Morning Report

05.02.2013

The politicians spoil the party

NOK & 3m NIBOR
7.60 7.50 7.40 7.30 7.20 08-Jan

A corruption scandal in Spain and growing support for Berlusconi in Italian polls spoiled the party yesterday. The euro weakened on a broad basis, Spanish and Italian government bond 1.90 yields rose and the stock markets fell. Spanish and Italian bond yields rose sharply yesterday, despite the fact that LCH Clearnet, one of Europe's largest clearing houses, announced that they reduced initial margin requirements for trading with Spanish (and French) government securities. The reason for the increase in Spanish government yields is mainly due to the political uncertainty that has arisen after Prime Minister Rajoy has been drawn into what appears to be a corruption scandal in the ruling party, Partido Popular. While demand has been good on the two first auctions of Spanish government bonds this year, Spain will issue 2-, 5and 10-year government bonds later in the week. While Spain has covered almost 10 percent of its long-term funding needs for 2013, the political uncertainty has risen despite Rajoys majority in parliament until 2015. In Italy, Berlusconi has previously announced his return to politics, but pledged in a speech Sunday to reverse the introduction of property taxes by PM Monti and cut government spending. His center-right coalition gathers more and more voices in the polls and catches up with Bersani and his center-left coalition in front of the election to be held last weekend of February. We have for some time pointed out the elections in Italy as a factor likely to contribute to increased uncertainty in general, not just higher Italian government bond yields. Increasing political turmoil in the euro zone made ground for profit-taking on the recent moves yesterday. The euro weakened broadly, while yields on German government bonds and European stock markets fell. Industrial orders in the U.S. were weaker than expected, and when one adjusts for aircraft and defense, orders have been broadly sideways over the past year. It further contributed to the decline in the U.S. stock exchanges. A rise in the HSBC's services PMI index for China from 51.7 in December to 54 in January was not enough to turn the weak sentiment in Asia in the early hours of today, and Asian stock markets open down. The depreciation of the Japanese yen since late October last year has been significant. Against the dollar and trade-weighted the yen has depreciated by almost 20 percent, while the weakening against the euro has been a whopping 25 percent. Expectations for highly accomodative monetary and fiscal policy have contributed to this decline. And with the new prime minister, Shinzo Abe, at the helm, expectations have so far been met. The inflation target was earlier this month increased from 1 to 2 per cent, while the central bank kept their inflation forecasts unchanged. The Prime Minister has promised to do everything in his power to lift Japan out of deflation after two decades of very low inflation. Inflation is expected to rise in 2014 and 2015, but this is as a result of an increase in the VAT in two turns. If the market finds Abe's promises credible, we should see an increase in long-term inflation expectations. These have risen slightly since last summer, but do not indicate any permanent shift as a result of higher inflation. Nevertheless, the Japanese public pension fund announced on Friday that they will look at whether it is appropriate to have a large inventory of Japanese government bonds. Life insurers considering other investments than government bonds in order to achieve the required return when interest rates are low, is nothing new. But that the world's largest pension fund sees a risk that large stimulus in the long term can lead to higher inflation and higher interest rates in Japan are important. Firstly, it may make it more difficult for the Japanese government to finance its borrowing, which could mean higher interest rates on government debt in itself. Second, they are hardly alone in their assessments. The potential for further weakening of the Japanese yen is therefore still intact. That said, the yen strengthened slightly against both the dollar and euro yesterday. Today there are service PMI's on the agenda in Sweden, EMU (specified for Italy, France, Germany and Spain), UK (CIPS) and the U.S. (ISM) services. While the euro area index is expected flat, we expect a recovery in the Swedish index in line with consensus. By mistake, it was announced that the Congressional Budget Office (CBO) would publish its report "Budget and Economic Outlook" yesterday. But the report with forecasts for U.S. government debt is released today and may be important in the debate between Democrats and Republicans on raising/postponement of the debt ceiling. magne.ostnor@dnb.no

22-Jan

1.88 1.86 1.84 1.82 1.80 05-Feb

3m(rha)

EURNOK

Norsk 10y sov.

2.8 2.6 2.4 2.2 2.0 1.8 08-Jan
rente

22-Jan

100 80 60 40 20 0 05-Feb
Diff(bp,rha)

Headquarters Dronning Eufemias gate 30 0191 Oslo Offices Abroad New York London Singapore Stockholm Sales Oslo (+47) Equity Fixed Income Regional Sales (+47) Bergen Bod Fredrikstad Hamar Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund Private Clients Research Regional Sales (+47) Eirik Larsen Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Camilla Viland Magne stnor Kyrre Aamdal Credit Research (+47) Ole Einar Stokstad Martin Brter Mikael L. Gjerding Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen Kristina Solbakken

+47 03000

+ 1 212 681 2550 +44 207 283 0050 +65 6220 6144 +46 84 73 48 50

22 94 89 40 24 16 90 30

56 13 27 20 75 52 99 10 69 39 41 50 62 54 14 82 61 24 79 56 38 14 61 64 24 16 90 80 51 84 04 30 77 62 96 80 73 87 49 73 33 01 73 80 70 11 69 85 24 16 90 90

24 16 90 77

24 16 90 08 24 16 90 03 24 16 90 07 24 16 90 04 24 16 90 01 24 16 90 06 24 16 90 02

24 16 90 48 24 16 90 46 24 16 90 47 24 16 90 49 24 16 90 44 24 16 90 45 24 16 90 51

Yesterdays key economic events (GMT) 10:00 15:00 EMU USA PPI Factory orders

As of Dec Dec

Unit m/m% %

Prior -0.2 -0.3 Prior 0.1 56.1

Poll -0.2 2.2 Poll -0.2 55.8

Actual -0.2 1.8 DNB

As of Unit Todays key economic events (GMT) 10:00 EMU Retail sales Dec m/m% 15:00 USA ISM non-manufacturing Dec Index USA CBO forecasts on US government debt

Morning Report
05.02.2013

3m LIBOR
0.20 0.15 0.10 0.05 0.00 08-Jan
EUR

22-Jan

0.31 0.31 0.30 0.30 0.29 05-Feb

USD(rha)

NOK & 3m NIBOR 7.60 1.90 1.88 7.50 1.86 7.40 1.84 7.30 1.82 7.20 1.80 08-Jan 22-Jan 05-Feb
EURNOK 3m(rha)

FX 0700 USD/JPY EUR/USD EUR/GBP EUR/DKK EUR/SEK EUR/CHF EUR/NOK USD/NOK JPY/NOK SEK/NOK DKK/NOK GBP/NOK CHF/NOK

Last 92.68 1.3628 0.8683 7.4612 8.6242 1.2385 7.4448 5.4615 5.90 86.40 99.80 8.578 6.013

Today 92.36 1.3488 0.8562 7.4593 8.5508 1.2280 7.3985 5.4882 5.94 86.60 99.22 8.646 6.027

Spot rates and forecasts In 1m Apr-13 Jul-13 Jan-14 FX 0700 -0.3 88 90 91 93 AUD -1.0 1.33 1.32 1.36 1.37 CAD -1.4 0.82 0.81 0.85 0.86 CHF 0.0 7.45 7.45 7.45 7.45 CZK -0.9 8.65 8.65 8.60 8.70 RUB -0.8 1.20 1.20 1.20 1.20 GBP -0.6 7.30 7.25 7.25 7.40 HKD 0.5 5.49 5.49 5.33 5.40 KWD 0.8 6.24 6.10 5.86 5.81 LTL 0.2 84.4 83.8 84.3 85.1 LVL -0.6 98.0 97.3 97.3 99.3 NZD 0.8 8.90 8.95 8.53 8.60 SEK 0.2 608.33 604.17 604.17 592.00 SGD

USD NOK 1.041 5.709 0.999 5.490 0.910 602.403 19.040 28.801 30.105 18.216 1.576 8.641 7.755 0.707 0.281 19.484 2.560 2.142 0.519 10.569 0.842 4.617 6.338 86.520 1.237 4.434

US dollar

5.7 5.6 5.5 5.4 5.3

08-Jan 22-Jan
USDNOK

1.40 1.35 1.30 1.25 05-Feb

EURUSD(rha)

NOK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.84 1.88 2.02 2.26 2.42 2.78 3.06 3.38

Last 1.82 1.89 2.04 2.28 2.41 2.77 3.07 3.38

SEK 1m 3m 6m 12m 3y 5y 7y 10y

Prior 1.13 1.18 1.28 1.53 1.55 1.88 2.15 2.40

Interest rates Last USD 1.13 1m 1.18 3m 1.28 6m 1.53 12m 1.54 3y 1.88 5y 2.15 7y 2.41 10y

Prior 0.20 0.30 0.47 0.78 0.53 1.00 1.51 2.06

Last 0.20 0.30 0.47 0.77 0.54 1.01 1.50 2.06

EUR 1m 3m 6m 12m 3y 5y 7y 10y

Prior 0.06 0.16 0.28 0.51 0.81 1.16 1.49 1.90

Last 0.06 0.15 0.28 0.50 0.78 1.11 1.45 1.85 Last 98.96 1.61 -0.35 10y sw ap 1.75 1.75 2.00

Japanese yen

95.0 90.0
85.0

7.0 6.0

Norw ay Prior NST475 95.25 10y yld 2.53 - US spread 0.48 3m nibor 1.85 1.85 1.85

Norw ay

80.0
08-Jan
USDJ PY

22-Jan

5.0 05-Feb
JPYNOK(rha)

Governm ent bonds Last SEK Prior Last US Prior 95.45 10y 112.83 112.76 10y 96.27 2.51 10y yld 1.98 1.99 10y yld 2.05 0.55 - US spread -0.07 0.03 30y yld 3.24 Interest rate forecasts 10y 10y Sw eden 3m libor USA 3m libor sw ap sw ap 3.25 3.25 3.50 Apr-13 Jul-13 Jan-14 1.10 1.10 1.10 2.25 2.25 2.50 Apr-13 Jul-13 Jan-14 0.35 0.35 0.35

Last Germany Prior 97.03 10y 98.19 1.96 10y yld 1.70 3.16 - US spread -0.35 10y sw ap 2.00 2.00 2.25 3m euribor 0.25 0.25 0.25

Germany Apr-13 Jul-13 Jan-14

Apr-13 Jul-13 Jan-14

SEKNOK & CHFNOK 87 86 85 84 83 08-Jan 22-Jan

SEKNOK CHFNOK(rha)

6.1 6.0 5.9 5.8 05-Feb

Equities 14200 13700 13200 12700 12200 08-Jan 22-Jan

Dow J.I.

480 470 460 450 440 05-Feb

Os lo(rha)

NOK sov. NST19 NST20 NST21 NST471 NST472 NST473 NST475 NST475 NOK FRA MAR JUN SEP DEC

Miscellaneous Prior Last Change Maturity year rem. NOK-index TWI Prior 2.55 1.63 -92 19.06.2013 0.37 Last 90.29 90.26 2.00 2.01 1 18.09.2013 0.62 Oil price: (Ldn,cl) 1m 1.99 1.75 -24 18.12.2013 0.87 SPOT 113.99 115.24 1.70 1.68 -2 15.05.2015 2.27 Gold price 04.02.2013 PM 1.96 1.91 -5 19.05.2017 4.28 AM: 1669.0 1666.0 2.12 2.06 -7 22.05.2019 6.29 Equities Today 0700 % last 2.57 2.51 -6 24.05.2023 10.30 Dow Jones 13880.08 -0.9% 2.53 2.51 -2 24.05.2023 10.30 Nasdaq C. 3131.17 -1.5% 3 mnd 6 mnd NOK NIDR NIBOR FTSE100 6246.84 -1.6% 1.89 2.03 1m 1.88 1.82 Eurostoxx50 2625.17 -3.1% 1.91 2.06 3m 2.02 1.89 DAX 7638.23 -2.5% 1.99 2.14 6m 2.10 2.04 Nikkei 225 11046.92 -1.9% 2.08 2.23 12m 2.28 2.28 OSEBX 468.62 -0.4% Sources to all tables and graphics: Thomson Reuters, Thomson Datastream and DNB Markets