EXFIS WEEKLY MARKET BULLETIN (Week Ending 27 Nov 2011)

US/EUROPE: Thanksgiving? More like political misgivings. In a shortened trading week due to the Thanksgiving celebrations, investors had little to cheer as US politicians admitted defeat again unable to reconcile their differences over how to reduce Americas debt mountain. President Obama set up a bipartisan committee several months ago to find $1.2 trillion in savings. This week, the group reported that it had failed to agree. President Obamas response was to say the deficit would be cut by $1.2 trillion one way or another. The blame game is already well under way. Republicans blame Democrats for never being serious about cutting entitlement programmes for the elderly and the poor and sticking rigidly to a wish for $1 trillion in tax increases. But Democrats attacked Republicans for ruling out tax rises for wealthy Americans. Markets were unimpressed. Thats because of the kind of cuts they expect to see coming through. Some economists are predicting an end to the temporary tax cut, which is estimated will deduct 0.5% from GDP in 2012. Others believe the extension to unemployment benefits will not take place, cutting a further 0.3% from next years GDP. This matters. For perspective, IMF figures show that Americas net government debt/GDP is 73%, compared with Europes 69%. At the same time, Americas structural deficit is 6% of GDP, while the Euro-zones is 3%. Little surprise then that another cut to Americas credit rating is under discussion by the rating agencies.

GLOBAL EQUITIES: Gloomy sentiment continues for a second week World markets had another poor week, as a stream of negative news gave little cause to begin festive celebrations early. Europe was the main source of the gloom. Portugal and Hungary both saw their credit ratings cut to junk status. An auction of German government bonds saw insufficient demand, forcing bund yields the rate the government pays to borrow above that of the UK. And the banking sector suffered as a consequence: rumours grew that Dexias bailout by the Belgian and French governments might collapse, while Commerzbank shares tumbled after report claiming it needed more capital. In Spain, the conservative Mariano Rajoy won a large election victory, giving him a strong mandate to push through further austerity measures; markets seemed largely unimpressed as Spanish bond yields remained worryingly high. All of this activity relating to the bond market was a significant drag on sentiment towards equities. Elsewhere, there was little news to cheer either. In Asia, a Chinese manufacturing index fell to a level consistent with contraction. Singapore delivered a gloomy prognosis for its exportdominated economy. Thailand also grew less than expected in quarter three. Meanwhile, in Japan, Olympus rose sharply on hopes that the company will remain listed, after its deposed CEO returned to Japan to help the company finalise its financial results. In the US, Hewlett-Packard reported a 91% fall in fourth-quarter profits. Chevron shares were hit by news that the oil explorer is being blocked from drilling in Brazil while a recent spill is examined. Groupon shares also fell below their listing price. But profits at Deere, the farm equipment maker, grew after sales rose 20% in the fourth quarter. In the UK, the consumer sector was under pressure. Arcadia announced falling profits and a plan to cut its number of stores by half. Dixons also reported a loss albeit a better one than feared. And outdoor goods chain Blacks Leisure announced a profits warning. But worst of

all, Thomas Cook shares slumped around 75% in a single day as it had to ask the banks for more money. There was some encouraging news, however, with three large US takeovers. Gilead Sciences bought drug developer Pharmasset for $11 billion, a near 90% premium to the stock's latest closing price. Insurer Alleghany acquired Transatlantic Holdings for $3.4 billion. And private equity group KKR agreed to buy oil and gas explorer Samson Investment in a $7.2 billion deal.

BONDS: Flight to quality spreads as German bund auction fails A partially covered German auction on Wednesday triggered a 30 basis-point increase in German bund yields, leaving them higher than UK gilt yields. Peripheral European yields also traded higher as investors retreated to safe havens: Swiss yields turned negative. Economic news from the EU was also unhelpful: Novembers PMI reports were stable, but still at recessionary levels. Industrial orders in Euro-zone countries slumped by 6.4%, more than double forecasts. Germanys central bank also slashed its growth forecast for the German economy, warning of a pronounced weak patch if the debt crisis worsens. There were interesting positive news items in Europe. The IFO Institute said German business confidence rose in November, confounding expectations for a fall. Italian consumer confidence also rose unexpectedly in November, showing that Italian households are optimistic about the arrival of the technocrat Monti government. Investors in Italian bonds are clearly less sure: Italy was forced to pay record interest rates in a !10bn bond auction the rate for two-year notes was an eye-watering 7.81%. Outside of Europe, the Commerce Department cut its calculation of US GDP to 2.0% growth in the third quarter from its initial reading of 2.5%. It was also revealed that US consumer spending slowed sharply last month, prompting further cuts to their growth forecasts. Japanese exports fell for the first time in three months, reinforcing worries about the strong yen and slowing global economy. In the UK, Rightmove reported that average asking prices for houses fell 3.1%, the biggest monthly drop in a year.

EXFIS WEEKLY MARKET BULLETIN (Week Ending 27 Nov 2011) !