Lookout Report - S&P Dow Jones Indices...2014/02/07 · 835,000 units, and then resume the existing uptrend in fairly short order, GMI Research believes it will be difficult not to

Financial Market Outlook: Once Again, We’re PayingParticularly Close Attention To Housing

In the aftermath of the disappointing and perhaps weather-influenced U.S. December

employment report, Global Markets Intelligence (GMI) Research, like most market participants,

was inclined to give the economy the benefit of the doubt. This judgment call appeared to be

justified a few weeks later when we learned that U.S. GDP grew by 3.2% in the final quarter of

2013, coming on the heels of the third quarter's 4.1% growth. These last two quarters of

growth represent the strongest back-to-back quarters for U.S. GDP since first-quarter 2012,

suggesting that the economy has retained significant upside momentum heading into 2014. The

path of corporate earnings growth in recent quarters also suggests that U.S. fundamentals have

been on the mend. As of Feb. 7, 2014, S&P 500 corporations have produced nearly sequential

quarterly improvements in earnings growth over the course of 2013 (Q1 5.1%, Q2 4.9%, Q3

5.7%, and Q4 7.5%).

Then the Institute for Supply Management's (ISM) Purchasing Managers' Index (PMI)

collapsed, falling to 51.3 in January from 56.5 in December, dealing a blow to the confidence of

the benefit-of-the-doubt crowd. January's PMI reading is the lowest level we have seen since

May 2013 (50.0). Needless to say, sustained weakness in the PMI would not be consistent with

a bullish outlook for corporate earnings and stocks, as analysts currently expect the S&P 500 to

earn nearly $119 per share in 2014 compared with $109.46 in 2013. Equity markets have

clearly reacted to this weaker-than-expected economic data over the past couple of weeks,

resulting in the largest market correction (5.8%) in over a year. Considering that weather

patterns in the U.S. were considerably more extreme in January than they were in December,

GMI Research is still inclined to give the U.S. economy the benefit of the doubt. This notion was

subsequently reinforced last Wednesday when the service-sector PMI came in better than

expected for January (54.0), the first time the index had beaten its consensus estimate in two

months. Unlike the manufacturing PMI, the services index's results are more in line with the

2.5% to 3.0% U.S. GDP growth we envision for 2014.

All of this discussion about weather-influenced economic indicators in December and January is

being overshadowed by the simple fact that the U.S. housing recovery hit a plateau in the middle

of 2013. Market participants have become accustomed to looking past flat or even declining

housing activity as long as broader economic indicators continue to suggest a more robust U.S.,

Lookout Reportfrom Global Markets Intelligence

February 7, 2014

Michael G Thompson

Managing Director

Global Markets Intelligence

(1) 212-438-3480

[email protected]

Robert A Keiser

Vice President


(1) 212-438-3540

[email protected]

The Lookout Report is a compendium

of current data and perspectives from

across S&P Capital IQ and S&P Dow

Jones Indices covering corporate

earnings, market and credit risks,

capital markets activity, index

investing, and proprietary data and

analytics. Published bi-weekly by the

Global Markets Intelligence research

group, the Lookout Report offers a

detailed cross-market and cross-asset

view of investment conditions, risks,

and opportunities.

27536843 | 108442115

or improving global, macro story. Now that certain high-profile indicators such as the December employment report and

the January PMI have reported much weaker than consensus expectations, market participants can't help but wonder if

the housing slowdown is now affecting the economy at large. GMI Research does not believe this to be the case, but, as we

stated in the prior edition of the Lookout Report, we firmly believe that a much clearer view of U.S. fundamentals should

be evident by the start of the second quarter.

This overview of existing economic and financial market conditions is linked to a larger question, namely what if Fed

tapering and an ensuing housing slowdown is now imparting an undue delayed-reaction negative influence on U.S.

growth? GMI Research has previously stated that we are interpreting the housing slowdown as "a natural but temporary

response by prospective homebuyers to rising mortgage interest rates as the bond market quickly adjusts to the Fed's

removal of unconventional monetary stimulus; and a time of typically weak seasonal demand for housing. Rising rates

essentially are magnifying the seasonal downturn in housing" (see Lookout Report titled, "Fed Tapering, The U.S.

Housing Slowdown, And The Prospect Of 6%-Plus Fourth Quarter S&P 500 Earnings Growth," published Jan. 10,

2014). If we are correct, as we transition from February into March and slowly begin to put winter behind us, we should

begin to see a noticeable increase in U.S. housing market activity. Considering the extremely tight inventory of existing

single family homes offered for sale (just 4.6 months of supply as of December), GMI Research will be closely following

U.S. housing starts and permits among other indicators for preliminary evidence of a resumption of the housing recovery

in spring 2014. As long as housing starts are able to maintain levels that are sufficiently above their mid-2013 low point of

835,000 units, and then resume the existing uptrend in fairly short order, GMI Research believes it will be difficult not to

conclude that the U.S. economic and housing recoveries will remain in solid shape well into 2014 and possibly beyond (see

chart 1).

Financial Market Outlook: Once Again, We’re Paying Particularly Close Attention To Housing Lookout Report from Global Markets Intelligence

2 February 7, 2014

27536843 | 108442115

Chart 1

Inside This Issue:

Macroeconomic Overview

The past two quarters of GDP growth have been the strongest back-to-back quarters of U.S. economic activity since the

first-quarter 2012. Despite this backdrop, recent weaker than anticipated U.S. economic data has caused investors to

carefully scrutinize bullish market assumptions for 2014. Recent disruptive U.S. weather patterns aside, S&P Capital IQ

Global Markets Intelligence Research remains inclined to give the U.S. economy the benefit-of-the-doubt, but we are once

again paying very close attention to housing market related economic indicators for evidence that the U.S. will emerge

strongly from its winter thaw.

Economic And Market Outlook: North American And European Earnings

After hitting a peak of 3.6% on Jan. 27, revenue growth now stands nearly a percentage point lower at 2.8%. This is a

result of recent top-line misses, specifically from big energy companies such as ConocoPhilips, Chevron Corp., and

Murphy Oil Corp., all of which reported last Thursday. The energy sector is the worst performing sector in terms of

revenue performance, with 57% of energy companies missing the S&P Capital IQ consensus estimates, followed by the

consumer staples and materials sectors. On the other hand, sales are strong in the health care and information technology

(IT) sectors. Expectations for 2014 are still strong, but quarterly revenue forecast figures have begun to fall.


3 February 7, 2014

27536843 | 108442115

International Update: Differentiated Currency Patterns Dictate The Direction Of Emerging Market Investments In 2014

Dissimilar developing Asian currency patterns are likely to persist in the coming months thanks to divergences in economic

fundamentals, policy atmospheres, and political trends. Even though lending rate increases by the Indian monetary

authorities seem promising for domestic inflation and foreign exchange prospects, this year's general elections could

decisively reverse foreign investment outflows if the National Democratic Alliance that includes the Bharatiya Janata party

captures enough seats to form a government and install the reform-minded Narendra Modi as prime minister.

S&P Dow Jones Index Commentary: Off To A Poor Start

Emerging markets, which lost 4.0% in 2013, opened 2014 in a weak position and the situation rapidly deteriorated after

the Chinese manufacturing report. Many emerging markets saw their currencies devalued, particularly in Latin America.

Turkey, India, and South Africa all raised their interest rates, but these measures failed to appease the market.

Leveraged Commentary And Data: Leveraged Loans Return 0.65% In January, A Three Month High

Fixed-income returns were turbocharged in early 2014 by a drop in the 10-year yield to 2.72% on Jan. 30, from 3.04% at

year-end. Thus, 10-year Treasuries led the field among the five asset classes we track here monthly, followed by high-grade

bonds, high-yield bonds, and loans, with equities bringing up the rear. This was a reversal of fortune from 2013, when a

126 basis point (bps) rise in the 10-year yield took a toll on high-grade bonds and Treasuries.

R2P Corporate Bond Monitor

European consumer confidence improved sharply (by 1.8), and is now above its long term-average for the first time since

July 2011 thanks to improving job expectations and a brighter outlook. The data from the European Commission also

showed that the eurozone's business climate was virtually unchanged in January at 0.19, compared with 0.2 in December.

Market Derived Signal Commentary: Rising Risk Reflects A Disappointing Holiday Season

L Brands, which owns Bath & Body Works and Victoria's Secret, was another retailer that was negatively impacted by the

holiday season. Sales increased to $2.098 billion from $1.947 billion a year ago and comparable store-sales rose 2% over

the five-week period ended Jan. 4, 2014. However, the company cut its fiscal fourth-quarter (ended Jan. 31, 2014) EPS

forecast to $1.60 from its previous forecast of $1.67-$1.82, citing merchandise margin compression from promotional

activities.

Capital Market Commentary: IPOs, M&A, And Debt

2014 got off to a mixed start for CUSIP requests related to selected debt securities. As indicated below, data from CUSIP

Global Services showed a rebound in security identifier orders for domestic corporate debt issues in January 2014

compared with the final month of 2013. However, from the perspective of year-ago statistics, volume is off by 17.5%. The

retreat in municipal security CUSIP applications continues as January's tally of 762 is off by almost 13% from the

preceding month's count, and off over 23% compared with January 2013.

S&P Fixed Income Index Commentary: Europe's Short Rate Remains Unchanged

Year-to-date, the S&P Eurozone Sovereign Bond Index returned 2.44%, in line with the 2.46% it returned for all of 2013.

There are a number of country-specific stories underlying the broader index. Because this is a market weighted index, the

return of the index will look more like its larger constituents (Italy, France, and Germany). However, if you were to look


4 February 7, 2014

27536843 | 108442115

at the performance of each of the individual countries, it is quite evident that investors have regained confidence in the

credit-worthiness of the once troubled countries such as Ireland, Italy, Portugal, Slovenia, and Spain.

Economic And Market Outlook: North American And European Earnings

North America

Despite what the markets have been telling us these past couple of weeks, earnings season has actually been very strong.

As the third peak week of the fourth-quarter 2013 earnings season comes to a close, growth stands at 7.5%, the highest

growth rate for the S&P 500 since fourth-quarter 2012. The above average number of beats has helped to boost results.

Thus far, 66% of companies have beaten their earnings estimates and 65% of companies have beaten their revenue

estimates, compared with historical averages of 65% and 61%, respectively. Earnings per share (EPS) currently stands at

$28.32, an all-time record for the S&P 500 and the seventh consecutive quarterly record.

Chart 2

However, revenue growth appears to have taken a turn for the worse. After hitting a peak of 3.6% on Jan. 27, revenue

growth now stands nearly a percentage point lower at 2.8%. This is a result of recent top-line misses, specifically from big

energy companies such as ConocoPhilips, Chevron Corp., and Murphy Oil Corp., all of which reported last Thursday.

The energy sector is the worst performing sector in terms of revenue performance, with 57% of energy companies missing

the S&P Capital IQ consensus estimates, followed by the consumer staples and materials sectors. On the other hand, sales

are strong in the health care and information technology (IT) sectors. Expectations for 2014 are still strong, but quarterly


5 February 7, 2014

27536843 | 108442115

revenue forecast have begun to fall.

Chart 3

The best and worst performing sectors for earnings growth are the same ones that we saw in previous weeks. The

telecommunication services sector is still the biggest winner with 85.3% growth, followed by the materials sector at

22.8% and the financials sector at 16.7%. On the downside, the energy sector is estimated to turn in the worst

performance of all 10 sectors, with a -7.9% decline, followed by the utilities sector at -5.3%.

One sector in particular that has been on the decline is the consumer discretionary sector. Although analysts still expect

the sector to report respectable growth of 7% this season, the retailers are taking a particularly hard hit from the

disappointing holiday season and bad weather. The multiline retail, specialty retail, and textiles, apparel, and luxury goods

industries are all estimated to post negative year-over-year growth. Even Amazon.com Inc., an internet retailer, blamed

poor weather conditions on the disappointing results it reported last Thursday. Shipping delays forced the company to

provide shipping reimbursements and issue gift cards.


6 February 7, 2014

27536843 | 108442115

Chart 4

The negative to positive (N/P) ratio for first-quarter 2014 is showing signs of improvement from recent quarters. Already,

78 companies have provided EPS guidance for first-quarter 2014. Of these, 53 are negative, 24 are positive, and only one

is in-line with estimates, producing an N/P ratio of 2.2. This ratio is better than the historical (15 year) average of 2.4, and

is a vast improvement from the 8.0 recorded last quarter, which represented the largest N/P ratio in the history of our

data. A majority of the positive guidance is being issued by IT companies.

Peak earnings season continues next week with 55 companies scheduled to report.

Europe

Fourth-quarter earnings season for the S&P Europe 350 Index is in full swing this week, with 18 companies reporting for

the quarter and an additional nine companies reporting for 2013. Of the companies that have reported for the fourth

quarter, 10 have missed earnings expectations, five have met expectations, and three have beaten their forecasts. Revenues

didn't fare much better, with 11 companies missing sales estimates and seven beating sales estimates.

These poor results brought the year-over-year earnings growth estimate down to 5.9% from the 7.7% we published in our

last report (See: "Lookout Report: Differences And Similarities Between Today And The Start Of 2013," published Jan.

24, 2014). This estimate is based off of the 181 companies that are scheduled to report results for the fourth quarter, as

the FSA does not require them to file quarterly. Analysts anticipate the leading sectors for the fourth quarter will be the IT

and utilities sectors, with year-over-year profit increases of 153% and 66%, respectively. The financials sector, previously


7 February 7, 2014

27536843 | 108442115

in the number two spot, has fallen nearly 20 percentage points since the last publication of this report due to poor bank

earnings.

Analysts currently expect -4.5% growth for the calendar year, which would make 2013 the first year with negative growth

since 2011. The sectors that analysts estimate will be the biggest laggards for 2013 are the utilities and energy sectors, with

-22.3% and -13.7% growth estimates, respectively. Of the nine companies that reported yearly results this week, two

missed earnings estimates while six beat earnings estimates and one met earnings estimates. On the revenue front, four

companies missed sales expectations while five beat sales expectations.

Chart 5

Due to the number of disappointing results over the last couple of weeks, analysts have ratcheted down their overall

calendar-year 2014 estimates to 11% from 14.7% on Jan. 24. Still, if the S&P 350 reaches this level, it will be the highest

profit growth for the index since 2010 (42.5%). The sectors that analysts expect to be negative in 2014 are the

telecommunication services (-9.51%), utilities (-6.2%), and consumer discretionary (-0.75%) sectors, while analysts

estimate that five sectors (energy, materials, industrials, financials, and information technology) will post double-digit

growth for the year.


8 February 7, 2014

27536843 | 108442115

Chart 6

Peak fourth-quarter earnings season for the S&P 350 will continue next week, with 17 companies scheduled to report for

the quarter and 20 companies expected to report full-year results.

Contact Information: Christine Short, Associate Director—Global Markets Intelligence, [email protected]

International Update: Differentiated Currency Patterns Dictate The Direction Of EmergingMarket Investments In 2014

The first 25 business days of 2014 have seen one of the worst sell-offs of emerging market currencies since the 1998

contagion that, at that time, was confined principally to Asia. In spite of the fact that some have performed worse than

others, the widespread dispersion of the rout intercontinentally would ordinarily make a cogent case for outright

disinvestment of developing stock and bond markets, were it not for the persistence of divergences in economic trends and

policy patterns in addition to variations in political stability throughout the emerging world. Indeed, the most vulnerable

currencies--those of developing economies plagued by towering current account deficits--have undergone the steepest

depreciation on a bilateral basis against the U.S. dollar since December 2013. Even some emerging currencies with

comfortable balances of payments surpluses and international reserve cushions, like Russia, have been ensnared in the

vortex. Still, the lack of uniformity to the downside seems encouraging, which may prove rewarding to discerning

investors.


9 February 7, 2014

27536843 | 108442115

Chart 7

Dissimilar developing Asian currency patterns are likely to persist in the coming months thanks to divergences in economic

fundamentals, policy atmospheres, and political trends. Even though lending rate increases by the Indian monetary

authorities seem promising for domestic inflation and foreign exchange prospects, this year's general elections could

decisively reverse foreign investment outflows if the National Democratic Alliance that includes the Bharatiya Janata party

captures enough seats to form a government and install the reform-minded Narendra Modi as prime minister. Elsewhere

regionally, we expect the foreign exchange regimes of Malaysia, Singapore South Korea, Indonesia, Taiwan, and Hong

Kong to resume steadier patterns as a commitment to credit policy vigilance and fiscal probity aid in short-circuiting any

further slide in their respective currencies. Downward pressure on the Philippine peso, by contrast, should remain in effect

amid the clean-up following last year's devastating string of natural disasters. Political instability should continue to

beleaguer the Thai baht.

A re-stabilization of many, if not most, currencies in the Eastern Europe, Middle East, and Africa (EEMEA) region is not

apparent in the immediate offing. Huge foreign account deficits and worsening inflation trends are conspiring to maintain

selling pressure on South Africa's rand and Turkey's lira long past looming national elections in the former and key

municipal balloting in the latter. A disintegrating political alliance opposed to President Jacob Zuma may spell continued

policy uncertainty in South Africa, as his likely re-election does little to end wildcat work stoppages at a number of mining

facilities. In Turkey, the taint of political scandal, together with a deteriorating economic outlook, is showing few signs of

disappearing anytime soon irrespective of relentless efforts by the Justice and Development Party (AKP regime) to curb

public discussion of the issue on the Internet. Needless to say, the currencies of both South Africa and Turkey should


10 February 7, 2014

27536843 | 108442115

remain vulnerable to downside volatility in the months ahead. Contrarily, Israel's shekel and Poland's zloty will proceed to

trade steadily, attracting foreign capital.

Like the EEMEA region, Latin America is still a region of remarkable contrasts, defined by the policy milieu of each

nation. The Argentine peso is the worst performing currency, having depreciated 17.5% and 37.8% in relation to the U.S.

dollar since the ends of 2013 and 2012, respectively, following the peso's effective devaluation last month. Analysts do not

foresee a letup in selling pressures on the peso as a result of the government's relentless intransigence on repaying overseas

bond holders, counterproductive measures to combat inflation, and steadfast adherence to anti-free market policies.

Venezuela's bolivar too will continue to lose value for virtually the same reasons as Argentina's peso. By contrast, the

Mexican peso appears to be on course to appreciate further from current levels because of the pro-market stance of

President Pena Nieto's regime and the central bank's determination to keep inflation from exceeding the upper limit of its

target range. Other beneficiaries of stabilizing domestic conditions could be the Colombian and Chilean pesos and the

Peruvian sol. However, renewed weakness should engulf Brazil's real.

Chart 8

In summary, differentiation of global emerging market foreign exchange patterns distinguishes preferred from undesirable

debt and shares markets in which to invest in Asia, EEMEA, and Latin America. A compelling case for Malaysian,

Singaporean, South Korean, Indonesian, Taiwanese, and Hong Kong currency bonds and stocks is justified by not just

policy stability and transparency, but also generally favorable growth and inflation trends. In the EEMEA region, only the

Polish zloty and Israeli shekel seem attractive from an investment standpoint. Mexico tops the list for Latin


11 February 7, 2014

27536843 | 108442115

America--especially, its energy sector--followed by Colombia, Chile, and Peru depending, of course, on trends in

government policy and macroeconomic fundamentals.

Contact Information: John Krey, Director—Global Markets Intelligence, [email protected]

S&P Dow Jones Index Commentary: Off To A Poor Start

Global markets have not gotten off to a good start in 2014. Developed markets, which returned 24.5% in 2013,

performed well until the Chinese manufacturing report raised concerns about Asian growth. These concerns set off a

global reaction.

Emerging markets, which lost 4.0% in 2013, opened 2014 in a weak position and the situation rapidly deteriorated after

the Chinese manufacturing report. Many emerging markets saw their currencies devalued, particularly in Latin America.

Turkey, India, and South Africa all raised their interest rates, but these measures failed to appease the market.

At this point, money appears to be flowing out of emerging markets, extending the trend that began last year. Some have

speculated that this money could be redeployed in the U.S. under a flight-to-safety scenario. However, the actual dollar

amount of any money flowing out of emerging markets will not have a significant impact in the U.S., given that the U.S

equity market is more than five times the combined value of all emerging markets.

Table 1

Standard & Poor's Global Broad Market Index (Jan. 31, 2014)

Market

value (bil.

$)

Percent of

region (%) BMI member

One

month

change

(%)

13 months

change (%)

Three

month

change (%)

Six month

change

(%)

One year

change

(%)

Two year

change

(%)

Three year

change

(%)

-- -- Global (3.74) 16.61 (0.89) 5.79 11.40 25.35 18.05

-- -- Global

excluding the

U.S.

(4.21) 8.62 (2.72) 5.27 4.34 15.70 2.51

3,797.93 100.00 Emerging (6.40) (10.16) (8.42) (1.70) (12.62) (7.18) (17.22)

13.94 0.37 Egypt 8.02 21.07 16.47 37.38 24.56 36.46 8.55

108.82 2.87 Indonesia 3.57 (21.50) (7.71) (19.80) (23.51) (22.37) (9.84)

65.90 1.74 Philippines 0.40 (7.53) (11.46) (12.49) (14.89) 21.09 45.54

26.66 0.70 Peru (0.67) (28.53) (4.41) 3.30 (29.00) (24.17) (27.96)

10.25 0.27 Morocco (1.67) (1.19) (2.48) 6.23 (0.19) (18.26) (31.06)

115.65 3.05 Thailand (2.14) (14.77) (12.93) (14.12) (21.41) 9.96 25.09

565.15 14.88 Taiwan (3.07) 6.41 (1.25) 3.89 6.10 10.41 (12.35)

10.06 0.26 Czech Republic (3.44) (18.59) (12.52) 4.77 (13.68) (24.16) (38.34)

10.39 0.27 Hungary (4.86) (4.69) (7.59) (2.58) (13.00) (7.10) (34.49)

322.69 8.50 India (4.94) (10.96) (3.69) 4.26 (15.32) (8.81) (21.98)

156.36 4.12 Malaysia (5.02) (0.90) (6.14) (2.30) 3.65 4.04 7.50

75.37 1.98 Poland (5.36) (2.48) (8.32) 6.56 0.22 12.67 (14.39)

931.73 24.53 China (5.97) 0.86 (3.73) 6.93 (3.92) 6.63 (7.27)

225.03 5.93 Mexico (6.54) (6.32) (3.26) (3.64) (11.69) 10.58 4.03

296.61 7.81 South Africa (9.68) (16.53) (11.01) (3.76) (11.90) (10.36) (9.27)

257.20 6.77 Russia (10.11) (11.64) (11.82) (0.59) (16.79) (16.69) (29.43)

418.21 11.01 Brazil (10.83) (27.89) (20.36) (9.06) (29.97) (37.36) (43.06)

73.61 1.94 Chile (12.46) (31.77) (19.34) (16.25) (36.45) (29.60) (36.97)


12 February 7, 2014

27536843 | 108442115

Table 1

Standard & Poor's Global Broad Market Index (Jan. 31, 2014) (cont.)

62.40 1.64 Turkey (12.84) (35.73) (26.71) (26.40) (37.25) (13.09) (28.78)

51.88 1.37 Columbia (12.86) (28.41) (20.58) (18.62) (29.20) (14.86) (16.77)

37,558.13 100.00 Developed (3.47) 20.18 (0.07) 6.61 14.55 29.85 23.18

17,690.10 47.10 Deveoped

excluding the

U.S.

(3.72) 13.67 (1.40) 6.90 8.84 22.07 7.97

217.66 0.58 Denmark 2.81 34.97 10.95 20.62 21.52 64.55 40.67

104.20 0.28 Israel 1.78 15.65 8.85 9.24 15.28 10.69 (13.03)

39.46 0.11 New Zealand 1.50 14.02 (2.69) 7.94 6.50 35.26 38.19

82.66 0.22 Ireland 0.28 43.60 5.97 18.26 33.98 62.85 65.89

402.38 1.07 Italy (0.01) 23.05 0.41 20.14 11.50 27.59 (10.73)

35.44 0.09 Portugal (0.18) 22.49 5.25 16.75 8.28 30.66 (17.90)

55.36 0.15 Austria (1.17) 11.26 (2.49) 13.56 5.58 31.41 (8.95)

489.86 1.30 Spain (1.54) 29.57 1.15 21.63 21.57 30.50 (2.64)

1,270.96 3.38 Switzerland (1.68) 23.62 1.36 8.70 14.38 42.54 33.30

29.02 0.08 Greece (2.46) 42.83 2.96 40.67 28.45 42.70 (33.72)

3,558.33 9.47 Japan (3.24) 20.68 (0.08) 4.33 16.41 21.91 8.79

19,868.02 52.90 U.S. (3.24) 26.54 1.14 6.36 20.08 37.48 40.08

507.54 1.35 Sweden (3.61) 19.45 2.00 6.04 10.41 33.98 12.64

42.16 0.11 Luxembourg (3.91) 5.66 5.72 19.31 2.32 0.62 (30.49)

3,220.10 8.57 U.K. (3.95) 14.47 0.01 7.88 10.41 24.77 18.97

1,517.88 4.04 Canada (4.16) (1.30) (4.10) 1.43 (2.96) (1.60) (10.65)

476.98 1.27 Hong Kong (4.60) 2.68 (3.59) 2.71 (3.35) 15.82 (0.86)

1,305.92 3.48 Germany (4.62) 22.41 2.29 14.13 16.28 41.07 19.21

1,387.23 3.69 France (4.67) 19.66 (2.47) 7.07 13.07 33.44 7.94

743.54 1.98 Korea (5.09) (2.10) (5.58) 7.39 1.48 6.42 1.08

178.18 0.47 Belgium (5.25) 16.90 (1.60) 7.40 13.06 49.45 29.41

407.77 1.09 Netherlands (5.28) 21.52 (1.44) 7.54 12.70 37.05 15.13

1,073.45 2.86 Australia (5.41) (7.03) (11.64) (0.17) (11.79) (2.07) (7.39)

240.90 0.64 Singapore (5.46) (8.28) (8.14) (7.55) (9.95) 3.84 (6.30)

146.54 0.39 Norway (6.37) 1.19 (6.98) (0.17) (4.90) 11.33 (2.44)

156.60 0.42 Finland (6.93) 26.05 (3.09) 19.17 17.39 30.49 (8.22)

Source: S&P Capital IQ.

Contact Information: Howard Silverblatt, Senior Index Analyst—S&P Dow Jones Indices, [email protected]

Leveraged Commentary And Data: Leveraged Loans Return 0.65% In January, A Three MonthHigh

Buoyant technical conditions pushed returns for the S&P/LSTA Leveraged Loan Index to a three-month high of 0.65% in

January, from 0.47% in December. The largest loans that comprise the S&P/LSTA Loan 100 Index underperformed the

overall market slightly, at 0.62%, versus 0.43% in December.


13 February 7, 2014

27536843 | 108442115

Chart 9

Rising loan prices contributed 0.25% to January's return, as the average bid for index loans ran further toward par,

closing the month at a post-credit-crunch month-end high of 98.58, versus 98.29 in December. (For the record, the

average bid peaked at 98.67 on Jan. 23 before inching down later in the month as stock prices fell.)


14 February 7, 2014

27536843 | 108442115

Chart 10

With the bulls in charge, lower-rated paper outperformed in January. In particular, defaulted loans posted outsized gains

(see below).

Table 2

Returns By Type Of Debt

January 2014 (%) 2013 (%) Average bid price

All loans 0.65 5.29 98.58

Performing loans 0.59 5.41 98.98

BB 0.45 3.80 100.25

B 0.60 5.89 100.14

CCC 1.49 10.38 85.02

CCC (excluding TXU) 1.58 12.45 85.22

D 12.82 11.34 55.81

S&P/LSTA 100 0.62 5.02 98.67

Source: S&P Capital IQ LCD.

While loan prices on the whole were higher in January, the rally stalled during the latter part of the month alongside

falling share prices, with the S&P 500 falling 3.6% after reaching an all-time peak. Thus, after returning 0.58% from Jan.

1-17, including 0.34% from market-value gains, loan returns cooled to 0.1%/-0.09% during the balance of the month.


15 February 7, 2014

27536843 | 108442115

The fact that loans held in as well as they did was a tribute to the formidable amount of excess liquidity coursing through

the market. Here's how the numbers break down:

The universe of S&P/LSTA Index loans expanded by $8.7 billion, or 1.3%, to a record $690 billion in January from $681

billion at year-end. At the same time, the amount of visible inflows to the market fell to $6.4 billion--comprising $1.9

billion of collateralized loan obligation (CLO) issuance and an estimated $4.5 billion of growth in loan mutual fund assets

under management (AUM), based on inflow data from Lipper FMI--from $11.3 billion in December.

Chart 11

As this chart illustrates, January's small-bore $2.2 billion technical deficit hardly dented the $28 billion liquidity surplus

that built up in 2013--a number that grows to $65 billion by adding an annualized total of allocations from pension funds

and other institutional accounts, based on the first nine months of data reported by eVestment Alliance. For this reason,

robust new-issue conditions persisted in January. For example, flex activity favored issuers by a score of 34 to three during

the month. As a result, new-issue clearing yields continued to shrink toward the recent lows of early 2013.


16 February 7, 2014

27536843 | 108442115

Chart 12

Likewise, LIBOR floors, on average, fell to a fresh low of 0.96%, from 0.97% in December.


17 February 7, 2014

27536843 | 108442115

Chart 13

And soft-call periods contracted to 7.3 months, on average, from 7.4 in December.


18 February 7, 2014

27536843 | 108442115

Chart 14

Finally, covenant-lite structures again dominated the new-issue market, capturing a record 94% of total first-lien volume

in January, compared with "just" 68% in December.


19 February 7, 2014

27536843 | 108442115

Chart 15

With these trends in mind, repricing remained a focus in January as issuers executed $32 billion of spread-shaving

transactions, versus $21 billion in December.


20 February 7, 2014

27536843 | 108442115

Chart 16

Looking ahead, participants generally expect tone to stay strong in February, though the calendar of merger and

acquisition (M&A) loans--which grew to a five-month high of $26.6 billion on Jan. 29, from $15.8 billion at

year-end--provided a hopeful sign to product-starved accounts.


21 February 7, 2014

27536843 | 108442115

Chart 17

On the other side of the technical ledger, however, managers say demand for loans continues unabated, even though CLO

volume got a flat-footed start in 2014 as a result of stubbornly high 'AAA' liability spreads that pressure model-driven

arbitrage. The reason, managers say, is that retail and institutional accounts have remained willing buyers of loans as a

way to hedge against rising rates.

That said, if equities remain heavy, they will undoubtedly weigh on loan prices. LCD's flow-name composite--our most

timely indicator of market direction--eased from a post-Lehman-bankruptcy high of 100.48 on Jan. 23 to a still-solid

100.03 on Jan. 30. To this point, the big risk to loan returns in 2014 is less a default spike--indeed, the forecast here

remains benign--than a liquidity crunch such as that of August 2011, when a cocktail of exogenous shocks led to a double

whammy for the loan market: (1) retail investors withdrew $5.5 billion from loan mutual funds, according to Lipper FMI,

and (2) high-yield flows ran $4.9 billion into the red, leading some high-yield accounts to sell loans (which by and large

had held in better than bonds). Selling pressure that month tagged the S&P/LSTA Index for a 4.4% loss, the most severe

monthly decline outside the final four months of 2008.


22 February 7, 2014

27536843 | 108442115

Chart 18

Of course, many managers would welcome a modest correction in the months ahead that would stanch the pace of

repricings and improve the economics of CLO deals. Few are banking on such an outcome, however. In fact, the

consensus view for 2014 is for another year of coupon-clipping returns, with any potential price appreciation concentrated

among 'CCC' and defaulted credits, which, as this chart demonstrates, are the only segments of the market that continue

to trade at a discount to par.


23 February 7, 2014

27536843 | 108442115

Chart 19

Coupon-clipping, however, isn't what it was even a year ago. On Jan. 31, the effective yield of the S&P/LSTA Index stood

at 4.55%, down from 4.58% at year-end 2013 and 5% at year-end 2012.


24 February 7, 2014

27536843 | 108442115

Chart 20

Loans versus other asset classes

Fixed-income returns were turbocharged in early 2014 by a drop in the 10-year yield to 2.72% on Jan. 30, from 3.04% at

year-end. Thus, 10-year Treasuries led the field among the five asset classes we track here monthly, followed by high-grade

bonds, high-yield bonds, and loans, with equities bringing up the rear. This was a reversal of fortune from 2013, when a

126 basis point (bps) rise in the 10-year yield took a toll on high-grade bonds and Treasuries.

Table 3

Returns (%)

January 2014 2013

S&P/LSTA Index 0.65 5.29

BAML HY Master (H0A0) 0.74 7.42

10-year Treasury (GA10) 3.18 (7.83)

S&P 500 including dividends (SPX) (3.46) 32.41

BAML High-Grade Corp (C0A0) 1.78 (1.46)

Source: S&P Capital IQ LCD and Bank of America Merrill Lynch.

On a risk-adjusted basis, January's returns had little impact on the cumulative Sharpe ratio of loans since the

commencement of the S&P/SLTA Index in 1997. What's more, loans' place on the leaderboard was unchanged, ahead of

equities but behind fixed-income products, which have ridden a sharp decline in the 10-year rate from 6.34% at the end of


25 February 7, 2014

27536843 | 108442115

1996 to 3.04% on Jan. 31.

Table 4

January 1997-January 2014

Annualized returns (%) Standard deviation of monthly returns (%) Sharpe ratio

S&P/LSTA Index 5.52 1.82 0.47

BAML HY Master (H0A0) 7.91 2.74 0.56

10-year Treasury (GA10) 5.97 2.18 0.45

S&P 500, including dividends (SPX) 8.42 4.62 0.37

BAML High-Grade Corp (C0A0) 6.58 1.58 0.74

Source: S&P Capital IQ LCD and Bank of America Merrill Lynch.

Big movers

As for January's action, bankrupt Cengage Learning topped the leaderboard amid expectations over the past couple of

weeks that a settlement was in the offing, while other large, liquid issues such as Clear Channel Communications,

Caeasars Entertainment, First Data, and H.J. Heinz traded higher with the broader market.

Toys 'R' Us and Gymboree contributed the largest drop to the index last month, as both were under pressure after posting

disappointing results in December. Dell also placed high on the list of the biggest return drags. The computer company's

loan traded off late in the month on its third-quarter results and news of the departure of its CFO.

Table 5

Big Movers

Up S&P loan rating January index return contribution (%)

Cengage Learning D 0.065

TXU CCC- 0.028

Clear Channel CCC+ 0.026

Caesars Entertainment B 0.009

Harrah's Entertainment B- 0.008

H.J. Heinz Co. BB 0.007

Valeant Pharmaceuticals BB 0.005

SuperMedia CCC+ 0.005

First Data Corp. B+ 0.005

IPC B- 0.004

Down

Toys "R" Us B (0.003)

Gymboree B- (0.003)

Laureate Education B (0.002)

Walter Industries B (0.002)

Dell BB+ (0.002)

The Weather Channel B+ (0.001)

Cumulus Media B+ (0.001)

Axcan Pharma B+ (0.001)

North American Breweries B+ (0.001)

J.C. Penney Co. B- (0.001)

Source: S&P Capital IQ LCD.


26 February 7, 2014

27536843 | 108442115

Contact Information: Steve Miller, Managing Director—Leveraged Commentary And

Data, [email protected]

R2P Corporate Bond Monitor

North America

On Jan. 29, 2014, the Federal Reserve (Fed) announced that it would trim its quantitative easing (QE) program by another

$10 billion to $65 billion in February, the second consecutive round of cuts and an indication that the central bank

continues to be confident in the U.S. economic recovery.

Although orders for long-lasting manufactured goods unexpectedly fell 4.3% in December, U.S. consumer confidence rose

to a five-month high of 80.7 in January from 77.5 in December, according to the Conference Board.

Likewise, U.S. home prices rose 13.7% in November, their biggest year-on-year gain in almost eight years in November,

according to Standard & Poor's Case-Shiller 20-City Composite Home Price Index.

Europe

Optimism over the eurozone's economic prospects continued to improve in January as the bloc's two largest economies,

Germany and France, saw an improvement in sentiment. Economic confidence in the 18 countries using the euro

strengthened by 0.5 points to 100.9 for the ninth consecutive month of gains, according to data released by the European

Commission on Jan. 30.

European consumer confidence improved sharply (by 1.8), and is now above its long term-average for the first time since

July 2011 thanks to improving job expectations and a brighter outlook. The data from the European Commission also

showed that the eurozone's business climate was virtually unchanged in January at 0.19, compared with 0.2 in December.

In the corporate world, U.K. companies are at their most confident in nearly a decade according to the latest business

confidence monitor from Grant Thornton and the Institute of Chartered Accountants in England and Wales (ICAEW).

Between late October and late January, 37.2% more firms said they were confident, the highest level since the beginning

of the survey in 2005 and the sixth consecutive quarterly increase.

Credit Markets

These positive economic indicators in both North America and Europe did little to soothe the credit market in terms of

risk. Risk-reward profiles--as measured by average Risk-to-Price (R2P) scores--deteriorated across the board in the month

to Jan. 31 (see tables 1 and 2). Yields decreased sharply while market and credit risk increased on the back of the Fed's

decision to continue tapering economic stimulus in February, triggering chaos in emerging markets and increasing equity

market volatility.

In North America, scores decreased by 15% as a result of an increase in the average probability of default (PD) of 0.02%

and an increase in the historical 20-day bond price volatility (BP Vol.) of 0.03%. At the same time, the average

option-adjusted spread (OAS) tightened by 17 basis points (bps).

In Europe, scores decreased by 12% as a result of an increase in the average PD of 0.003%, an increase in the BP Vol. of

0.02%, and a tightening in the average OAS of 17 bps.


27 February 7, 2014

27536843 | 108442115

Table 6

North American Risk-Reward Profiles By Sector--One Month Avg. R2P Score And Components Change

Scores (%) OAS (bps) PD (%) BP Vol. (%)

Consumer discretionary (17) (20) 0.140 (0.020)

Consumer staples (20) (17) 0.059 (0.015)

Energy (14) (23) 0.000 (0.015)

Financials (19) (11) 0.003 0.223

Health care (12) (21) (0.001) (0.001)

Industrials (18) (15) 0.037 (0.001)

Information technology (15) (12) 0.004 0.008

Materials (19) (24) (0.008) 0.063

Telecommunication services (11) (12) (0.000) 0.022

Utilities (8) (21) (0.001) 0.016

Average (15) (17) 0.023 0.028

One month change to Jan. 31, 2014. Source: S&P Capital IQ.

Table 7

European Risk-Reward Profiles By Sector--One Month Avg. R2P Score And Components Change

Scores (%) OAS (bps) PD (%) BP Vol. (%)

Consumer discretionary (14) (21) 0.012 0.015

Consumer staples (9) (14) (0.001) 0.008

Energy (19) (17) 0.073 (0.007)

Financials (14) (20) (0.003) 0.025

Health care (7) (18) (0.023) 0.028

Industrials (5) (19) (0.006) (0.000)

Information technology (5) (12) (0.004) 0.014

Materials (11) (6) (0.005) 0.089

Telecommunication services (27) (28) (0.005) 0.030

Utilities (12) (21) (0.012) 0.026

Average (12) (17) 0.003 0.023

One month change to Jan. 31, 2014. Source: S&P Capital IQ.

Contact Information: Fabrice Jaudi, Vice President—Global Markets Intelligence, [email protected]

Market Derived Signal Commentary: Rising Risk Reflects A Disappointing Holiday Season

Cautious consumer spending, which necessitated offering steep discounts to lure customers into stores, plagued the 2013

holiday shopping season, and credit investors took note.

The five-year credit default swap (CDS) spread for retailers widened by 83 basis points (bps), on average, to 402 bps over

the 30-day period ended Feb. 3. At the current level, the average spread is equivalent to a Market Derived Signal (MDS)

consumer discretionary benchmark of 'b'.

Three segments of the retailing industry are expected to report year-over-year earnings declines. As of Feb. 4,

fourth-quarter results are expected to decline 10% for distributors, 4.6% for multiline retail, and 2.9% for specialty retail.

However, analysts polled by S&P Capital IQ expect internet and catalog retail earnings per share (EPS) to increase


28 February 7, 2014

27536843 | 108442115

46.07%, highlighting the trend of weak foot traffic.

Thus far in the reporting season, 58.82% of consumer discretionary companies have beaten their consensus estimate,

which is less than the 66.8% for the S&P 500.

Best Buy Co. Inc.'s holiday sales report on Jan. 16 helped trigger alarm in the credit market. Best Buy said that domestic

and international holiday sales declined 2.6% in its fiscal fourth quarter (ended Jan. 31, 2014) and comparable store sales

fell 0.8%. A 23.5% increase in domestic comparable online revenues was the lone bright spot.

The company was essentially forced to offer promotions in order to, as it said, live up to consumers' expectations for

competitive pricing. As a result, Best Buy forecast a 175 bps-185 bps drop in operating income for fiscal fourth-quarter

2014 compared with the year-ago period. Last week, it announced it would cut 950 jobs in Canada to lower costs. On

Feb. 27, analysts expect Best Buy to report fourth quarter EPS of $1.01, which would represent a 38% decline from

fourth-quarter 2013.

L Brands, which owns Bath & Body Works and Victoria's Secret, was another retailer that was negatively impacted by the

holiday season. Sales increased to $2.098 billion from $1.947 billion a year ago and comparable store-sales rose 2% over

the five-week period ended Jan. 4, 2014.

However, the company cut its fiscal fourth-quarter (ended Jan. 31, 2014) EPS forecast to $1.60 from its previous forecast

of $1.67-$1.82, citing merchandise margin compression from promotional activities. A year ago, L Brands earned $1.76 in

the fourth quarter. The company is scheduled to report its quarterly results at the end of February.

Among the 19 retailers with CDS contracts, five have MDSs that are superior to their Standard & Poor's Ratings Services

corporate credit ratings (see table 2). Two companies have MDSs that are in line with their credit ratings, and the

remainder have MDSs that are inferior to their corresponding rating, implying that financial market participants may

believe that the risk of default is greater than what their ratings would suggest.

Table 8

Retailers

CDS (bps) Change (bps) Change (%) Benchmark (bps) MDS ICR OL/CW

AutoZone Inc. 49.6 5.6 12.8 153.5 a- BBB Stable

Best Buy Co. Inc. 360.0 136.9 61.4 403.7 b BB Stable

Dillard's Inc. 161.4 35.0 27.7 292.4 bb+ BB+ Stable

Expedia Inc. 146.3 15.9 12.2 211.8 bb+ BBB- Stable

Gap Inc. (The) 120.7 34.7 40.4 211.8 bbb- BBB- Stable

Home Depot Inc. 32.0 7.2 29.0 73.1 a+ A Stable

Kohl's Corp. 177.3 50.9 40.3 119.8 bb BBB+ Stable

L Brands Inc. 202.7 54.0 36.4 292.4 bb BB+ Stable

Lowe's Cos. Inc. 34.7 8.5 32.6 93.6 a+ A- Stable

Macy's Inc. 80.4 17.0 26.8 119.8 bbb BBB+ Stable

Neiman Marcus Group Inc. (The) 133.6 16.4 13.9 611.8 bb+ B Stable

Nordstrom Inc. 68.4 24.9 57.4 93.6 bbb+ A- Stable

Office Depot Inc. 326.8 64.1 24.4 1,090.7 b B- Stable

Penney (J.C.) Co. Inc. 1,642.2 440.9 36.7 1,944.3 ccc CCC+ Negative

RadioShack Corp. 2,227.7 419.6 23.2 1,944.3 ccc CCC+ Negative

Staples Inc. 230.6 78.1 51.2 153.5 bb- BBB Stable

Target Corp. 48.6 23.2 91.7 63.6 a- A+ Negative


29 February 7, 2014

27536843 | 108442115

Table 8

Retailers (cont.)

TJX Companies Inc. 39.6 6.7 20.3 63.6 a A+ Stable

Toys 'R' Us Inc. 1,561.0 145.7 10.3 1,090.7 ccc B- Stable

Bps--Basis points. CDS--Credit default swap. MDS--Market Derived Signal. ICR--Issuer credit rating. OL/CW--Outlook/CreditWatch. Source: S&P

Capital IQ.

Retailers' earnings results will be pivotal to the risk trend in the credit market. Better-than-expected earnings and positive

guidance could reverse the trend, but the opposite is also true. We will return to the retailers' CDS after the industry's

reporting season concludes to see if the sentiment has changed.

Lisa Sanders, Director—Global Markets Intelligence, [email protected]

Capital Market Commentary: IPOs, M&A, And Debt

IPOs

The U.S. stock market's rough start to 2014, reflected in a 6% decline in the S&P 500 Index, has so far managed to avoid

affecting the initial public offerings (IPO) markets.

To date, 17 companies have priced issues, raising nearly $5.3 billion. Collectively, these issues have gained, on average,

20% from their offer price, with five of these IPOs gaining 25% or more. At this time a year ago, 13 IPOs were priced in

the U.S. market, with more than $7.4 billion raised. A $3.02 billion closed-end fund offering by PIMCO Dynamic Credit

Income Fund and Zoetis Inc.'s $2.2 billion offering provided the bulk of it. The health care sector continues to be the top

performer with three of the top five IPOs.

Table 9

2014 IPOs Ranked By Performance (Year-To-Date)

Date Issuer Value (mil. $) Share price ($) Latest close ($) Change (%)

1/29/2014 Dicerna Pharmaceuticals Inc. 90.00 15 32.66 117.70

1/30/2014 Ultragenyx Pharmaceutical Inc. 121.00 21 39.00 85.70

1/23/2014 Care.com Inc. 91.00 17 28.44 67.30

1/30/2014 Malibu Boats Inc. 100.00 14 18.10 29.30

1/9/2014 GlycoMimetics Inc. 56.00 8 10.01 25.10

1/14/2014 Cypress Energy Partners L.P. 75.00 20 23.46 17.30

1/30/2014 Cara Therapeutics Inc. 55.00 11 12.63 14.80

1/30/2014 The New Home Co. LLC 85.90 11 12.12 10.20

1/23/2014 Rice Energy Inc. 924.00 21 23.00 9.50

1/22/2014 Santander Consumer USA Holdings Inc. 1,799.80 24 25.25 5.20

1/16/2014 RSP Permian Inc. 390.00 19.5 20.50 5.10

1/29/2014 Celladon Corp. 44.00 8 8.00 0.00

1/30/2014 Intrawest Resorts Holdings Inc. 187.50 12 11.60 (3.30)

1/30/2014 Trevena Inc. 64.80 7 6.59 (5.90)

1/15/2014 American Capital Senior Floating Ltd. 195.00 15 13.83 (7.80)

1/16/2014 CHC Group Ltd. 310.00 10 8.73 (12.70)

1/16/2014 EP Energy Corp. 704.00 20 17.06 (14.70)



30 February 7, 2014

27536843 | 108442115

M&A

While the recent turmoil in emerging markets has roiled the equity markets of late, currency gyrations and anxiety over

foreign economic conditions have done little to dissuade corporate or financial buyers from engaging in cross border

merger transactions.

As indicated in the S&P Capital IQ data (see below) , the proportion of cross border merger and acquisition (M&A) deals

relative to worldwide announced deal activity has consistently hovered around 33% share. In particular, aggregate deal

activity in the post-credit crisis period from 2009 to present, —show the percentage of cross border M&A as a percentage

of worldwide deals has remained above 30%. To that end, it would appear that the short-term uncertainties do little to

dissuade cross border M&A transactions.

Table 10

Cross Border M&A As Proportion Of Worldwide M&A

Year Worldwide M&A (bil. $) Cross border M&A (bil. $) Cross border (%)

2000 2,677.5 956.3 35.70

2001 1,380.7 497.2 36.00

2002 1,034.8 333.8 32.30

2003 1,090.0 286.5 26.30

2004 1,748.2 550.6 31.50

2005 2,516.2 875.4 34.80

2006 3,242.8 1,222.6 37.70

2007 3,776.8 1,781.4 47.20

2008 2,341.0 883.6 37.70

2009 1,984.9 616.8 31.10

2010 2,368.2 783.7 33.10

2011 2,882.4 870.8 30.20

2012 2,480.6 869.6 35.10

2013 2,646.1 910.9 34.40

2014YTD 272.5 85.9 31.50


Debt

2014 got off to a mixed start for CUSIP requests related to selected debt securities. As indicated below, data from CUSIP

Global Services showed a rebound in security identifier orders for domestic corporate debt issues in January 2014,

compared with the final month of 2013. However, from the perspective of year-ago statistics, volume is off by 17.5%.

The retreat in municipal security CUSIP applications continues as January's tally of 762 is off by almost 13% from the

preceding month's count, and off over 23% compared with January 2013. Similarly, both long-term and short-term

municipal CUSIP requests slipped in January 2014, compared with December 2013's count, although the recent results

surpassed those in January 2013.

With aggregate CUSIP request volume among those debt securities surveyed below slipping under the 2,000 count, the

early outlook for underwriting activity within these select asset classes may be muted.


31 February 7, 2014

27536843 | 108442115

Table 11

Selected Debt CUSIP Requests

January December 2014 2013 Change (%)

Domestic Corp. Debt 724 618 724 878 (17.50)

Municipals 762 874 762 995 (23.40)

Short term Muni note 109 125 109 90 21.10

Long term Muni note 27 34 27 22 22.70

International debt 186 180 186 220 (15.50)

PPN domestic debt 180 244 180 190 (5.30)

Total 1,988 2,075 1,988 2,395 (17.00)

Source: CUSIP Global Services.

Contact Information: Rich Peterson, Director—Global Markets Intelligence, [email protected]

S&P Fixed Income Index Commentary: Europe's Short Rate Remains Unchanged

The European Central Bank left its key rate unchanged at a record low of 0.25% in the wake of January's very low

inflation.

The central bank's president, Mario Draghi, said the measure of inflation would remain low over the upcoming months,

but he expects it to eventually rise to the central bank's target rate of just under 2%.

He was adamant that there is no deflation in Europe, and explained that the situation in Europe is not similar to Japan's

deflationary period, touching upon the finer points of Europe's inflation and describing how the European economic

recovery is advancing.

Year-to-date, the S&P Eurozone Sovereign Bond Index returned 2.44%, in line with the 2.46% it returned for all of 2013.

There are a number of country-specific stories underlying the broader index. Because this is a market weighted index, the

return of the index will look more like its larger constituents (Italy, France, and Germany).

However, if you were to look at the performance of each of the individual countries, it is quite evident that investors have

regained confidence in the credit-worthiness of the once troubled countries such as Ireland, Italy, Portugal, Slovenia, and

Spain.

Table 12

S&P Index Returns

Index Daily return (%) MTD (%) QTD (%) YTD (%) One year (%)

S&P Eurozone Sovereign Bond Index 0.08 0.13 2.44 2.44 5.66

Country indices

S&P Eurozone Sovereign Bond Austria Index 0.02 0.11 2.28 2.28 2.67

S&P Eurozone Sovereign Bond Belgium Index 0.00 (0.04) 2.35 2.35 3.83

S&P Eurozone Sovereign Bond Cyprus Index (0.91) (23.00) (2.07) (2.07) N.A.

S&P Eurozone Sovereign Bond Finland Index 0.00 0.04 2.05 2.05 2.28

S&P Eurozone Sovereign Bond France Index 0.00 0.02 2.11 2.11 3.46

S&P Eurozone Sovereign Bond Germany Index 0.02 0.08 2.30 2.30 1.73

S&P Eurozone Sovereign Bond Ireland Index 0.26 0.26 2.47 2.47 11.91

S&P Eurozone Sovereign Bond Italy Index 0.17 0.26 2.39 2.39 8.75

S&P Eurozone Sovereign Bond Luxembourg Index 0.06 0.19 2.33 2.33 3.01


32 February 7, 2014

27536843 | 108442115

Table 12

S&P Index Returns (cont.)

S&P Eurozone Sovereign Bond Netherlands Index 0.01 0.04 2.11 2.11 2.08

S&P Eurozone Sovereign Bond Portugal Index 0.41 0.31 6.64 6.64 14.28

S&P Eurozone Sovereign Bond Slovakia Index 0.08 0.20 1.01 1.01 5.04

S&P Eurozone Sovereign Bond Slovenia Index 0.42 0.61 1.83 1.83 10.74

S&P Eurozone Sovereign Bond Spain Index 0.21 0.22 3.27 3.27 13.64

N.A.--Not available. MTD--Month to date. QTD--Quarter to date. YTD--Year to date. Data as of Feb. 5, 2014. Source: S&P Dow Jones Indices.

Contact Information: Kevin Horan, Director--S&P Dow Jones Indices, [email protected]

About S&P Capital IQ and S&P Dow Jones Indices Research & Analytics

S&P Capital IQ Research & Analytics


Provides event-driven, multi-asset class market commentary and analysis; model development, and investment

advisory services.

Research

Provides global company and funds research including insight into the performance of the world's leading

investment funds.

Leveraged Commentary and Data

Delivers insight into the leveraged loan market through a combination of data, commentary, analysis, and

real-time news.

S&P Dow Jones Indices

The world's leading index provider maintaining a wide variety of investable and benchmark indices to meet an

array of investor needs.

Sign up for your complimentary subscription: www.standardandpoors.com/lookout


33 February 7, 2014

27536843 | 108442115

34 February 7, 2014

27536843 | 108442115

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminateits opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.comand www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additionalinformation about our ratings fees is available at www.standardandpoors.com/usratingsfees.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result,certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain theconfidentiality of certain nonpublic information received in connection with each analytical process.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&Preserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of theassignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact.S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make anyinvestment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. TheContent should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when makinginvestment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information fromsources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives.

No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified,reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor'sFinancial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as wellas their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of theContent. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, orfor the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIEDWARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS,SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE ORHARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special orconsequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence)in connection with any use of the Content even if advised of the possibility of such damages.

This report was prepared by the S&P Capital IQ Global Markets Intelligence group, formerly known as the Global Markets Intelligence research group. This group isanalytically and editorially independent from any other analytical group at S&P.

Copyright © 2014 by Standard & Poor's Financial Services LLC. All rights reserved.

Documents

Lookout Report - S&P Dow Jones Indices...2014/02/07 · 835,000 units, and then resume the existing uptrend in fairly short order, GMI Research believes it will be difficult not to