the data is often backwards looking. Statistical tests demonstrate that emerging market redemptions normally follow poor EM returns. The evidence that these high-frequency fund inflows and outflows can actually predict future price movements is much weaker, likely in part because funds can anticipate these flows themselves and therefore maintain cash balances to buffer the impact of any sudden redemptions. Instead, a more comprehensive picture of investor sentiment is provided by data on non-resident holdings published by individual country governments, as this data covers almost all investors. Consider the stark differences: According to EPFR, in the last seven months of the year, net outflows from local currency EM funds exceeded $20bn, or around 20% of fund assets. Meanwhile, non-resident holdings of Latin American sovereign bonds during the summer and fall, as reported by each country, remained mostly stable. That discrepancy implies that some foreign investors were actually buying when retail investors were selling. Note that as outflows from the funds participating in the survey continue, this discrepancy could get larger because the sample will become a smaller and smaller portion of the actual EM investor base. For this reason, we saw little reason to expect a sudden capital reversal during most of last year. Latest data releases in Latin America Nevertheless, the recent release of December data for Peruvian bonds has caused us to revisit the analysis, as foreign holdings of nominal government bonds abruptly dropped from 59% to 55%. Most of the reduction occurred in the short and intermediate sections of the curve; currency appreciation is probably more important for investors in this part of the curve, and perhaps currency weakness has caused investors to re-evaluate their bond investments. Since yields are significantly lower in Peru than in Mexico, investors may rotate out of Peru soberanos once they realize they can no longer count on the steady currency appreciation of previous years. In contrast, so far, the government data shows no outflows from Colombia, with December non-resident holdings at 6.6%, almost the same as reported at the end of October, and significantly higher than the 4.5% reported at the end of April. Yet, to really get an idea of foreign sentiment about Latin America, we need to look at the larger countries — Brazil and Mexico. Foreign holdings in these two countries were $134bn and $87bn USD-equivalent, far larger than the $7bn foreigners held in Peru and $4bn in Colombia. In Brazil, non-resident holdings were 14.6% in 9 February 7, 2014 Global Views Emerging Markets Strategy Araceli Espinosa (5255) 9179-5237 [email protected] Joe Kogan (212) 225-6541 [email protected] … continued from previous page April; they rose to a peak of 17.2% in September and fell to 16.1% by the end of the December. This 1.1% decrease in holdings implies that non-residents decreased their positions in Brazil by around 6%. While double-digit yields must have tempted some investors, it seems that a poor economic outlook is finally having an impact on foreign sentiment. Mexico is the most interesting story, and coincidentally, the country where we can get more frequent updates than in the rest of Latin America. Despite recent market volatility, foreign holdings have remained stable at around 57% of nominal bonds outstanding. Even though the currency depreciated significantly in January, available data until the 22nd of January is not showing outflows. Thus, investors may be starting to discriminate more between countries, with Mexico receiving the largest benefits. Figure 1. Non-resident ownership of local bonds around the world Source: IIF, individual country statistics. Graph shows foreign ownership of both government-issued nominal and inflation-linked bonds. The numbers may differ from ownership of just nominal bonds mentioned in the text above, since foreigners focus on nominal bonds in Latin America. For example, non-residents hold 57% of nominal Mbonos but only 37% of all government bonds. Emerging market countries outside of Latin America We have already discussed one of the “Fragile Five,” Brazil, where outflows have only recently started and net inflows for 2013 were still highly positive. Similarly, in South Africa, while non-residents reduced their exposure to the country’s bonds in November and December, net inflows for 2013 were still positive, although only barely. (That observation is based on balance of payments type flow data to all bonds, not just government bonds). Turkey is seeing non-resident ownership decrease by 1% of bonds outstanding per quarter, such that non-resident ownership has returned to 2012 levels. As shown in Figure 2, some countries have actually received inflows in the fourth quarter, namely Hungary and Indonesia, and, in Latin America, Mexico and Colombia. 10 February 7, 2014 Global Views Emerging Markets Strategy Araceli Espinosa (5255) 9179-5237 [email protected] Joe Kogan (212) 225-6541 [email protected] … continued from previous page Figure 2. Change in non-resident ownership by quarter in 2013 Source: IIF, individual country statistics. Graph shows percentage points change in ownership in consecutive quarters. Fourth quarter data is not yet available for Korea, Malaysia, and Thailand. Conclusions The trend in investor sentiment toward local currency instruments has certainly shifted, but so far is not as negative as some figures would suggest. Retail investors are obviously pulling back, but certain long-term investors have easily taken their place. More vulnerable countries are seeing some outflows, but so far those outflows are small relative to the reversals we have seen before. Consider for example, that non-resident holdings in Peru dropped from 36% to 17% during the period of 2008 to 2009, while in Mexico they fell from 27% to 21% in less than four months. Relative to these numbers, a couple of quarters of outflows of 1% of bonds outstanding do not seem so bad. Nevertheless, not all countries have built up the reserves to weather outflows as Peru and Mexico had. To the extent that some countries may have relied on prior inflows to finance current account deficits, we might see some adjustments going forwards with even a moderate reversal. The good news is that investors are not decreasing their positions indiscriminately. Motivated perhaps by economic reforms and the potential for ratings upgrades, investors have not reduced positions in Mexico. That idea is consistent with what the Ministry of Finance has been saying for years — that the composition of its investor base has changed significantly toward long-term investors. Meanwhile new markets continue to develop. Colombia received inflows every quarter in 2013, despite weakness in its currency. This country is a still a niche market with relatively little foreign presence, and it is benefitting from the government’s effort to entice foreign entry through a decrease in tax rates and a simplification of tax rules. We do not yet have holdings data for January 2014, but we would not be surprised to see a slowdown in inflows or even some outflows as a result of not just the 5% currency depreciation in that month, but also government statements favouring a weaker currency. Still, in the long-run, we would expect longer-term non-resident investors to increase positions, thanks to the high real yields available in that country. While we have focused on local currency flows, as this is the most recent source of concern both for country governments and for investors, we should mention that the pattern we see for hard currency bonds is not so different. Survey data has been showing significant outflows from hard currency funds since May. Nevertheless, gross issuance of global bonds from Latin America has continued at a steady pace. Issuance in 2013 was $122bn, higher than any previous year, at least since the financial crisis. Not surprisingly, issuance was low in January by historical standards, as January is usually a good month for origination, and concessions have probably increased to around 10bp. Still, once this bout of volatility passes, we could see issuance resume. 11 February 7, 2014 Global Views Fixed Income Strategy Alan Clarke (44 207) 826-5986 [email protected] Eurozone Inflation — Or Lack Of It Inflationary pressures are distinctly lacking in the eurozone. Last week saw the second consecutive downward surprise in eurozone inflation, with the flash estimate easing to 0.7% y/y against expectations for 0.9% y/y. German inflation surprised on the downside for the second consecutive month and contrary to the ECB assumption that the prior month’s fall should be temporary. Mathematically, in order for the eurozone aggregate measure of inflation to have been so low (in light of the German, Italian and Spanish preliminary data that have already been released) the French HICP must have been very low — probably in the region of 0.6% y/y (earlier estimates had been closer to 1.0% y/y). That is despite January’s VAT hike which we thought would have added around 0.3 percentage points. In the event, it seems that France has followed Italy in showing near zero impact from higher indirect taxes. We won’t know this for sure until the French data are released (20 February), but something drastic would have to have happened elsewhere in the region for this not to have been the case. Close to but… The ECB’s mandate is to keep inflation close to but below 2%; For the last 6 months or so inflation has been close to but below 1%; We think that there is a serious risk that inflation falls to close to but below 0%. The depressed inflationary picture is more evident the deeper that we look under the surface. Chart 1 shows the headline inflation reading on a country-by-country basis. Only two countries in the eurozone are anywhere near 2% - the rest are well below and several are close to zero. Chart 1: Eurozone Country by Country Breakdown Similarly, Chart 2 shows inflation on a component-by-component basis. Only one component (alcohol and tobacco) is above 2% (in turn that is probably reflective of tax hikes). All other components are far more muted and below their respective average pace over the last 5 years. 12 February 7, 2014 Global Views Fixed Income Strategy Alan Clarke (44 207) 826-5986 [email protected] … continued from previous page Chart 2: HICP Inflation Breakdown by Component Last but not least, Chart 3 shows a more simplified breakdown of eurozone inflation based on ‘the Big 3’. The ‘Big 3’ refers to the three key categories of inflation within the HICP. Namely: Energy; FAT (Food, Alcohol and Tobacco); and Core Chart 3: The Big 3 Contributions to Eurozone Inflation This breakdown helps to highlight where the main sources of inflation are coming from (or not as the case may be). In the case of the eurozone, in contrast to the previous 3 years, energy prices are contributing absolutely nothing to the current pace of inflation. The contribution from FAT has been dwindling as the effects of last year’s agricultural commodity price spike have unwound. This has left core components as the main contributor to headline inflation. Even this component has seen its contribution to overall inflation halving over the last twelve months, down to around 0.5 percentage points. 13 February 7, 2014 Global Views Fixed Income Strategy Alan Clarke (44 207) 826-5986 [email protected] … continued from previous page Where Next? Looked at from the perspective of ‘the Big 3’, the only way is down. The FAT component is subdued and unlikely to go any higher given a lack of any food crisis of late and no fresh sin taxes in the pipeline. Similarly, energy price inflation is non-existent. There are no major base effects to change that (if anything there is a moderate downward base effect due to push down on inflation fairly soon) and crude oil prices have been stable to slightly down of late. That leaves core inflation in the driving seat. It is hard to argue anything apart from a further slowdown in core inflation. The eurozone economy has the biggest gap between the unemployment rate and the NAIRU of any developed economy. That points towards slowing underlying inflation. The EUR exchange rate was on a rising trend through last year — pointing to slowing imported inflation. Last but not least, individual eurozone economies are striving for greater competitiveness to rebalance their economies and pursue an export-led recovery. This has helped to narrow current account deficits but that typically results in slowing inflation. All in all, that points to a serious risk that the next stop for eurozone inflation is zero. We will return to this issue in our new and improved ‘Inflation Station’ publication later in the month. For now the focus will be on how and when the ECB will respond to signs that deflation is on the ECB’s doorstep. 14 February 7, 2014 Global Views Fixed Income Strategy Alan Clarke (44 207) 826-5986 [email protected] UK: As Good As It Gets Survey Readings Topping Out Both the UK manufacturing and services sector PMI surveys disappointed expectations during January; both fell by ½ point to 56.7 and 58.3 respectively. For the services sector index, this was the third consecutive monthly decline and extended the losing streak to 4.2 points. We expect further downside for both surveys over the coming months. Our LILI (Leading Indicator for Leading Indicators) model helps to provide an early warning of the likely future trend in the PMI surveys. The model weights together movements in the effective exchange rate, the real central bank policy rate, the shape of the yield curve, peripheral spreads, money supply growth, house price inflation and the ted spread. The resulting LILI index helps to gauge how accommodative (or restrictive) conditions are in the economy. When conditions are looser than average it is typically a sign that survey readings will improve and vice versa. This time a year ago, the LILI model had posted a sharp loosening in conditions, helped by the weakening in the GBP exchange rate, narrowing in peripheral bond spreads and rising equity prices. In turn that proved to be a reliable signal of the subsequent surge in the PMI surveys. Unfortunately the situation has reversed in recent months. The LILI model has shown that conditions have become far less accommodative, down from almost 2 standard deviations looser than average to only just in accommodative territory still. The relationship suggests that both PMI surveys should continue to fall from upper-50 territory down to lower-50 territory (Chart 1). Chart 1: CIPS Manufacturing vs LILI Model Don’t Panic! First and foremost, our emphasis is that despite the falls, both surveys currently remain at elevated levels. That is above previous cyclical peaks! Furthermore, the consensus forecast for GDP growth this year (in line with our own of 2.5% y/y) points to a slowdown in the quarter-to-quarter growth rate. Hence a moderate downward trend in the PMI surveys merely confirms what the majority of forecasters were already expecting. Furthermore, there is currently a massive residual between the CIPS services survey and the hard services output component of GDP (Chart 2). The CIPS services index would have to fall a long way before it is pointing to an outright slump in hard output. Recoveries (or slowdowns) are seldom a straight line affair. Hence it isn’t a no-brainer that these surveys will continue to slide in the coming months — or GDP for that matter. In particular, the commentary that accompanied the CIPS surveys acknowledged that the poor weather in January had probably contributed to the latest weakening and asserted that February could see some catch-up. Nonetheless, we would be surprised if both surveys have not lost further ground by the middle of the year. 15 February 7, 2014 Global Views Fixed Income Strategy Alan Clarke (44 207) 826-5986 [email protected] … continued from previous page While the UK surveys have been losing ground, it has not been the same story on the continent. The eurozone composite PMI has risen by 1 point to 52.9 over the last 4 months with Italy notably enjoying the bounceback. There has been a tendency for the eurozone PMIs (for no particularly logical reason) to lag behind the trend in the UK, hence some catch-up was reasonable on this basis. Moreover, given the relationship between the surveys and the eurozone LILI model, there is also good reason for sentiment to have caught up (Chart 3). We have our doubts that the surveys will rise that much further. In particular, the LILI for the eurozone never registered particularly accommodative conditions — they are barely in accommodative territory. In addition, the impact of softening overseas developments is a potential dampener (assuming that there was some substance to the weakening in the ISM). Chart 2: CIPS Services vs GDP Business Services Output Chart 3: Eurozone Composite PMI vs LILI To summarise, our LILI model has highlighted that monetary conditions have become less accommodative in the UK and this is starting to bear down on upstream indicators such as the PMIs. There is more downside to come on the back of this relationship. However, this should be seen as a cooling off rather than a seizing up. These surveys remain at historically elevated levels and are merely nudging down towards levels consistent with a still-respectable pace of GDP growth. The eurozone surveys are one step behind and have continued to rise. However, we suspect that the extent of further upside is probably limited. 16 February 7, 2014 Global Views Fixed Income Strategy Frédéric Prêtet (00 33) 17037-7705 [email protected] ECB February Decision — Waiting For Another Month! ECB statement — Strengthening forward guidance… but waiting for additional data As we and the consensus expected, there were no policy changes from the ECB. However, it is true that it could have been a close call and market speculations have been mounting over recent days regarding a potential surprise move. The lack of any clear indication regarding the ECB’s next move was therefore seen as disappointing and the immediate reaction was for the euro to erase all of its recent weakness. It is true that this status quo and the tone of the press statement gave the feeling of some paralysis at the ECB. With the refi rate already at 0.25% and deposit rate at 0%, extra actions involve, in some cases, going into “unchartered territory”. While the ECB president once again repeated that the board is “ready to consider all available instruments”, it sounds that there is difficulty to gather a broad majority inside the board to any specific action. Does it mean that the ECB will be in a prolonged wait and see environment? We do not think so and, as already indicated by the ECB president, the March meeting could be a big rendez-vous. In this regards, we keep our main scenario of rate cuts taking place in a one month time. First, Mr. Draghi recognised that the ECB is not fully comfortable with the inflation development. While repeating once again that it does not see a risk of deflation in the euro area and that the outlook for price development continue to be broadly balanced, the ECB now fully recognises and is “alert” that “we are now experiencing a prolonged period of low inflation”. So, in our view, it raises very much the probability for potential additional actions. Despite this “alert” situation, the ECB president justifies the current status quo by taking a longer perspective on inflation rather than focusing on the recent developments and weaker than expected January figures. He thus stressed positive leading indicators, especially on the growth side to remove the deflationary risk. Also, the poor development in both money supply and credit growth at the end of last year were party dismissed as being negatively and temporarily distorted by the AQR. However, he gave a number of data to be tracked over the coming month which could alter this assessment and change the mood inside the board. These volatility points will be: On the growth side with the release of Q4 GDP data on Friday, February 14th which was clearly pointed out by M. Dragihi. The consensus is looking for a +0.3% q/q rise after a weak +0.1% q/q rise in Q3. Our own forecast is between 0.2%/0.3% but coming industrial production data will help to fine tune this forecast. So, it will confirm the ECB’s scenario of a “gradual recovery”. Furthermore, we expect all major countries to show positive quarterly growth, meaning that the recovery is broadening. So, if confirmed, this figure should rather favour a status quo. While not clearly mentioned by the ECB president and more risky in our view could rather be February business surveys (like PMIs on February 20th) as there is the risk that the past appreciation of the euro as well as lower growth momentum in emerging markets could start weighting on sentiment. The ECB recognised that the volatility in emerging markets and its potential impact on the growth scenario was a point of focus for the board. On the monetary side with the release of January M3 and credit growth data on February 27th. The ECB president clearly expects some improvement on this side given that end of last year was “temporarily” distorted. However, we think that the last ECB lending survey was a bit disappointing, suggesting that banks were rather slower than expected in easing credit conditions. So, there could be some risk of a disappointing outcome on this side. 17 February 7, 2014 Global Views Fixed Income Strategy Frédéric Prêtet (00 33) 17037-7705 [email protected] … continued from previous page On the price side with February inflation data on February 28th. While not clearly mentioned as the ECB president likely wanted to avoid, like at last month’s press conference, to be too much tied to a specific figure, any weaker than expected outcome could refuel the pressure to act. It will indeed change the ECB’s inflation scenario of a 1.1% inflation trend for this year. It is already worth noticing that the base effect in energy will not be very helpful as they increased by 1.2% m/m in February last year. Our current forecast is for yoy Eurozone inflation to edge down to 0.6% in February from 0.7% in January. Furthermore, we will also look in particular for any downside surprise in core inflation. The ECB president seems to suggest that low core inflation mainly comes from countries engaged in a strong economic adjustment program. However, there are now a majority of Eurozone member states where core inflation is below the 1% line, raising the risk of deflationary pressure spilling over between countries. Finally, new ECB staff forecasts to be released next month will be under focus as the ECB president indicated that it will also integrate an outlook on 2016. We would say that any inflation forecast below the 1.5% line by this time will likely question the ECB’s mandate of medium-term price stability and push for additional action. 18 February 7, 2014 Global Views Foreign Exchange Strategy Eduardo Suárez (416) 945-4538 [email protected] Latin America Week Ahead: For The Week Of February 10 - 14 After this week which was replete with tier-1 US data, the coming one will be somewhat slower on that front but we still get retail sales, manufacturing production, US industrial production, and U. Michigan consumer confidence. However, the tone for next week is likely to be partly influenced by today’s non-farm payrolls release as risks related to a Fed policy shift are part of what appears to have put markets under pressure. Our sense is that the data point was in somewhat of a “sweet-spot” for LATAM FX, as it was strong enough to avoid US growth concerns, but also weak enough to avoid leading to fears that Fed policy normalization could accelerate. Emerging Markets (EM) have stabilized over the past couple of sessions, but our sense is that many of the underlying themes that drove the correction we saw in January remain in the background, and are likely to be recurring themes, driving occasional bouts of volatility. Accordingly, our bias remains to focus on alfa rather than beta trades, by crossing regional FX versus each other to avoid the risk of directional USD bets. On this front, our favoured trades remain long MXN/CLP (premised on the rebound of the US economy, Mexico’s lower dependence on commodities, and the structural reform story) and long PEN/COP (with PEN having a more diversified commodity basket and relative appetites for currency weakness by central banks). Week-ahead views: Brazil: Today’s release of lower-than-anticipated inflation (5.59% vs a 5.65% consensus) is likely to put downward pressure on DI rates, which are currently pricing in another 50bps hike for the next meeting. However, it is also worth bearing in mind that the government has signaled that inflation has become a priority for the administration, as rising prices appear to now be seen as one of the most politically costly problems ahead of next year’s presidential elections. This has seemingly prompted a more concerted effort to tighten the fiscal stance in order to reduce inflationary pressures, and the risk of further eroding investor sentiment. On this front, it will be worth watching for further signs of where the government will set the primary surplus target for 2014 — which could factor into the prospects for credit ratings downgrades. On the data front, next week features retail sales, the monthly economic activity index, and formal job creation, which are all worth watching. BRL continues to gradually slide, although intervention has made the currency’s depreciation steadier. Chile: This looks set to be a very quiet week on the data front, with the two major releases being the BCCh’s traders’ and economists’ surveys, which will be interesting to watch for signs of whether the volatility in global markets has altered expectations regarding the central bank’s easing prospects. Colombia: This week’s highlight is likely to be the release of BanRep’s MPC meeting minutes on Friday, which should be monitored for the central bank’s discussion on both FX and rates. The central bank is now the only one in LATAM which continues to accumulate FX reserves despite the weakening trend that hit regional FX to start the year. Accordingly, we see BanRep underperforming its Andean peer PEN. Mexico: FinMin Videgaray said the first oil contracts for the private sector could come as soon as late 2014. So far, our sense is that the reform has been well received by private players, but more clear guidance is likely to be available after secondary legislation is approved, which is expected between now and April. Despite the government’s hopes for late 2014 contracts, we believe it is worth bearing in mind that in the past there have been delays in EMs, including Mexico, on project auctions. On the data front, this looks set to be a busy week, with gross fixed investment & AMIA auto-sector data, manufacturing and industrial production all in the pipeline. In addition, we are scheduled to get Banxico’s Quarterly Inflation Report and Banxico’s MPC meeting minutes, which will be important to watch, given inflation and monetary policy are once again market relevant topics. Peru: This week’s highlight is likely to be the BCRP’s MPC meeting, where the reference rate is widely expected to be left unchanged, but an update of the central bank’s views will still be interesting. In addition we also get important data on the monthly economic activity index, the trade balance and unemployment. 19 February 7, 2014 Global Views Portfolio Strategy Vincent Delisle (514) 287-3628 [email protected] Portfolio Strategy Asset Mix — February Update This comment was originally published on February 4, 2014. Asset Mix: EM Vortex Hits Cyclical Sentiment Overweight (OW); Market Weight (MW); Underweight (UW) Gimme Shelter? Defensive leadership appears set to continue in February and we would not fight the near term malaise. Sentiment is shaky and the ongoing S&P 500 sell-off could extend further. Still, we do not expect a sustained period of equity underperformance. The S&P 500 and U.S. 10-Yr Yields are already tracking the ISM stumble (exhibits 1 and 2), and our U.S. LEI points to 3%’ish GDP growth in H1/14. Unless the U.S. macro picture materially deteriorates, this Q1 pullback could prove to be an opportunity to add to equities. We also believe the recent softness in U.S. data may prove temporary as post-winter activity accelerates and low inventories fuel new orders. However, weak Chinese momentum and EM anxiety could persist in the near term. Globally, the silver lining has come from a pick-up in Eurozone activity in January (PMI up to 53.9 in January, three-year high). Our recommended tactical asset mix (versus a neutral benchmark) is unchanged at +5% Equities; -10% Bonds; +5% Cash (see Exhibit 3). Exhibit 1 - ISM Manufacturing vs. S&P 500 QOQ (2000-2014) Exhibit 2 - ISM and 10-Yr U.S. Yields (2000-2014) Source: Scotiabank GBM Portfolio Strategy, Bloomberg. Source: Scotiabank GBM Portfolio Strategy, Bloomberg. Exhibit 3 - Scotiabank GBM Asset Mix – February 2014 Update Equities Asset Mix Benchmark Recommended 60% 65% Canada (TSX) 5% U.S. (S&P 500) 22% MSCI EAFE 18% (1. Europe, 2. Japan, 3. Australia) Far East ex-Japan 10% LatAm 5% Bonds Government Corporate Cash (91-D Tbills) Exhibit 4 - Tactical Asset Mix Signals – February 2014 Change From Last Last 3M Trend 5% 26% 22% 30% 30% 10% 16% 14% 0% 5% Equity vs. Bonds (U.S.) +10% - +14% +9% +15% +14% +8% Equity vs. Bonds (Canada) +11% - +12% +1% +0% +9% +6% Cyclical vs. Defensive Sectors +9% - +7% +5% +0% +7% +3% MW Sector Strategy (S&P 500) 9% 3% 40% Q4-13 Q3-13 Q2-13 Q1-13 Q4-12 Global Equity Canada OW - MW OW UW MW U.S. OW + OW OW OW MW UW Europe (Western Europe) UW + OW MW OW OW OW Far East (ex-Japan) UW - UW UW UW OW MW LatAm UW = UW UW UW UW MW Source: Scotiabank GBM Portfolio Strategy estimates Source: Scotiabank GBM Portfolio Strategy estimates 20 February 7, 2014 Global Views Portfolio Strategy Vincent Delisle (514) 287-3628 [email protected] … continued from previous page Asset Mix & Global Equity Screens. Equity exposure is declining in both our U.S. and Canadian asset mix models in light of weaker ISM and LEI momentum, as well as deteriorating earnings revisions. See exhibits 5 and 6 for equity versus bond indications. Equity overweight signals from our model decline to +5% in the U.S. (versus +16% average in Q4/13) and to +7.5% in Canada (versus +13% in Q4/13). In terms of global equity allocations, the DM over EM bias remains elevated, mainly on improved European signals. See Exhibit 7 for updated DM versus EM barometer. Exhibit 5 – U.S. Tactical Asset Mix* (Recommended Equity Weighting) 80% Exhibit 6 – Canada Tactical Asset Mix* (Recommended Equity Weighting) 80% 25% Overw eight Equities 20% 75% 30% Overweight Equities 75% 20% 15% 70% 70% 10% 65% 60% 0% 60% -5% 55% 10% 65% 5% 0% 55% -10% -10% 50% 50% -15% 30% 20% 10% 0.2 -0.2 -10% -0.4 0% -10% -10% -20% -20% -30% -30% Risk-Off Trade Extended -50% -40% Oct-09 Oct-08 Oct-07 Oct-06 Oct-05 Oct-04 Oct-03 Oct-02 Dec-14 Dec-13 Dec-12 Dec-11 Dec-10 Dec-09 Dec-08 Dec-07 Dec-06 Dec-05 Dec-04 -30% Dec-03 -1 -50% Bonds "relative" Overbought -60% Dec-02 Sep-13 10% 0% -40% -20% Overw eight Emerging -0.8 Sep-11 20% 10% -60% Oct-14 0% 20% Oct-13 0 40% 30% Oct-12 0.4 30% Oct-11 MSCI DM Less EM 3M Rolling Rel. Return - RHS 50% S&P 500 "relative" Overbought Risk-On Trade Extended 40% -0.6 Sep-09 50% Oct-10 Overw eight Developed 0.6 Sep-07 Sep-01 Sep-13 Sep-11 Sep-09 Sep-07 Sep-05 Sep-03 Sep-01 Sep-15 Exhibit 8 - Scotiabank Strategy U.S. Risk-On/Risk-Off Indicator* (2002-2013) Exhibit 7 - Developed vs. Emerging Markets Barometer 1 -30% *Model Based on ISM, Risk-On/Risk-Off, LEI, Revision Ratio, P/E, TSX 200 Day MA Neutral = 60% Equity/40% Bond Split Source: Scotiabank GBM Portfolio Strategy, Bloomberg *Model Based on ISM, Risk-On/Risk-Off, LEI, Revision Ratio, P/E, S&P 500 200 Day MA Neutral = 60% Equity/40% Bond Split Source: Scotiabank GBM Portfolio Strategy, Bloomberg, Thomson Financial. 0.8 TSX Less Canada Bonds 3M Rolling - RHS Overweight Bonds 40% -25% Sep-05 Overw eight Bonds 40% -20% 45% -20% S&P 500 Less U.S. Bonds 3M Rolling - RHS Sep-03 45% *S&P 500 less long-term government bonds (TLT) 3M rolling relative return Source: Scotiabank GBM Portfolio Strategy, Bloomberg. Source: Scotiabank GBM Portfolio Strategy estimates, Bloomberg. 21 February 7, 2014 KEY DATA PREVIEW Global Views Economics Derek Holt (416) 863-7707 [email protected] Dov Zigler (416) 862-3080 [email protected] Key Data Preview CANADA Can Canadian manufacturing sustain its winning streak? We’re skeptical that the very rapid pace of gains in Canadian manufacturing sales seen to start Q4 (a cumulative +1.7% in October and November) will continue into December and we’re looking for a soft 0.1% m/m number. Our rationale is: a) automotive output declined in the U.S. and, coupled with soft exports of cars out of Canada (-1.1% m/m) seems to have slowed in Canada too, and b) refined petroleum products output in Canada also may have been slower too as evinced by soft exports in that sector (-8% m/m). On the plus side, machinery exports were up and new orders were strong in September and October as well, which is why we’re looking for a flat number and not an outright decline. Note that even a flat print in volume terms would leave manufacturing tracking for a 7% q/q SAAR gain in real terms. 55 Canadian Manufacturing Sales & Orders H2 2013 Bump, No Trend C$, Billions 50 45 New Orders Shipments 40 10 11 12 13 Source: Statistics Canada, Scotiabank Economics Did a colder-than-usual January impede residential construction in Canada? We’re looking for housing starts to have held steady in the 185k/month annualized range in January after the pace of building permits treaded water in October and November. Very cold weather across the country, including unusually cold weather in the prairies (recall news items comparing the temperature in Winnipeg this January to the temperature on Mars) could weigh on construction on the margin, although the very low not-seasonallyadjusted levels of housing starts in January in any event imply that the seasonally adjusted figures that we see account for significant-enough downside from weather effects. UNITED STATES Retail sales in the U.S. are one of the data series that do seem to get whipped around fairly considerably by weather (in contrast to, say, jobs or the ISM index, where the evidence is less persuasive one way or the other and the impacts harder to disentangle). As the table to the right shows, extreme weather conditions caused by Nor’easters do tend to line up with hiccups in retail sales — and therefore the five days lost to winter storms on the east coast in January 2014 ought to weigh on results. Combined with soft car sales (at -1% m/m, probably a symptom of the same issue), we’re anticipating a decline in retail sales of -0.2% m/m on headline, with a flat reading ex-autos. Deviation of Storm from 3‐ Month Storm T‐1 Storm T+1 Average Rank 1 0.8 ‐0.8 1.6 ‐1.33 2 0.8 ‐0.8 1.6 ‐1.33 3 0.5 ‐1.4 1.8 ‐1.70 4 1.2 ‐0.6 0.9 ‐1.10 5 ‐0.5 0.2 1 ‐0.03 6 0 0.1 2.2 ‐0.67 7 ‐0.6 1.6 1.9 0.63 Retail Sales During Months With Significant Northeast Snowstorms Storm March‐93 January‐96 February‐03 January‐05 February‐07 February‐10 February‐94 U.S. industrial production in January could also be a victim of the recent autos weakness, but in this case, we’re looking at an inventory story more than a weather-related tale in forecasting a soft 0.1% m/m increase. U.S. auto inventories have gotten ahead of sales by a decent margin, and restocking should curtail autos production, which accounts for 5% of industrial production. In terms of the weather impact, winter storms can be a wash when it comes to utilities, with cold weather tending to result in more utilities use in homes but less in industrial applications, with the results sometimes even being dramatically lower utility output (e.g. utilities output fell quite a bit in both January and February 2011 amidst a long and tough streak of storms). A1 22 February 7, 2014 KEY DATA PREVIEW Global Views Daniela Blancas (416) 862-3908 [email protected] Economics Sarah Howcroft (416) 862-3174 [email protected] Tuuli McCully (416) 863-2859 [email protected] … continued from previous page EUROPE Fourth-quarter real GDP data for the euro area will be released on February 14th. On the heels of a subdued 0.1% q/q gain in the third quarter, we anticipate output growth of 0.2% q/q (0.3% y/y) in the October-December period, in line with the European Central Bank’s ongoing assessment of a moderate — albeit fragile and uneven — recovery. Germany will once again lead the way, with an expected 0.3% q/q advance, while France will be softer at around 0.1%. Italy will likely see its first positive GDP print since the second quarter of 2011, with a 0.1% q/q increase. The peripheral economies of Portugal and Greece will also report GDP estimates next week, with conditions there continuing to gradually improve with Portugal having already exited recession and Greece’s pace of decline slowing considerably in recent quarters. All told, although the recovery is underway, the pace of expansion in the euro area remains below the trend in potential growth (around 0.3-0.4% q/q), implying that the region’s large output gap, high unemployment and deflationary risks will persist for the time being. Euro Area Real GDP 0.8 0.6 q/q % change 0.4 0.2 0 -0.2 Euro area -0.4 Germany France -0.6 Italy -0.8 13Q1 13Q2 13Q3 13Q4f Source: Bloomberg, Scotiabank Economics. LATIN AMERICA Next week, December retail sales (February 13th) and the central bank economic activity index (February 14th) will be released in Brazil. The country’s economic performance remains subdued amidst relatively high inflation, disappointing industrial activity and rising social discontent over public-services infrastructure insufficiency. Ahead of the World Cup (June-July) and the presidential elections (October), the government has accelerated its spending in the last few quarters, raising concerns over fiscal sustainability. At the beginning of 2013, the government unveiled an economic plan to boost industrial activity; however, the effect faded once the stimulus ended. As a result, industrial activity expanded by a mild 1.3% y/y in 2013 following the 2.5% plunge registered in 2012. On a positive note, with unemployment remaining at record low levels (4.3% as of December) and inflation relatively high but decelerating, retail sales showed improvement toward the end of the year. We anticipate that economic activity will continue to recover at a very moderate pace, with industrial output lagging the rebound while the retail sector will outperform. ASIA Malaysia will release fourth-quarter real GDP data on February 12th. We estimate that the country’s output increased by 4.6% y/y following a 5.0% gain in the July-September period, taking economic expansion to 4½% for 2013 as a whole. Activity continues to be driven by domestic demand, particularly household spending and investment; private consumption is underpinned by higher incomes, supportive labour market conditions, low interest rates, and government subsidies to several socioeconomic groups. Investment activity is held up by infrastructure projects as well as outlays in consumer-related services sectors, and the oil and gas industry. With China and Japan being among the most important export destinations, their economic performance will be significant for Malaysian exporters; regardless, net exports will likely not be a major growth contributor given the strength of import demand. We expect the Malaysian economy to grow by around 5% annually in 2014-15. A2 23 Malaysian Real GDP Growth 7 y/y % change 6 forecast 5 4 3 2 1 0 Mar-11 Mar-12 Mar-13 Source: Bloomberg, Scotiabank Economics. February 7, 2014 KEY INDICATORS Global Views Economics Key Indicators for the week of February 10 – 14 North America Country Date Time Indicator CA 02/10 08:15 Housing Starts (000s a.r.) Period Jan BNS 185.0 Consensus 184.0 Latest 187.5 Dec Dec Dec ---- 0.2 1.0 0.5 0.1 -1.4 0.5 MX MX US 02/11 09:00 Industrial Production (m/m) 02/11 09:00 Industrial Production (y/y) 02/11 10:00 Wholesale Inventories (m/m) US CA US 02/12 07:00 MBA Mortgage Applications (w/w) 02/12 09:00 Teranet - National Bank HPI (y/y) 02/12 14:00 Treasury Budget (US$ bn) FEB 7 Jan Jan ---- ---28.5 0.4 3.8 53.2 CA US US US US US 02/13 02/13 02/13 02/13 02/13 02/13 08:30 08:30 08:30 08:30 08:30 10:00 New Housing Price Index (m/m) Continuing Claims (000s) Initial Jobless Claims (000s) Retail Sales (m/m) Retail Sales ex. Autos (m/m) Business Inventories (m/m) Dec FEB 1 FEB 8 Jan Jan Dec -3000 335 -0.2 0.0 -- 0.1 2968 330 0.0 0.1 0.4 0.0 2964 331 0.2 0.7 0.4 CA US US US US US 02/14 02/14 02/14 02/14 02/14 02/14 08:30 08:30 08:30 09:15 09:15 09:55 Manufacturing Shipments (m/m) Export Prices (m/m) Import Prices (m/m) Capacity Utilization (%) Industrial Production (m/m) U. of Michigan Consumer Sentiment Dec Jan Jan Jan Jan Feb P 0.1 ---0.1 80.0 0.2 -0.1 -0.1 79.3 0.2 80.5 1.0 0.0 0.0 79.2 0.3 81.2 Period Dec Dec Dec BNS ---- Consensus -0.2 0.3 0.9 Latest 1.3 0.2 1.4 Europe Country Date Time Indicator FR 02/10 02:45 Industrial Production (m/m) FR 02/10 02:45 Manufacturing Production (m/m) IT 02/10 04:00 Industrial Production (y/y) FR EC 02/12 02:45 Current Account (€ bn) 02/12 05:00 Industrial Production (m/m) Dec Dec --- --0.3 -1.9 1.8 GE GE SW 02/13 02:00 CPI (y/y) 02/13 02:00 CPI - EU Harmonized (y/y) 02/13 03:30 Riksbank Interest Rate (%) Jan F Jan F Feb 13 1.3 1.2 0.75 1.3 1.2 0.75 1.3 1.2 0.75 FR GE FR HU SP SP IT PD PO RU EC EC GR 02/14 02/14 02/14 02/14 02/14 02/14 02/14 02/14 02/14 02/14 02/14 02/14 02/14 4Q P 4Q P 4Q P 4Q P Jan F Jan F 4Q P 4Q P 4Q P Feb 14 4Q A Dec 4Q A 0.1 0.3 --0.2 0.3 0.1 --5.50 0.2 --- 0.2 0.3 -0.1 2.5 0.2 0.3 0.1 2.9 0.1 5.50 0.2 14.5 -- -0.1 0.3 -0.1 1.8 0.2 0.3 0.0 1.9 0.2 5.50 0.1 17.1 -3.0 01:30 02:00 02:45 03:00 03:00 03:00 04:00 04:00 04:30 04:30 05:00 05:00 05:00 GDP (q/q) Real GDP (q/q) Non-Farm Payrolls (q/q) GDP (y/y) CPI (y/y) CPI - EU Harmonized (y/y) Real GDP (q/q) GDP (y/y) Real GDP (q/q) One-Week Auction Rate (%) GDP (q/q) Trade Balance (€ bn) Real GDP NSA (y/y) Forecasts at time of publication. Source: Bloomberg, Scotiabank Economics. 1 A3 February 7, 2014 KEY INDICATORS Global Views Economics Key Indicators for the week of February 10 – 14 Asia Pacific Country JN JN JN MA Date 02/09 02/09 02/09 02/09 Time 18:50 18:50 18:50 23:01 Indicator Bank Lending (y/y) Current Account (¥ bn) Trade Balance - BOP Basis (¥ bn) Industrial Production (y/y) Period Jan Dec Dec Dec BNS ----- Consensus --685.4 -1260.0 5.5 Latest 2.3 -592.8 -1254.3 4.4 JN TA TA TA CH CH IN JN JN IN AU AU AU PH 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 00:00 03:00 03:00 03:00 06:59 06:59 06:59 06:59 06:59 07:59 19:30 19:30 19:30 20:00 Consumer Confidence Exports (y/y) Imports (y/y) Trade Balance (US$ bn) Aggregate Financing (CNY bn) New Yuan Loans (bn) Exports (y/y) Eco Watchers Survey (current) Eco Watchers Survey (outlook) Imports (y/y) Home Loans (%) House Price Index (y/y) Investment Lending (% change) Exports (y/y) Jan Jan Jan Jan Jan Jan Jan Jan Jan Jan Dec 4Q Dec Dec --------------- -0.0 -7.1 1.6 1930.0 1100.0 -55.5 --0.7 8.6 -13.8 41.3 1.2 10.1 2.2 1232.2 482.5 3.50 55.7 54.7 -15.25 1.1 7.6 1.5 18.8 SK JN JN JN JN 02/11 02/11 02/11 02/11 02/11 18:00 18:50 18:50 18:50 18:50 Unemployment Rate (%) Machine Orders (m/m) Tertiary Industry Index (m/m) Japan Money Stock M2 (y/y) Japan Money Stock M3 (y/y) Jan Dec Dec Jan Jan 3.0 ----- 3.0 -3.8 -0.3 4.20 3.4 3.0 9.3 0.6 4.20 3.4 JN MA MA MA CH CH CH IN IN NZ AU AU SK TH 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 01:00 05:00 05:00 05:00 06:59 06:59 06:59 07:00 07:00 16:30 19:30 19:30 20:00 22:30 Machine Tool Orders (y/y) Current Account Balance (MYR mns) Annual GDP (y/y) GDP (y/y) Exports (y/y) Imports (y/y) Trade Balance (USD bn) CPI (y/y) Industrial Production (y/y) Business NZ PMI Employment (000s) Unemployment Rate (%) BoK Base Rate (%) Consumer Confidence Economic Jan P 4Q 2013 4Q Jan Jan Jan Jan Dec Jan Jan Jan Feb 13 Jan --4.5 4.6 ---9.5 ---5.9 2.50 -- --4.7 4.7 1.0 4.0 24.1 9.2 -1.0 -15.0 5.9 2.50 -- 28.1 9842.0 5.6 5.0 4.3 8.3 25.6 9.9 -2.1 56.4 -22.6 5.8 2.50 61.4 ID CH CH 02/13 06:59 BI Reference Interest Rate (%) 02/13 20:30 CPI (y/y) 02/13 20:30 PPI (y/y) Feb 13 Jan Jan 7.50 2.5 -1.5 7.50 2.4 -1.6 7.50 2.5 -1.4 SI IN CH ID 02/14 02/14 02/14 02/14 Dec Jan Jan 4Q -6.0 --- -7.0 5.6 2.9 -- -8.7 6.2 3.3 -8449.0 00:00 01:30 06:59 06:59 Retail Sales (y/y) Monthly Wholesale Prices (y/y) Actual FDI (y/y) Current Account Balance (US$ mn) Forecasts at time of publication. Source: Bloomberg, Scotiabank Economics. 2 A4 February 7, 2014 KEY INDICATORS Global Views Economics Key Indicators for the week of February 10 – 14 Latin America Country Date Time Indicator PE 02/10 06:59 Trade Balance (USD mn) Period Dec BNS -- Consensus -- Latest -197.0 BZ BZ PE 02/13 06:00 Retail Sales (m/m) 02/13 06:00 Retail Sales (y/y) 02/13 18:00 Reference Rate (%) Dec Dec Feb --4.00 0.2 5.0 -- 0.7 7.0 4.00 BZ PE PE BZ 02/14 02/14 02/14 02/14 Dec Dec Jan Dec ----- -1.2 --1.9 -0.3 4.8 5.7 1.3 05:30 06:59 06:59 07:59 Economic Activity Index SA (m/m) Economic Activity Index NSA (y/y) Unemployment Rate (%) Economic Activity Index NSA (y/y) Forecasts at time of publication. Source: Bloomberg, Scotiabank Economics. 3 A5 February 7, 2014 AUCTIONS Global Views Economics Global Auctions for the week of February 10 – 14 North America Country US US US US US US US US US US US US Date 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 02/10 Time 11:00 11:30 11:30 11:30 11:30 11:30 11:30 11:30 11:30 11:30 11:30 11:30 Event U.S. Fed to Purchase USD2.25-2.75 Bln Notes 3M High Yield Rate 3M Direct Accepted % 3M Bid/Cover Ratio 3M Indirect Accepted % 6M Direct Accepted % 6M Indirect Accepted % 6M High Yield Rate 6M Bid/Cover Ratio U.S. to Sell 3-Month Bills U.S. to Sell 6-Month Bills U.S. to Sell USD50 Bln Cash Management Bills CA CA CA US US US US US MX MX MX MX MX MX MX MX MX MX MX US US US US US 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 02/11 10:30 10:30 10:30 11:30 11:30 11:30 11:30 11:30 12:30 12:30 12:30 12:30 12:30 12:30 12:30 12:30 12:30 12:30 12:30 13:00 13:00 13:00 13:00 13:00 Canada to Sell CAD4.650 Bln 98-Day Bills Canada to Sell CAD1.800 Bln 182-Day Bills Canada to Sell CAD1.800 Bln 364-Day Bills 4W Direct Accepted % 4W Indirect Accepted % 4W Bid/Cover Ratio 4W High Yield Rate U.S. to Sell 4-Week Bills 1M T-Bill Yield 1M T-Bill Bid/Cover Ratio 1M T-Bill Amount Sold 3M T-Bill Yield 3M T-Bill Bid/Cover Ratio 3M T-Bill Amount Sold 6M T-Bill Yield 6M T-Bill Bid/Cover Ratio 6M T-Bill Amount Sold 3Y I/L Yield 3Y Fixed Yield 3Y Direct Accepted % 3Y Indirect Accepted % 3Y Bid/Cover Ratio 3Y High Yield Rate U.S. to Sell 3-Year Notes US CA CA CA US US US US 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 11:00 12:00 12:00 12:00 13:00 13:00 13:00 13:00 U.S. Fed to Purchase USD1.00-1.25 Bln Notes Canada to Sell 30-Year Bonds 30Y Auction Size 30Y Auction Yield 10Y High Yield Rate 10Y Bid/Cover Ratio 10Y Indirect Accepted % U.S. to Sell 10-Year Notes US US US US US 02/13 02/13 02/13 02/13 02/13 13:00 13:00 13:00 13:00 13:00 30Y High Yield Rate 30Y Direct Accepted % 30Y Bid/Cover Ratio 30Y Indirect Accepted % U.S. to Sell 30-Year Bonds US 02/14 11:00 U.S. Fed to Purchase USD1.00-1.25 Bln Notes Source: Bloomberg, Scotiabank Economics. 4 A6 February 7, 2014 AUCTIONS Global Views Economics Global Auctions for the week of February 10 – 14 Europe Country Date Time Event GE 02/10 05:30 Germany to Sell EUR2 Bln 182-Day Bills FR 02/10 08:50 France to Sell Bills NE GR UK NO 02/11 02/11 02/11 02/11 04:30 05:00 05:30 06:00 Netherlands to Sell 2019 Bonds Greece to Sell 13-Week Bills (To be confirmed) U.K. to Sell GBP1.3 Bln 0.125% I/L 2024 Bonds Norway to Sell Bonds IT SW SZ GE 02/12 02/12 02/12 02/12 05:00 05:03 05:30 05:30 Italy to Sell 12-Month Bills Sweden to Sell 5-Year Bonds Switzerland to Sell Bonds Germany to Sell EUR5 Bln 2016 Bonds IT UK UK 02/13 05:00 Italy to Sell 3-Year Bonds 02/13 05:30 U.K. to Sell Bonds 02/13 05:30 U.K. to Sell GBP1.75 Bln 3.75% 2052 Bonds Asia Pacific Country Date Time Event AU 02/10 19:00 Australia Plans to Sell Index Linked Bonds CH 02/11 22:00 China to Sell 5-Year Bonds JN NZ JN 02/12 03:00 Japan Auction for Enhanced-Liquidity 02/12 20:05 New Zealand Plans to Sell NZD200 Mln Inflation-Indexed Bond 02/12 22:35 Japan to Sell 3-Month Bill JN 02/13 22:45 Japan to Sell 5-Year Bonds Latin America Country BZ BZ BZ BZ BZ Date 02/11 02/11 02/11 02/11 02/11 Time 11:00 11:00 11:00 11:00 11:00 Event Brazil to Sell I/L Bonds due 5/15/2019 - NTN-B Brazil to Sell I/L Bonds due 5/15/2023 - NTN-B Brazil to Sell I/L Bonds due 8/15/2030 - NTN-B Brazil to Sell I/L Bonds due 8/15/2040 - NTN-B Brazil to Sell I/L Bonds due 8/15/2050 - NTN-B CO CO CO CO CO CO CO CO CO CO CO CO 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 02/12 10:30 10:30 10:30 10:30 10:30 10:30 10:30 10:30 10:30 10:30 10:30 10:30 5Y Fixed Yield 5Y Fixed Total Bids 5Y Fixed Amount Sold 5Y Fixed Bid/Cover Ratio 10Y Fixed Yield 10Y Fixed Total Bids 10Y Fixed Amount Sold 10Y Fixed Bid/Cover Ratio 15Y Fixed Yield 15Y Fixed Total Bids 15Y Fixed Amount Sold 15Y Fixed Bid/Cover Ratio BZ BZ BZ BZ 02/13 02/13 02/13 02/13 11:00 11:00 11:00 11:00 Brazil to Sell Bills due 4/1/2015 - LTN Brazil to Sell Bills due 4/1/2016 - LTN Brazil to Sell Bills due 1/1/2018 - LTN Brazil to Sell Floating-rate Notes due 3/1/2020 - LFT Source: Bloomberg, Scotiabank Economics. 5 A7 February 7, 2014 EVENTS Global Views Economics Events for the week of February 10 – 14 North America Country Date Time Event CA 02/10 12:50 Bank of Canada Deputy Governor Murray Speaks in Sudbury CA 02/10 19:00 Former BoE Governor Dodge Speaks at TFSA CA US US CA US 02/11 02/11 02/11 02/11 02/11 08:50 09:00 10:00 12:00 20:00 Bank of Canada Deputy Governor Lane Speaks in Toronto Fed's Plosser Speaks on Economic Outlook in Newark, Delaware Fed's Yellen Delivers Monetary Policy Report to House Canada Releases Labour Force Survey Fed's Lacker Speaks on Financial Stability at Stanford US US 02/12 08:45 Fed's Bullard Speaks on Monetary Policy in New York 02/12 MSCI Quarterly Index Review US 02/13 10:30 Fed's Yellen Testifies Before Senate Banking Committee Europe Country Date Time Event GE 02/08 06:00 Merkel, McAllister Hold News Conference After CDU Party Talks PO SP EC EC 02/10 03:00 Portugal's Portas Speaks at Breakfast Conference in Madrid 02/10 05:30 Spain PM, Budget Minister Speak in Madrid 02/10 06:00 EU Foreign Ministers Hold Meeting in Brussels 02/10 13:00 Trichet Speaks in Athens SP EC EC EC PO NO 02/11 02/11 02/11 02/11 02/11 02/11 03:00 03:00 04:00 06:30 Economy Minister Luis de Guindos Speaks in Madrid EU's Almunia Speaks at Competition Conference in Brussels EU General Affairs Ministers Hold Meeting in Brussels EU's Thomas Wieser Speaks in Frankfurt Bank of Portugal Releases Data on Banks Oslo Energy Forum Holds 2014 Conference SP GE PO SP EC 02/12 02/12 02/12 02/12 02/12 04:00 05:00 05:00 06:15 10:30 IMF to Release Report For Spain 5th Review of Banks German Economy Ministry Presents Half-Year Economic Forecasts Portugal's Silva, Italy's Napolitano to Speak at Conference ECB's Praet Speaks at Event in Madrid ECB President Draghi Speaks in Brussels SW SP NO EC UK UK EC 02/13 03:30 Riksbank Interest Rate 02/13 09:40 BOS' Duran Speaks in Madrid 02/13 12:00 Norges Bank Gov. Olsen Makes Annual Speech 02/13 18:00 EU's Barnier in Washington Feb. 14-15 02/13 Last Day of Commons Session Before February Recess 02/13 Commons By-Election in Wythenshawe & Sale East 02/13 EU Leaders Hold Summit in Brussels RU EC IT 02/14 04:30 One-Week Auction Rate 02/14 06:00 ECB Announces 3-Year LTRO Repayment 02/14 Italy Sovereign Debt Rating May Be Published by Moody's Source: Bloomberg, Scotiabank Economics. 6 A8 February 7, 2014 EVENTS Global Views Economics Events for the week of February 10 – 14 Asia Pacific Country Date Time Event CH 02/10 China Minister Zhijun to Meet With Taiwan's Minister Yu-chi SK AU ID 02/12 20:00 BoK 7-Day Repo Rate 02/12 20:25 RBA Assistant Governor Debelle Speaks at Forum in Sydney 02/12 Bank Indonesia Reference Rate AU 02/13 17:05 RBA Assistant Governor Kent Gives Speech in Sydney Latin America Country Date Time Event PE 02/13 18:00 Reference Rate (%) Source: Bloomberg, Scotiabank Economics. 7 A9 February 7, 2014 CENTRAL BANKS Global Views Economics Global Central Bank Watch NORTH AMERICA North America Rate Bank of Canada – Overnight Target Rate Current Rate 1.00 Next Meeting March 5, 2014 Scotia's Forecasts 1.00 Consensus Forecasts -- Federal Reserve – Federal Funds Target Rate 0.25 March 19, 2014 0.25 -- Banco de México – Overnight Rate 3.50 March 21, 2014 3.50 -- Fed: Slow job growth in December and January ought to have the FOMC at least thinking twice about continuing down the tapering path without pausing for a breather, although it will get a chance to look at February jobs figures as well before it meets on March 19th for Janet Yellen’s first meeting at the helm. BoC: An uptick in jobs in January (and a surge in manufacturing in Q4 2013) should have the BoC content to continue down its current monetary policy guidance path – and to wait and see what the pass-through from the weaker CAD into CPI will be. EUROPE Europe Rate European Central Bank – Refinancing Rate Current Rate 0.25 Next Meeting March 6, 2014 Scotia's Forecasts 0.00 Consensus Forecasts -0.50 Bank of England – Bank Rate 0.50 March 6, 2014 0.50 Swiss National Bank – Libor Target Rate 0.00 March 20, 2014 0.00 -- Central Bank of Russia – One-Week Auction Rate 5.50 February 14, 2014 5.50 5.50 Hungarian National Bank – Base Rate 2.85 February 18, 2014 2.75 2.75 Central Bank of the Republic of Turkey – 1 Wk Repo Rate Sweden Riksbank – Repo Rate 10.00 0.75 February 18, 2014 February 13, 2014 10.00 0.75 -0.75 Norges Bank – Deposit Rate 1.50 March 27, 2014 1.50 -- We do not anticipate any further monetary easing after the quarter-point rate cut executed by Sweden’s Riksbank at its last policy-setting meeting in December. The headline inflation rate was unchanged at 0.1% y/y in December, though the policy-relevant core measure picked up from 0.7% to 0.8%. The minutes from the last meeting indicated a small probability of another rate cut this month; however, with economic data on balance portraying an improving growth outlook, we expect the repo rate to be left at 0.75% until early next year. The Russian central bank will likely leave the benchmark oneweek auction rate unchanged at 5.50% next week. After dropping 7% versus the US dollar in the opening weeks of 2014, the ruble has seen a small correction over the last week on the back of easing risk aversion, in line with some other emerging-market currencies. Meanwhile, January inflation data showed the headline rate dipping to 6.1% y/y from 6.5% in December. These developments have eased some of the earlier pressure on the bank to tighten policy in response to increased emerging-market sell-off pressure. Asia Pacific ASIA PACIFIC Rate Reserve Bank of Australia – Cash Target Rate Current Rate 2.50 Next Meeting March 3, 2014 Scotia's Forecasts 2.50 Consensus Forecasts -- Reserve Bank of New Zealand – Cash Rate 2.50 March 12, 2014 2.75 2.75 People's Bank of China – Lending Rate 6.00 TBA -- -- Reserve Bank of India – Repo Rate 8.00 April 1, 2014 8.00 -- Bank of Korea – Bank Rate 2.50 February 12, 2014 2.50 2.50 Bank of Thailand – Repo Rate 2.25 March 12, 2014 2.00 -- Bank Indonesia – Reference Interest Rate 7.50 February 13, 2014 7.50 7.50 Inflationary pressures in South Korea remain low with consumer price inflation at 1.1% y/y in December. Accordingly, the Bank of Korea’s monetary policy stance will likely remain accommodative in the coming quarters, with the benchmark rate set at 2.50%. In Indonesia, a monetary tightening bias will remain in place; nevertheless, we do not anticipate a rate hike to take place next week. The reference rate was raised by 175 bps between June and November to the current level of 7.50%, and another small increase may take place in the coming months. Tighter monetary conditions will help limit inflationary pressures and stabilize the Indonesian rupiah, which has faced a persistent weakening bias in recent months. Nevertheless, annual inflation will likely continue to exceed the central bank’s target corridors, which are set at 3½-5½% for 2014 and 3-5% for 2015. Consumer price inflation closed 2013 at 8.4% y/y. LATIN AMERICA Latin America Rate Banco Central do Brasil – Selic Rate Current Rate 10.50 Next Meeting February 26, 2014 Scotia's Forecasts 10.75 Consensus Forecasts -- Banco Central de Chile – Overnight Rate 4.50 February 18, 2014 4.50 4.25 Banco de la República de Colombia – Lending Rate 3.25 February 28, 2014 3.25 3.25 Banco Central de Reserva del Perú – Reference Rate 4.00 February 13, 2014 4.00 -- We maintain our view that the central bank of Peru will keep the reference rate unchanged at 4.0% at the next meeting on February 13th. Headline inflation has decelerated in the last three months; however, it remains close to the upper limit of the central bank’s tolerance range. Although economic activity softened somewhat last year, output growth remains solid and we expect continued advances above the 5% y/y mark in the 2014-15 period. Africa AFRICA Rate South African Reserve Bank – Repo Rate Current Rate 5.50 Next Meeting March 27, 2014 Scotia's Forecasts 5.00 Consensus Forecasts -- Forecasts at time of publication. Source: Bloomberg, Scotiabank Economics. 8 A10 February 7, 2014 FORECASTS Global Views Forecasts as at January 30, 2014* Economics 2000-12 Output and Inflation (annual % change) 2013e 2014f 2015f 2000-12 2013e 2014f 2015f 2 Real GDP Consumer Prices World1 3.7 2.9 3.5 3.6 Canada Canada UnitedUnited StatesStates MexicoMexico 2.2 1.9 2.4 1.8 1.9 1.3 2.4 3.0 3.3 2.5 3.0 3.7 2.1 2.5 4.7 0.9 1.5 3.9 1.1 1.5 4.3 1.9 1.9 4.0 Kingdom UnitedUnited Kingdom Euro Zone Euro zone 1.7 1.3 1.9 -0.5 2.5 0.9 1.8 1.3 2.3 2.1 2.0 0.8 2.2 1.2 2.4 1.4 Japan Japan Australia Australia China China India India Korea South Korea Thailand Thailand 0.9 3.1 9.3 7.2 4.3 4.2 1.8 2.4 7.7 4.5 2.8 3.2 1.8 2.7 7.3 5.2 3.4 3.5 1.2 2.9 7.0 5.7 3.5 4.5 -0.3 3.0 2.4 6.7 3.1 2.7 1.4 2.7 2.5 6.2 1.1 1.7 1.5 3.0 2.8 6.6 2.2 2.5 2.1 2.9 3.5 6.3 2.5 2.8 3.4 4.5 5.7 2.3 4.4 5.1 2.3 4.4 5.4 2.5 4.7 5.6 6.5 3.2 2.6 6.0 2.5 2.9 6.0 3.0 3.0 5.5 3.0 2.5 13Q4 14Q1f 14Q2f 14Q3f 14Q4f 15Q1f 15Q2f 15Q3f 1.00 0.25 0.25 0.50 0.00 2.50 1.00 0.25 0.00 0.50 0.00 2.50 1.00 0.25 0.00 0.50 0.00 2.50 1.00 0.25 0.00 0.50 0.00 2.50 1.00 0.25 0.00 0.50 0.00 2.75 1.00 0.25 0.00 0.75 0.00 3.00 1.00 0.25 0.00 1.00 0.00 3.25 1.00 0.25 0.00 1.25 0.00 3.50 1.06 0.94 1.37 1.66 105 0.89 6.1 13.0 2.36 1.13 0.88 1.33 1.65 102 0.87 6.1 13.5 2.55 1.15 0.87 1.30 1.66 104 0.86 6.0 13.1 2.40 1.12 0.89 1.27 1.65 107 0.88 6.0 13.2 2.45 1.11 0.90 1.25 1.64 109 0.88 6.0 13.4 2.50 1.10 0.91 1.25 1.64 110 0.89 5.9 13.4 2.52 1.10 0.91 1.24 1.63 111 0.89 5.9 13.4 2.55 1.10 0.91 1.24 1.61 112 0.89 5.9 13.5 2.55 Commodities (annual average) 2000-12 2013 2014f 2015f WTI Oil (US$/bbl) Brent Oil (US$/bbl) Nymex Natural Gas (US$/mmbtu) 60 62 5.45 98 109 3.73 92 108 4.20 90 108 4.25 Copper (US$/lb) Zinc (US$/lb) Nickel (US$/lb) Gold, London PM Fix (US$/oz) 2.22 0.78 7.64 745 3.32 0.87 6.80 1,410 3.15 0.98 7.25 1,270 3.05 1.40 7.60 1,375 Pulp (US$/tonne) Newsprint (US$/tonne) Lumber (US$/mfbm) 730 585 274 941 608 356 970 612 390 970 645 400 Brazil Brazil Chile Chile Peru Peru Central Bank Rates (%, end of period) Bank of Canada Federal Reserve European Central Bank Bank of England Swiss National Bank Reserve Bank of Australia Exchange Rates (end of period) Canadian Dollar (USDCAD) Canadian Dollar (CADUSD) Euro (EURUSD) Sterling (GBPUSD) Yen (USDJPY) Australian Dollar (AUDUSD) Chinese Yuan (USDCNY) Mexican Peso (USDMXN) Brazilian Real (USDBRL) 1 World GDP for 2003-12 are IMF PPP estimates; 2013-15f are Scotiabank Economics' estimates based on a 2012 PPP-weighted sample of 38 countries. 2 CPI for Canada and the United States are annual averages. For other countries, CPI are year-end rates. * See Scotiabank Economics 'Global Forecast Update' (http://www.gbm.scotiabank.com/English/bns_econ/forecast.pdf) for additional forecasts & commentary. 9 A11 February 7, 2014 ECONOMIC STATISTICS Global Views Economics North America Canada Real GDP (annual rates) Current Acc. Bal. (C$B, ar) Merch. Trade Bal. (C$B, ar) Industrial Production Housing Starts (000s) Employment Unemployment Rate (%) Retail Sales Auto Sales (000s) CPI IPPI Pre-tax Corp. Profits 2012 13Q2 13Q3 Latest 1.7 1.6 2.7 -62.2 -63.7 -61.9 -12.0 -7.3 -7.4 -19.9 (Dec) 1.1 -0.1 0.9 1.4 (Dec) 215 190 195 188 (Dec) 1.2 1.2 1.3 0.6 (Dec) 7.3 7.1 7.1 7.2 (Dec) 2.5 2.7 3.2 3.1 (Nov) 1673 1744 1777 1708 (Nov) 1.5 0.8 1.1 1.2 (Dec) 1.1 -0.1 0.9 -1.4 (Dec) -4.9 -8.2 -1.1 Mexico Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI 3.9 1.6 1.3 -14.6 -19.9 -21.8 0.0 -3.4 -4.1 2.6 -0.3 -0.5 4.1 4.5 3.4 United States Real GDP (annual rates) Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production Housing Starts (millions) Employment Unemployment Rate (%) Retail Sales Auto Sales (millions) CPI PPI Pre-tax Corp. Profits 2012 13Q2 13Q3 Latest 2.8 2.5 4.1 -440 -386 -379 -741 -700 -711 -706 (Dec) 3.6 2.1 2.4 3.7 (Dec) 0.78 0.87 0.88 1.00 (Dec) 1.7 1.6 1.8 1.7 (Dec) 8.1 7.5 7.2 6.7 (Dec) 5.1 4.7 4.7 4.0 (Dec) 14.4 15.5 15.7 15.3 (Dec) 2.1 1.4 1.6 1.5 (Dec) 1.9 1.5 1.2 1.2 (Dec) 18.5 3.7 3.5 19.9 (Dec) -1.4 (Nov) 4.0 (Dec) Europe Euro Zone Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production Unemployment Rate (%) CPI 2012 13Q2 13Q3 Latest -0.6 -0.6 -0.3 162 293 259 443 (Nov) 122.0 267.9 209.1 304.2 (Nov) -2.5 -0.9 -1.1 -0.5 (Nov) 11.3 12.0 12.1 11.9 (Dec) 2.5 1.4 1.3 0.9 (Dec) Germany Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production Unemployment Rate (%) CPI 2012 13Q2 13Q3 Latest 0.9 0.5 0.6 240.8 240.3 235.2 386.5 (Dec) 245.2 251.7 261.3 304.7 (Dec) -0.5 -0.5 -0.1 2.9 (Dec) 6.8 6.9 6.8 6.8 (Dec) 2.0 1.5 1.6 1.4 (Dec) France Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production Unemployment Rate (%) CPI 0.0 0.5 0.2 -57.3 -19.9 -49.7 -61.3 (Nov) -52.1 -44.1 -47.7 -45.6 (Dec) -2.5 0.6 -1.5 -1.4 (Nov) 10.2 10.8 10.9 10.8 (Dec) 2.0 0.8 0.9 0.7 (Dec) United Kingdom Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production Unemployment Rate (%) CPI 0.3 2.0 1.9 -92.7 -35.3 -167.6 -172.4 -156.4 -183.8 -151.6 (Dec) -2.5 -0.7 -0.3 1.8 (Dec) 8.0 7.8 7.6 7.1 (Oct) 2.8 2.7 2.7 2.0 (Dec) Italy Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI -2.6 -2.2 -1.8 -8.1 20.2 28.5 12.4 49.4 41.4 -6.4 -3.5 -3.8 3.1 1.2 1.0 Russia Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI 45.8 50.0 -7.0 0.6 (Nov) (Nov) (Nov) (Dec) 3.4 74.8 16.0 -5.3 5.1 1.2 3.4 14.2 0.3 7.2 1.2 0.6 14.4 -0.1 6.4 16.6 (Nov) 0.8 (Dec) 6.5 (Dec) All data expressed as year-over-year % change unless otherwise noted. Source: Bloomberg, Global Insight, Scotiabank Economics. 10 A12 February 7, 2014 ECONOMIC STATISTICS Global Views Economics Asia Pacific Australia Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production Unemployment Rate (%) CPI 2012 13Q2 13Q3 Latest 3.6 2.4 2.3 -64.1 -31.9 -52.8 5.9 32.4 12.6 57.2 (Dec) 4.8 5.0 2.7 5.2 5.6 5.7 5.8 (Dec) 1.8 2.4 2.2 Japan Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production Unemployment Rate (%) CPI 2012 13Q2 13Q3 Latest 1.4 1.3 2.4 60.4 70.0 54.5 -71.1 (Nov) -85.8 -89.9 -117.5 -133.2 (Dec) 0.2 -3.1 1.9 5.9 (Dec) 4.4 4.0 4.0 3.7 (Dec) 0.0 -0.3 0.9 1.6 (Dec) South Korea Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI 2.0 2.3 3.3 48.1 79.2 75.9 28.5 57.6 43.1 1.2 -1.7 1.0 2.2 1.2 1.4 (Dec) (Dec) (Dec) (Dec) China Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI 10.4 7.5 7.8 193.1 230.7 264.5 244.4 307.7 (Dec) 10.3 8.9 10.2 9.7 (Dec) 2.5 2.7 3.1 2.5 (Dec) Thailand Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI 6.5 -1.5 0.5 2.1 3.0 India Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production WPI 5.1 4.4 -91.5 -21.8 -16.0 -16.7 0.7 -1.0 7.5 4.8 Chile Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI 2012 13Q2 13Q3 Latest 5.6 4.0 4.7 0.0 -6.8 -13.8 12.4 5.4 -1.8 1.8 (Dec) 3.4 1.4 4.9 2.3 (Dec) 3.0 1.7 2.2 2.8 (Dec) Colombia Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI 4.2 -12.1 0.4 -0.3 3.2 Indonesia Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI 77.1 43.8 1.2 1.1 2.9 -7.2 -0.3 -5.1 2.3 2.7 -0.9 1.7 -3.9 1.7 2.0 (Dec) -6.7 (Dec) 1.7 (Dec) 6.2 5.8 -24.4 -10.0 -0.1 -1.0 4.1 6.8 4.3 5.6 5.6 -8.4 -1.0 7.1 8.6 1.5 (Dec) -1.9 (Nov) 8.4 (Dec) 4.8 -5.2 -9.9 1.7 6.6 -10.1 (Dec) -2.1 (Nov) 6.2 (Dec) Latin America Brazil Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Industrial Production CPI Peru Real GDP Current Acc. Bal. (US$B, ar) Merch. Trade Bal. (US$B, ar) Unemployment Rate (%) CPI 2012 13Q2 13Q3 Latest 0.9 3.1 1.9 -54.2 -74.2 -68.5 19.4 8.3 5.9 31.8 (Dec) -2.6 3.1 0.3 -3.0 (Dec) 5.4 6.6 6.1 5.9 (Dec) 9.2 -7.1 0.5 7.0 3.7 5.6 -3.1 -0.1 5.7 2.5 4.4 0.1 5.8 3.1 -0.2 (Nov) 5.7 (Dec) 2.9 (Dec) 3.9 -2.5 0.4 0.0 2.1 5.1 -3.6 0.0 -1.6 2.3 0.1 (Nov) -0.6 (Nov) 1.9 (Dec) All data expressed as year-over-year % change unless otherwise noted. Source: Bloomberg, Global Insight, Scotiabank Economics. 11 A13 February 7, 2014 FINANCIAL STATISTICS Global Views Economics Interest Rates (%, end of period) Canada BoC Overnight Rate 3-mo. T-bill 10-yr Gov’t Bond 30-yr Gov’t Bond Prime FX Reserves (US$B) 13Q3 1.00 0.97 2.54 3.07 3.00 71.3 13Q4 1.00 0.92 2.76 3.23 3.00 71.8 Jan/31 1.00 0.89 2.34 2.93 3.00 71.8 Feb/07* 1.00 0.88 2.40 3.00 3.00 (Dec) Germany 3-mo. Interbank 10-yr Gov’t Bond FX Reserves (US$B) 0.15 1.78 65.7 0.24 1.93 67.4 0.25 1.66 67.4 0.24 1.66 (Dec) Euro Zone Refinancing Rate Overnight Rate FX Reserves (US$B) 0.50 0.18 332.5 0.25 0.45 331.2 0.25 0.23 331.2 0.25 0.13 (Dec) Japan Discount Rate 3-mo. Libor 10-yr Gov’t Bond FX Reserves (US$B) 0.30 0.09 0.69 1240.8 0.30 0.09 0.74 1237.2 0.30 0.08 0.62 1237.2 0.30 0.08 0.62 (Dec) 1.03 0.97 1.619 1.353 0.75 0.90 1.06 0.94 1.656 1.374 0.69 0.89 1.11 0.90 1.644 1.349 0.73 0.91 1.10 0.91 1.640 1.361 0.72 0.90 15130 1682 12787 40185 52338 950 16577 1848 13622 42727 51507 1041 15699 1783 13695 40880 47639 1056 945 605 359 102.33 3.56 990 605 372 98.42 4.23 990 605 370 97.49 4.94 United States Fed Funds Target Rate 3-mo. T-bill 10-yr Gov’t Bond 30-yr Gov’t Bond Prime FX Reserves (US$B) 13Q3 0.25 0.01 2.61 3.68 3.25 136.7 13Q4 0.25 0.07 3.03 3.97 3.25 133.5 Jan/31 0.25 0.02 2.64 3.60 3.25 133.5 Feb/07* 0.25 0.08 2.67 3.65 3.25 (Dec) France 3-mo. T-bill 10-yr Gov’t Bond FX Reserves (US$B) 0.06 2.32 54.6 0.15 2.56 50.8 0.10 2.23 50.8 0.15 2.24 (Dec) United Kingdom Repo Rate 3-mo. T-bill 10-yr Gov’t Bond FX Reserves (US$B) 0.50 0.40 2.72 93.3 0.50 0.40 3.02 91.2 0.50 0.40 2.71 91.2 0.50 0.40 2.71 (Dec) Australia Cash Rate 10-yr Gov’t Bond FX Reserves (US$B) 2.50 3.81 45.9 2.50 4.24 49.7 2.50 4.00 49.7 2.50 4.15 (Dec) ¥/US$ US¢/Australian$ Chinese Yuan/US$ South Korean Won/US$ Mexican Peso/US$ Brazilian Real/US$ 98.27 0.93 6.12 1075 13.091 2.217 105.31 0.89 6.05 1050 13.037 2.362 102.04 0.88 6.06 1081 13.357 2.413 102.23 0.90 6.06 1074 13.352 2.385 15695 1783 13713 40184 47700 1060 U.K. (FT100) Germany (Dax) France (CAC40) Japan (Nikkei) Hong Kong (Hang Seng) South Korea (Composite) 6462 8594 4143 14456 22860 1997 6749 9552 4296 16291 23306 2011 6510 9306 4166 14915 22035 1941 6572 9294 4226 14462 21637 1923 990 605 366 98.31 4.95 Copper (US$/lb) Zinc (US$/lb) Gold (US$/oz) Silver (US$/oz) CRB (index) 3.31 3.35 0.85 0.95 1326.50 1204.50 21.68 19.50 285.54 280.17 3.22 0.89 1251.00 19.31 283.31 3.27 0.92 1259.25 19.87 289.15 Exchange Rates (end of period) USDCAD CADUSD GBPUSD EURUSD JPYEUR USDCHF Equity Markets (index, end of period) United States (DJIA) United States (S&P500) Canada (S&P/TSX) Mexico (IPC) Brazil (Bovespa) Italy (BCI) Commodity Prices (end of period) Pulp (US$/tonne) Newsprint (US$/tonne) Lumber (US$/mfbm) WTI Oil (US$/bbl) Natural Gas (US$/mmbtu) * Latest observation taken at time of writing. Source: Bloomberg, Scotiabank Economics. 12 A14 February 7, 2014 Global Views DISCLAIMER Emerging Markets Strategy www.gbm.scotiabank.com TM Trademark of The Bank of Nova Scotia. Used under license, where applicable. Scotiabank, together with “Global Banking and Markets”, is a marketing name for the global corporate and investment banking and capital markets businesses of The Bank of Nova Scotia and certain of its affiliates in the countries where they operate, including Scotia Capital (USA) Inc. The fixed income strategy reports contained herein have been prepared for Institutional Investors by Fixed Income Strategists of Scotia Capital (USA) Inc. (“SCUSA”) and may include contributions by strategists who are employees of affiliates of SCUSA. 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