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RBC Credit Strategy August, 10 2010

RBC Credit Strategy August, 10 2010

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Published by: derailedcapitalism.com on Aug 10, 2010
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Priced as of prior trading day’s market close, EST (unless otherwise noted).For Required Conflicts Disclosures, please see Page 3.
2010 2009 2008 2007 2006 2005 2004 2003 2002 2001Jan 1.652 0.202 1.463 -0.021 -0.391 1.113 0.517 1.084 0.399 1.173Feb 0.602 -0.348 0.035 1.000 0.068 -0.202 1.420 1.080 0.205 0.514Mar 0.963 -0.277 -1.616 -0.210 -1.078 0.047 0.958 -0.110 -0.540 0.885Apr 0.611 2.662 0.642 -0.042 -0.353 1.107 -0.695 0.898 0.847 -0.774May -0.339 2.254 -0.651 -0.756 0.316 0.870 -0.191 2.173 0.241 0.645Jun 0.287 2.102 -1.271 -0.408 -0.467 1.096 0.221 0.294 0.869 0.869Jul 1.011 3.244 1.167 0.393 1.063 -0.135 0.909 -0.834 0.819 1.381Aug 1.147 0.892 0.373 0.995 0.813 1.420 0.092 1.424 1.017Sep 1.466 -4.121 -0.109 0.352 -0.055 0.484 1.564 1.470 -0.098Oct 0.776 -1.942 0.801 0.370 -1.006 0.822 -0.925 -0.718 2.021Nov 0.887 1.518 -0.393 0.569 -0.095 1.010 0.008 1.248 -0.102Dec -0.067 0.718 -0.397 -0.836 0.439 0.475 1.013 1.914 -0.847Q1 3.249 -0.424 -0.143 0.766 -1.398 0.956 2.921 2.063 0.062 2.593Q2 0.558 7.182 -1.284 -1.202 -0.504 3.105 -0.666 3.393 1.968 0.734Q3 1.011 5.959 -2.137 0.658 2.428 0.622 2.838 0.810 3.757 2.312Q4 1.602 0.260 0.006 0.097 -0.665 2.324 0.086 2.446 1.054Year 4.875 14.899 -3.281 0.217 0.585 4.042 7.580 6.472 8.453 6.850
EMU Corporate Index (ER00) Total Returns
-1000-800-600-400-200020040060028/02/1990 29/02/1996 28/02/2002 29/02/2008-3-113579
US Non farm payrolls(000's, LHS)US Fed Funds RateYield % RHS
0123456782000 2002 2004 2006 2008 2010USD 3-mth Libor3-mth Euribor3-mth GBP Libor
Source: Bloomberg
Royal Bank of Canada Europe LimitedSimon Ballard
(Senior Credit Strategist)
+44 (0)20 002 2712;simon.ballard@rbccm.comAll values in US dollars unless otherwise noted.
AUGUST 10, 2010
Damned If They Do, Damned If They Don’t
Big day for credit markets amid speculation of Fed QE2
QE2 positives may be largely priced into expectations
Greater risk for spread product would be ‘no action’ by the Fed
Austerity measures leave balance of risks firmly in the deflation camp
Today marks a big data point for risk asset markets, albeit perhaps not a data pointthat is likely to change the overall metrics and dynamics of market direction. Withthe Fed concluding its August monetary policy committee meeting there is muchanticipation that, in the context of recent disappointing economic data, it will beminded to enact further stimulus measures. These are being referred to as ‘QE2’(Quantitative Easing 2). However, with so much expectation now being bakedinto spread product, we would suggest that the greatest risk to valuations now isthat the Fed does not do anything ‘new’ at today’s meeting. For the time being,spreads remain well underpinned, albeit with limited liquidity due to seasonaleffects. Cash is still being put to work steadily and the primary new issue marketcontinues to tick over, particularly in the US. This said, for the Fed to do nothingtoday would be a missed opportunity; we believe it needs to be seen as beingproactive and taking the initiative to re-ignite a struggling recovery.The introduction of so-called QE2 may see some positive reaction from credit andequity markets, but this is perhaps already priced into (firm) spreads. Conversely,if the Fed fails to deliver then an air of disappointment may begin to circulate,with equities and spreads trading off. Concern would be that, by failing to act, theFed risks allowing the US economy to slip into a ‘double dip’. Let’s face it, withthe anaemic economic numbers such as they are, it would be difficult to justify alack of Fed action as due to the economy being so strong that it doesn’t requirefurther stimulus. The Fed may state that it prefers to wait before taking furtheraction, but again we would expect the market to take this decision negatively.There may be a fine line between the dictionary definitions of ‘nascent’ and‘anaemic’, but as far as the current global growth situation is concerned webelieve the latter to be the more appropriate adjective. At best, this is proving tobe a jobless recovery on both sides of the Atlantic, with pressure on the consumerand the housing market; a situation that is currently further highlighted by thenews that Freddie Mac – the Federal Home Loan Mortgage Corporation – isseeking an additional $1.8bn in support from the US Treasury. According to pressreports, this latest request will bring the total amount of federal aid spent inbailing out Freddie (and sibling Fannie) to $148.3bn since the financial crisisbegan. And this figure could rise to close to $300bn before the US mortgagemarket recovers fully. But a weak housing market is not exclusive to the US. Inthe UK, house prices headed back into the red in July – the first price decline in ayear – with forecasters stating that UK house prices look set to retain a softer tonethrough H2 2010 at least, thereby re-igniting fears of a softer growth outlook forthe UK economy.Bottom line, we are far from on a firm growth trajectory and in the context of global fiscal austerity measures, we conjecture that the balance of risks forfinancial markets remains skewed towards deflation as opposed to inflation.Credit markets remain fragile and susceptible to ongoing headline risk. Expecttoday’s Fed announcement to receive more interest than might otherwise beexpected for a mid-August meeting. Look for spreads to trade sideways/slightlybetter on news of QE2 being introduced, but for the market to be disappointed if the Fed decides that no further stimulatory action is required at this time.
RBC Capital Markets Credit Strategy
Global Credit Research TeamRoyal Bank of Canada Europe Limited
Roger Appleyard, Head Global Credit Research +44 20 7653 4101 roger.appleyard@rbccm.comSimon Ballard, Senior Credit Strategist +44 20 7002 2712 simon.ballard@rbccm.comMiriam Hehir, Analyst +44 20 7653 4175 miriam.hehir@rbccm.comAlastair Whitfield, Associate +44-20-7653 4834 alastair.whitfield@rbccm.com
RBC Dominion Securities Inc.
Jonathan Allen, CFA, Director, Credit Research (Canada) (416) 842-3806 jonathan.allen@rbccm.comMatthew Kolodzie, CFA, P.Eng., Analyst (416) 842-6152 matthew.kolodzie@rbccm.comAltaf Nanji, CFA, Analyst (416) 842-6462 altaf.nanji@rbccm.comAndrew Calder, CFA, Associate Analyst (416) 842-4522 andrew.calder@rbccm.comSteve Choi, CFA, Associate (416) 842-6140 steve.choi@rbccm.com
High Yield ResearchRBC Capital Markets Corporation
New York
Christina Boni, Analyst (212) 428-6461 christina.boni@rbccm.comMiles Highsmith, Analyst (212) 428-2360 miles.highsmith@rbccm.comBill Hoffmann, Analyst (212) 428-2362 bill.hoffmann@rbccm.comAdam Leight, Analyst (212) 618-3250 adam.leight@rbccm.comMark Rose, CFA, Analyst (212) 437-9150 mark.rose@rbccm.comChris Machen, Associate (212) 618-7544 chris.machen@rbccm.comJennifer Myung, Associate (212) 428-7931 jennifer.myung@rbccm.comSarah O'Rielly, Associate (212) 618-3304 sarah.orielly@rbccm.comTaylor Spandl, Associate (212) 618-3284 taylor.spandl@rbccm.com
RBC Capital Markets Credit Strategy
Required Disclosures
Conflicts Disclosures
This product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses toprovide specific disclosures for the subject companies by reference. To access current disclosures for the subject companies, clientsshould refer tohttps://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1or send a request to RBC CMResearch Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated byinvestment banking activities of the member companies of RBC Capital Markets and its affiliates.
Distribution of Ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy,Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform,Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the samebecause our ratings are determined on a relative basis (as described above).
Conflicts Policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. Toaccess our current policy, clients should refer tohttps://www.rbccm.com/global/file-414164.pdf or send a request to RBC CMResearch Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. Wereserve the right to amend or supplement this policy at any time.
Dissemination of Research and Short-Term Trading Calls
RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regardto local time zones in overseas jurisdictions. RBC Capital Markets’ research is posted to our proprietary websites to ensure eligibleclients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may bedone by the sales personnel via email, fax or regular mail. Clients may also receive our research via third-party vendors. Please contactyour investment advisor or institutional salesperson for more information regarding RBC Capital Markets’ research. RBC CapitalMarkets also provides eligible clients with access to SPARC on the Firm’s proprietary INSIGHT website. SPARC contains marketcolor and commentary, and may also contain Short-Term Trade Ideas regarding securities of subject companies on which the Firmcurrently provides research coverage. SPARC may be accessed via the following hyperlink:www.rbcinsight.com. A Short-TermTrade Idea reflects the research analyst’s directional view regarding the price of a security of a subject company in the coming days orweeks, based on market and trading events. A Short-Term Trade Idea may differ from the price targets and recommendations in ourpublished research reports reflecting the research analyst’s views of the longer-term (one-year) prospects of the subject company, as aresult of the differing time horizons, methodologies and/or other factors. Thus, it is possible that the security of a subject company thatis considered a long-term ‘sector perform’ or even an ‘underperform’ might be a short-term buying opportunity as a result of temporary selling pressure in the market; conversely, the security of a subject company rated a long-term ‘outperform’ could beconsidered susceptible to a short-term downward price correction. Short- Term Trade Ideas are not ratings, nor are they part of anyratings system, and the Firm generally does not intend, nor undertakes any obligation, to maintain or update Short-Term Trade Ideas.Securities and Short-Term Trade Ideas discussed in SPARC may not suitable for all investors and have not been tailored to individualinvestor circumstances and objectives, and investors should make their own independent decisions regarding any securities orstrategies discussed herein.
Analyst Certification
All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of thesubject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

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