PP 7767/09/2010(025354)

Economic Highlights
Global
•
MARKET DATELINE

5 October 2010

1 Foreign Capital Inflows Fuelling Bond Bubbles And

Pushing Up Currency In Emerging Economies?

2 US Factory New Orders Fell In August

3 Euroland’s Unemployment Rate Remained At A High

Level Of 10.1% In August

Tracking The World Economy...

Today’s Highlight

Foreign Capital Inflows Fuelling Bond Bubbles And Pushing Up Currency In Emerging Economies?

The US Federal Reserve Chairman, Ben S. Bernanke, believes that further buying of financial assets by the Fed is likely
to help the economy more, after saying that the central bank’s first round of large-scale asset purchases had been
effective in improving the economy. “I do think that the additional purchases — although we don’t have precise numbers
for how big the effects are — would have the ability to ease financial conditions”, said the Fed Chairman.

As the Fed moves closer to announce the purchase of more Treasuries as soon as their next policy meeting on 2-3
November, foreign investors are rushing into emerging market bonds from Indonesia to Mexico to search for higher
returns, pushing up these countries currencies. As it stands, foreign investors held 27% of Indonesia’s local currency
government debt as of the end of July, compared with 16% a year earlier. In Malaysia, it was 18.8% through July, up
from 10% a year ago, and it was 7.4% in South Korea versus 5.8% a year earlier. That has also sent several Asian
currencies to, or near, record high against the US dollar. Even Mexico, which has in the past defaulted on its dollar-
denominated debt, is seeing foreigners playing a big part in its bond market in recent months. Interestingly, the demand
for local currency bonds prompted the Philippines last month to issue US$1bn worth of peso bonds directed at global
investors. It was oversubscribed 13.5 times, enabling the Philippines to pay a yield of just 5%. Investors are so bullish
on Philippines, Moody’s Investors Service calculates, that current bond yields imply the market thinks Philippine bonds
should have an investment-grade rating of A3. Moody’s actual rating on Philippine bonds is six notches below that.

Separately, Brazil doubled a tax it charges foreigners on investment in fixed-income securities in a bid to stem gains in
the real, which reached its strongest in more than two years last week. The government said that it would raise its so-
called IOF tax on fixed-income investments by foreigners to 4% from 2% beginning 5 October. The government first
slapped a 2% tax on foreign investments in October 2009. Other Latin American countries are also attempting to curb
currency appreciation. Chile’s President said on 4 October that he will meet with policymakers at the central bank this
week to discuss ways to address the currency’s gains. Colombia’s President Juan Manuel Santos called for bold and
creative action to weaken the Colombian peso in an 11 August statement.

The US Economy

Factory New Orders Fell In August

◆ Factory new orders fell by 0.5% mom in August, compared with +0.5% in July. This was the third month
of decline in four months, dragged down mainly by a drop in new orders for non-defence aircraft (which is often
volatile) and vehicle parts. Excluding transportation, factory new orders rebounded to increase by 0.9% mom in

Peck Boon Soon

(603) 9280 2163
Please read important disclosures at the end of this report.
bspeck@rhb.com.my

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 5 October 2010

August, from -0.9% in July, indicating that the underlying industrial activities remain resilient. This was the first
increase in five months, underpinned by increases in new orders for fabricated metals, machinery, computers &
electronic products, electrical equipment and furniture. Similarly, non-defence capital goods new orders
excluding aircraft rebounded to increase by 5.1% mom in August, from -5.3% in July. This was the third
month of increase in four months, suggesting that businesses are still spending, albeit cautiously, in view
of the prospects of a slowdown in the global economy. Yoy, factory new orders inched up to 10.1% in August,
after slowing down to 9.0% in July, but off the peak of +19.3% in April, indicating that factory new orders are
losing momentum. Meanwhile, non-defence capital goods new orders excluding aircraft rebounded to +23.8% yoy
in August, from +13.7% in July and surpassed a high of +22.4% recorded in April, indicating that business spending
is still holding up very well.

The Euroland Economy

Euroland’s Unemployment Rate Remained At A High Level Of 10.1% In August

◆ Euroland’s unemployment rate held stable at a high level of 10.1% of total labour force for the fourth
consecutive month in August. This suggests that the unemployment rate has stabilised somewhat. However,
it remained at the highest level since the introduction of the single currency more than a decade ago, suggesting
that the job market remained sluggish in the region. A pick-up in unemployment rate in countries like France,
Spain, Ireland, Slovakia and Slovenia Spain was offset by a moderation in unemployment rate in Germany, Italy,
Netherlands, Hungary and Portugal. The high level of unemployment rate suggests that the recovery in
consumer spending and the Euroland economy will likely be slow.

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