RMS Market Update

DAILY MARKET COMMENTARY February 4, 2010

Global Recovery Uncertainty Expands

Promising ADP Data Puts Focus on Friday’s NFP
Heading towards Friday’s NFP data, ADP Private Sector employment fell -22k vs -30k
calls and prev adjusted -61k from -84k. This is quite positive considering it marks the
smallest drop in jobs since employment began falling in Feb of 2008; however, this release
has been too volatile to judge as a trend setter.
Teetering between expansion and contraction, Jan ISM non-mfg index rose to 50.5%
from 49.8% vs 51.1 calls. Closely-watched employment index rose to 44.6% from 43.6.
The employment index has been below 50 since Dec 2007, hitting a 31.1 low in Nov 2008.
US mortgage applications spiked +21%, after prev -10.9% dip and 9.9% prior to that.
After being ordered to investigate brakes for its 2010 Prius model by the Japanese
government, Toyota admitted that the hybrid-electric Prius had problems with its anti-lock
braking system. Latest blow dealt to the already beleaguered company further tarnishes
the symbol of the automaker's engineering prowess. A spokesperson noted it had found
design problems in models sold before late Jan, and had corrected models sold since then.
American safety officials confirmed having received dozens of similar complaints.
With Toyota basing many of its recent hopes on the Prius, new questions surrounding
the car raise doubts about a model that was not part of the recent global recalls of more
than nine million vehicles.

EU Retail Sales Fizzles; BOE Pauses Bond Purchases

EU-27 recovery lost its momentum in Jan as
growth in the private sector slowed as latest data
shows EU retail sales stagnated in Q4 of 2009 as
consumers tightened spending despite Christmas.
Dec retail volume remained flat m/m, defying
+0.4% expectations, with higher adjusted decline
for Nov (0.5% from 1.2%). Y/Y sales slid 2.3% in
2009 in EU18 and -1.7% in EU-27.
Concerns over unchecked EU unemployment
and possibility of CB tightening has forced most
to save; while it keeps inflation in check, it also
kyboshes strong consumer recovery/spending hopes. Don’t expect consumption to offer
any support to overall GDP growth.
EU’s Jan Mfg and Services PMI fell to 53.7 m/m after Dec's 26-month high of 54.2 and
first decline bottoming out in Feb and signals a modest easing in the growth rate.
RMS Daily Commentary Page 2 of 3

Growth continues to be led by the manufacturing and remained in expansion territory

for 4th consecutive months. Growth of mfg production increased for the 6th successive
month and fastest pace for almost 2½ years. France and Germany hit a 20-month peak
and recorded the fastest rates of expansion in Jan. Italy activity also increased, but growth
has slowed; Spain and Ireland continued to underperform.
Divergence between so-called core EU countries and the weaker periphery continue to
swell, where public finances have deteriorated markedly as a result of the recession. These
EU have-nots are likely to face a prolonged period of painful adjustment in their attempt to
rebalance their economy away from domestic demand.
Jan employment in the private sector declined for the 19th consecutive month. Job
losses were recorded in all of the national mfg and service sectors. Amongst the big-four
EU economies, Spain reported the steepest reduction in employment, while Germany was
the only one to register a fastest rate of reduction m/m.
Manufacturers reported sharper cost increases than service providers; however, strong
competition prevents manufacturers and service providers from passing on higher costs to
their clients. Overall, average selling prices declined for the 15th consecutive month.
Should we now be more concerned about deflationary risk than inflation? While positive
after 2009 H1 paralysis, it is sad if we are to get excited about data that is barely showing
life above 50-mark…what does that tell you about 2010 prospects?
BOE Called Halt “Temporary” To Bond Purchases
Bank of England called a halt to its ₤200B series of bond purchases, opting to weigh the
impact of its money-creating, quantitative easing program on the UK economy. In a
statement, the Monetary Policy Committee noted that its past stock of bond purchases
"together with the low level of bank rate, would continue to impart a substantial monetary
stimulus to the economy for some time to come.
Trichet To Be Peppered With Questions About Greece, Spain And Portugal
ECB stayed pat on rates as expected; expect post decision meeting to be consumed with
Trichet being peppered with questions about debt problems smaller EU countries,.
Too soon to say how far EUR’s recent slide will take us; €1.40 is now major resistance.

CAD Weakness Constrained by Stubborn Crude Price

Speculators’ stubborn reluctance to drive crude price lower keeps CAD better supported
than other major currencies. Look for USD short-covering to persevere as recovery
sustainability uncertainty, particularly in EU, inflates.
Equities
Goldman Sachs added CDN Natural Resources to conviction buy list, while removing
Suncor Energy from the list.
In news bullish to potash miners, Russian based distributor Belarusian Potash said it has
hiked potash prices in tandem with the recovery in demand.
Gold miner Iamgold Corp. announced plans to hike its gold output to about 1 million
ounces in 2010 from the 0.93 million ounces in 2009, helped by new mine at Burkina Faso.
RMS Daily Commentary Page 3 of 3

China Defends Currency After Obama Criticism

BEIJING: China dismissed on Thursday US threats it would get tough with Beijing on
trade and currency to ensure American goods did not face a competitive disadvantage,
saying Renminbi was at a reasonable level.
Foreign Ministry spokesman Ma Zhaoxu said Renminbi was at a reasonable level, and
that China did not deliberately pursue a trade surplus with the United States.
"At the moment, looking at international balance of payments and forex market supply
and demand, the level of Renminbi is close to reasonable and balanced," Ma Zhaoxu told a
regular news briefing.
"Accusations and pressure do not help to solve the problem," he added.
US president Barak Obama earlier said his administration was pushing China to enforce
trade rules and further open their markets, adding to a range of issues weighing on
relations between the world's biggest and third-biggest economies.
Analysts cautioned against reading too much into Obama's comments, saying his words
were as much aimed at appealing to a domestic audience as trying to put pressure on
Beijing.
"Even if China wants to adjust its exchange rate, it is nearly impossible for Beijing to
meet the demands of the US -- this is China's own business," Li Jian, a researcher with a
think-tank under Ministry of Commerce, told Reuters.
Markets, too, were not counting on a brisk rise.
"Previous tough comments on Renminbi from the US administration have typically led
nowhere," said a US bank dealer in Shanghai. "The market is not sure the latest comments
by Obama will really lead to a tougher US stance on the yuan."
Offshore one-year dollar/yuan non-deliverable forwards (NDFs), a rough gauge of
market sentiment, on Thursday implied a 2.8 percent rise in yuan over the next 12 months,
slightly less than on Wednesday. The yuan's spot exchange rate, which is tightly controlled
by the central bank, was nearly flat.
Obama has twice declined to label China as a currency manipulator, but faces a third
decision on that issue in April.
Zuo Chuanchang, a researcher with the Academy of Macroeconomic Research, a think-
tank under the National Development and Reform Commission, said a row over Renminbi
would not lead to anything like a trade war.
"It's very normal to see some disputes between China and the United States, but this
doesn't mean there will be a bust-up." he said. "It's a political show, and it does really
mean too much."