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1-Jun-09 SALVATION
The summer doldrums are being washed away by optimism that the economy didn’t slip into a permanent black hole. U.S.
stocks gained for a second week, capping the first 3-month gain for the S&P 500 index since its record in 2007, as commodities posted
the biggest monthly rally since 1974 on bets that an economic recovery will boost demand for fuel, metals and crops. The commodity
price index CRB is now 25 % above its low on March 2nd 2009 and has been gaining 10 % since the beginning of the year. On Friday, oil
price (WTI) rose to $66.31 /bbl and is trading at $67.00 /bbl this morning. It was around $40 /bbl at the beginning of the year and hit a low
nd
on December 22 2008 ($31.41 /bbl).
Economic recovery is directly connected to the increase of the budget deficit that may be up to 15 % of GDP this year. As a
consequence, U.S. Treasury 10-year rate rose sharply recently (3.73 % on may 27th vs.2.05 % on December 30th 2008) before retreating
to 3.52 % on Friday. Although inflationary risks are very low (no wage increase, very low level of capacity utilization ratio around 69 % in
the U.S., rising unemployment…) some investors are betting that inflation will sharply rise soon (see Gold price at $985 /oz this morning).
The relevant interest rate in this case is real, not nominal. Accordingly, one should be turning to inflation-indexed, not conventional,
Treasuries for clues. The real yield of 10-year TIPS has fallen by around 24bp since the stock market hit its recent low on 9th March,
compared to a rise of around 73bp in the nominal yield of 10-year conventional Treasuries over the same period. The relevant interest
rate is also risky, not “risk-free”. Risk premiums in the bond and equity markets clearly differ, but the contraction in corporate bond
spreads over the past couple of months serves as reminder of how risk aversion generally has subsided. The spread of 7-10 year A-rated
US corporate bonds over equivalent maturity Treasuries has shrunk from nearly 530bp at the end of March to a little under 370bp today.
Treasury Secretary Timothy Geithner told China that the U.S. wants to shrink its budget gap as soon as an economic recovery
takes hold, reassuring the nation that is the biggest holder of U.S. government debt. The U.S. goal is a deficit of “roughly 3 percent” of
gross domestic product from an officially projected 12.9 % this year, Geithner reaffirmed today in a speech in Beijing. Geithner’s maiden
visit to China as treasury secretary aims to deepen cooperation in dealing with the global financial crisis in meetings with Premier Wen
Jiabao, President Hu Jintao and Vice Premier Wang Qishan. U.S. government debt has this year handed investors the worst loss since at
least 1977 on forecasts for ballooning deficits and Wen has expressed concern about the “safety” of China’s dollar assets. China held
about $768 billion of Treasuries as of March. For the fiscal year that ends Sept. 30, the U.S. deficit is projected to reach a record $1.75
trillion from last year’s $455 billion shortfall, according to the Congressional Budget Office. Geithner said that China’s investments in U.S.
financial assets are very safe, and that the U.S. is committed to a strong dollar. Anyway, the euro rose again, breaking the highest level
of the year (1.4158 EUR/USD on Friday).
China’s manufacturing expanded for a third month, adding to evidence that the world’s third-largest economy is recovering from its
deepest slump in almost a decade. The official Purchasing Manager’s Index was at a seasonally adjusted 53.1 in May after registering
53.5 in April. Loan growth, accelerating fixed-asset investment and rising retail sales have spurred confidence that the 4 trillion yuan
($586 billion) stimulus package is working. Stocks climbed in China and Australia’s dollar traded near an eight- month high on optimism
Chinese demand for commodities will rise.
Salvation for GM: General Motors will file for bankruptcy today, and emerge with majority ownership by taxpayers and liabilities reduced
by more than 50 percent. The “new GM” will get $30.1 billion in bankruptcy financing from the government, and the Treasury “does not
anticipate providing any additional assistance” after that, the Obama administration said yesterday. The federal government will have a 60
percent equity stake in the retooled automaker, and 12 percent will be held by the Canadian government, which is lending $9.5 billion to
the company.
In a busy week for data releases, the highlight is May employment report (Friday); Aside from the employment data, the main highlights
are likely to be the ISM activity surveys for May.
WTI €/$ $/¥ 10 yr US 10 yr Euro Basic Energy Financ Health Tech Tel Indus Utilities SOX S&P NAS DOW Close

Last 67,2 1,4137 95,25 3,52 3,59 2,42 1,28 1,80 1,54 1,08 0,45 1,67 0,85 0,99 1,36 1,29 1,15 US
Perf 1d % 3,01 -0,15 0,10 6,11 bp -7,1 bp 1,34 1,24 -0,76 0,33 -0,43 -1,37 0,19 0,96 -0,83 0,01 -0,27 -0,19 Europe
ECONOMIC DATA with impact
US Personal Income, expected at -0.2 % in April vs. -0.3 % in March
US Personal Spending, expected at -0.2 % in April vs. -0.2 % in March (12.30 GMT).
US ISM manufacturing Index (14.00 GMT) should rise again (42.0 expected in May vs. 40.1)
US Construction Spending (14.00 GMT) is expected to ease (-1.5 % expected in April vs. +0.3 %).
Swiss, Norway, Denmark and Ireland are closed today
POSITIVE IMPACTS
PORSCHE : Qatar is still considering taking a stake in Porsche or other German auto companies (Qatar’s PM) / Separately, VW's chief
labour representative said that he had little faith in Porsche's 2 top managers and said unions were still sceptical about a merger (FAZ)
GERMAN CARMAKERS : German car sales are likely to have grown by a double-digit percentage rate in May (VDA Assoc.)
BAYER : A sister compound to potential blockbuster Nexavar showed promise against kidney cancer in a Phase II study
FIAT : A U.S. bankruptcy court judge approved the sale of most of Chrysler's assets to a group led by Fiat, as expected / Separately,
Germany agreed a deal with Magna, GM and the U.S. government to save Opel, snubbing Fiat's rival offer…
ENEL launches its capital increase Today
ASTRA-SANOFI : A new class of drugs under development to-treat breast cancer showed promise in early studies = One of the agents
being developed by Sanofi, called BSI-201 / The other drug, known as olaparib, is under development at AstraZeneca
ROCHE : Herceptin (Genentech) reduces the risk of death for certain stomach cancer patients by 26% compared with chemo alone
BARCLAYS : Vanguard Group made a $5bn bid for iShares (Sunday Telegraph)
DANONE has no interest in investing in Parmalat or Granolaro, but will keep an eye out for small deals once its capital increase to
reduce debt is conducted (Le Figaro) / Stock trades ex-right this morning
BRITISH AIRWAYS and IBERIA are set to resume merger talks within days (Sunday Telegraph)
PETROCHEMICALS : Saudi Arabian Oil plans to award by the end of June $10 bn worth of contracts for the construction of the planned
Jubail export refinery to be implemented jointly with Total (MEED)
INTESA will apply to sell convertible bonds to the Italian govt “by the end of H1” (Corriere della Sera)
UBI BANCA should turn in profit of around €350m for 2009 (Il Sole 24 Ore's)
ALSTOM said it will buy back as many as 800k shares
NEGATIVE IMPACTS
ARCANDOR : German economy minister, warned the Social Democrats, who are partners in the federal coalition government, against
making premature promises about state aid to Arcandor, without first exploring other options (German press)
BASF : DuPont said it has filed a lawsuit against BASF, claiming the German company infringed 4 patents relating to biotechnology traits
TNT : CVC Capital Partners has proposed paying just < £2 bn for a 30% stake in Royal Mail ahead of a rival offer from TNT (Sunday Tel)
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1-Jun-09 SALVATION
FRANCE TELECOM : Orange had an offer to buy rival T-Mobile UK rejected by Deutsche Telekom (The Observer) / Separately, FTE
announced that Orange Participations has received expressions of interest from a number of shareholders of the Egyptian Company for
Mobile Services who wish to dispose of their holdings in ECMS…
RBS is reportedly looking at a further break up of its Asian assets after the Age newspaper reported that HSBC and STAN had decided
not to lodge bids in the latest round, leaving Australia and New Zealand Banking Group as the only contender for all the assets
HYPO REAL ESTATE will need more state support even after a capital increase from the German government
SANTANDER plans to offer $5bn in new bonds of Brazilian companies to international investors by Sept. (Bank executive)
A2A postponed a shareholders meeting to June 3 after they failed to agree on a div. & the appointment of a supervisory board (Corriere)

GM : M. Obama will Today announce GM's bankruptcy filing (Cable News Network)
RESULTS DIVIDENDS EVENTS
Dutsche Land : End of short selling ban / Gaming, Restaurant and
Today Delhaize (€1.48) / Legrand (€0.70) /
Leisure conference at Goldman Sachs / TMT conf at Merrill Lynch
Bouygues / Ciba / Kingfisher ABB AGM / Hermes AGM / WPP AGM / Bayer investor day / Hypo
Tuesday France Telecom (€0.80) / Grifols (€0.232096)
/ Car sales Real Estate AGM
Cable & Wireless (6.30 GBp) / EADS (€0.20) / Vodafone (GBp Electronic Arts analyst meeting / Tenaris AGM / Acciona AGM /
Wednesday Bombardier / 5,777778) / WPPP (GBp 11.42222) / British Food (GBp Bombardier AGM / Peugeot AGM / ASML at Merrill Lynch TMT conf /
7,666667) European Gaming Companies conf at Credit Suisse
Vallourec AGM / Acciona AGM / Home Depot analyst meeting /
Thursday Johnson Matthey Hermes (€1.03) /
Power, Gas & Utilities conf at Citigroup
Friday Lloyds AGM
TRADING IDEAS
BUY PHILIPS / VIVENDI / NOKIA / KPN / FTE / DTE / TOTAL / GSZ / EDF / ACCOR looking good
BUY ALLIANZ / MUNICH RE / EON / BAYER / DANONE / SANOFI to play eco recovery

BUY NESTLE / SELL UNILEVER // BUY CARREFOUR / SELL METRO // BUY DAIMLER / SELL PEUGEOT // BUY ENI / SELL REPSOL // BUY
GLAXO / SELL ASTRAZENCA // BUY LINDE / SELL BASF
BROKER METEOROLOGY
DNB NOR .................................. RAISED TO OVERWEIGHT FROM NEUTRAL ......................................................... BY JPMORGAN

KBC ........................................... CUT TO NEUTRAL FROM OUTPERFORM .........................................................BY CREDIT SUISSE

TELECOM ITALIA ..................... CUT TO NEUTRAL FROM BUY ............................................................................................. BY UBS

PLEASE FIND BELOW ON THE NEXT PAGE OUR MORNING ECO

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1-Jun-09 SALVATION
CHART OF THE DAY
Euro zone consumer price index and European Central Bank refi rate
Since 2000

a/a, %
4,5 5,0

4,0 4,5

3,5 4,0

3,0 3,5

2,5 3,0

2,0 2,5

1,5 2,0

1,0 1,5

0,5 1,0
Mai
0,0 0,5
00 01 02 03 04 05 06 07 08 09

Prix à la consommation - G - Taux refi de la BCE - D -

Source : Bloomberg

Euro area inflation dropped at 0% driven by a “base effect” from a year ago as energy prices sharply dropped. The euro area is now at
the door of a deflation situation increasing the pressure on the European Central Bank to cut its refi rate next Thursday.

Time Country Indicator Period GE forecasts Consensus Previous

8.45 GMT Italy PMI manufacturing May 39,5 37,2
8.50 GMT France PMI manufacturing (final) May 43,1 43,1
8.55 GMT Germany PMI manufacturing (final) May 39,1 39,1
9.00 GMT Euro zone PMI manufacturing (final) May 40,5 40,5 40,5
10.30 GMT United Kingdom PMI manufacturing May 44,0 42,9
13.30 GMT United States Personal income April 0% - 0,2% - 0,3%
13.30 GMT United States Personal spending April 0% -0,2% -0,2%
13.30 GMT United States Personal consumer expense core April 0,2%,+1,9% YoY 0,2%,+1,8% YoY
15.00 GMT United States ISM manufacturing May 43 42,0 40,1
15.00 GMT United States Construction spending April -1,8% 0,3%
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1-Jun-09 SALVATION
ECONOMIC DATA PREVIEW
Watch in the United-States the ISM manufacturing for may due at 15.00 GMT, expected to increase led by the drop of interest rates
and by the beginning of the budgetary revival plan. Watch as well the personal spending and the personal income for the first quarter
due at 13.30 GMT, expected to move from negative territory to both reach 0%.

Watch in the Euro area the final release of the PMI manufacturing for May due at 09.00 GMT, expected to remained stable at 40.5
which is still under the level of 50 reflecting a contraction of the activity./JB

ECONOMY
UNITED-STATES : THE SECOND ESTIMATION OF THE GDP (ANNUALISED) CONFIRMED A SHARP DROP DESPITE A SLIGHT CORRECTION
The second estimation of the US GDP revealed a contraction of 5.7% (annualised) showing a small correction since the first
release(6.3%). The first estimation sharp decline has been lead by a slump in both investment and inventories and both revealed
smaller decline for the preliminary release. Meanwhile personal consumption dropped from 2.2% at the advanced release of the GDP to
1.5% at the present preliminary release showing that household spending representing around 70% of the GDP are weakening.
Nevertheless it seems that the US economy has reached a bottom at the first quarter of 2009 and the GDP should sharply rebounded
from the second to the fourth quarter mostly lead by the effects of the budgetary revival plan.

EURO ZONE : CONSUMER PRICE INDEX REACHED AND HISTORICAL LOW IN MAY
Euro zone inflation which reached a peak in July 2008 at 4% YoY is regularly dropping since then led by the decline of energy and
commodities prices. Nevertheless after reaching 1.1% in January the consumer price index increased rose in February at 1.2% YoY led
by the slight rebound of oil prices. This rebound did not last as European inflation dropped to 0.6% in March and April. May revealed an
historical level of the inflation rate at 0% driven by a “base effect” from a year ago as energy prices sharply dropped Most likely further
falls in food and energy prices should drive down the euro area inflation in the coming month, and the annual rate should shortly reach
zero. The euro area is now at the door of a deflation situation which is the worst situation. Indeed this means that global offer is way
above global demand which will get adjusted by an increase of unemployment and of bankruptcies. This risk is increasing the pressure
on the European Central Bank to cut its refi rate next week./JB