2nd July 2012 Europe is a concern! Global Outlook Stress has recently re-emerged in the eurozone with some commentators even questioning the existence of the euro. This, plus some disappointing data in other regions, such as the US and China, has added risks to investors’ otherwise more positive growth expectations. Unless we get a surge in commodity prices – if anything the reverse is happening at the moment - price pressures should remain contained. Countries continue to resist currency strength and this is a sign that the inflation concerns of policy makers remain modest. Short-term interest rates remain at emergency levels in the US with the Fed intending to keep these levels for another two years. Elsewhere, other central banks are either neutral in their stance or have embarked on easing measures. The ECB is officially on hold at the moment but another rate reduction is likely before this cycle ends, especially since eurozone growth concerns have resurfaced. Last week’s EU summit announcements produced a sharp relief rally in peripheral bond markets at the end of the week. Interestingly, most of those markets were unchanged on the week in terms of their spreads versus Germany. What this means is that investors were buoyed by the announcement effect but remain sceptical that this is ‘the solution’. Irish bonds were the exception and did rally over the week as a whole. The EU announcement may alter perceptions of growth risks but the global backdrop - low short rates, central bank buying and disinflation concerns – still suggests that long-term interest rates in major developed countries could stay at exceptionally low levels for a considerable period of time. After last week’s move higher, global equities in euro terms have gained 8.6% so far this year. While valuations continue to be seen as reasonable – as they have been for some time now - it’s investors’ perception of the macroeconomic backdrop that has driven sentiment this year. Thus, the EU summit announcement flipped sentiment back to more positive mode, continuing the sentiment ‘flip-flop’ that has been a significant market factor for some time. While we did add some equity exposure after the announcement, we are not yet convinced that we are finished with this current volatile phase. Thus, for now, we will stick with a neutral to slight underweight stance on equities. Bonds Spanish and Italian bond prices jumped following the action taken by the eurozone’s leaders. Spanish 10-year yields fell the most since August, taking them away from the worrying 7% level. 10-year yields in Spain are now slightly above 6%, while Italy’s are just below the 6% level. With risk-appetite increasing, German bonds under-performed the periphery following the summit. The Merrill Lynch over 5 year government bond index ended the week down 0.4%. Currencies

The euro gained the most versus the US dollar this year, after euro leaders took a step towards resolving the region’s debt crisis, increasing the demand for the region’s currency. The €/$ rate ended the week at €1.265. Oil & gold Oil prices rose sharply on optimism that Europe’s debt crisis may ease as result of the latest steps taken, helping growth in the region, and worldwide, as a result. The West Texas oil price ended the week at $85 a barrel, a weekly rise of 6.5%. Elsewhere, the gold price recovered some of its previous week’s losses, rising 1.6% over the week. Source: Blackrock, Zurich Investment Managers, Aviva, FT.com & Bloomberg