The Weekly

Hans F. Olsen, CFA - Head of Investment Strategy Americas +1 212 526-4695 hans.olsen@barclayswealth.com

12th August 2011 CONTENTS: Page 3: Equities Page 5: Fixed income Page 7: Currencies Page 10: Commodities

THIS WEEK IN MARKETS And Back to you Europe

Separating the signal from the noise in this weeks market gyrations tested the senses. The US downgrade played out as expected with the attendant stock market volatility. Add in disconcerting data on productivity and employment costs and the rise in credit default swaps for France and Germany and the global sell-off we are in the midst of, makes sense. I suspect that investors are suffering headline fatigue and are voting with their feet. Our baseline view of the world remains that we will not slip into another recession. The economy continues to grow, albeit slowlypainfully slowly. However, with the release of revised first quarter data on GDP and productivity, along with recent soundings on the manufacturing and service sectors, the risk of another slide into recession is rising. Watching for this development, our focus remains on employment and consumer behavior. With roughly 70% of the economy being consumption related, it is the consumer who holds center stage in this drama. Judging from the increase in July retail sales, the consumer continues to do his part supporting the economy. The real locus of the current sell off is Europe. The cost of insuring against German and French sovereign default has increased over the past week. The market is clearly worried about France. Pair the move in the sovereign cost of insurance and increasing risk aversion of European banks to lend to each other (gauged via the Euribor-OIS spread), and the convulsive reaction to the market becomes clear. Something is rotten in the heart of the Euro Area. These stresses will push European policymakers to lean even harder into supporting periphery economies while also buttressing their own fiscal positions. The news flow from Europe will likely be the driving force for markets over the next week. Watch for comments from the ECB, Germany and France that they stand ready to do whatever is necessary to support the Euros integrity.

Nightmare on Wall Street

The fear trade is in vogue. The Swiss Franc, Gold, Yen, and U.S. Treasuries have benefited from the global dyspepsia. Gold is up more than 20% since July 1st, the price chart for the barbarous relic has gone parabolic in a full-throated repudiation of fiat currencies.

Figure 1 Recessions 1945-2009

Recession Period 11/1/1948-10/1/1949 7/1/1953-5/1/1954 8/1/1957-4/1/1958 4/1/1960-2/1/1961 12/1/1969-11/1/1970 11/1/1973-3/1/1975 1/1/1980-7/1/1980 7/1/1981-11/1/1982 7/1/1990-3/1/1991 3/1/2001-11/1/2001 12/1/2007-6/1/2009 Average Duration of Contraction (month) 11 10 8 10 11 16 6 16 8 8 18 11 -0.50% -2.60% -2.80% -1.60% 0.40% -1.10% -1.70% -1.50% -0.90% 0.00% -4.60% -1.50% -6.70% 16.60% -12.30% 11.70% -10.70% -24.20% 6.50% 4.40% 3.50% -12.70% -36.30% -5.50% Decline in Real GDP Decline in S&P 500

Source: Bloomberg, Barclays Wealth Strategy,

Cont. 1

Investors are grappling with two primary questions: will the US slip into another recession and will the Euro survive? While the risks have risen as economic activity has slowed, the fact remains that jobs are still being created, corporate profits remain robust and resilient, and the consumer is still spending. On survival of the Euro, there has been too much political and financial capital expended to let it die. Currency unification is an enormous and complicated enterprise. Decades in the planning, Euro zone leaders have shown one consistency: the willingness to do whatever it takes to support one another in the name of economic union. Undoubtedly, this will lead inexorably to further economic integration and the likely creation of a Euro zone Ministry of Financethe European counterpart to the US Treasury Department. Some have posited the notion that this will create the United States of Europethat is, if the German populace doesnt say, Genug!

Portfolio Implications
We have been preparing our portfolios over the last several months for this environment. Ahead of the market pull back this week, we raised cash by four percent adding to the existing over weight to cash created by our reduction in emerging market debt and corporate bonds at the end of June. As the market recedes, appealing opportunities emerge. Notably, dividend paying stocks become even more fetching by the day as yields rise. In an environment where investors are starving for income, dividend paying stocks offer the best of both worlds: generous income and an undated call option on future prosperity a compelling combination. In a testament to diversification, our macro managers who are long volatility are performing well posting positive returns.

Economic War Games

Playing out what would likely happen under different economic scenarios is instructive. Looking at recessions since 1945 (Figure 1), the average length of a contraction is 11 months and the decline in economic activity is 1.5%. The stock market, on average, declines 5.5%. Earnings on average decline 15.7%. Even if S&P 500 earnings decline 15.7% from the current 2011 consensus estimate of $99.35, the market would still be trading at a price/earnings multiple of 14, below its 10-year average. At current levels, Mr. Market has more than discounted a recessionary outcome. What if the pessimists are wrong? With the market trading at under 12 times this years earnings, a re-rating of US equities are clearly in order. If the level of corporate profits remains as resilient in the second half of the year as they were in the first, then the S&P should see a 20% or more gain from current levels. If, as expected, the economy does not slip into recession, the market is cheap by several multiple points. Even with 1.5-2% GDP growth, while not recessionary, such weak growth certainly feels like the economy is in a funk.

A Different View
The rush to sovereign debt as a haven of safety is understandable. What is less apparent is how expensive this debt has become. Consider Figure 3. Figure 3 shows the price earnings ratio for the 10-year reference security for sovereign nations and compared the results to each countrys corresponding equity market. The results are noteworthy. The bull market in sovereign debt is at extremes. With a multiple of 46, the US government debt looks extremely overvalued compared to the equity market. Combine this with a negative real yield and the case for sovereign debt is thin. Indeed, at these levels, it is hard to make a case for Developed Market Bonds as the asset class is long risk and short much in the way of return.

Figure 2 10-year US treasury (yield)

Yield 4.5% 4.0%

Figure 3 Relative valuations of bond and equity markets P/E (x)

P/E (x) 1 00 90 80 70 89

3.5% 3.0%

60 50 40 30 20 9 35 24 1 2 1 4 1 2 1 0 1 0 41 45 38 32 20 8 9 1 0 20 9 1 2 1 2 1 2 39 39 48 46

2.5% 2.0%

1 0 0

1 .5% Jan-2008

Austria Sep-2008 MayJan-201 0 Sep-201 0 May-201 1

Finland

Italy

Spain

US

P/E Equivalent of 1 0-Year Gov't Bond

P/E MSCI Equity Index

Source: Bloomberg, Barclays Wealth

Source: Bloomberg, Barclays Wealth

EQUITIES
William Hobbs - Research, Economics & Strategy +44 (0)20 3555 8415 william.hobbs@barclayswealth.com

EQUITIES
OUR CONVICTIONS Markets to make progress in
2011

THIS WEEK
Markets pricing in double dip recession Earnings season continues to provide relief from mixed economic news Valuations imply a significant opportunity across developed markets

Developed preferred to GEMs Tech, cyclical consumer and

energy sectors preferred

Opportunity knocks
Equity markets continued to oscillate wildly this week, though to little end effect. The S&P put us through 4 days of moves in excess of 4% and yet finished trade last night almost exactly where it began the week. On a very short term view, this looks to be a fair assessment of the week by the market. The news from Standard & Poors was not unexpected and seemed to do little to deter the feeding frenzy on US government bonds, while the FOMC statement similarly provided little we didnt already know about. Sentiment is still being dictated by fears of a US double dip recession and by fears the European sovereign debt crisis is creeping closer to the core of Europe. At times in the last two weeks, it has seemed the only anomaly in all the negative data and news flow has been the Q2 earnings season in the US. There are those who dismiss corporate earnings as a backwards looking indicator, which to some extent is fair. However, for those of the belief that US economic growth is already in negative territory, we would counter that the average peak in annualised trailing earnings has tended to come five months prior to the beginning of a recession (looking at S&P 500 earnings changes during post WWII recessions) and there are only two occasions that earnings were still rising, as they are now, when a recession actually began - the 1974 - 75 oil shock and the 1981 82 monetary policy induced recession. Figure 1: S&P Price to 12month forward earnings
(x) 24 22 20 1 8 1 6 1 4 1 2 1 0 8 Aug-01

Our colleagues at Barclays Capital suggest that Q3 earnings would have to miss bottom up consensus forecasts by some 14% for the year on year growth rate to actually fall. This would represent quite a one quarter turn around for a broadly unleveraged corporate sector, in seemingly robust health. We mentioned the ongoing Q2 earnings season in last weeks weekly, but one week on, the situation remains little different. Nearly 90% of the constituents of the S&P have already reported earnings and on average they have managed to beat consensus expectations by an average of 5.7%, registering some 23% earnings growth for the quarter. All of this is not to say that such a collapse in earnings is impossible, but on current evidence, it looks unlikely. As Hans Olsen noted in his piece on the front page, the market has already opted to more than factor in such an eventuality, providing what we see as an attractive opportunity. Yes data has been patchy, and in some cases, outright poor, however we do not think that it points to a double dip yet and still expect the US to manage economic growth in the second half. Stuttering - maybe, slow almost certainly, but growth all the same. If corporates manage to eke out similar levels of profit growth to those seen in the first half, amidst a weak economic backdrop, we would expect the developed equity markets to reward investors with significant gains from these levels. The S&P is trading on a paltry 11x forward earnings forecasts, some 29% below the 10 year average as shown by the chart below. Figure 2 Weekly market performance
YTD % return -25 -20 MSCI dev. mrkts S&P 500 DJ Eurostoxx 50 Nikkei 225 FTSE1 00 MSCI EM

-1 5

-1 0

-5

Aug-03

Aug-05

Aug-07

Aug-09

Aug-1 1

-1 0 Weekly

-8

-6

-4

-2

Price to 1 2month forward earnings

1 Avg 0yr

Weekly % return Year to date

Source: Factset, Barclays Wealth Strategy

Source: Factset, Barclays Wealth Strategy

EQUITIES

EQUITY MARKET DATA AND VIEWS

Market valuation data as at 11th August 2011
MSCI indices
Market capitalization (free float) (%) 86.6 43.4 16.1 8.5 8.3 9.8 13.4 Price to book ratio (x) 1.8 2.2 1.4 1.1 1.8 1.9 1.9 Forecast dividend yield (%) 3.1 2.2 4.8 2.5 4.1 3.0 3.2 EPS growth (%) PE ratio (x) 2011 12.3 13.0 10.5 14.3 10.2 12.7 11.1 2012 10.6 11.3 9.2 11.5 9.1 11.1 9.7

World US Europe ex UK Japan UK Asia ex Japan Emerging Markets

2011 16.0 16.4 7.4 23.1 20.7 13.4 17.8

2012 15.8 15.4 16.7 24.6 11.7 15.7 16.1

EPS and PE ratios are based on IBES (Institutional Brokers Estimate System) consensus data.

Source: Factset, MSCI, Barclays Wealth Strategy

Our preferred markets in an equity-only context

US: overweight
We consider that US equities offer the best risk-reward attractions of all the developed markets. Even in the eventuality of a much slower than expected second half recovery in the US economy, we expect corporates to demonstrate robust earnings growth.

Europe ex-UK: overweight

Valuations for European equity markets are amongst the most attractive in the developed world. Stocks have been punished due to Eurozone sovereign debt concerns, among other things, which present a number of interesting opportunities.

Japan: neutral
We responded to the post-disaster sell-off by closing our underweight call. The yen may not rise far, and valuations have likely undershot. Long-term issues remain, but after the write-down, the chances of a cyclical rebound remain high.

UK: underweight
The FTSE should make progress in the second half of the year, but may be marginally held back by concerns surrounding the implementation of the austerity programme.

EM: Underweight
Emerging market valuations are up with events but we still like the long term outlook. Look to increase emerging market exposure via cheaper developed market stocks.

Figure 3 Regional views and TAA (cross-asset) tilts

MSCI Indices Developed markets US Europe ex UK Japan UK Pacific ex Japan RoW Emerging Markets Total
Market capitalization (free float) (%) SAA weight (%) TAA Tilts (%)
Memo: Bal. Portfolio TAA Tilts (%)

Figure 4 Global sector views

MSCI world index Energy Materials Industrials Consumer Discretionary Consumer Staples Health Care Financials IT Telecoms Utilities Sector weight 11.3 8.1 10.9 10.5 10.6 9.9 18.7 11.8 4.3 3.9 Barclays Wealth 12.8 8.1 10.9 12.0 9.1 9.9 18.7 13.3 2.8 2.4 Tilts 1.5 0.0 0.0 1.5 -1.5 0.0 0.0 1.5 -1.5 -1.5

86.6 43.4 16.1 8.5 8.3 5.2 5.1 13.7 100

81.8 41.0 15.2 8.0 7.9 4.9 4.8 18.2 100

2.5 2.6 1.2 0.0 -1.0 0.3 -0.5 -2.5 0

+7.0 4.0 2.0 0.5 0.0 0.5 0.0 0.0 7.0

Source: Datastream, Barclays Wealth Strategy & Economics

Source: MSCI, Factset, Barclays Wealth Strategy

FIXED INCOME
Fadi Zaher, Fixed Income Strategy, +44 +44(0) 20 3134 8949 fadi.zaher@barclayswealth.com Amie Stow, Fixed Income Strategy, +44 (0) 20 3134 2692 amie.stow@barclayswealth.com

FIXED INCOME
OUR CONVICTIONS Rates to rise only slowly Cash provides portfolio
insurance

THIS WEEK
US treasuries have shrugged off the downgrade with risk aversion dominating flows The ECB has provided some respite to Italian and Spanish bonds Our fixed income portfolios have been rebalanced to reflect our TAA changes

Own fewer corporate bonds

than usual

What a difference a week makes

After the rollercoaster ride in markets this week, the US downgrade seems like a lifetime away. US treasuries have stood strong, with risk aversion flows due to economic uncertainties outweighing any negative impact from the downgrade. The 2-year yield has rallied to a new low of 18bps and the 10-year has rallied from 2.56% last week to around 2.26%. The FOMC statement also drove performance, confirming that economic conditions are likely to warrant exceptionally low levels of the federal funds rate at least through mid-2013, and the bond market now appears to be pricing in the prospect of QE3. The downgrade has led to increased euro area tension with markets now surveying other AAA Sovereigns with scepticism. The spotlight has centred on France despite all three rating agencies confirming the triple A rating this week. The CDS has jumped to 25bps, implying that the probability of a default has risen. Equity markets have also fallen but the government bond market has only seen small moves. We would side with the bond market and believe that debt-to-GDP will stabilise in 2013 unlike the US (Figure1). However, if this dynamic changes we would see risks to the downside. Elsewhere in Europe, the ECB announced at the beginning of the week that it would be re-awakening its Securities Market Programme (SMP) to buy Italian and Spanish debt. The impact on yields has been impressive. 10-year yields are now over a full percentage point lower, taking Spain back to November 2010 levels and Italy back to early July levels. Looking ahead, the ECB cannot sustain this level of buying. Instead we view this as a stop Figure 1 US, France and Germany government debt as a % of GDP
Gross govt debt as %GDP 1 20 10 1 1 00 90 80 70 60 50 40 30 20 1 980 US 1 984 1 988 France 1 992 1 996 2000 2004 2008 201 2 201 6 Germany

gap until the EFSF is put in place. We believe that this is unlikely to be until mid-September at the earliest, as it still has to get approval from the various European parliaments. Until then, the ECB is unlikely to want to push yields much lower but will instead maintain them at a stable level ahead of both Spain and Italy coming back to the markets in September. Over the medium term, fiscal integration is needed in the euro area and we expect more discussions around this at the EU summits this year. Credit markets have also seen considerable volatility, with spreads across investment grade and high yield widening out. In Europe this has been most noticeable in financials. French banks have been the worst hit, with their CDS reaching new highs however, we believe that these solvency concerns are not justified given the strength of balance sheets and solid margins. Overall, on a valuation basis, this sector still looks compelling in our view.

Rebalanced fixed income portfolios

In order to position portfolios for the uncertain months ahead, we have reduced our exposure to government bonds and extended our overweight in cash within our TAA framework. Government bonds look substantially overvalued and we would prefer to have the money in cash as ammunition for attractive market opportunities ahead. In our fixed income portfolios (Figure 3) we maintain a 26% weighting to government bonds, preferring core holdings. We have reduced exposure to index linked gilts because breakevens fell sharply in the past couple of weeks as UK inflation expectations might moderate due to the decline in oil prices. Figure 2 Market Performance

total return (%) UK IL US IL US HY US IG Eur 1 0yr Eur 2yr UK 1 0yr UK 2yr US 1 0yr US 2yr -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 1 0.0% 1 2.0% 1week Yr to date

*IMF forecasts after 2010

Source: IMF, Barclays Wealth

Source: Bloomberg, Barclays Wealth

FIXED INCOME

FIXED INCOME MARKET DATA AND VIEWS

Market data and forecasts
Views at a Glance (% points unless otherwise stated) USD Current level Government Bond Yields (%)
3m 10y 0.01 2.28 up up 0.72 2.32 up up 0.55 2.52 up up

EUR End 2011 (F) Current level End 2011 (F) Current level

GBP End 2011 (F)

Curve (Bps)
3m-10y 227 down 160 down 197 down

Corporate Credit Spreads (Bps)

Investment Grade High Yield 189 706 284 828 800 -

Inflation (%)
CPI 3.6 up 3.1 up 4.2 up

Our investment views for fixed income portfolios

Duration
Interest rate changes look less pressing outside the euro area, but we would stay short duration. We have extended our cash overweight.

Curve
We expect a flattening bias overall, though long end has little room for yields to fall further after recent rally.

Inflation
In the UK we expect that inflation will peak in November before moderating to our long-term average throughout 2012.

Credit Spreads
We are sharply underweight investment grade credit. We are also underweight high yield: valuations look expensive and risk aversion may persist through the autumn.

Figure 3 Stylised Fixed Income Portfolio (USD), med risk

Benchmark Cash and Short-term Bonds Government Bonds Inflation Linked Bonds Total Government Bonds IG Sr Financials IG Sub Financials IG Non-Financials IG FRNs Total Investment Grade Credit High Yield& EM Debt EM debt (Unhedged) Total HY & EM Debt TOTAL % 30.5% 29.0% 4.5% 33.3% 4.6% 2.0% 9.6% 2.0% 18.2% 18.2% 0.0% 18.2% 100% Tilts 32.5% -11.0% 3.4% -7.4% -4.1% -1.5% -9.2% 0.2% -14.5% -12.4% 1.7% -10.8% 0% Weights 63.0% 18.0% 7.9% 25.9% 0.5% 0.5% 0.4% 2.2% 3.7% 5.8% 1.7% 7.4% 100%

Figure 4 Fixed Income Portfolio Tilts and Opportunities August 7th changes Cash: extended overweight reduces risk in the portfolio and leaves funds available for opportunities ahead Government bonds: cut to underweight look substantially overvalued and are trading at low yields but core government bond holdings do provide insurance headwinds out there Investment Grade credit: remain underweight valuations are expensive and event risks like M&A are increasing headwinds. High Yield & Emerging Market bonds: remain underweight market looks fully priced, and potentially vulnerable to macrodriven summer volatility. Concerns about GEM inflation leave that segment looking less attractive.
Source: Barclays Wealth Strategy

Source: Barclays Wealth Strategy

CURRENCIES

CURRENCIES
OUR CONVICTIONS The US dollar to stay soft The Swiss franc to weaken in
time

Petr Krpata, FX Strategy, +44 (0)20 3555 8398 petr.krpata@barclayswealth.com

THIS WEEK Despite the US downgrade, the US dollar remained broadly supported However, the US growth outlooks, coupled with its fiscal position, will likely keep USD soft Speculation about the Swiss franc peg to the euro materially weighed on the franc

Sterling remains cheap

Another dent for the US dollar

When one would think that it cannot get worse (following the stream of disappointing economic data last week), the mood got even gloomier over the weekend. The downgrade of the US to AA+ from S&P after the market close last Friday clearly weighed on risk appetite and dented investors confidence. Despite the dent in confidence originating in the US, the dollar has remained broadly supported. As we wrote in The Weekly on 29/07/2011, we expected the US dollar to remain supported in the aftermath of the downgrade. However, we do not expect this to last for too long as we retain our cautiously constructive view on the global and US economy. Our economists continue to judge that the US economy is likely to recover somewhat later in the year as one-off factors that weighed on the first half of the year, such as high oil prices and supply chain disruptions (due to the Japanese earthquake) are likely to be absent. In this environment of modest growth (both in the US and globally), the demand for the US dollar as a safe haven asset is likely to recede. In addition, the latest FOMC minutes clearly indicated that interest rates are to stay on hold until at least mid-2013. Although that appeared to us as stating the obvious (we did not expect the Fed to hike rates before 2013), the market now has a clear message that one more potential catalyst for the dollar to rebound in the medium term is off the table. Moreover, the necessary fiscal adjustments are yet to take place; the proposed USD 2.1bn measures are a) less than the market (and S&P) was hoping for b) seems to focus more on easily reversible cuts to the discretionary spending rather than other structural issues such the tax base. It is yet to be seen how the fiscal measures will affect the US long term growth outlook. While the medium to longer term dollar prospects do not appear Figure 1 Weekly USD moves against other currencies
JPY SEK EUR NOK CHF CAD GBP AUD NZD -2.2% 0.0% 0.1 % 0.3%

particularly rosy, we expect the currency to range trade against the euro and sterling in the near-term. The world of currencies is about relative value and neither sterling nor the euro are necessarily better alternatives to the US dollar (and vice versa) over the weeks ahead. The ongoing concerns about the viability of peripheral countries are likely to prevent the euro appreciating materially, while the clouded outlook for the UK economic recovery (as underscored by this weeks Inflation Report and the dovish tone of the subsequent press conference) does not make sterling a clear cut better choice. It took guts to trade the Swiss franc this week, with the currency volatility far exceeding other main crosses (Figure 2). With risk aversion dominating markets, the franc rose to near parity against the euro, prompting the Swiss National Bank to further step up its efforts to curb the currency appreciation. The SNB increased the Swiss Monetary Base by a further CHF 40bn and announced additional foreign exchange swap transactions. Although this stopped the franc appreciation, what sharply reversed the currency trend were remarks (and the subsequent speculation) of the SNB Deputy President Thomas Jordan that a franc peg to the euro cannot be ruled out. The currency depreciated against the euro by almost 10% (from its peak to trough) in three days. We remain cautious about near-term prospects for the franc, given the ongoing concerns about the global economic outlook and the sovereign debt situation in the euro area. However, we continue to judge that the currency has a lot of scope to weaken in the long term. The franc now appears extremely rich. Against the euro, the franc is overvalued by 42% and 29%, based on Purchasing Power Parity by OECD and our Fundamental Equilibrium Exchange Rate model respectively. Moreover, the currency strength is likely to spill into the domestic economy while Swiss corporates, such as Nestle, already see the franc strength materially eating into their sales growth. Figure 2 The Swiss francs volatility exceeded other main crosses
3 month Implied Option Volatility, EUR 24 Earthquake in Japan Recent market jitters

20

1 6

0.4% 0.4% 0.6% 1 .0% 1 .9%

8 Jan-1 1 Feb-1 Mar-1 1 1 Apr-1 1 EUR/JPY May-1 1 Jun-1 1 EUR/CHF Jul-1 1 Aug-1 1 EUR/GBP 1 2

EUR/USD

Source: Barclays Wealth Strategy, Ecowin

Source: Barclays Wealth Strategy, Ecowin

CURRENCIES

FORECAST AND OUTLOOK

FX Forecasts (Majors)1
EUR/USD USD/JPY GBP/USD USD/CHF USD/CAD AUD/USD NZD/USD EUR/JPY EUR/GBP EUR/CHF EUR/SEK EUR/NOK GBP/JPY GBP/AUD GBP/NZD GBP/CAD GBP/CHF Spot 1.43 77 1.63 0.77 0.99 1.03 0.83 110 0.88 1.10 9.23 7.83 125 1.58 1.97 1.61 1.26 3 month 1.50 78 1.58 0.88 0.97 1.04 0.81 117 0.95 1.32 8.80 7.65 123 1.52 2.18 1.53 1.39 Forecasts 6 month 1.48 80 1.59 0.93 1.00 1.00 0.78 118 0.93 1.38 8.65 7.60 127 1.59 2.04 1.59 1.48 12 month 1.44 83 1.60 0.98 1.02 0.95 0.76 120 0.90 1.41 8.50 7.55 133 1.68 2.11 1.63 1.57 3 month 5.1% 1.7% -3.0% 14.3% -1.7% 1.3% -1.7% 6.9% 8.4% 20.1% -4.9% -2.6% -1.3% -4.2% 10.3% -4.6% 10.8% Forecasts vs Forward 6 month 12 month 3.8% 1.2% 4.3% 8.2% -2.3% -1.5% 21.0% 28.1% 1.2% 3.0% -1.7% -5.1% -4.7% -5.9% 8.3% 9.5% 6.3% 2.8% 25.7% 29.7% -6.9% -9.0% -3.6% -5.0% 1.9% 6.6% -0.6% 3.8% 2.5% 4.6% -1.1% 1.4% 18.3% 26.2% USD per EUR JPY per USD USD per GBP CHF per USD CAD per USD USD per AUD USD per NZD JPY per EUR GBP per EUR CHF per EUR SEK per EUR NOK per EUR JPY per GBP AUD per GBP NZD per GBP CAD per GBP CHF per GBP

Notes: 1We use Barclays Capital FX forecasts for the 3 month, 6 months and 12 months forecasts. The Forecast vs. Forward is the expected return on a cross-rate long position having accounted for the cost of carry. Confidence intervals determined using Barclays Wealth FX Scorecard, based on popular FX strategies: momentum, value and carry. See FX forecasting: Introducing confidence levels for details.

High confidence: FX indicators strongly supportive of the forecast; historic success rate around 60-85%. Medium confidence: FX indicators mildly supportive of the forecasts; historic success rate around 50-65%. Low confidence: FX indicators not supportive of the forecast; historic success rate around 30-50%.

Our tactical investment views

USD/JPY expected to stay range bound for some time The risk of intervention is likely to limit the downside to USD/JPY (at around 75 level), while the US loose monetary policy, concerns about the US growth outlook as well as its fiscal position is likely to cap the dollar from appreciating materially, at least above USD/JPY 80. Selective Asian currencies remain our favourites over the long-term time horizon The recent risk aversion in markets weighed on Asian currencies such as KRW, MYR, TWD, PHP or SGD. However, we continue to favour these currencies for their supportive fundamentals and expect them to strengthen in the long term. Our view is that the global economy is likely stabilise and rebound in the second half of the year, likely providing support to these currencies.

Our current FX investment strategy ideas

Short CHF, long SEK We judge that the gradual resolution of euro area peripheral problems, low Swiss interest rates, and the francs expensive valuation are all likely to weigh on the franc over the quarters ahead. We favour expressing our bearish franc view via short positions against SEK, which we expect to outperform due to the favourable monetary outlook and robust economy. Position long GBP vs JPY We judge that GBP is likely to outperform JPY in the long term. GBP is inexpensive and is likely to recover due to its improving fiscal position and somewhat more favourable monetary outlook. JPY may stay supported over the weeks ahead but is likely to weaken against GBP in the longer term due to its accommodative monetary policy. Anticipate a gradual renminbi appreciation We expect China to continue allowing the renminbi to appreciate versus the dollar this year after maintaining a fixed exchange rate from July 2008 to June 2010. As forward rates have already priced in some CNY appreciation, we prefer to express the view via a basket of other Asian currencies (SGD, MYR, PHP, KRW, and TWD) versus USD, EUR and JPY.

CURRENCIES

SUMMARY OF VIEWS
G10 currencies
US dollar: Concerns about the US growth outlook, fiscal position, loose monetary policy and current account deficit are likely to continue to weigh on the USD over the quarters ahead. Euro: The euro is likely to remain supported by still favorable interest rate differentials as well as a lack of a credible alternative among the major currencies. However, concerns about the sovereign debt situation in the euro area are risks to the currency. Sterling: Although sterling remains inexpensive, it seems that a catalyst for the currency to appreciate is not in place yet. The feeble UK recovery remains a concern and despite the high levels of inflation, the MPC seems to be in no rush to start the tightening cycle. Japanese yen: We expect the yen to remain supported by the uncertainty about the US fiscal position and global growth prospects over the months ahead. However, loose monetary policy for an extended period is likely to weigh on the yen in the long term. Swiss franc: Currently overvalued, low interest rates for an extended period should likely cause the Swiss franc to weaken in time. Canadian dollar: CAD has benefited from elevated oil prices, but is expensive. It may stay supported against the US dollar due to USD weakness. Australian dollar: Although overvalued, the highest rates among G10 currencies may continue to support AUD. New Zealand dollar: The currency appears overvalued and provides scope for the NZD dollar to fall. Norwegian krone: Healthy economic recovery, interest rate hikes, firm oil prices and a relatively strong fiscal position should support NOK. Swedish krona: Robust economic growth, expected rate hikes and a likely rebound in global growth should cause SEK to appreciate.

Emerging market currencies

Overview: Emerging market currencies, in general, still appear inexpensive relative to their long-run fair values, while many offer attractive yields. However, they are likely to remain very sensitive to investors risk appetite. We continue to favour Asian currencies, although investors should be more selective.

Emerging Asian currencies

A robust economic recovery in Asia and a managed appreciation of the Chinese renminbi (CNY) are supportive of Asian currencies. We expect the Korean Won (KRW), Malaysian ringgit (MYR), Thai baht (THB), Taiwanese dollar (TWD) and Philippine peso (PHP) to rise.

Latin American currencies

The Brazilian Real (BRL) remains attractive for its high yields. Although the government tries to curb BRL appreciation via interventions and capital controls we expect the currency to range trade over the months ahead. The Mexican peso (MXN) is likely to remain sensitive to the outlook for the US economy.

Emerging European and African currencies

We judge that the Czech koruna (CZK) is likely to remain supported due to a healthy economic recovery and some monetary tightening while it benefits from the strongest balance sheet in EM Europe. Some privatization inflows, EUR selling by the Polish Ministry of Finance and healthy economic growth should be Polish zloty (PLN) supportive, but the currency is vulnerable to market sentiment.

Interest rate outlook

Current US (Fed Funds) UK (bank rate) Euro area (Repo rate) Japan (Call rate) Canada (Call rate) Australia (cash rate) Switzerland (overnight rate) Norway (sight deposit rate) Sweden (repo rate)
Note: End-of-period data

0-0.25 0.50 1.50 0-0.1 1.00 4.75 0-0.25 2.25 2.00

2011 Q3 0-0.25 0.50 1.50 0-0.1 1.00 4.75 0-0.25 2.25 2.00

2011 Q4 0-0.25 0.50 1.75 0-0.1 1.25 4.75 0-0.25 2.50 2.25

Forecasts 2012 Q1 2012 Q2 0-0.25 0-0.25 0.50 0.75 2.00 2.25 0-0.1 0-0.1 1.75 2.25 5.00 5.25 0-0.25 0-0.25 2.50 2.75 2.50 2.75

The ECB was the first to hike among G4. We expect the BoE to stay on hold this year while the Fed is not likely to hike until mid-2013 Japans and Switzerlands interest rates are likely to be kept low for an extended period, weighing on the yen and the franc in time. The Australian dollar is the only G10 currencies which offer an attractive yield in money markets. We expect the Norwegian and Swedish central banks to continue in their tightening cycles.
Source: Barclays Wealth Economics and Barclays Capital

Commodity price data

Commodities GSCI Index Oil ($ per barrel, Brent) Gold ($/Ounce) Level 472.5 107 1754 w-o-w %chg mtd %chg -0.4 -4.6 4.5 -6.4 -9.2 8.1 ytd %chg -1.6 15 23.8 Gold to remain supported at current elevated levels as long as concerns about global growth and the euro area problems persist. Oil is expected to remain at elevated levels throughout the year.
Source: EcoWin

Note: Prices at close of business 11 August 2011.

COMMODITIES

COMMODITIES
OUR CONVICTIONS Long-term oil and metal
fundamentals constructive

Tanya Joyce, Commodity Strategy, +44 (0)20 3555 8405 tanya.joyce@barclayswealth.com

THIS WEEK Commodities show signs of stabilising this week but returns are likely to remain volatile When global growth picks up, attractive returns could be made in oil and industrial metals Upside risks for agricultural commodities have increased following cuts to harvest estimates
Despite our view that the global recovery will resume an upward trajectory in the second half of the year, near term investor sentiment will continue to dominate returns. However, when market volatility eventually normalises and global macro indicators start to show signs of further stabilisation, we could see particularly attractive returns within the energy and industrial metals sector with supply-demand fundamentals looking encouraging. Constrained supply-side prospects on the back of potential mine supply disruptions should tighten industrial metal markets, while oil demand growth (driven by EM demand) outpacing supply growth, alongside ongoing MENA tensions and eroding global spare capacity, should help to provide some upward momentum in oil prices in the medium and long-term.

Upside risks for agricultural

commodities

Fear or fundamentals?
Much as with other perceived risk assets, escalating fears about global growth over the last two weeks resulted in a broad-based selloff in commodities. Oil and industrial metal prices dropped even agricultural commodities slipped, despite their supposed immunity to broader macroeconomic concerns. Although prices started to show signs of stabilising this week, with fears of a double-dip recession likely to continue dominating sentiment in the short term, it seems timely to ask whether we are nearing the end of the commodities super cycle? Probably not is the simple answer. Short-term investor sentiment will likely play a very important role in the day-to-day fluctuations in prices and this is likely to continue for some time. But given our expectations of a gradual global recovery, we expect this period of weakness in prices to be short-lived and expect fundamentals to reemerge as the primary driver of prices in the medium and long-term. One important reason why we think the super cycle is not over is because of the increasingly dominant role of emerging economies in commodity markets. The ongoing urbanisation in emerging markets, particularly in China, has meant strong growth in infrastructure and manufacturing, equating to robust demand for raw materials. We still believe that demand in emerging economies will be more than sufficient to offset declining demand from more mature service oriented economies. There are those who highlight that current consumption in developing markets for commodities leaves very little room for further upside. However, as Figure 1 illustrates, there is still a wide disparity between per capita consumption in the emerging world vs. their developed peers. Figure 1 Oil consumption and consumption per capita
mb/d 20 18 16 14 12 10 8 6 4 2 0 United States China Japan India Russia Canada Consumption per capita (lhs) b/yr 30 25 20 15 10

Harvest estimates slashed

The long awaited World Agricultural Supply and Demand Estimates (WASDE) report for August released on Thursday provided no relief for consumers as estimates for this years harvests were slashed. Extreme heat hampered corn and soybean plantings, prompting the US Department of Agriculture to cut their forecasts for US production by 4% and 5%, on the back of lower acreage and yields. This in turn caused US corn and soybeans ending stocks to be revised lower by 18% and 11%, respectively, reaffirming expectations that US and, hence, global inventories would remain critically tight this year and next (Figure 2). While the report was more neutral for wheat as global production was revised higher, it did highlight excessive rain had damaged US crops as expected. Although record high prices suggest an aggressive supplyside response, adverse weather conditions in key producing regions will likely continue to play havoc with this years production, thus setting a solid foundation for firmer prices in the second half of the year. Figure 2 Annual change in global ending stocks
40% 30% 20% 10% 0% -10%

Oil consumption (rhs)

5
-20%

2006-07 Wheat

2007-08

2008-09

2009-10 Est.

Soybeans

Corn

2010-11 Proj. Aug11

2011-12 Proj. Aug11

Source: IEA, CIA World Factbook, Barclays Wealth Strategy

Source: USDA, Barclays Wealth Strategy

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COMMODITIES

COMMODITY MARKET DATA AND VIEWS

Indices, prices and forecasts1
DJ-UBS Indices
Commodity TR Commodity Spot Energy TR Precious metals TR Agriculture TR Industrial metals TR Livestock TR
1

Level
316.2 463.5 213.0 565.9 174.8 366.4 74.1

w-o-w %
0.0 0.7 1.0 3.6 0.0 -5.2 -1.0

mtd %
-3.4 -2.7 -6.9 4.5 0.3 -10.6 -0.6

ytd %
-3.1 0.7 -9.3 22.9 -4.3 -9.8 -1.7

y-o-y %
19.0 27.6 -4.5 62.0 33.2 11.2 2.9

Commodities
Brent Crude oil ($/bbl) WTI Crude oil ($/bbl) Gold ($/oz)

Spot
107 86 1754

w-o-w %
-4.6 -1.3 4.5

mtd %
-9.2 -10.7 8.1

ytd %
15.0 -6.2 23.8

y-o-y %
37.6 10.1 46.4

Forecasts
Brent Crude oil ($/bbl) WTI Crude oil ($/bbl) Gold ($/oz)

Q311
110 99 1560

Q411
115 102 1580

2011
112 100 1509

2012
115 110 1550

Long term
135 137 850

Notes: We use Barclays Capital forecasts for all commodities. All forecasts are average quarterly and average annual forecasts.

Prices and forecasts as at close of business, 11 August 2011

Summary of sector views

All commodities
In our view, commodity prices are likely to firm as the global economy slowly recovers setting a solid foundation for the long-term. Furthermore, current geopolitical risks look likely to remain elevated for some time adding to potential upside risks. However, fluctuating macroeconomic sentiment may well cause returns to be extremely volatile in the year ahead.

Energy
Ongoing tensions in the MENA region alongside tightening fundamentals in the oil market should sustain oil prices at elevated levels, offsetting potential weakness in US natural gas prices due to oversupply. However, a slowdown in global growth may increase downside risks to oil prices in the short-term.

Precious metals
Investment demand remains the predominant driver of gold and silver prices and this is unlikely to change in the short and medium-term. When monetary policy tightening cycles in the developed world eventually kick into gear, appetite for safe-haven assets will likely diminish slowly, which should eventually cause prices to ease from current levels in the long-term.

Industrial metals
Global industrial production should continue to slowly recover as the economic recovery finds its feet. This is likely to support OECD and EM demand while tight supply conditions are likely to underpin industrial metal prices in the second half of the year. Tightening credit conditions in China remain a key risk to metals demand growth as a slowdown in Chinese demand could weigh on prices.

Agriculture
Adverse weather conditions, which hampered near-term supply in 2010, are likely to be a key issue in 2011. Inventories for some agricultural commodities are still at very low levels, while demand continues to remain robust. Figure 3 Contributions to DJ-UBS total return index
%m-o-m, nsa 1 2 1 0 8 6 4 2 0 -2 -4 -6 -8 -1 0 Jan-1 0 Energy May-1 0 Agricultural Sep-1 0 Livestock Jan-1 1 Ind metals May-1 1 Prec metals 0.2 0.0 -0.2 -0.4 -0.6 -0.8 -1 .0 -1 .2 1 2 30-Jun-1 1 3 29-Jul-1 1 4 04-Aug-1 1 5 6 1 -Aug-1 1 1

Figure 4 DJ-UBS roll yield

% 0.6 0.4

DJ-UBS CI

Source: Ecowin, Barclays Wealth Strategy

Source: Bloomberg, Barclays Wealth Strategy

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