AUG 06 Danske Weekly Focus

8/9/2019 AUG 06 Danske Weekly Focus

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1 | 06 August 2010www.danskeresearch.com

Investment Research

Market Movers ahead

In the US the FOMC meeting is the main event next week. We believe that thespeculations about further monetary easing are premature, but that the assessment of

the current economic situation will be downgraded. We expect US July retail sales

to increase 0.5% m/m after a weak H1 2010.

For the euro area, the key event next week is expected to be the release of Q2 GDPdata. We expect to see robust growth, but at a rather uneven pace. Germany isexpected to stand out as the top-performer.

UK inflation report on Wednesday is expected to weigh on GBP and support Gilts. In Scandinavia focus turns to inflation numbers out of Denmark, Sweden and

Norway. The monetary policy meeting in Norges Bank will not attract much attention.

Unchanged rates are widely expected.

Global Update

Over the past month the euro area has been the main provider of good news while USdata have disappointed. The German Ifo index, German factory orders and Euro PMI

all surprised to the upside, while US data covering housing, business and consumption

have all been weak.

The relative stronger numbers out of the euro area relative to the US and less PIIGSconcern have pushed EUR/USD above 1.32.

Wheat prices rise strongly on Russian drought and subsequent export ban. A new foodcrisis cannot be ruled out if the export ban spreads to other countries like we saw in

2008. However, global wheat stocks are in fact plenty and other grains prices are not

rising to the same degree.

06 August 2010

Editors

Allan von Mehren

+45 4512 8055

[email protected]

Steen Bocian

+45 45 12 85 31

[email protected]

Weekly FocusEurope strikes back

Contents

Market movers ahead ........................................... 2

Global update: Euro shining for now .... 5

Scandi update ................................................................. 8

Fixed income: Slowdown fears to keep

bond yields low ............................................................... 9FX: Dollar under pressure for now .... 10

Commodities: No summer lull .................. 11

Credit ................................................................................... 12

Financial views........................................................... 13

Macroeconomic forecast .............................. 14

Financial forecast ................................................... 15

Calendar ........................................................................... 16

Germany to show very strong growth US: ISM data still signal growth

Source: Reuters Ecowin and Danske Markets Source: Reuters Ecowin and Danske Markets

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2/18


Weekly Focus

Market movers ahead

Global

In the US the FOMC meeting is the main event next week. Recently, speculation offurther easing has intensified. However, we believe that it is premature for the Fed toannounce new easing measures at the upcoming meeting. That said, it is quite certain

that the assessment of the economic situation will be downgraded following a range

of disappointing economic data. Hence, the Fed will continue to communicate that

yields will remain exceptionally low for an extended period. It will be interesting to

see if Plosser votes against the extended period language again. If not, it will be a

dovish sign.

July retail sales will provide important information about the trend of consumer

spending after downward revisions and soft data in the first half of the year. We

expect improvement with a 0.5% m/m increase in overall sales. Car sales already

reported for July have been solid and rising gasoline prices will contribute positively

as well. The underlying pace of spending is likely to improve at a healthy 0.4% m/m

following a weak reading in April and May, but a better one in June. Michiganconsumer confidence is released Friday.

Finally, the July CPI data will be released. We expect core inflation to remain very

low with a 0.0% m/m reading consistent with an unchanged annual rate of inflation at

0.9%. The headline will be boosted slightly by higher gasoline prices to 0.2% m/m up

from -0.1% m/m.

For the euro area, the key event next week is expected to be the release of Q2 GDPdata. We expect to see robust growth, but at a rather uneven pace. Germany is

expected to stand out as the top performer. We expect German GDP to have expanded

1.3% q/q in Q2, up from 0.2% in Q1. French GDP is expected to have advanced 0.7%

q/q during Q2. PIIGS countries are expected to have seen very limited growth. For the

euro area we expect robust growth at 0.7% q/q, which compares with a mere 0.2% q/qin Q1. It is mainly exports that support increased activity while private demand

remains sluggish. Q2 is expected to mark a peak in growth and we expect momentum

to decline during H2 2010, although Q3 should produce growth above trend too.

In the UK, BoEs Inflation Report due Wednesday will be the one to watch nextweek. Despite CPI being at 3.2% y/y and annual price increases having been above

BoEs target of 2% in 41 of the past 50 months, the BoE isnt particularly worried

about price pressures at present. We think projections will show that inflation will

edge lower on the medium-term horizon and economic growth will be revised

downwards, i.e. the Report will be GBP negative. Nationwides consumer confidence

index is likely to edge lower on Tuesday night. GBP is expensive according to our

short-term models and we see only limited scope for additional gains against the euro.

In Asia there will be extra focus on the Chinese data for July given the recent signs ofslowdown. Industrial production is expected to weaken as signalled by the decline in

Chinese PMI in recent months. Retail sales should stay fairly robust though with

growth rates above 18% y/y. Next week also brings data on the trade balance, fixed

investments and house prices which should give a further clue of how much the

tightening measures of the Chinese authorities are cooling activity. In Japan focus is

on the Bank of Japan meeting. Data have softened somewhat recently and JPY is

trading at record strong levels against USD. This is not what you want to see when

you are dealing with deflation and it clearly puts Bank of Japan in a tight spot. We

could soon see further QE from Bank of Japan.

US: Retail sales set to improve

Source: Reuters Ecowin

Germany to show very strong growth

Source: Reuters Ecowin and Danske Markets

China slowing down


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3/18


Weekly Focus

Scandies

In Denmark attention will focus especially on June goods exports, due out Monday,as exports look likely to play an important part in the continued economic recovery,

given the generally weak consumption indicators in Q2 10. Monday will also see the

release of June current account numbers, which are expected to show a surplus ofDKK6bn and hence a continued record high 12-month accumulated surplus. Industrial

production data for June and inflation numbers for July will be released Tuesday. We

expect headline inflation to increase from 1.7% in June to 1.9% in July.

In Sweden, the release of inflation numbers for July will be a key event in the weekahead. We have taken a quick look at the possible impact from soaring wheat and

other agricultural commodity prices (AC prices for short) on Swedish inflation. Wheat

prices are up almost 60% over the past month and this is a potential inflation threat

via rising food prices. The data suggest that 20-25% of the rise in AC prices are

sipping through to the consumer. Hence, a rise in AC prices by 10% would raise

consumer food prices by about 2%. Other components worth considering are

mortgage costs, petrol and electricity prices. Mortgage costs are expected to rise on

the back of the Riksbanks coming rate hikes. There is no change to call here. Petrol

prices, however, are likely to show almost a 3% decline, which is new. Electricity

prices probably rose in July but now appear to be falling even faster going into

August. The overall revision to our inflation forecast is slightly downward. Upside

risks for the next couple of months probably stem from higher mortgage costs (which

may be underestimated) and soaring AC prices. The downside stems from the

appreciating SEK. We may not have seen the entire impact on CPI from that yet. We

forecast July CPI and CPIF (CPI with fixed mortgage rates) to print -0.1% m/m /

1.2% y/y and -0.3% m/m / 1.7% y/y, which means CPI is rising while CPIF is falling.

In Norway, the policy meeting at Norges Bank on 11 August is not expected to attractmuch attention. At its latest policy meeting, Norges Bank made it clear that interest

rate hikes would be paused. Although we have seen some improvement in the

financial markets over the past month and indicators, particularly in the eurozone and

to some extent in Norway, have surprised on the upside, we do not expect Norges

Bank to change its rhetoric much at the meeting anything else but unchanged rates

would be a major surprise. The coming week will also see the release of inflation

numbers. We expect underlying inflation to increase from 1.3% y/y to 1.5% y/y.

Headline inflation should edge up marginally from 1.9% to 2.0%. Retail sales have

generally shown a disappointing performance so far this year. However, we expect

some catching-up in June, with retail sales set to grow 0.6% m/m after falling 0.1% in

May.

Denmark: Goods exports rebounding

Source: Reuters EcoWin

Sweden: Inflation in agricultural

commodity prices a risk in autumn

Source: Statistics Sweden

Norway: Still low core inflation

Source: Reuters EcoWin

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4/18


Weekly Focus

Market movers ahead

Source: Bloomberg and Danske Markets

Global movers Event Period Danske Consensus Previous

Tue 10-Aug - CNY Trade balance USD bn Jul 19.60 20.02

- JPY BoJ Monetary Policy Announcement % 0.10 0.10 0.10

20:15 USD FOMC meeting % 0.25 0.25

Wed 11-Aug 1:01 GBP Nationwide Consumer Confidence Jul 63

4:00 CNY Retail sales value y/y Jul 18.5% 18.3%

4:00 CNY Industrial production y/y Jul 13.4% 13.7%

4:00 CNY Fixed assets investments y/y Jul 25.3% 25.5%

11:30 GBP Bank of England Quarterly Inflation Report

Fri 13-Aug 11:00 EUR GDP, s.a. q/q|y/y 2nd quarter 0.7%|1.4% 0.7%|1.4% 0.2%|0.6%

14:30 USD CPI m/m|y/y Jul 0.2%|1.2% 0.2%|1.2% -0.1%|1.1%

14:30 USD Retail sales m/m Jul 0.5% 0.4% -0.5%

15:55 USD University of Michigan Confidence Index Aug 69.0 69.8 67.8

Scandi movers Event Period Danske Consensus Previous

Mon 09-Aug 9:30 DKK Current account DKK bn Jun 6.0 6.7

Tue 10-Aug 9:30 DKK CPI m/m|y/y Jul -0.4%|1.9% -0.2%|1.7%

Wed 11-Aug 14:00 NOK Norwegian Deposit Rates % 2.0 2.0 2.0

Thurs 12-Aug 9:30 SEK CPI change m/m|y/y Jul 0.0%|0.9%


5/18


6/18


Weekly Focus

In 2007-2008 food price inflation rose to 6-7% in both the US and the euro area. As food

weighs 15% in US and 20% in the euro area this had a considerable effect on inflation.

The impact is even higher in emerging markets where food has a much higher weight in

the consumption basket.

US recovery continues to lose pace

Over the past couple of months, incoming US economic data have been surprisingly

weak, a sign that the recovery is losing pace into H2. Overall the weakness has been

widespread: housing, business and consumption data. This trend has continued

throughout July, but with a few exceptions.

Housing data continue to be very soft as the effect from the expiration of the first time

home buyer tax credit ripples through the housing market. Recent evidence suggests that

the weakness continued into July, with June pending homes declining to a new record

low. While the current housing data probably seriously understate the true trend in

housing, the magnitude of the post tax-credit setback has surprised us. If home demand

does not begin to recover soon, home prices could face another setback, which could hitthe financial sector. In any case there is little doubt that residential construction will be a

negative for growth in Q3 and will probably not contribute much positive in Q4.

The softening in both hard and soft business indicators had been expected, but has been

somewhat deeper than expected. We suspect that the financial turmoil in late spring and

early summer created by the euro debt jitters has led to extraordinary caution in the

business sector. Both orders and hiring have simultaneously slowed. However, the recent

ISM reading adds some comfort as the manufacturing index slowed much less than feared

and the non-manufacturing index surprisingly rose. In our view this might be the first sign

that some of the recent weakness has been amplified by the euro crisis and that this might

reverse in the coming months.

Until last Friday the available economic data showed that consumption had expanded by

3.0% q/q AR in Q1 and close to 2.5% q/q AR in Q2. However, with the release of the

advance national accounts, the picture changed dramatically. Q1 consumption growth was

revised lower to 1.9% q/q AR and Q2 consumption printed a much lower-than-expected

1.6%. The bad news is that the slower pace of consumption growth makes the US

recovery look less resilient, as we need final consumption to be strong enough to feed

investment and job creation.

The bottom line is that the flow of data in the recent month leaves us with a slower pace

of growth and lesser degree of resilience in the US economy. Hence, not only is our

current 3% H2 growth forecast probably a notch too high, but the risk of a sharperslowdown has also increased as the economy is more sensitive to adverse shocks. The

good news is that financial conditions have substantially improved given the sharp

decline in bond yields and the recent rebound in risky assets. This might reverse some of

the front-loaded slowing caused by the turmoil in the spring.

Clear signs of slowing in China

It is increasingly evident that the Chinese economy is slowing. The HSBC PMI new

orders index for July decreased again to 47.9 after falling below the 50-line already in

US: Very weak home sales data


US: ISM data still signal decent growth


"[Heading 2]"

US: A brand new consumption profile


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7/18


Weekly Focus

June. Import growth has also shown some signs of moderation recently. Tightening

measures from the Chinese authorities are starting to take effect. The Chinese central

bank said on Sunday that it would stick to its credit target of CNY7500bn in new loans

this year and strictly implement the tight credit policies it adopted. A campaign to close

energy-inefficient businesses has also contributed to a slowdown in heavy industry.

Although the slowing in China should be watched closely, it is important to stress that

China still has fiscal and monetary room to manoeuvre. It can thus ease policy if needed

to sustain growth at robust growth levels. To some extent the slowing is also needed in

order to stem inflationary pressures.

There are other indications that growth in Asia is cooling off. Japanese industrial

production has stalled in recent months after seeing significant gains earlier in the year.

Japanese PMI also declined in July to 52.8 from 53.9 in June. It is still above the long

term average and thus signalling growth above trend.

Japanese production growth slowing

down

Kilde: Reuters Ecowin

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Industrial production >>(green is production plans

for July and August)


8/18


Weekly Focus

Scandi update

Denmark: Renewed doubt about the strength of consumption

Junes retail sales figures, which we received in the past week, were down 1.4%

compared to May. Retail sales have generally been a major disappointment throughout

2010. Q2 retail sales were down 1.7% on Q1, and in June this year sales were still

hovering around January levels. In other words, retail sales provide no sign of a budding

recovery in private consumption. This stands in stark contrast to the GDP data from

Statistics Denmark, which have in fact shown decent consumption growth since summer

2009 and where total private consumption up to and including Q1 this year rose by almost

3% i.e. quite substantial consumption growth.

We should therefore remember not to overinterpret the retail sales figures, as they are not

a perfect indicator for private consumption and have had considerable difficulty capturing

recent consumption developments. Nevertheless, despite our reservations about retail

sales usefulness as an indicator at the moment, there is no denying that the figures give

some idea about consumption developments. Given this, concern is growing that private

consumption will not keep up the pace in the coming quarters to the detriment of

economic activity and the current stabilisation of the labour market.

The notion that domestic demand never really picked up in Q2 is also reflected in the data

for corporate sales, which were released in the past week. Domestic sales fell by 2.2%

from May to June and by 0.6% in Q2 compared to Q1. In contrast, foreign sales did

surprisingly well, with a small increase coming on top of strong growth in May. This

bodes well for exports, which have now risen by 22.6% in current prices since hitting

bottom last year. Looking just at Q2, export growth was an impressive 5.8% relative to

Q1. Hence somewhat surprisingly it would seem that Danish economic growth is

currently being driven more by exports than by consumption.

Norway better indicators

Over the past week, Norwegian indicators have improved, following the disappointing

performance in the spring of 2010. The PMI rose to 54.9 in July from 52.0 in June.

During the first six months of 2010, the Norwegian PMI hovered around 50 in spite of the

recovery in the global economy. So, at long last, the global recovery appears to be feeding

through to Norways ailing manufacturing industry. Also, the credit indicator showed

renewed appetite for business borrowing. Meanwhile, Norwegian electricity prices have

declined significantly over the summer months, which, together with continued low

interest rates, should support retail sales going forward.

Who is right?

Source: Statistics Denmark and own calculations

Norway: Rebound in PMI

Source: Reuters EcoWin, Danske Markets

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9/18


Weekly Focus

Fixed income: Slowdown fears to keep bond yields low

Bond markets defer rally in risky assets

During July long bond yields in the US and Germany have been trading more or less

sideways. This is in sharp contrast to equity, commodity and credit markets where prices

have been boosted by the rebound in risk appetite.

Solid Q2 earning reports and receding fears of a southern European debt meltdown, partly

helped by the results of the European bank stress tests, have triggered a rally in risky

assets markets and southern European debt markets, as relative valuations had become

attractive following a painful spring. However, equity and bond markets have completely

decoupled as illustrated in the chart to the right. In fact, US 10-year yields have continued

to test new lows, as concerns about the economic outlook continue to mount on the back

of the disappointing flow of US and Chinese economic data.

With core inflation still on a downward path and leading indicators set to soften further,

we believe that bond yields in general will continue to trade in the current very low range.Indeed, long bond yields may even decline further, even though we are trading 50-60bp

below fair value in US 10-year Treasuries according to our model. In our view, the most

likely scenario is that 10-year US Treasury yields will trade in a narrow range between

2.75% and 3.25%.

German bond markets shift focus from euro to global outlook

The downward pressure on US long bond yields has effectively capped Bund yields,

which have crept only gradually higher despite extremely solid economic data out of

Germany and a significant relief rally in the (non-Greece) southern European sovereign

debt markets. Not even the run-up in 2-yr Schatz yields has been able to push the long

end much higher. Hence, it is clear that global economic data will remain the key driverof long bond yields in Germany as well.

With growth in both the US and Asia slowing, it is feared that it is only a matter of time

before weakness shows up in Europe and Germany. We believe the potential further

improvement in industrial indicators in Euroland is limited and that we are close to a peak

in growth momentum. Further, the ECB was relatively cautious at its meeting and did not

signal any imminent tightening.

On the back of the significant improvement in southern European debt markets and with

growth momentum to slow, it is difficult to argue for substantially higher long bond

yields in Germany. Going forward we expect 10-yr Bunds to trade in the range between

2.50 and 2.75%.

FOMC meeting to dominate bond markets next week

Next weeks Fed meeting will be the main event for global bond markets. A more dovish

Fed is likely to fundamentally support the current very low level of US 2-year bond

yields, but will probably not be able to push them lower. Following the announcement

there might even be a minor risk of disappointment given the recent talk about more QE,

which we find premature. It will also be important to see if Hoenig dissents again. If not it

would be a dovish sign.

Key events of the week ahead

German 2yr auction (Aug 9) FOMC meeting (Aug 10) US Tsy auction in nominal 3s,

10s and 30s

Euro area GDP (Aug13) US CPI (Aug 13) US retail sales (Aug 13) Earnings reports

Bond yields trade sideways

Source: Ecowin and Danske Markets

Bonds decouple from risk appetite

Source: Ecowin and Danske Markets

Senior AnalystPeter Possing Andersen

+45 45 13 70 19

[email protected]

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10/18


Weekly Focus

FX: Dollar under pressure for now

The dollar has had a particularly rough summer, losing more than it gained in May.

There were several reasons for the turbulence. First, US data have been so miserable that

many market observers have begun to question the robustness of the US recovery andeven fear that the US central bank (Fed) might be forced to consider a new round of

quantitative easing, i.e. extraordinary purchases in the government and mortgage bond

markets. Second, US yields have hit new lows and the market has almost completely

given up on rate hikes from the Fed within the next year. In contrast, European data have

been surprising positively perhaps because analyst expectations were at rock bottom

and the European bank stress test at least did not make things any worse than they were.

Finally, equity and commodity prices have risen on the back of solid global corporate

earnings in Q2, and this has also helped floor the greenback.

The big question now is whether the dollars summer slump marks the start of an

extended period of dollar weakness or if what we have seen has simply been a

correction after the euros pronounced downturn in the early part of the year.

In our view the dollar is clearly heading lower in the short term but not necessarily on the

verge of chronic frailty. Even though the US economy faces a couple of challenging

quarters, and while private consumption has not picked up, the housing market still looks

rather depressed and improvements in the labour market are slow in coming, the outlook

nevertheless remains brighter for the US than for Europe, where a marked tightening of

fiscal policies will almost certainly drag growth considerably lower.

We expect the dollar to continue to weaken in the short term, driven by strong equity

markets and accommodative Fed rhetoric: USD/DKK at 5.50 is not impossible. As the

market adjusts its expectations on US data, the key numbers will begin to look better and

the Fed will be in a position to tighten its tone as some central bank members are

already urging. Another factor that could send the euro down and the dollar up is a

slightly more balanced risk environment where investors do not simply back pro-cyclical

assets. We see a strong probability of USD/DKK up around 6.20 within six months.

Strong yen a bugbear for Japan

An interesting FX cross worth following at the moment is USD/JPY, which continues to

drift lower. Disappointment over US data and hence declining US yields explains some of

the movement, but much of the yens recent strength is also due to Chinas aggressive

buying of Japanese government bonds. Chinas USD2.5trn currency reserve is continuing

to swell at a rapid pace and only a small share of it is assumed to be in yen. If China

carries on buying Japanese government bonds, the yen could strengthen further. Some

speculate that the yen could break below 79.75, the lowest level ever, reached in April

1995, but Japanese politicians are aware that an overly strong yen would harm exports

unnecessarily. We see the right place for USD/JPY as being between 90 and 100.

Swiss franc on the retreat

The Swiss franc has lost some of the strength gained when the European debt crisis was at

its height. Improved risk appetite and low Swiss inflation numbers can explain much of

the retreat. We would still urge caution with the franc, however, as it could easily pick up

a good tailwind if equity market sentiment were to turn.

Weekly changes against EUR

Source: Danske Markets

EUR/USD vs. global equities still

some correlation, but not as solid


USD/JPY vs. relative rates very

close correlation


Senior Analyst

John Hydeskov

+45 45 12 84 97

[email protected]

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11/18


Weekly Focus

Commodities: No summer lull

Recent developments: upsurge as growth outlook deteriorates

During July, commodities saw a remarkable rally in wheat (see details below) while

prices of base metals and oil also surged as market sentiment improved on better-than-feared Euroland data. Milling wheat has risen to above EUR200/t and oil prices passed

USD82 earlier this week. In the aluminium market, physical premiums have continued to

rise, suggesting that despite ample stocks, the spot market is in fact fairly tight. There are

also signs of tightness in the copper market, which recorded a deficit in the first four

months of the year. However, the growth picture in other regions notably China and the

US has in fact deteriorated somewhat of late. Crucially, US oil stocks have remained

stubbornly high and there have been few signs of the usual seasonal draw during the

summer period. Indeed, OECD forward demand cover is at a high 61 days, and the

improvement in manufacturing activity in H1 has entailed little inventory rundown. With

fundamentals in the oil market increasingly discouraging, we look for prices to head

below the USD80 mark again before moving more firmly into the USD80-90 rangetowards the end of the year.

Wheat rally looks overdone but could spur regulatory changes

Wheat prices have surged over the past month, recently touching highs not seen since

early December last year. The main reasons for the surge have been weather related:

notably an ongoing drought in Russia and very dry weather in Europe combined with

heavy rains in Canada have led to market fears that the harvest this season could be lower

than previously expected. As a result, some countries including Russia have said that they

will limit exports considerably in order to contain price rises at home. Further adding to

problems on the supply side is the fact that upcoming Indian monsoon rains could lead

the quality of existing stockpiles to deteriorate/rotten, which could lead to two very

different scenarios: either that India will flood the market with wheat and thus induce a

price slide in the near term, or that global inventories will decline rapidly and thus put

upward pressure on prices.

Looking at the broader fundamental picture, the story about wheat however remains one

of booming stocks on the back of some record harvests in recent years. The recent price

surge thus comes on the back of a long period of stalling prices. Global stocks are at

historically very high levels and consumption has not risen accordingly, leaving the

stocks-to-use ratio in e.g. the US at close to 50%, suggesting a very loose market (a

normal level for this ratio is 20-40%). Notably, speculators have been massively short

wheat at CBOT since the start of the year but lately there has been some reporting of

short covering as prices have risen, i.e. investors exiting bets that prices will fall.

From a structural perspective, the potential threat to crops from wheat rust in the longer

run is also looming. On the whole, the outlook for wheat prices thus seems extraordinarilyhigh at the moment. While the recent price rise looks a bit overdone in our view, we

cannot rule out further price rises in the short term. The next thing to look out for in the

market is the first estimates of crop yields soon to be published. The next WASDE report

from the US Department of Agriculture is due for release on 12 August.

In the longer term, the surge in grains such as wheat, soybeans and corn could lead the

authorities to re-consider regulation in the commodity sphere. Albeit the latest rally could

turn out to be little more than a bump on the road, policymakers may well decide that

time could is ripe for extending the recent overhaul of the financial sector in the US to

explicitly include trading in commodities as well.

Monthly changes

Source: Bloomberg, Danske Markets.

Week ahead

EIA Short-Term Energy (Tue) IEA Oil Market report (Wed) USDA WASDE report (Thu) OPEC monthly report (Fri)

Wheat: market tightness and prices

Source: EcoWin, Danske Markets

Senior Analyst

Christin Tuxen

+45 4513 7867

[email protected]

-5 5 15 25 35 45

ICE Brent

API2 coal

Aluminium

Copper

Gold

LIFFE Wheat

% m/m


12/18


Weekly Focus

Credit

Market commentary

It has been a dull weak in the credit market with modest activity and limited newsflow. Abetter than expected ISM number supported credit spreads and indices continue to move

tighter. The investment grade index, iTraxx Europe, has tightened to 100bp whereas the

high yield index, iTraxx Crossover, has tightened to 460bp. The cash market is also in

fine shape with demand outpacing supply although turnover is limited. Cash spreads are

therefore likely to continue to grind tighter in the coming weeks in the absence of

significant new supply.

For banks the feel-good sentiment that emerged after the CEBS stress test and the easing

of the Basel III proposal has remained and has recently been further underpinned by

generally strong Q2 earnings statements from the large international banks.

The primary market

Summer is normally a quiet period when it comes to issuance of bonds and this one is no

exception. The changes to the Basel III proposal that were announced a few weeks ago

have somewhat alleviated the fears that banks would need to substantially increase their

issuance of bonds with long tenor as the sharp tightening of liquidity rules is postponed

until 2018. Still, we expect banks to be fairly active come end August and September as

the markets have been on hold for long periods during Q2 on the back of the southern

European debt crisis.

This week a new 5Y senior bond from Nordea was the most interesting transaction at a

swap spread +73bp.

Selected new issues during the week

Name Rating Coupon Maturity Currency Size

Bond spread on

issue date, (bp)*

Nordea Aa2/AA- Fixed 5Y EUR 1.25bn 73

BNP Paribas Aa2/AA- Fixed 5Y EUR 0.5bn 55

Note: Ratings are Moody's and S&P. * Mid-Swaps for Fixed, Discount Margin for floating

Source: Danske Markets & Bloomberg

iTraxx Crossover (5Y CDS)

Source: Markit

iTraxx Europe (5Y CDS)

Source: Markit

Senior Analyst

Henrik Arnt

+45 4512 8504

[email protected]

0

200

400

600

800

1,000

1,200

1,400

Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10 Jul/10

bp

0

50

100

150

200

250

Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10 Jul/10

bp


13/18


Weekly Focus

Financial views

Equities Despite a rally in risky assets, the gap between the stock markets implied earnings

expectations and analysts expectations has yet to be closed. Although we are now

halfway through the Q2 earnings season with companies surprising on the positive

side, the double-dip fear among investors is still present. Both investors and

companies fear 2011, especially if a slowdown in ISM is not offset by expected job

creation and private consumption. Along with worsening signs in the US housing

market, this dampens the positive signals and guidance upgrades from the companies.

As we believe the stock market to discount too low growth expectations, we see room

for performance of global equities. We reiterate our global market forecast of 10-15%

end-year 2010.

Fixed Income Global: Global bond markets are no longer trading on risk aversion, but on economic

data. Focus has shifted from fear of a European debt meltdown to fear of a hard

landing in the global economy, as both US and Chinese data have been consistently

weak. With the outlook for continued weakening global leading indicators, low

inflation and dovish central banks, bonds are likely to be range bound at the current

low levels in the coming months. We recommend to modestly overweight on duration

on a 3-6 month horizon.

Credit The constructive tone in the credit market continues with spreads moving tighter both

within cash and CDS. In the coming weeks we expect cash spreads to further tighten on

the back of more confidence within the banking sector as well as decent interest from

investors at a time where primary market activity is low. It should be stressed though that

turnover is limited.

As such we are positive on credit for the moment. Company credit metrics are soundand we thus consider the default risk in the short- to medium- term as very low. In the

longer term, however, it is inevitable that companies will feel the negative effect from

the austerity measures currently being undertaken around Europe.

FX outlook EUR/USD can edge higher in the short term, driven by a soft Fed and buoyant equity

markets. Feds tone will probably sharpen in autumn and winter, coinciding with

more euro turmoil, i.e. lower EUR/USD levels on the 3-6 month horizon. Chinese yen

buying has sent USD/JPY lower, which may continue for now. GBP is overbought

against EUR and is a sell. CHF has a decent chance of a comeback if risk appetite

abates.

SEK has performed on global risk appetite and strong growth momentum shouldwarrant lower levels of EUR/SEK going forward. NOK has benefitted from higher oil

price but is not backed by a central bank that raises rates here and now.

Commodities Wheat has rallied on weather-related supply concerns and oil has moved firmly above

USD80 per barrel. In our view, current market pricing looks a bit stretched given a

large stock overhang of both commodities globally. Base metals could be in for a

correction as focus turns to a likely bubble in the Chinese property sector.

Equities and US 10Y yield


EUR/USD and USD/JPY


Credit spreads


Commodity prices


Feb

10

Mar Apr May Jun Jul

2.8

3.0

3.2

3.4

3.6

3.8

4.0

925

975

1025

1075

1125

1175

1225

1275 Index %

US 10-year gov bond >>

07 08 09 10

1.5

2.5

3.5

4.5

5.5

6.5

2.5

7.5

12.5

17.5

22.5

27.5 % points % points

>

Aug

09

Oct Dec

10

Feb Apr Jun Aug

2700

2900

3100

3300

3500

3700

62.5

67.5

72.5

77.5

82.5

87.5USD/barrel Index

LME metal prices >>


14/18


Weekly Focus

Macroeconomic forecast

Source: OECD and Danske Bank. 1) % y/y. 2) % contribution to GDP growth. 3) % of labour force. 4) % of GDP.

Macro forecast, Scandinavia

Denmark 2009 -4.7 -4.6 3.4 -13.0 -1.7 -10.2 -13.2 1.3 3.6 -3.0 38.0 3.92010 1.5 2.8 1.6 -6.9 0.8 2.6 1.4 2.2 4.1 -5.6 42.1 4.12011 1.8 2.3 0.5 1.2 0.2 3.9 3.9 1.8 4.0 -4.5 46.5 4.1

Sweden 2009 -5.1 -0.8 1.7 -16.0 -1.5 -12.4 -13.2 -0.3 8.4 -2.1 38.9 7.22010 2.7 2.2 1.5 2.3 1.1 9.1 11.3 1.3 9.3 -3.5 43.6 6.32011 1.5 1.4 1.3 1.8 0.0 3.3 3.2 2.1 10.1 -4.1 47.2 6.6

Norway 2009 -1.6 0.2 4.8 -7.9 -2.1 -3.9 -10.3 2.1 3.1 8.0 26.0 19.02010 1.8 3.9 2.7 -7.2 0.8 1.1 1.9 2.5 3.3 12.0 26.0 24.92011 3.1 4.2 2.3 3.8 0.1 0.3 5.5 1.7 3.2 10.0 - 17.0

Macro forecast, Euroland

Euroland 2009 -4.0 -0.5 2.3 -10.8 -0.8 -12.6 -11.4 0.3 9.4 -6.3 78.7 -0.72010 1.3 0.1 1.4 -2.0 0.4 7.9 5.8 1.4 9.8 -6.7 84.8 -0.32011 2.1 1.2 1.1 3.8 0.0 5.4 4.6 1.6 9.5 -6.0 88.5 -0.2

Germany 2009 -4.9 -0.1 3.4 -13.5 0.4 -14.5 -9.5 0.2 7.5 -3.5 73.0 4.02010 1.9 -1.0 2.1 9.9 0.1 8.9 8.8 1.0 8.1 -5.0 76.5 3.72011 2.7 1.7 1.4 7.4 0.0 7.0 6.7 1.2 7.6 -3.0 79.0 3.2

France 2009 -2.6 0.7 2.8 -7.0 -1.6 -10.7 -9.8 0.1 9.4 -8.3 78.0 -2.32010 1.6 1.3 1.7 -1.0 0.3 7.9 5.9 1.2 10.0 -8.5 82.0 -2.52011 1.8 1.4 1.0 4.2 0.1 6.2 6.2 1.5 9.7 -7.0 87.0 -2.2

Italy 2009 -5.1 -1.6 1.6 -13.1 -0.3 -19.2 -15.2 0.7 7.8 -5.3 114.6 -2.22010 1.3 0.9 1.3 0.1 0.2 8.0 6.0 1.9 8.6 -5.0 116.0 -2.02011 2.0 1.0 1.0 5.2 0.1 8.4 7.2 2.0 8.3 -4.5 117.5 -1.7

Spain 2009 -3.7 -5.1 5.0 -15.5 0.0 -12.0 -18.2 -0.3 18.1 -11.2 54.3 -5.22010 -0.3 -0.5 1.8 -5.6 0.0 7.2 4.6 0.9 20.1 -10.0 66.0 -4.12011 1.0 0.7 0.2 0.2 0.0 6.1 4.1 1.9 19.8 -8.5 73.0 -3.2

Finland 2009 -7.8 -2.1 0.7 -13.4 0.0 -24.3 -22.3 0.0 8.2 -2.2 44.0 1.42010 1.8 1.0 0.5 -3.0 0.0 4.0 3.5 1.4 9.0 -3.9 49.5 1.42011 2.5 1.5 0.0 4.0 0.0 8.0 5.0 2.0 8.6 -3.3 52.0 2.2

Macro forecast, Global

USA 2009 -2.4 -0.6 1.8 -18.3 -0.6 -9.6 -13.9 -0.3 9.3 -9.9 83.8 -2.92010 3.3 2.7 0.3 2.9 1.2 12.1 11.3 1.6 9.4 -10.2 91.6 -3.92011 3.2 2.7 9.4 2.8 -0.4 6.4 6.4 1.6 9.4 -8.8 96.8 -3.8

Japan 2009 -5.2 -1.1 1.6 -14.4 -0.3 -24.1 -16.9 -1.4 4.7 -8.0 220.0 2.82010 3.3 2.2 1.6 -1.1 -0.1 23.7 2.6 -1.0 4.3 -5.2 220.4 3.42011 2.1 1.7 1.0 2.5 0.0 5.4 5.4 0.1 - - - 3.0

China 2009 8.7 - - - - - - -0.7 4.3 -3.3 23.6 5.82010 10.2 - - - - - - 3.3 4.0 -2.2 20.5 4.82011 9.5 - - - - - - 3.5 4.0 -2.2 20.5 5.5

UK 2009 -4.9 -3.2 2.8 -14.9 -1.2 -10.6 -13.3 2.2 7.6 -10.4 68.6 -1.32010 1.3 0.9 3.0 -2.0 1.1 4.4 0.9 3.2 8.0 -10.7 80.3 -2.02011 2.3 2.6 2.2 2.2 1.3 6.9 5.0 2.1 8.1 -8.8 88.2 -1.2

2009 -1.5 1.2 2.5 -3.7 1.0 -9.3 -5.7 -0.5 3.7 1.4 38.8 8.3

2010 2.0 1.8 0.5 2.1 -0.7 7.0 5.0 1.0 3.8 -1.0 40.0 9.02011 1.7 1.6 1.0 1.5 -0.2 4.0 4.0 1.2 3.5 -0.5 39.0 10.0

Y ear GDP

1

Private

cons.

1

Public

cons.

1

Fixed

inv.

1

Stock

build.

2

Ex-

ports

1

Im -

ports

1

Infla-

tion

1

Unem-

ploym.

3

Public

budget

4

Current

acc.

4

Public

debt

4

Current

acc.4

Public

cons.1

Fixed

inv.1

Stock

build.2

Ex-

ports1

Current

acc.4

Im -

ports1

Public

debt4

Public

budget4

Ex-

ports1

Infla-

tion1

Unem-

ploym.3

Switzer-

land

Y ear GDP1

Private

cons.1

Im -

ports1

Public

debt4

Public

budget4

Y ear GDP1

Private

cons.1

Public

cons.1

Fixed

inv.1

Stock

build.2

Infla-

tion1

Unem-

ploym.3


15/18


16/18


Weekly Focus

Calendar


Key Data and Events in Week 32

Period Danske Bank Consensus Previous

1:50 JPY Current account s.a. JPY bn Jun 1447.0 904.81:50 JPY Money supply M2+CD y/y Jul 2.9% 2.9%

1:50 JPY Bank Lending y/y Jul -1.9%

7:00 JPY Eco Watchers Survey: Current Index Jul 48.0 47.5

8:00 DEM Trade balance EUR bn Jun 13.0 12.0 9.7

9:30 DKK Current account DKK bn Jun 6.0 6.7

9:30 DKK Trade Balance DKK bn Jun 7.5


- CNY Trade balance USD bn Jul 19.60 20.02

- JPY BoJ Monetary Policy Announcement % 0.10 0.10 0.10

- JPY Cabinet Office Monthly Economic Report

1:01 GBP BRC Retail Sales Monitor Jul

1:01 GBP RICS House Price Balance Index Jul 9%8:00 DEM Inflation (HICP) m/m|y/y Jul 0.3%|1.2% 0.3%|1.2% 0.3%|1.2%

8:45 FRF Manufacturing production m/m|y/y Jun 0.5%|7.5%

8:45 FRF Industrial production m/m|y/y Jun -0.2%|7.3% 1.7%|8.2%

9:30 DKK CPI m/m|y/y Jul -0.4%|1.9% -0.2%|1.7%

9:30 DKK Industrial production m/m Jun 4.4%

10:00 NOK Consumer prices m/m|y/y Jul -0.1%|1.9%

10:00 NOK Core inflation(CPI-ATE) m/m|y/y Jul -0.4%|1.4% 0.2%|1.3%

10:00 NOK Producer prices, incl. Oil m/m|y/y Jul 2.3%|11.4%

10:30 GBP Trade balance GBP mln. Jun -3817

11:15 EUR ECB Announces Allotment in 7-Day Refinancing Tender EUR bn 154.8

11:15 EUR ECB Announces Allotment in 1-Month Refinancing Tender EUR bn 49.4

14:30 USD Unit labour cost q/q 2nd quarter 0.4% 1.6% -1.3%

20:15 USD FOMC meeting % 0.25 0.25


- OTH Earnings: Nestle SA, Cisco Systems Inc

1:01 GBP Nationwide Consumer Confidence Jul 63

1:50 JPY Machine orders m/m|y/y Jun 5.4%|1.5% -9.1%|4.3%

1:50 JPY Domestic CGPI m/m|y/y Jul 0.0%|0.0% -0.4%|0.5%

4:00 CNY PPI y/y Jul 6.0% 6.4%

4:00 CNY CPI y/y Jul 3.3% 2.9%

4:00 CNY Retail sales value y/y Jul 18.5% 18.3%

4:00 CNY Industrial production y/y Jul 13.4% 13.7%

4:00 CNY Fixed assets investments y/y Jul 25.3% 25.5%

10:30 GBP Jobless Claims Change 1,000 Jul -18.0 -20.8

10:30 GBP Unemployment rate % Jun 7.8 7.8

11:30 GBP Bank of England Quarterly Inflation Report

13:00 USD MBA mortgage applications % 1.3

14:00 NOK Norwegian Deposit Rates % 2.0 2.0 2.0

14:30 USD Trade balance USD bn Jun -42.2 -42.3

20:00 USD Budget statement USD bn Jul -165.0 -180.7

Monday, August 9, 2010

Tuesday, August 10, 2010

Wednesday, August 11, 2010


18/18

Weekly Focus

DisclosureThis report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank.

Danske Bank is under supervision by the Danish Financial Supervisory Authority.

Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high

quality research based on research objectivity and independence. These procedures are documented in the Danske

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remuneration linked to specific corporate finance or dept capital transactions.

Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals

Ethical rules and the Recommendations of the Danish Securities Dealers Associations.

Financial models and/or methodology used in this report

Calculations and presentations in this report are based on standard econometric tools and methodology.

Risk warning

Major risks connected with recommendations or opinions in this report, including as sensitivity analysis of

relevant assumptions, are stated throughout the text.

First date of publication

Please see the front page of this research report.

Expected updates

This report is updated on a weekly basis

DisclaimerThis publication has been prepared by Danske Markets for information purposes only. It has been prepared

independently, solely from publicly available information and does not take into account the views of Danske

Banks internal credit department. It is not an offer or solicitation of any offer to purchase or sell any financial

instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no

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AUG 06 Danske Weekly Focus

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