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July 2006 Martin Vozar

Capital Markets Overview. July 2006 Martin Vozar. Global Trends. Commodities:

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July 2006 Martin Vozar

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  1. Capital MarketsOverview July 2006 Martin Vozar

  2. Global Trends Commodities: • Crude oil: the standing dispute over Iranian enrichment program, tests of the North Corean ballistic missiles and fighting between Israeli forces and Hezbollah propped up oil prices in last weeks. Oil prices in July 14 reached record levels at 77.03 USD (WTI). • Gold: gold in last days rose for the political tension and quickening inflation, climbed to the highest in almost two months on July 17 (664 USD). As some investors bet a rally was exaggerated, price is descending.

  3. Global Trends • Fixed income: • US: The most important element of Chairman Bernanke's semi-annual testimony isthe groundwork he laid for a Fed pause. U.S. Economic growth is slowing and Fed needs to be mindful of the lags in the monetary policy transmissionmechanism. • Japan: The BoJ increased its key interest rate by 25 bp at July 14. Fukui told that the BoJ has no intention to increase rates consecutively. • Europe:After the 25bp hike on June 8, ECB left rates unchanged in July 6 meeting. Signalling possibility of an early hike. ECB probably will hike in August meeting as economic growth and record oil costs threaten to fuel inflation in the dozen euro nations.

  4. Global Trends Stocks Markets: • US Equities: U.S. stocks rallies after dollar drop, announcement the biggest M&A ever (HCA Inc. buyout by financial investors) and some of the firms reported quarterly profits that exceeded analysts estimation. • Japan: The Nikkei 225 Stock Average dropped 500 or 4.1% to 15000 from the first of July. Investors are afraid about future prospect of earnings because a slowdown in the U.S. economy.China monetary tightening had a negative effect on investor sentiment, too. • Europe equities: European stocks advanced to the highest in almost two weeks on speculations that increased mergers and acquisitions will help equities rally (933 bill. of M&A announced this year, 519 bill. last year).

  5. US – Economy • The Nonfarm Payrolls increased in Jun only by 121.000 followed a 92.000 rise in May. • •Industrial production rose more than forecast. Increased by 0.8% compared to 0.1% gain in May. The proportion of industrial capacity in use rose to 82.4% (81.8% in May). • • The University of Michigan’s preliminary index declined to 83 from 84.9 in June. Consumers confidence unexpectedly weakened as gasoline prices rose and reinforcing concern about cooling economy. • • The Philadelphia Fed manufacturing survey for July slipped to 6.0 from a reading of 13.1 the prior month. This compares unfavourably with the 2Q average of 13.6, the 1Q average of 10.3 and the 2005 average of 12.4. • • Initial jobless claims for the week of July 15 declined 30,000 to 304,000(consensus 320,000) following a 20,000 increase the weekbefore.

  6. US – Economy • MBA Mortgage Applications dropped 4.6% in Jun 19. Mortgage rates stay close to their highest since 2002 (the average rate on a 30-year fixed mortgage decreased to 6.73% last week, from 6.81%. Rate is up about 1% from the 2Q/2005). • NAHB Housing Market Index dropped this month to the lowest level in more than 14 years (eight decline in nine months). Index declined to 39 from 42 in June. • “The US economy seems poised to grow in coming quarters at a pace roughly in line the expansion of its underlying productive capacity" Ben S. Bernanke • Fed forecast for next year GDP growth is 3%-3.25%. It is worth noting that to meet the Fed's forecast of 3.25%-3.5% GDP growth for this year, the economy will need to slow to roughly a 2.5% pace in the second half of this year. • Fed forecast for the unemployment rate at year end is 4.75-5% -- above the current 4.6% pace. • The Fed raised inflation forecast for both 2006 (to 2.25%-2.5%) and2007 (to 2%-2.25%).

  7. US – Economy • CPI rose 4,3 % after May’s 4.2 % increase (YoY). CPI Ex Food & Energy rose a larger than forecast 0,3 % (MoM) for a fourth straight month (longest period since 1995). Medical care (+3.1%), Housing cost +0.2% (rents +0.4%), food and airfares (0.3%). • PPI Ex Food & Energy rose more than forecast in June. PPI increased 0,5 %, followed a 0.2% advance in May (MoM). PPI rose 4,9 % after May’s 4,5 % increase (YoY). PPI Core rose 0.2%, after May 0.3% (MoM). PPI Core rose 1.9, after 1.5% in May (YoY).

  8. US – FX Market • The dollar fell the most in three weeks against the euro and weakened versus the yen after Bernanke said “moderation” is under way in the economy. The dollar had surged from 07/07/06 to 07/18/06 to three-month highs (-2.5%, 1.280) on expectations faster growth would prompt the Fed to increase interest rates. • Potential for dollar appreciation is exaggerated from medium point of view after Bernanke said “policy must be mindful of the future effect of past interest rate increases while remaining on guard persistently higher inflation”. • The dollar is down 6,5 % this year against the euro and 1% versus the yen on speculation central banks in Europe and Japan will raise rates more than the Fed. • Economists’ forecast for Q3 06, Q4 06, Q1 07 and Q2 07 are 1.28, 1.30, 1.31 and 1.32 (Bloomberg polls median of 26 economist).

  9. Three-month money (from Jun 26) Sep 06 Mar 07 Jun 07 Median 5,35 5,30 5,10 Max 5.80 5.95 6.10 Min 4,95 5,60 4,00 US – Fed funds rate • Futures traders are pricing in a 58 % chance the FED will raise its benchmark interest rates to 5,50 % in August 8 meeting. • Many FOMC members saw the current spate of inflation as only temporary, while only some highlighted the risk from wage pressures.

  10. US – Money and Bond Markets

  11. US - Yield Curve Changes

  12. EU – Economy • French June consumer spendingwas better thanoverall expectations, rising a strong 1.7% (previously month reported 0.9%). Consumption of manufactured goods upa 6.0% in 2Q, 4.9% in 1Q. • •Italian July consumer confidence grow. Headline index rising from a revised 106.9 in June to 108.7 in July. The victory in the soccerWorld Cup had a strong impact on household sentiment in July (opinions on the economic climate jumped to 103.1 in July from 93in June). • Euro area new orders rose a stronger than expected 2.3% MoM in Mayafter a revised 0.8% monthly drop in April and -1.3 March.

  13. EU – Economy • German ZEW fell for a sixth month to 15.1 from 37.8 in June (expectation 35).While the current activity information continued to strengthen, the first of the July surveys, the ZEW, also revealed a further widening of the contrast between current strength and deteriorating future expectations. • The European Commission forecast the fastest economic growth since 2000, (around 2.3 % YoY).The official data tracking 3.25% QoQ forecast for GDP in 2Q.

  14. EU – Economy • Euro area CPI inflation was confirmed at 2.5% YoY in June. Record high oil prices in mid-July suggest that inflation is set to remain close to current levels for a while longer. Analysts expect headline inflation to average 2.2% YoY in August and September, and 2.3% in the fourth quarter. •Core inflation, which printed at 1.4% in June (after 1.3% in May), will likely take another step up to 1.6% in July. • The renewed surge in energy prices and high commodity prices, along with stronger demand and higher utilization rates, put some upside risk on the core inflation projection.

  15. ECB Refi Rates 3Q 06 4Q 06 1Q 07 Median 3.00 3.25 3.50 Max 3.25 3.50 3.75 Min 2.75 2.75 2.75 ECB • The ECB is balancing the strength of growth and inflation indicators, on the one hand, with lingering doubts about the sustainability of domestic demand growth, the stronger currency, potential US slowing, and looming fiscal tightening, on the other. • "We will exercise strong vigilance so as to ensure that risks to price stability over the medium term do not materialise…“ JC Trichet • Analyst are pricing in a 90 % chance the ECB will raise its benchmark interest rates to 3,00 % in August 3 meeting.

  16. EU – Bond Market

  17. EU - Yield Curve Changes

  18. US vs. EU Yield Curve Changes

  19. Japan vs. EU&US Yield Curve Changes

  20. Slovak MM and Fixed income • Jun CPI drop to 0.1 % from March 0.3%. The annual rate decreased to 4.6 %, from May’s highest level since December 2004, 4.8%. • The NBS intervened three times (21.6.2006, 29.6.2006 and 12.7.2006) at levels above 38.5 SKK/EUR in support of the koruna.

  21. Slovak MM and Fixed income • Investors are expecting new government statement.

  22. Slovak MM and Fixed income

  23. CEE Central Banks from CEE region, interest rates: • SKK changed 4.5 % (today’s hike +50bp) • HUF changed6.5% (yesterday hike +50bp) • PLN unchanged 4% (meeting planed tomorrow) • CZK unchanged2.0 % (expecting hike +25bp 7/27/2006)

  24. CEE Yield curves comparison

  25. Credit Markets Overview

  26. Credit trends • In 2Q 2006, global corporate credit quality worsened slightly.The downgrade ratio increased to 54% from 52% recorded in the first quarter, but is still better than in 4Q2005. • But in dollar terms, the amount affected by upgrades exceeded the amount affected by downgrades for the first time since the first quarter of 2005. • In the first five months of 2006 7 corporate bond issuers defaulted on a total of $2.7 billion compared to 13 issuers defaulting on $3.2 billion in the first five months of 2005 • Automotive-related industries represent 60% share of defaults

  27. Credit trends • The global credit market started to firm recently, ending a disappointing period for credit markets since early May. In fact synthetic credit indices such as the iTraxx series are yet to see spreads widen out to levels at the start of March 2006. • The reduction in supply over the summer months combined with a recovery in equity markets and risk appetites could be positive for credit markets in the near term • There is still a lot of liquidity in the market. The biggest concern remains rising inflation and from this resulting further Fed tightening.

  28. Credit trends • Auto sector: • Both GM and Ford were downgraded recently, as the rating agencies think the 2006 will be more difficult for both carmakers as previously anticipated. • CDS spreads were not much affected. • GM’s investors urged the car maker to consider a partnership with Renault and Nissan (Renault has a controlling 44% stake in Nissan) – GM shares turned sharply higher, while Renault CDS rises.

  29. Credit trends Europe US

  30. Investment portfolio managementContacts:Jan Pataky Head of Investment portfolio management (+421 2) 5850 5463 pataky.jan@slsp.sk Andrea Osuchova Portfolio Manager (+421 2) 5850 5392 osuchova.andrea@slsp.skLubomir Golany Portfolio Manager (+421 2) 5850 5412 golany.lubomir@slsp.sk Alena Teplicanova Quant Analyst (+421 2) 5850 5382 teplicanova.alena@slsp.skMartin Vozar Research (+421 2) 5850 5388 vozar.martin@slsp.skMichal Klestinec Research (+421 2) 5850 5403 klestinec.michal@slsp.sk

  31. Disclaimer:This report is meant as supplementary economic information for our clients and is based on information available on the date of printing. Our analysis and conclusions are of a general nature and do not take into account the individual circumstances or needs of investors such as income potential, tax situation or the level of risk he or she is prepared to undertake. Information about previous performance does not guarantee future performance. Although we judge our sources to be reliable, we do not accept any responsibility for the completeness and accuracy of our information. This report is neither an offer to sell nor an offer to buy any securities. Erste Bank der oesterreichischen Sparkassen AG confirms that it has approved any investment advertisements contained in this material. Erste Bank der oesterreichischen Sparkassen AG is regulated by the Financial Securities Authority for the conduct of investment business in the UK.

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