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25-May-09 DEAD ZONE

Very slow day today with both the US and the UK market closed for Memorial day and Bank holidays.
The market has been focusing on the possibility for the US and the UK to lose their AAA after Thursday’s announcement that S&P had
placed its AAA rating on the UK on watch for possible downgrade. Yes, t he chances that a country like the UK or even the US might
lose its AAA rating in the coming years are rather greater than generally assumed. However, the consequences for the financial markets
may not be quite as bad as feared. The rating agency said that it would delay any decision until after the next general election (still likely
to be a year away) in order to assess the fiscal plans of any new government. The other leading agencies – Moody’s and Fitch –
reiterated their stable outlook. Th e concerns that S&P has raised about the UK public finances were absolutely nothing new . These
concerns had already been reflected in a sharp increase in the costs of insuring against default on UK government debt last autumn
(which have since fallen back as sentiment has improved).
Nonetheless, the prospect of a downgrade is real. After all, Ireland and Spain have already lost their AAA rating with S&P this year
(downgraded one notch to AA+). The UK is facing similar budget deficits and levels of government debt as a share of GDP. The gap
between the criteria for a AAA and AA+ rating is also pretty small. Taking S&P’s definitions as an example, a triple-A rating means that
the country’s capacity to meet its financial commitments is considered to be “extremely strong”. A double-A rating still implies a “very
strong capacity ... (which) differs from the highest rated debt only in very small degree”. Looking at these criteria, a one notch
downgrade for the UK would not sound unreasonable, or so dramatic. Indeed, it is not inconceivable that the US might be downgraded
too , or at least put on negative watch.
There are three reasons why the impact on long-term interest rates of a lower credit rating may not be as serious as widely
imagined. For a start, the links between credit ratings and the cost of borrowing are not as mechanical as many assume. Investors may
actually prefer to hold an asset considered to be secure at a lower rating rather than one which is vulnerable to downgrade at the one
above. AAA ratings may soon be increasingly scarce in any event, so the impact on any one country from losing that rating will be much
reduced. Second, ratings changes rarely come out of the blue: the reasons for a downgrade have usually been clear for some time and
already reflected in the cost of credit . (The recent downgrades of Ireland and Spain had no lasting impact on government bond yields or
credit spreads.) Third, the downward pressure on borrowing costs from the economic and financial environment in which a downgrade
is likely to take place will typically be more than enough to offset any upward pressure from a rating change. The prime example of this
is Japan, which lost its triple-A rating with S&P in 2001 and is now rated AA (two notches lower than the UK or the US). Despite this,
Japanese 10-year government bond yields are still only 1.4%, compared to 3.3% in the US and 3.7% in the UK.
Indeed, a credit downgrade might simply underline the case for a painful period of fiscal consolidation. A lower credit rating
might therefore deter some foreign buyers, but this could be offset by increased domestic demand as investors switch out of equities
and other riskier assets back into bonds. Admittedly, the impact of losing a triple-A credit rating would be more damaging for the UK
than either the US or Japan. Foreign investors own a relatively low proportion of Japanese government debt, but the sheer size of the
market means it is impossible to ignore. A smaller and more international market like the UK would be more vulnerable to capital flight.
What’s more, if conditions deteriorated to the extent that the US were downgraded, many other countries would presumably
be in just as big a mess and any hit on the dollar might be at least partially offset by safe haven buying. Sterling could not rely on the
same support. But overall, we suspect that the blow to national pride from a rating downgrade would be much greater than the
additional harm caused to the financial markets over and above the problems that caused the downgrade in the first place.
This week’s releases are likely to provide further evidence that housing market activity has found a floor. The surge in
affordability and signs that the market is stabilizing will mean that both the number of existing and new home sales increased in April,
reversing the small falls in March (data due Wednesday and Thursday respectively). Elsewhere, the Conference Board’s measure of
consumer confidence (Tomorrow) for May is likely to follow the path of the University of Michigan’s measure by recording its third
increase in as many months. The rebound in equity prices will be the main factor behind an increase from 39.2 in April to around 43.0.
The Eurostoxx managed to close its gap on the downside, and to do new high just ahead of the long weekend. Positive
elements such as a no bankrupcty from GM to be revealed this week (or not), the repaying from Goldman, JP, Amex and Bank of
America to the US governement anytime, or any coming week, nicer housing data and the flooding amount of cash sleeping in
monetary find will be some reasons to resume the upside trend and reach new high levels.

WTI €/$ $/¥ 10 yr US 10 yr Euro Basic Energy Financ Health Tech Tel Indus Utilities SOX S&P NAS DOW Close

Last 61,3 1,4016 95,12 3,45 3,55 0,78 0,22 -1,20 -0,11 -0,41 -0,50 -0,19 0,55 0,02 -0,15 -0,19 -0,18 US
Perf 1d % -0,59 0,13 -0,36 0,01 bp 17,7 bp 1,66 1,35 -0,25 0,53 0,37 -0,06 0,69 1,42 0,87 0,59 0,58 0,69 Europe
ECONOMIC DATA with impact
IFO (9h UK time) should register a more convincing improvement than in April. May’s sharp increase in the German composite PMI index
certainly points to a further increase in the Ifo, and given tentative signs of recovery in global demand, the expectations index should be
rising for the fifth month running. Even the composite business climate index is seen at a seven-month high of around 86.0.

POSITIVE IMPACTS
AREVA may announce the sale of its transportation & distribution unit in June to fund investment (FT citing unidentified govt officials)
ALSTOM plans to sell equipment to generate electricity from tidal currents within 3 Y, helped by a partnership with a Canadian Co
SCHNEIDER is to unveil new and innovative pipeline management solutions at Gastech 2009 May25 –28) in Abu Dhabi.
PEUGEOT is hiring again because of demand for its 308 compact model (Le Parisien)
RENAULT has better visibility for coming months as car sales pick up again (Le Journal des Finances)
BMW plans to build electric motors for its vehicles by itself ( Handelsblatt citing head of a BMW development team)
VOLKSWAGEN : Audi is holding on to its sales tgt despite a slump in the mkt for premium cars because the situation will significantly
improve in 2010 and 2011 (CEO)
PORSCHE : received a €700M bridge loan from Volkswagen
HEIDELBERGCEMENT is putting its Hanson U.K. unit up for sale for £1bn (the Mail on Sunday)
SAINT GOBAIN is in the market with a €2bn, 3 year refinancing loan (2 bankers )
ENEL : dividend will remain “extremely attractive” after a capital increase of €8bn (Finance Director) /Separatly Co expects rating
agencies to remove it from credit watch negative after it completes its rights issue,
ENI : Libya is buying shares of Eni & other Italian Cos & may seek to raise its stake in the oil company to 10% (Libyan energy Minister)
SNAM RETE GAS can raise profit to more than €2 bn after buying storage Cos Stogit & distribution company Italgas (CEO)
PHILIPS offered €200M for 100% of Saeco, the Italian coffee-machine company (Il Sole 24 Ore)
BULGARI : The family controlling the Co has "absolutely" no intention to sell (CEO)
SANOFI has received the 1st of what is expected to be a series of orders from the U.S for type A Flu Vaccine ($190M)
 WWW.GLOBAL-EQUITIES.COM / DEL SARTE / + 33 (0) 1 44 43 33 24

25-May-09 DEAD ZONE

CREDIT SUISSE hopes to participate in Agricultural Bank of China's preparations for a dual listing on the Hong Kong and Shanghai
bourses (China Daily)
HSBC said it completed the 88.89% acquisition of PT Bank Ekonomi Raharja for $607.5m through unit HSBC Asia Pacific Holdings. Co
will offer 2,652 rupiah apiece to buy shares it doesn’t own
STANDARD CHARTERED : Temasek Holding increased its stake to 19.11% from 18.81% after receiving a stock dividend
AVIVA : The auction of Aviva's Australian assets has narrowed down to a handful of bidders, including some of Australia's biggest banks

NEGATIVE IMPACTS
SANTANDER : Venezuela’s govt will pay $1.05 bn for the Spanish lender’s local unit as H. Chavez extends his control of foreign
businesses in his drive to create a socialist state.
GERMAN BANKS : NordDeutsche Landesbank Girozentra’s CEO is pessimistic about the chance of early recovery in the financial sector
but rejected the idea of a forced consolidation of Landesbanken
SWISS BANKS : Switzerland's banking authority has subjected banks in the country to a stress test. (NZZ am Sonntag)
DEUTSCHE BANK faces a probe by the BaFin into potential violations the company uncovered in its corporate security department.
IRISH BANKS : The Irish govt faces "enormous practical difficulties" in the setting up of its "bad bank" (Finance Minister)
RBS & LLOYDS have told the govt they may miss lending targets set as a condition for receiving more state support (Sunday Telegraph)
L’OREAL : A British court ruled Friday that eBay is not liable for bogus beauty products sold on its Web site …
GERMAN RETAIL : A department store merger deal between Arcandor & Metro alone won't solve Arcandor's financial problems (CEO)
ACS was awarded a contract to clean Paris streets over the next 4 Y (Expansion)
ITALCEMENTI may report a 15% decline in earnings this year to €950M (Il Sole 24 Ore)
FIAT : Magna International and Fiat have improved their offers for General Motors unit Opel
FRANCE TEL : Egypt's market regulator has delayed ruling on a bid by a France Telecom unit for mobile operator Mobinil
INFINEON has no chance of entering partnerships or alliances due to a major slowdown in the semiconductor industry (Executives)

RESULTS DIVIDENDS EVENTS

Today Gazprom ST Micro ($0.03)
France Telecom AGM / Atos Origin AGM / Suez Env
Tuesday Aveva Telekom Austria (€0.75)
AGM
Adecco ( CHF 1.50) / Credit Agricole (€0.45) / Deutsche Salzgitter AGM / Mc Do AGM / EADS AGM / Industrial
Wednesday Ubisoft / Suedzucker Bank (€0.50) / Soc Gen (€1.20) / Thales (€1.05) / Marks conf at Credit Suisse / Exxon Mobil / Energy, Utilities
& Spencer (GBp 10,55556) and Power conf at Deutsche Bank
Cap Gemini investor day / ADP AGM / Time Warner
Thursday Ahold / / Man Group / Costco / Dell / Heinz Casino (€2.53) + Mercialys 1 per 8 / Salzgitter (€1.40) AGM / Safran AGM / Delhaize AGM / Man Group
analyst meeting / Home depot
Ackermans & van Haaren (€1.39) / Nexans (€2.00) / Suez
Friday Arcandor
Env (€0.65)
TRADING IDEAS
BUY MUNICH RE / EON / SANOFI / DANONE to play eco recovery
BUY EDF / FTE / DTE looking good

BUY DTE / SELL TEF // BUY ERICSSON / SELL NOKIA // BUY MUNICH RE / SELL AXA // BUY AHOLD / SELL METRO // BUY IBERDROLA / SELL
VEOLIA // BUY EON / SELL RWE

BROKER METEOROLOGY
PEUGEOT .................................. RAISED TO NEUTRAL ................................................................................................ BY MERRILL

PLEASE FIND BELOW ON THE NEXT PAGE OUR MORNING ECO

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25-May-09 DEAD ZONE

CHART OF THE DAY

EURO/USD and Brent prices ($/b)
Since 1999
1,6
140
1,5
120
1,4
100
1,3
80
1,2

1,1 60

1 40

0,9 20

0,8 0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EUR/USD Cours du Brent ($/b)

Source : Bloomberg

As exposed above the rebound of the barrel can be explained by the weakness of the USD specifically versus the EURO which is
mechanically increasing the barrel rise trend.

As. Time Country Indicator Period GE forecasts Consensus

6.00 GMT Japan BoJ monthly report May
9.00 GMT Germany IFO business climate May 84,8 85,0
9.00 GMT Germany IFO current assessment May 84,3 84,5
9.00 GMT Germany IFO current expectations May 85,5 85,5

Inde x e s P rice % 5 D a ys Ytd Forex Price % 5 Days Ytd

DJIA 8277,3 0,21% - 5,69% EUR/USD 1,4014 3,39% 0,35%
S&P 500 887,0 0,53% - 1,80% EUR/JPY 133,25 -2,04% 4,96%
Nas daq 1692,0 0,76% 7,29% USD/JPY 95,09 1,28% 4,67%
CA C 40 3228,0 2,73% 0,31% Oil Price % 5 Days Ytd
DA X 4918,8 3,83% 2,26% Brent $/b 59,6 7,92% 42,60%
Eur os tox x 50 2433,5 3,56% - 0,58% Gold Price % 5 Days Ytd
DJ 600 207,0 2,37% 4,36% Gold $/oz 954,7 3,99% 8,25%
FTSE 100 4365,3 0,57% - 1,55% Rates USA Euro Japan
Nikkei 9335,4 - 0,42% 5,37% Central Banks* 0,25 1,00 0,10
Shanghai Comp 2589,4 - 1,78% 42,21% Overnight 0,15 0,90 0,10
Sens ex ( India) 13914,9 14,08% 44,24% 3 Months 0,17 0,72 0,20
MICEX ( Rus s ia) 1054,0 5,23% 70,13% 10 Y ears** 3,45 3,55 1,46
Bov es pa ( Bras il) 50568,5 3,19% 34,67% *US: Fed Funds; Jap: Overnight; Euro: Ref i
** Euro: German Bund rate So urc e : B lo o m berg
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25-May-09 DEAD ZONE

ECONOMIC DATA PREVIEW

No economic data due in the United-States

Watch in Germany the release of the IFO business climate for the may due at 9.00 GMT, expected to rise for a second month in a
row as this index most likely reached a bottom. But if the euro should pursue its rising trend the IFO increase could be stopped./JB

ECONOMY
UNITED KINGDOM : GROWTH DOMESTIC PRODUCT SECOND RELEASE CONFIRMED A SHARP DROP
The preliminary release of the United Kingdom GDP for the first quarter 2009 confirmed the sharp drop of the first release of -1.9%,
-4.1% YoY. Looking at the breakdown the unrevised 1,9% drop of the GDP was due by a further drop in inventories. This destocking
process is most likely not over and should impact negatively the UK GDP at the second quarter. Nevertheless inventories accounted
only for a third of the decline of the GDP. The balance is representing by the sharp falls in household spending (-1.2%), investment
(-3.8%) and exports(-6.1%).Gross Domestic Product dropped the most since 1979 nevertheless being out of the euro area especially at
a time when the euro is sharply increasing is a substantial asset for the United Kingdom economy./JB
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25-May-09 DEAD ZONE

VIX index : implied volatility on the S&P 500 $Libor - 3-Month(Interbank Rate)
6
85
80
5,5
75 5
70
65 4,5
60 4
55
50 3,5
45 3
40
35 2,5
30 2
25
20 1,5
15
1
10
5 0,5
25/05/2007 25/11/2007 25/05/2008 25/11/2008 25/05/2009 25/05/2007 25/11/2007 25/05/2008 25/11/2008 25/05/2009
Source : Bloomberg Source : Bloomberg

United States : 10-year Treasury yield 10-year Treasury spread USA-Euro zone
5,5 1,2
5,25 1
5
0,8
4,75
0,6
4,5
4,25 0,4
4 0,2
3,75
0
3,5
3,25 -0,2
3 -0,4
2,75
-0,6
2,5
2,25 -0,8

2 -1
25/05/2007 25/11/2007 25/05/2008 25/11/2008 25/05/2009 25/05/2007 25/11/2007 25/05/2008 25/11/2008 25/05/2009
Source : Bloomberg Source : Bloomberg

Oil : Brent ($/b) Forex : Euro vs Dollar (EUR/USD)

150 1,65
140
1,6
130
1,55
120
110 1,5
100
1,45
90
1,4
80
70 1,35
60
1,3
50
40
1,25

30 1,2
25/05/2007 25/11/2007 25/05/2008 25/11/2008 25/05/2009 25/05/2007 25/11/2007 25/05/2008 25/11/2008 25/05/2009
Source : Bloomberg Source : Bloomberg