What matters today

FIM RESEARCH

(Europe edition)
10 June 2011

Developed macro Interest rate strategy FX strategy Emerging markets Commodity markets

1. 2. 3.

Disappointing Chinese data weighed on market sentiment The outcome of yesterday’s ECB meeting was hardly a surprise and we continue to look for July rate hike followed by a gradual pace of monetary tightening UK industrial output likely to decline in April

1. 2.

Front-end yields look expensive going into Q3 following ECB hike signal No news is bad news for peripherals at the moment; next week’s 15Y Bono auction will test sentiment

1. 2. 3.

EUR: Heavy on Q1 2012 rate expectations despite “vigilance”. SEK: Undermined by weak activity data. NOK: Ignoring Brent’s latest OPEC induced spike.

1. 2.

Turn in sentiment to push up EM FX and rates; but rates are still low China May exports to slow more than expected and so hurt EM mood.

1.

OPEC did not reach agreement at its 8 June meeting

For a full list of contributors please refer to the back of the document

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What matters today (Europe edition)

Developed Markets – Key events – Friday 10 June
GMT 00:50 00:50 00:50 01:00 07:00 07:00 07:00 07:45 07:45 08:30 08:30 09:00 09:00 09:00 09:00 09:00 09:30 09:30 09:30 09:30 09:30 09:30 09:30 10:00 12:00 12:59 18:00 19:00 JN JN JN NZ GE GE GE FR FR SW SW IT IT NO NO NO UK UK UK UK UK UK UK IT SP UK US US Indicator/Event For Cons. Tertiary Industry Index (MoM) APR 2.70 Domestic CGPI (MoM) MAY 0.20 Domestic CGPI (YoY) MAY 2.50 RBNZ Governor Bollard Consumer Price Index (YoY) MAY F 2.30% CPI - EU Harmonised (MoM) MAY F -0.20% CPI - EU Harmonised (YoY) MAY F 2.40% Industrial Production (MoM) APR 0.40 Manufact Production (MoM) APR 0.30 Industrial Orders s.a. (MoM) APR Industrial Prod. s.a. (MoM) APR 0.50 GDP sa and wda (QoQ) 1Q F 0.10 GDP sa and wda (YoY) 1Q F 1 CPI (MoM) MAY -0.30 CPI (YoY) MAY 1.40 CPI Underlying) MAY -0.10 Industrial Production (MoM) APR 0.10 Industrial Production (YoY) APR 1.50 Manufact Production (MoM) APR -0.10 Manufacturing Production (YoY) APR 3.40 PPI Input NSA (MoM) MAY -1 PPI Output Core NSA (MoM) MAY 0.30 PPI Output n.s.a. (MoM) MAY 0.30 12m BOT auction for EUR 6.0 bn ECB's Gonzalez-Paramo Speaks NIESR GDP Estimate MAY 1m, 3m and 6m T-bill auctions for GBP 4.5 bn Monthly Budget Statement MAY -$59.0B CA-CIB f/c 3.50 0.30 2.60 2.30% -0.20% 2.40% 0.40 0.50 Prev. -6 0.90 2.50 2.30% -0.20% 2.40% -0.90 -1 1.10 0.90 0.10 1 0.50 1.30 0.80 0.20 0.70 0.20 2.70 2.60 0.60 0.80 Comment

Rise in energy prices to feed into corporate goods

0.10 1 -0.20 1.70 -0.40 0.90 -0.70 2.80

Inflation to remain above the Norges Bank forecast

Contraction on additional holidays and Japanese events

0.30 -$136B

Developed macro
 Sentiment was lifted by the unexpectedly narrowing US trade deficit during US hours. Elsewhere, central banks delivered no surprises in their rate decisions. The ECB and Bank of England left their rates unchanged while the key word ‘strong vigilance’ was mentioned in the ECB press conference, signaling a July rate hike. Overnight in Asia, the upbeat sentiment had been short-lived, with disappointing Chinese trade numbers weighing on markets again. kintai.cheung@ca-cib.com 
ECB ‘strongly vigilant’ as expected, on its course to a July rate hike

In our view, the ECB press conference was broadly in line with expectations although, on balance, the few changes to the official statement were on the hawkish side. As expected, the Governing Council signalled a rate hike for next month while extending unlimited liquidity provisioning for another quarter. ECB staff projections were revised higher for this year albeit by a smaller margin than we had expected. Despite Greek worries (the ECB strongly opposed to any form of debt restructuring once again) and the evidence of slowing economic activity, the ECB sounded confident enough to keep on normalising its monetary stance. Therefore, we continue to forecast a gradual pace of monetary tightening, with a 25bp rate

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hike every three months, bringing real policy rates back into positive territory by mid-2012 (see The ECB has more in store, 9 June 2011).
UK IP likely off to a weak start in Q2

UK manufacturing production is expected to post negative growth in April (-0.7% MoM) on weak domestic demand and special events such as the additional bank holiday at the end of April and supply chain disruptions in the automobile industry due to the Japanese tragic events. frederik.ducrozet@ca-cib.com

Interest rate strategy
Front-end yields look expensive going into Q3 following ECB hike signal

Without listening to Trichet’s comments, yesterday’s price action suggested the ECB had turned dovish and there was no rate hike on the horizon. Though many were expecting a rate hike signal for next month, no reaction rather than a bond market rally would have seemed more plausible, particularly at the front end. The German Schatz trades not much more than 10bp above where the refi policy rate is highly likely to be next month, which seems rather expensive in our view. The Greek rescue plan and Euro banking stress tests are the main sources of uncertainty that could justify Euro core yields at these levels in the very near-term, and both are due towards the end of the month. Choppy market conditions are likely to persist for the coming weeks, but we would most likely stay away from front end going into Q3 at these levels. The Euro rates market was generally in a risk-off mood yesterday, as sovereign spreads pushed wider on the back of very little news flow. The likelihood is there will not be any official news on the Greek rescue package for another two weeks, and judging by the current market behaviour this information vacuum will be negative for peripherals. Whether this lack of information is a serious problem for peripherals will be highlighted by how well the 15Y Spanish Bono is received via an auction next Thursday. Despite the reasonable amount of macro data releases today, not many (if any) will have an impact on rates during this session. Today’s central bank speakers are more likely to have some market impact in terms of schedule events, though Euro-sovereign sentiment remain key influence. orlando.green@ca-cib.com

No news is bad news for peripherals; next Thursday’s 15Y Bono auction will be important hurdle

Euro sentiment remains key with little scheduled news today

FX strategy
Despite policy maker “vigilance” ECB Q1 2012 rate expectations took a hit yesterday

EUR: Heavy on Q1 2012 rate expectations despite “vigilance”. EUR/USD should remain heavy today with German inflation data likely to add to the pair’s bearish tone. May consumer prices should again slow (e.g. 0.2%MoM) maintaining a stable 2.4%YoY inflation rate. Such an outcome is important in the aftermath of yesterday’s ECB statement. Indeed it is instructive that European interest expectations in early 2012 (e.g. as measured by 6x9 FRA’s) moderated significantly yesterday despite governor Trichet’s reiteration of “strong vigilance”. Could is be that the market is shifting focus from an expected July ECB rate hike to the potential for a significant growth downgrade in Europe? Possibly, with the result being further EUR/USD weakness today.

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Fears surrounding a weaker European growth outlook are undermining SEK

SEK: Undermined by weak activity data. Moderating European data appears to have (finally) gained traction with SEK investors. EUR/SEK has risen swiftly in June with the pair up over 2%Mtd. Importantly similar underperformance is reflected on an NEER basis (-1.4%Mtd) to suggest SEK selling has been broad based. Thus today’s expected moderation in April industrial production and orders data is potentially significant given the Riksbank’s relatively aggressive policy stance. Should a stronger European slow-down become reflected in leading Swedish activity indicators, SEK could move quickly – particularly against less exposed currencies like NOK and CAD. NOK: Ignoring Brent’s latest OPEC induced spike. Despite the near $6bl rise in Brent oil this week NOK has remained curiously heavy. Such performance contrasts against a strong historical connection between oil prices and currency performance. Similar to Sweden (see above), recent NOK weakness appears based upon concerns regarding the European growth outlook. While such concerns are valid, NOK should remain relatively insulated to any meaningful deterioration in the European growth outlook. This insulation stems from Norway’s strong oil export exposure and the associated government pension fund. Thus we maintain a constructive NOK outlook, and would recommend European growth pessimists add NOK/SEK longs on any May inflation related weakness. Technically, EUR/GBP is still moving higher on the daily (and weekly) cloud patterns, but the extended upmove needed a correction, but is now heading back to the Ichimoku conversion and base lines, which act as a rolling 50% retracement levels on a 9-day and 26-day time horizon. They should offer support at 0.8815 and 0.8824 respectively, with signs that the conversion line will now move above the base line (a bullish confirmation), just below the 38.2% Fibonacci retracement level at 0.8834 (from the 0.86060.8975 upmove that started in late May). adam.myers@ca-cib.com simon.smollett@ca-cib.com

European growth pessimists should consider NOK/SEK longs

Emerging Markets – Key events – Friday 10 June
GMT 8:00 13:00 15:00 RO BZ MX Indicator/Event Consumer Prices (YoY) Retail Sales (YoY) For MAY APR Cons. 8.50% -CA-CIB f/c 8.60% -Prev. 8.30% 4.10% Likely to provide a more benign outlook on inflation Comment Inflation should peak this summer

Central Bank Monetary Policy Minutes

Emerging markets
EM improvement but fragile as Chinese figures are disappointed

The emerging positive momentum is finally getting firmer with EM FXs stronger vs EUR as well USD yesterday. Rate wise, EMEA rates are finally going upwards. Nevertheless discrepancies between EMEA, LatAM and Asia remain the same. It seems indeed hard to stop the bull flattening of Asian rates. The Chinese trade data published overnight should not change it and may weigh on EM market sentiment this morning, all the more since the macro calendar is light. It is Russia which will garner most part of the attention but it could hard affect the global EM mood.

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Disappointing Chinese data weigh on sentiment

Indeed, Chinese exports growth slowed sharply in May, to 19.4% YoY from 29.9% YoY in April. The slowdown was driven mostly by base effects and does not indicate any significant deterioration in external demand. To a small degree, it may reflect weaker output due to power shortages. On the other hand, imports growth surged to 28.4% YoY from 22.0% YoY, by far beating consensus and reflecting actual pick-up in purchases. Trade surplus widened to USD 13.1 bn, but this is down by a third from a year earlier and well below consensus. Today, it is Russia which will garner most part of the attention. Russian central bank will publish today statistics on external trade for April. Trade balance will likely reach all-time high of USD19.7 bn driven mainly by the high oil prices. First estimate of non-cis import for May that was published by customs earlier this week showed 49.1% YoY growth rate. Thus strong trend in import growth remains in place (it is driven mainly by investment goods and durables). This combined with the fact that volumes of export are stagnating, means that if we won’t see further fast oil price growth, trade balance will start to decline and break-even oil price for current account will exceed USD90/bl by year-end. In Brazil, retail sales will provide an opportunity to gauge demand side pressures on inflation. Market consensus stands at 0.4% MoM or 11% YoY. This indicator will likely shed light on how macro prudential measures and higher rates are working aiming to curb consumption and credit demand. In Mexico, May’s headline inflation came out at -0.74% MoM, 3.25% YoY lower than market expectations of -0.66% MoM. The bulk of the decline was concentrated in electricity (-18.81%), the always volatile tomato prices (36.31%) and cucumbers (-45.98%). The core measure showed a 0.18% MoM increase or 3.12% YoY, well within Banxico’s inflation target range. It is worth mentioning that price deceleration for this measure concentrated in services and merchandise not including food items. Bottom-line: inflation is well tamed and still not showing significant demand side pressures. We expect Banxico to remain in the sidelines until Q1 2012. frances.cheung@ca-cib.com darisuz.kowalczyk@ca-cib.com mario.robles@ca-cib.com guillaume.tresca@ca-cib.com

Russia: fast growing import is for now compensated by high oil prices

Brazil: demand side pressures?

Mexico: no hikes until Q1 2012

Commodity markets
 OPEC surprised the markets on Wednesday, by not reaching agreement at its Vienna meeting. This outcome of the meeting does not appear particularly bullish, however. Non agreement on production means, in particular, no agreement to “maintain current production levels” (communiqué of the previous December 2010 meeting in Ecuador). Members willing to increase production would feel free to do so, and more oil could flow to the market with this non-agreement than under a more restricting deal. During the meeting, according to Saudi Arabia Oil Minister, UAE, Kuwait, Qatar and Saudi Arabia, proposed to increase production compared to the current level (estimated by OPEC at 28.8Mbd) by 1.5Mbd to 30.3Mbd. These four countries hold 3.75Mbd of spare capacity, 83% of total OPEC spare capacity. The proposal was rejected by Algeria, Angola, Venezuela, Iran, Libya and Ecuador – representing less than 11% of OPEC spare capacity who wanted to leave production unchanged. Oil markets will need more crude oil from OPEC in the coming month, more or less what Mr. Naimi was suggesting. Mr. Naimi, after the meeting, made it clear that Saudi Arabia will do its best to

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provide part (or all, if need be) of it. UAE, Kuwait and Qatar are likely to also increase production. This could reduce spare capacity in the group to 1.5Mbd at the end of the year, which appears supportive for prices. On the other hand, (1) the assumption that Libya will remain out of the market through the end of the year is strong (2) it is very likely that some other OPEC members (Angola for example) will increase production and (3) Saudi Arabia is accelerating the development of new fields. In any case, if prices remain above 115$/bl for much longer, economic growth and oil demand are likely to be severely impacted, reducing the call on OPEC in 2H11. christophe.barret@ca-cib.com

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European Government Bond Auction Calendar
Announcements highlighted, otherwise Crédit Agricole CIB expectation
Country Germany France France France France France France Spain Spain Belgium Belgium Belgium Belgium Germany Italy Italy Italy Italy Italy France France France Spain Spain Austria Austria Belgium Finland Italy Italy Netherlands Germany France France France France Spain Netherlands Germany Italy Italy Italy Italy Italy Germany Spain Austria Germany France France France Spain Germany Italy Italy Italy Date 18-May-11 19-May-11 19-May-11 19-May-11 19-May-11 19-May-11 19-May-11 19-May-11 19-May-11 23-May-11 23-May-11 23-May-11 23-May-11 25-May-11 26-May-11 27-May-11 30-May-11 30-May-11 30-May-11 01-Jun-11 01-Jun-11 01-Jun-11 02-Jun-11 02-Jun-11 07-Jun-11 07-Jun-11 07-Jun-11 08-Jun-11 08-Jun-11 14-Jun-11 14-Jun-11 15-Jun-11 16-Jun-11 16-Jun-11 16-Jun-11 16-Jun-11 16-Jun-11 21-Jun-11 22-Jun-11 24-Jun-11 27-Jun-11 28-Jun-11 28-Jun-11 28-Jun-11 29-Jun-11 30-Jun-11 05-Jul-11 06-Jul-11 07-Jul-11 07-Jul-11 07-Jul-11 07-Jul-11 13-Jul-11 13-Jul-11 13-Jul-11 13-Jul-11 Description 5Y Obl - Apr 16 2Y BTAN (new) - Sep 13 4Y OAT - Oct 15 5Y OAT - Apr 16 Linker - Jul 16 Linker - Jul 19 Linker - Feb 16 10Y SPGB - Apr 21 30Y SPGB - Jul 41 2Y OLO - Sep 13 7Y OLO - Jun 17 10Y OLO - Sep 21 15Y OLO - Mar 22 10Y Bund - Jul 21 2Y CTZ - Apr 13 Linker - Sep 21 CCT - Apr 18 3Y BTP - Apr 14 10Y BTP - Sep 21 7Y OAT - Apr 18 10Y OAT (new) - Oct 21 15Y OAT - Oct 23 3Y SPGB - Apr 14 5Y SPGB - Apr 15 10Y RAGB - Apr 22 30Y RAGB - Mar 37 15Y OLO (new) - Mar 26 10Y RFGB - Apr 21 Linker (new) - Sep 26 5Y BTP - Apr 16 3Y DSL - Jan 14 2Y Schatz - Jun 13 2Y BTAN 3Y BTAN 5Y BTAN (new) Linker 15Y SPGB - Jul 26 5Y DSL (new) - Jan 17 10Y Bund - Jul 21 Linker 2Y CTZ 10Y BTP 3Y BTP CCT 5Y Obl - Apr 16 10Y SPGB (new) 30Y RAGB (new) 2Y Schatz - Jun 13 10Y OAT 15Y OAT 30Y OAT 5Y SPGB - Apr 16 10Y Bund 5Y BTP 15Y BTP 30Y BTP Realised / Expected Bn 4.91 4.48 2.72 1.28 1.20 0.41 0.38 2.50 0.72 0.68 0.65 1.20 0.86 4.17 2.00 1.50 1.83 2.95 3.50 1.55 5.00 1.93 2.75 1.20 0.88 0.88 3.50 1.50 3.00 4.00 2.50 - 3.50 6.00 2.00 1.00 5.00 1.75 2.50 5.00 4.00 1.50 2.25 3.50 2.25 2.00 6.00 4.00 3.00 5.00 4.75 2.25 2.50 3.00 4.00 3.00 2.00 1.50 Comments well covered by comp bids - b/c 1.9 - avg yld 2.45% upper size bracket, slight cheapening b/c 2.02 - avg yld 2.04% large liquidity injection, underperformed Obl b/c 1.99 - avg yld 2.67% tiny portion of bids served b/c 4.5 - avg yld 2.8% max of announced range b/c 2.28 - avg yld 0.64% still substantial bids b/c 3.59 - avg yld 0.98% b/c 3.84 - avg yld 1.57% expensive to the market, tightened to Italy b/c 1.83 - avg yld 5.395% nice outperformance b/c 1.97 - avg yld 6.0% this maturity still has the best cover of OLO taps b/c 2.84 - avg yld 2.447% issued rich to the market, good post auction b/c 1.72 - avg yld 3.753% 2bp premium and 2bp rally vs OATs and BTPs b/c 1.67 - avg yld 4.202% off-the-run 15Y, in demand at the auction and after b/c 1.53 - avg yld 4.198% issued at 4c premium despite low yield b/c 1.7 - avg yld 3.04% went well, ok performance b/c 1.74 - avg yld 2.851% top of announced range traded flat post auc b/c 1.51 - avg yld 2.51% mediocre auction, lost 7c post auc, b/c 1.59 avg yld 3.00% massive concession pre auction, timid bids b/c 1.5 - avg yld 4.73% large tap in a spread widening environment b/c 1.34 - avg yld 3.43% bond in demand, held well in the market b/c 2.95 - avg yld 3.02% largely overbid, overperformed Bund post auction b/c 2.54 - avg yld 3.5% max of expected size b/c 1.97 - avg yld 3.63% decent size, issued rich to the market b/c 2.49 - avg yld 4.04% 3bp premium, richened vs BTPs b/c 2.9 - avg yld 4.23% timid bids b/c 1.81 - avg yld 3.477% good size for long end b/c 1.75 - avg yld 4.011% via syndication, ms+83bp 2bp premium over the market, mild widening vs bund b/c 1.61 - avg yld 3.33% syndication, BTPei Sep 23 +27bp

Previous auctions

Upcoming auctions

Source: Issuer websites, Crédit Agricole CIB

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FIM Research
Hervé Goulletquer Head of FIM Research hervé goulletquer@ca-cib.com +33 1 41 89 88 34

Global FX Research
Mitul Kotecha Daragh Maher Simon Smollett Adam Myers Head of Global FX Strategy Deputy Head of Global FX Strategy Senior FX Options Strategist/Technical Analyst Senior FX Strategist mitul.kotecha@ca-cib.com daragh.maher@ca-cib.com simon.smollett@ca-cib.com adam.myers@ca-cib.com +852 2826 9821 +44 20 7214 7469 +44 20 7214 5609 +44 20 7214 7468

Commodities Research
Christophe Barret Robin Bhar Global Oil Analyst Senior Metals Analyst christophe.barret@ca-cib.com robin.bhar@ca-cib.com +44 20 7214 6537 +44 20 7214 7404

Emerging Markets Research
Sébastien Barbé Frances Cheung Dariusz Kowalczyk Maxim Oreshkin Mario Robles** John Sfakianakis Guillaume Tresca Vladimir Vale Head of EM Research and Strategy Senior Strategist – Asia ex-Japan Senior Economist/Strategist – Asia ex-Japan Senior Strategist – Russia and CIS Senior Strategist – Latin America Chief Economist BSF Crédit Agricole Group Emerging Markets Strategist Chief Strategist Crédit Agricole Brasil SA DTVM sébastien.barbé@ca-cib.com frances.cheung@ca-cib.com dariusz.kowalczyk@ca-cib.com maxim.oreshkin@ca-cib.com mario.robles@ca-cib.com johns@alfransi.com.sa guillaume.tresca@ca-cib.com vladimir.vale@ca-cib.com +33 1 41 89 15 97 +852 2826 1520 +852 2826 1519 +7 495 937 0581 +1 212 261 7736 +9661 276 4611 +33 1 41 89 18 47 +55 11 3896 6418

Global Interest Rate Strategy
David Keeble** Luca Jellinek Peter Chatwell Orlando Green Global Head of Interest Rates Strategy Head of European Interest Rates Strategy Interest Rate Strategist Interest Rate Strategist david.keeble@ca-cib.com luca.jellinek@ca-cib.com peter.chatwell@ca-cib.com orlando.green@ca-cib.com +1 212 261 3274 +44 20 7214 6244 +44 20 7214 5289 +44 20 7214 7467

Macro Research
Isabelle Job Hélène Baudchon Frederik Ducrozet Slavena Nazarova Michael P. Carey** Sireen Harajli** Susumu Kato Yoshiro Sato Head of Macro Research Economist - USA Economist - Eurozone Economist – UK, Scandinavia Chief Economist - North America Associate – North America Chief Economist - Japan Associate – Japan isabelle.job@credit-agricole-sa.fr helene.baudchon@credit-agricole-sa.fr frederik.ducrozet@ca-cib.com slavena.nazarova@ca-cib.com michael.carey@ca-cib.com sireen.harajli@ca-cib.com susumu.kato@ca-cib.com yoshiro.sato@ca-cib.com +44 20 7214 5767 +33 1 43 23 27 61 +33 1 41 89 98 95 +33 1 41 89 99 18 +1 212 261 7134 +1 212 261 7139 +81 3 4580 5336 +81 3 4580 5337

Asset Allocation
Jean-François Perrin Asset Allocation Strategist jean-françois.perrin @ca-cib.com +33 1 41 89 94 22
** employee(s) of Crédit Agricole Securities (USA), Inc. Certification The views expressed in this report accurately reflect the personal views of the undersigned analyst(s). In addition, the undersigned analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Simon Smollett, Adam Myers, Frances Cheung, Orlando Green, Frederik Ducrozet, Christophe Barret, Kintai Cheung Important: Please note that in the United States, this fixed income research report is considered to be fixed income commentary and not fixed income research. Notwithstanding this, the Crédit Agricole CIB Research Disclaimer that can be found at the end of this report applies to this report in the United States as if references to research report were to fixed income commentary. Products and services are provided in the United States through Crédit Agricole Securities (USA), Inc. Disclaimer © 2011, CRÉDIT AGRICOLE CORPORATE AND INVESTMENT BANK All rights reserved. This research report or summary has been prepared by Crédit Agricole Corporate and Investment Bank or one of its affiliates (collectively “Crédit Agricole CIB”) from information believed to be reliable. Such information has not been independently verified and no guarantee, representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. This report is a “commercial communication” as defined in article 6 of the Directive 2000/31/CE of 8 June 2000. For the avoidance of doubt, it is not a “communication à caractère promotionnel” within the meaning of the Règlement General AMF. It is provided for information purposes only. Nothing in this report should be considered to constitute investment, legal, accounting or taxation advice and you are advised to contact independent advisors in order to evaluate this report. It is not intended, and should not be considered, as an offer, invitation, solicitation or personal recommendation to buy, subscribe for or sell any of the financial instruments described herein, nor is it intended to form the basis for any credit, advice, personal recommendation or other evaluation with respect to such financial instruments and is intended for use only by those professional investors to whom it is made available by Crédit Agricole CIB. Crédit Agricole CIB does not act in a fiduciary capacity to you in respect of this report. Crédit Agricole CIB may at any time stop producing or updating this report. Not all strategies are appropriate at all times. Past performance is not necessarily a guide to future performance. The price, value of and income from any of the financial instruments mentioned in this report can fall as well as rise and you may make losses if you

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10 June 2011

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