U.S.

remains a better house in a bad neighbourhood

Tom Fitzpatrick 1-212-723-1344 thomas.fitzpatrick@citi.com

Shyam Devani 44-207-986-3453 shyam.devani@citi.com

Jim Zhou 1-212-723-3469 jim.zhou@citi.com

Following our charts on the German DAX Index sent earlier today we take a broader look at European markets and conclude that across board (Equity and Bank indices, Fixed Income and FX), the U.S. looks to be better positioned vis a vis Europe. We believe a serious top may now be in place on European equity indices and the stand out chart is the German DAX Index which is in danger of falling to 6,000 The Germany U.S. yield spread (2s; 5s; 10s Germany minus 2s; 5s; 10s U.S.) is making lower lows this week. German 10 year yields are at key levels and we maintain that they are likely to fall much further than U.S. 10 year yields This move down in EURUSD over the past week is something that is likely to last and see the pair back at the January 2012 lows. The downtrend is unlikely to stop there and our overall target of 1.10-1.15 (Possibly later this year) is still in place.

Chart of the Day: A top looks to be in place on the German DAX Index

76.4% retracement

Double top

Triple negative divergence

Source: Aspen Graphics / Bloomberg 07 March 2012.

Held the 76.4% retracement against last years high and shows triple negative divergence We also formed a double top and closed below the converged neckline and trend support yesterday (6,733). The double top targets 6,500. We are, however, more concerned with the hold of the 76.4% retracement against the highs and the weekly chart below which warns of a more aggressive move down towards (and possibly beyond) 6,000.

DAX Weekly Chart- Below 6,000 a danger 76.4% retracement

Source: Aspen Graphics / Bloomberg 07 March 2012.

The 55 week moving average currently comes in at 6,519 When it broke below this average last year, it quickly fell to, and ultimately beyond, the 200 week moving average. The hold of the 76.4% Fibonacci retracement against the highs as well as the stretched momentum suggests that we could be seeing the beginning of a decent trend towards that 200 week moving average below 6,000, and possibly beyond.

DAX Index versus S&P 500 suggests DAX to underperform

1990

2000

2010

Source: Aspen Graphics / Bloomberg 07 March 2012

The major highs on ratio above were at the same level every 10 years since 1990 The shorter term move up here seems to have run out of steam with weekly momentum crossing down from stretched levels not seen for 2 years It is not easy to come up with targets on this chart but note that previous turns down, in 1990 and 2000, saw the DAX underperform the S&P 500 for more than three years As a result we can expect the DAX to underperform for this year and most of next year too Horizontal supports on this chart come in at the 3.75 area which is more than 20% away

European banks versus U.S. Banks

Source: Aspen Graphics / Bloomberg 07 March 2012.

A move down is European Banks underperforming U.S Banks. We are now pushing the multi year low from 2003. There is only one more support level at 2.31 (from 1996)

Fixed Income Germany (2Y+5Y+10Y averaged) minus U.S. (2Y+5Y+10Y averaged) yield spread H S S

New trend lows this week

Source: Aspen Graphics / Reuters 07 March 2012.

Above is the yield spread of German yields (averaged across the curve: 2Y+5Y+10Y) versus U.S. yields (also averaged across the curve:2Y+5Y+10Y) We have now taken out the Jan. lows and are making new lows for this trend The dominant pattern is a head and shoulders top that targets minus 96 basis points If we are going to meet that target, we would almost certainly EVENTUALLY need to see rising yields in the U.S., but that is for another day. Right now the trend in fixed income markets remains one of lower yields and flatter curves. Given how low 2 year and 5 year yields are in Germany and the U.S., we would need to focus on longer end yields which are going to move the spread above.

German 10 year yields

188 basis points down after the ECB hiked

189 basis points down after the ECB hiked Consolidation ended when the European Debt crisis emerged

Same again ?

Source: Aspen Graphics / Reuters 07 March 2012.

Sitting right on the base of the triangle consolidation at 1.75% A breach of that level would suggest another leg lower leaving only the 1.63% low from last year as a support level The move of lower yields was 188 basis points from the high in April 2011, which was just after the ECB hiked rates Interestingly enough the trend down from the high in July 2008, just after the ECB hiked, was 189 basis points before a consolidation. So the two trends down in the chart above both followed an ECB rate hike and were both of the same magnitude before a consolidation. German 10 year yields then started to fall again at the end of 2009- early 2010 as the periphery of Europe (Greece) came into focus. Could we be approaching the end of this current consolidation again?

German 10 year yields

Source: Aspen Graphics / Reuters 07 March 2012.

The long term chart shows the trend line support coming in at 60 basis points Hard to imagine us getting there (But then many things in the last 5 years seemed unimaginable)

Foreign Exchange The yield spread between Germany and the U.S. is also giving a leading indication for EURUSD German 2Y+5Y+10Y yields minus U.S. 2Y+5Y+10Y (Equally weighted)

Yield spread is leading EURUSD

Source: Aspen Graphics / Reuters 07 March 2012.

Currency pair now catching up The overlay says EURUSD should be around the 1.29 area.

EURUSD daily chart

Source: Aspen Graphics / Reuters 07 March 2012.

Bearish daily reversal at the highs of the last bounce Negative momentum divergence Breach of the short term rising trend support that held 2 sessions ago The next near term support level is 1.2974 and then the Jan, 2012 low at 1.2624

Our big picture chart that overlays todays price action with that seen in 1996-1997, suggests a move to below 1.15 is likely over time

EURUSD overlay with the 1990s

Source: Aspen Graphics / Reuters 07 March 2012.

Bottom Line The trend of European underperformance against the U.S. appears to be back in play This should materialise in Equities, Fixed Income markets (in terms of yields) and FX. We believe a top is in place in the DAX Index and a move to at least 6,000 could lie ahead The Germany U.S. yield spread (averaged across the curve) is making new trend lows and that should continue going forward German 10 year yields are testing the base of the consolidation at 1.75% and the only support level left below that is 1.63%. The downtrend looks to be intact and much lower yields look likely. EURUSD is catching up with the yield spread overlay and should trend back down to the Jan, 2012 lows and beyond.

Bottom line It aint over till its over and when it comes to Europe this crisis does not look to be over.

Contact: CitiFX.Technicals@citi.com https://icg.citi.com/data/documents/S&T_ExternalDiscl_0209.pdf

2012 Citigroup Inc. All rights reserved. CITI and Arc Design is a registered service mark of Citigroup Inc.