Eurozone newsflow still key still for developed markets (page 1 of 2)

By Gary Dugan, CIO, Private Banking, Emirates NBD

From the jaws of success came a further Euro zone turmoil. Euro zone news flow continues to
have the power to impact all parts of the world. Just a few days ago bond yields in the troubled
periphery of Europe were falling as Spain and Italy were able to launch new bonds on relatively low yields and with good support from the market.

As the week ended negotiations with Greek creditors foundered and S&P downgraded nine Euro zone countries and placed 14 on negative watch. Among them, S&P downgraded France and Austria's credit rating by one notch from AAA to AA+; Malta, Slovakia and Slovenia were also downgraded one level; Italy, Spain,
Portugal and Cyprus were downgraded by two notches.

The immediate impact of the downgrade of French debt is quite limited. French bonds already
trade at a significant yield premium to Germany. However in the medium term the widespread
downgrade of European debt may cause problems.

More technical factors in the debt markets
could hamper the Euro zone's ability to provide solutions to its debt crisis. The downgrade of a
number of Euro zone credits makes it more difficult for banks to swap Euro zone debt
instruments for liquidity from the European Central Bank. Also plans for some of the new Euro zone institutions to raise capital to buy up the debt of countries that are struggling are impeded by the widespread downgrades.

When you see the downgrades in the Eurozone debt markets it convinces you that the GCC region still has bond markets that offer value. Given that short-term dollar interest rates will
remain close to zero and ten-year bonds around 2% we expect international investors to look
increasingly at markets such as Qatar and Abu Dhabi where high quality longer-dated AA rated
bonds yield 3-4%.

Could there be signs that the US economic recovery is not as robust as some had thought. The recent US retail sales figures for December were disappointing. Remember all that noise that in the holiday season post-Thanksgiving consumers were shopping like crazy- well they were not crazy enough. Retail sales excluding autos fell 0.2% month-on-month in December.

Whilst household income growth and consumer confidence is picking up the rise in the price of oil will be constraining the growth of consumer spending power. The impact of the slowdown in retail sales is likely to be compounded by signs that the US government is reigning in spending at a far greater pace than previously thought. The next few weeks will give more details of how the US economy is faring.

Industrial confidence data is due out that is likely to show a further modest improvement. The corporate results season continues with quarterly reports from financial heavyweights Citigroup, Goldman Sachs and American Express.

JPMorgan's results did not bode well for the sector as they reported a 23% decline in profits and weak revenues. Investment banking was a notable weak spot with revenues down 30%.

The Euro may be due a short recovery after such a significant fall in recent months. The
fundamentals still point to ongoing weakness however the currency has fallen 12% against the
dollar since late October.

Also market traders speculative positions are at record shorts (meaning many traders have sold very heavily Euros versus buying dollars).