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October 2006 Martin Vozar

Capital Markets Overview. October 2006 Martin Vozar. Global Trends. Commodities: Crude oil : Crude oil rose after a six OPEC members, led by Saudi Arabia, agreed to cut output by about 3.4 percent to stem a two month slide in prices.

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October 2006 Martin Vozar

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  1. Capital MarketsOverview October 2006 Martin Vozar

  2. Global Trends Commodities: • Crude oil: Crude oil rose after a six OPEC members, led by Saudi Arabia, agreed to cut output by about 3.4 percent to stem a two month slide in prices. • Gold: Gold rose after North Korea carried out its first nuclear weapons and as higher base metals prices boosted purchases of commodities as a basket. Gold prices decreased to $577 from the peak 715 USD at 5/12/06 (-19.2 percent) and is up 11 percent this year.

  3. Global Trends • Fixed income: • US: As expected, the FOMC heldpolicy rates unchanged at 5.25%. New meeting is planed at 10/25/06. • “…inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand." • 9/20/2006 FOMC Statement • Japan: The BoJ held its key interest rate at 0.25% on 8 September monetary policy meeting. • Europe:As expected, the ECB increased its key policy rate by 25bp to 3.25% on 5 October meeting.

  4. Global Trends Stocks Markets: • US Equities: U.S. stocks rallied, pushing the Dow Jones Industrial Average to a record, as oil fell the most since March and investors predicted the Federal Reserve will soon reduce its benchmark interest rates. • Japan: Nikkei 225 stock Average climbed to a four-week high on speculation the federal reserve will cut U.S. interest rates. Nikkei rose 2.3 percent to 16.449, its highest close since May 15. Other Asian stocks (South Korea’s, China’s) dropped after North Korea said it carried out a nuclear weapons test. • Europe equities: European stocks dropped from a five-year high after North Korea said it detonated a nuclear bomb. European Socks rose last week, sending the DJ STOXX 50 to the highest since March 2002, as takeover speculation picked up oil prices retreated. The index has gained 7.3 percent this year.

  5. Global Trends S&P500 DJIA Nikkei 225 DJ STOXX 50

  6. US – Economy • Initial jobless claims for the week of September 30 declined to 302.000 from a 319.000 the week before 9/23 (9/16, 322,000). 4 week avg. 313.500. • •Housing startsin August declined by 7.2% to 1.665 million annualized units (July 1.795 mil.). From beginning of the year Housing Starts dropped by 26.4%. • • The University of Michigan’s preliminary index of consumer sentiment increased to 85.4 from 84,4 in August (average level from 1978 is at 88.3). Confidence among U.S. consumers supported declining gasoline prices and strength in the labour market. • The U.S. unemployment rate matched a five-year low in September 4.6% (August 4.7%) • • The national US Homebuilders survey for September dropped to a 15-year low this month as sales slowed and profits dropped. Index fell to 30 from 33 in August. It was the eight consecutive monthly drop in the index.

  7. US – Economy • American CPI prices rose in August at half the pace of the previous month. The CPI MoM rose 0.2% following July's 0.4%. The Core CPI climbed 0.2% for a third consequently month a row. • Headline CPI prices rose 3.8 percent during the 12 months ended in August compared with 4.1% in the period ended in July. Core prices rose 2.8 percent from a year earlier, the biggest 12-month jump since November 2001 (July 2.7%). • The PPI corefell in August by -0.4% (MoM), the second decrease since October. Headline PPI decreased to 3.7% from 4.2% a month earlier.

  8. US – FX Market • The dollar posted the biggest gain since July against the yen and euro after a report showed the U.S. jobless rate unexpectedly fell in September. • evidence of quicker economic growth prompted traders to pare bets the FED will reduce interest rates early next year, making dollar denominated assets more attractive to international investors.

  9. Two-year T-bond yield (Reuters Poll) Q406 Q107 Q207 Median 5.00% 4.85% 4.73% Max 5.40% 5.75% 5.60% Min 4.10% 4.05% 3.80% US – Fed funds rate • Fed leave’s its benchmark interest rates at 5.25% on 20 September FOMC meeting.

  10. US – Money and Bond Markets

  11. US - Yield Curve Changes

  12. EU – Economy • The Euro area GDP was reported to have grown at a 3.7%q/q pace, after a 2.5% pace in 1Q. In the 2Q, the strength was broad based across countries and sectors. France and the Netherlands reported annualized gains of 4.7%q/q and 4% respectively. The German data are close to 4%q/q.

  13. EU – Economy • Euro area industrial production was weaker than expected in July. Eurostat estimates that output declined 0.4% on the month in July (consensus: +0.3%) while the June outcome was 0.0%. Germany (+2.4%m/m), France (-1.3%m/m), Italy (-0.3%m/m). Average rate for 3Q +0.5%, 2Q +4.1%. • Euro area capacity utilization in manufacturing has risen sharply in the past few quarters and now stands at 83.6%. In the last upswing, capacity utilization reached this level in early 2000. • Euro area unemployment in June declined to the lowest since the common currency began. The jobless rate fell to 7.8% from 7.9% in May.

  14. EU – Economy • The Euro area service PMI came down a bit in September to a reading of 56.7 from 57.4 in August. The PMI readings add to the evidence that the Euro area economy remains very healthy at the end of the third quarter. • Euro area non-auto retail spending rose a solid 0.7%m/m in August following a revised gain of 0.4% in July. • The solid performance registered during the summer months leaves the level of non - auto spending 3.2% above the second quarter average after 2.3% in 2Q. This confirms that Euro area retail sales have been firmer in the third quarter, which is particularly encouraging for the Euro area growth outlook.

  15. EU – Economy • German IP (including construction) increased 1.9% on the month in August, beating overall expectations (consensus: 0.3%). In the details, manufacturing production was particularly strong, up 2.3% MoM in August. The level of manufacturing output in July-August is up 8.2% relative to last spring after a gain of 5.9% in 2Q. Construction output rose a solid 1.2% in the same month after 3.4% MoM in July.

  16. EU – Economy • Euro area HICP inflation rose 2.3% YoY in August, down a tenth from July's level. The move reflected some easing in the energy component, down from 9.5% YoY in July to 8.1% YoY in August, partly offset by a further pickup in food prices, up to 2.9% YoY in August from 2.6% YoY in July. • Core inflation moved down slightly from 1.6% YoY in July to 1.5% YoY in August, driven by lower transport & communication prices. • Euro area headline inflation will fall smartly in the next few months, most likely below 2.0% in the autumn, on the back of lower energy prices.

  17. ECB Refi Rates (Reuters Poll) Two-year schatz yeld (Reuters Poll) 4Q 06 Q406 1Q 07 Q107 Q37 2Q 07 Median Median 3.78% 3.50% 3.50% 3.75% 3.50% 3.75% Max Max 3.50% 4.10% 4.00% 4.25% 4.00% 4.25% Min Min 3.25% 3.25% 3.25% 3.25% 3.20% 3.25% ECB • As expected, the ECB changed basic rate by 25bpto 3.25% on 5 October meeting.

  18. EU – Bond Market

  19. EU - Yield Curve Changes

  20. US vs. EU Yield Curve Changes

  21. US vs. EU Spread Changes

  22. Japan - Yield Curve Changes

  23. Slovak MM, Fixed income and FX • August PPI decreased to 8.8 % from July’s level 9.0% YoY. The monthly PPI was constant on July’s level at 0.6 %. • The central bank surprised markets and increased repo rate by 25bp to 4.75% in the last week of September • Budget balance in September was better than previous month. –5.1 bill. from -5.7 bill in August (YoY). • Unemployment rate fall under 10%, 9.9% in August, 10.2% in July. • Real wage was up +3.1% in July, June +2.4%.

  24. Slovak MM, Fixed income and FX • Slovak koruna was traded in a narrow range and appreciated recently in line with the positive mood for Central Europe

  25. Slovak MM, Fixed income and FX

  26. CEE Central Banks from CEE region, interest rates: • SKK changed 4.75 % (+0.25bp, new meeting 10/31/2006) • HUF changed7.75% (+0.5bp, new meeting 10/24/2006) • PLN unchanged 4%(new meeting 10/25/2006) • CZK changed 2.50% (+0.25bp, new meeting 10/26/2006)

  27. CEE Yield curves comparison

  28. Credit Markets Overview

  29. Credit trends • Moody’s Speculative Grade Default rate • The default rate slipped to 1.6% in August from 1.7% in July, as only two, relatively small, US-based corporate defaults occured in August

  30. Credit trends • Moody’s Speculative Grade Default rate • Moody's predicts only a marginal rise in corporate defaults over the next twelve months – compared to the forecast from the beginning of 2006. • Moody's forecasting model for global speculative-grade default rate predicts that the default rate will finish 2006 at 2.1%, rising to only 2.4% by the end of August 2007.

  31. Credit trends Auto sector • Since GM announced a possible partnership with Renault and Nissan, GM shares increased 75%, while CDS spread tightened from around 1200 down to 600.

  32. Credit trends • The traditionally busy period of new supply approached, but is expected to have no big influence on spreads’ stability – new issuance manageable, only few large deals. • The credit spreads remained within a tight trading range for last month and in a current environment of low default rates and good credit quality – it’s hard to see a factor which would push spreads significantly wider. • New series of iTraxx started to be traded on 20 September 2006: • iTraxx Europe (125 names) – Series 6 +2bp wider than Series 5 • - 8 names differ • iTraxx Crossover (45 names) – Series 6 +41bp wider than Series 5 • - 7 names differ

  33. Credit trends Europe U.S.

  34. Credit trends • CDO spread change: Almost no change in CDO in September

  35. Investment portfolio managementContacts:Jan Pataky Head of Investment portfolio management (+421 2) 5850 5463 pataky.jan@slsp.sk Andrea Osuchova Portfolio Manager (+421 2) 5850 5392 osuchova.andrea@slsp.skLubomir Golany Portfolio Manager (+421 2) 5850 5412 golany.lubomir@slsp.sk Alena Teplicanova Quant Analyst (+421 2) 5850 5382 teplicanova.alena@slsp.skMartin Vozar Research (+421 2) 5850 5388 vozar.martin@slsp.skMichal Klestinec Research (+421 2) 5850 5403 klestinec.michal@slsp.sk

  36. Disclaimer:This report is meant as supplementary economic information for our clients and is based on information available on the date of printing. Our analysis and conclusions are of a general nature and do not take into account the individual circumstances or needs of investors such as income potential, tax situation or the level of risk he or she is prepared to undertake. Information about previous performance does not guarantee future performance. Although we judge our sources to be reliable, we do not accept any responsibility for the completeness and accuracy of our information. This report is neither an offer to sell nor an offer to buy any securities. Erste Bank der oesterreichischen Sparkassen AG confirms that it has approved any investment advertisements contained in this material. Erste Bank der oesterreichischen Sparkassen AG is regulated by the Financial Securities Authority for the conduct of investment business in the UK.

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