ECB may cut rates to 0.5% in 2H12
In Citi's view, the Greek debt restructuring has not ended the sovereign debt crisis. The underperformance of Spanish versus Italian bonds after the Spanish government's announcement that it is raising its deficit target highlights fragilities in the region's economic and fiscal fundamentals and in investor confidence.

European Central Bank (ECB) officials made clear that after the strong use of the 3-year long-term refinancing operations (LTROs), it is now time for governments and banks to take action. Hence, unless there is another severe escalation of the crisis the ECB is likely to be on hold, leaving the refinancing rate unchanged at 1.0% until the third quarter of 2012. But given the likelihood of more negative news on the economy and lower medium-term inflation risks, Citi analysts expect ECB easing (taking the refinancing rate to 0.5%) in the second half of this year.

Citi analysts have raised the European Telecoms sector from an underweight position to neutral. Along with other defensive sectors, Telecoms has been a poor performer over the past few months. Results from the fourth quarter of 2011 were brutal but the sector now looks cheap especially on a dividend basis. It has a trailing dividend yield of 8% and yields more than twice the market on a 2012 full year basis. On the other hand, Citi analysts have lowered Basic Resources and Oil & Gas to neutral from overweight while raising Autos from neutral to overweight.

Citi is overweight in Insurance, Autos, Health Care, Personal & Household and Food & Beverage, providing exposure to positive relative earnings trends and a skew towards emerging market exposure. Citi's underweight sectors - Utilities, Real Estate, Construction and Travel & Leisure - have more domestic exposure and tend to score poorly on balance sheet strength.