Investment Research

25 June 2010

Weekly Focus
China drops peg – will it be appreciated?

Market Movers ahead

 G20 meeting with focus on financial regulation.
Contents
 US Congress compromise on financial regulation. Market movers ahead ........................................... 2
 ISM may be turning, but the declines from here will be very gradual. We look for Global update................................................................... 5
Scandi update ................................................................. 7
strong nonfarm payrolls data, reinforcing the belief in a full recovery in the US
Focus: Research - Fiscal tightening is
economy with healthy job growth. unlikely to kill growth ............................................... 9
 Roll over of ECB EUR442bn 12m LTRO. Equities: Looking for signs of sustained
upswing .............................................................................12
 Riksbank meeting. We expect a 25bp hike. Fixed Income: Rates - Risk on, risk off is
the name of the game .........................................13
 Danish currency reserve: will the growth continue? FX: Sweden’s Riksbank in focus ...............14
Commodities: Economy in focus ............15
Global Update Financial views...........................................................16
 US housing market data has been very, very weak, but durable goods orders point to Macroeconomic forecast ..............................18
strong capex ahead. Financial forecast ...................................................19
Calendar ...........................................................................20
 PMI and Ifo in Euroland held up well. However, the indices may be topping at the
moment, pointing to a slower pace of improvements in growth.

 The People’s Bank of China (PBoC) last weekend announced that it will abandon the
de-facto USD peg that has been in place since mid-2008. Instead it will return to a
managed float targeting a basket of currencies. This will largely be a return to the
exchange rate system from before the financial crisis.

 The UK has announced a tough austere emergency budget. The UK crisis budget is
comforting but relies on some very optimistic assumptions. The Chancellor sees the
debt burden peaking at 70% in three years’ time.

Focus
 We have estimated the impact of the fiscal tightening that has already been put
forward in the euro area for the coming years. This is projected to dampen euro area
growth by 1.0 percentage points in 2011 and less in the subsequent years.

USD/CNY Change in US private payrolls

6.84 6.84 500 '000 '000 500

6.83 6.83 250 250

6.82 6.82 0 0

6.81 6.81 -250 -250 Editors

6.80 6.80 -500 -500
Allan von Mehren
6.79 6.79 -750 -750 +45 4512 8055
6.78 6.78 -1000 -1000 alvo@danskebank.dk
April May June 96 98 00 02 04 06 08 10
10 Steen Bocian
Source: Source: Ecowin +45 45 12 85 31
steen.bocian@danskebank.dk

www.danskeresearch.com
Weekly Focus

Market movers ahead

Global
 Next week’s US calendar includes the release of the two most important data reports.
Census crowding out in May to lift
On Thursday the manufacturing ISM index is expected to remain unchanged, at 59.7.
private employment in June
In spite of weak headlines, the details in the regional PMIs have been surprisingly
500 1000 persons 500
strong, indicating that the ISM will remain at its high level for another month. Over 1000 persons
400 Private payrolls Total payrolls 400
the following months we do expect a moderate decline in the ISM as growth (incl. Census)
300 300
momentum slows.
200 200
The second major event of the week will be Friday’s release of the June employment
100 100
report. We expect the non-farm payrolls to fall 50,000, as Census workers are starting
0 0
to leave federal payrolls. Private payrolls, adjusted for the Census effect, are expected Jan Feb Mar Apr May
10
to increase 200,000. Half of this effect stems from pent-up labour demand, as private
employment during the last few months has been crowded out by Census hiring (see Source: Reuters Ecowin and Danske Markets
Research - US: A reality check on the job market). The other 100,000 represent an
underlying upward trend in employment.
Finally focus will be on data for pending home sales. Hence a strong figure on
Thursday will point towards a more robust recovery of the US housing market,
following a few months with weak numbers for both existing and new home sales.

 Next week is kicked off in the euro area with the release of ECB’s report on
monetary developments on Monday – including M3 growth and data on monthly loan
flows. Lately loans to households have increased at a decent pace, while loans to non-
financial institutions have been looking softer. It will be interesting to see what effect
the euro debt crisis has had on the latest monetary developments. Further, some
labour market data will be released, including German unemployment figures and
euro area unemployment rate. We expect German unemployment to continue its Swiss growth indicators in good shape
downtrend, while euro area unemployment should remain stable at 10.1%, which 75 Index KOF >> 3,0
Index
should be consistent with the PMIs released this week. By end next week final PMIs 65 2,0

will be released across the euro area. 55 1,0

45 0,0
 Next week’s UK data include final Q1 GDP numbers – likely to be confirmed at
35 -1,0
+0.3% q/q – and PMI manufacturing data which probably will decline slightly from << PMI
25 -2,0
May’s peak of 58. Nationwide house prices rose 0.5% in May but we are about to
96 98 00 02 04 06 08 10
enter a period with more moderate house price increases. The presentation of the
Government’s emergency budget spurred positive comments from Fitch and Moody’s
Source: Reuters Ecowin
while S&P said it was too early to assess the impact on Britain’s AAA rating. Despite
the austere budget, we are also reluctant to conclude that the risk of a UK downgrade
is off the table but it will to a large extent depend on the will of British policy makers Inflationary pressure appears to be
from now on. Investors have reacted by buying sterling, sending the pound to a 25- easing in China
month high. 12.5
% 3m AR % 3M AR 20
<< House prices 15
10.0
 Interest in Switzerland will centre on leading growth indicators in the form of the 7.5
10
5
5.0
KOF and PMI for June, released on Wednesday and Thursday respectively, which are 2.5 0
-5
expected to confirm further strong growth in activity in Switzerland. Other things 0.0
-10
-2.5
<< CPI inflation
being equal, this will increase the chances of the Swiss National Bank raising interest -5.0 -15
-7.5 -20
rates in 2010. We still expect the first hike to come at the December meeting. -10.0
PPI inflation >>
-25
05 06 07 08 09 10
 In China most May data will be released next week. Overall we expect the Chinese
data to confirm that the risk of an imminent overheating is subsiding. Year-on-year Source: Reuters Ecowin and Danske Markets
CPI inflation is expected to edge slightly higher to 3.0% y/y from 2.8% y/y and it will

2| 25 June 2010
www.danskeresearch.com
Weekly Focus

probably continue to increase in the coming months. However, producer price

inflation is now declining sharply on the back of lower commodity prices and house
prices appear to have stabilized. In addition it appears that growth in China peaked in
Q1 and growth in industrial production is expected to ease further to 16.6% y/y from
17.8% in the previous month.
 In Japan attention will be on who will be Japan’s new Prime Minister following
Yokio Hatoyama’s resignation. The current finance minister, Naoto Kan, is the big
favourite which means there will probably be a minor government reshuffle in the
wake of the appointment of a new prime minister. We expect Q1 GDP growth to be
revised down to 4.1% q/q AR from 4.9% q/q AR in the first preliminary release,
mainly because corporate investments will be revised slightly lower.

Scandi
 A raft of interesting data are on the agenda in Denmark. Tuesday brings figures for
Stable unemployment in Denmark
business confidence in June in the form of the Statistics Denmark’s business tendency
Thousands Thousands
surveys, Wednesday brings revised GDP data for Q1, and Thursday brings both 10
Change in unemployment
10

unemployment and retail sales for May. The unemployment figures are particularly 8 8

6 6
eagerly awaited, and we expect an unchanged rate in May and so a further sign that 4 4
the number of jobless in Denmark has probably peaked. Official unemployment has 2 2

been stable since November last year. 0 0

-2 -2

 In Sweden, trade balance, retail sales and PMI are all published during the week -4
JAN 09 APR JUL OCT JAN 10 APR
-4

ahead. Since the onset of the financial crisis, survey data have proven a poor predictor
of economic developments which is why we will put more emphasis on retail sales
Source: Statistics Denmark
and trade balance data that will provide important input to our estimate of Q2 GDP-
growth.
Important input to Q2 GDP
But the main event will no doubt be the Riksbank’s repo rate decision and the
13 SEK bn 17.5
accompanying – fully fledged – monetary policy report. We not only expect a hike of % AR
<< Trade balance (MA3)
11 12.5
25bp, but also foresee a quite hawkish Riksbank, possibly indicating a swifter initial
hiking phase. This does, however, not mean that we agree. To the contrary actually. 9 7.5

But the Riksbank has set its mind on rooting out any excesses on the housing market 7 2.5

and that the financial crisis is over and done with from a Swedish macro perspective. 5 -2.5
Retail sales (MA3) >>
Why wait seems to be its line of reasoning. 3 -7.5
07 08 09 10
 A busy week awaits in Norway. As mentioned previously, developments in
household borrowing are crucial with Norges Bank predicting negative real mortgage Source: Statistics Sweden
rates for five years. With nominal income growth of 4-5% going forward, this will be
the line in the sand for growth in household debt. We expect household credit demand
to be very strong in May, helping to push overall credit growth up to 4.1%. Otherwise NAV data something to rely on
we will probably see healthy retail sales data for May, showing that Norwegian 120000 Unemployed
Unemployed
120000
110000 110000
consumers are back in the game. The June PMI will also be very exciting in the light 100000 AKU 100000
of slightly lower global activity but signs of an upswing in oil-related industries. 90000 90000
80000 80000
While the LFS figures released during the past week could suggest that 70000 NAV 70000
60000 60000
unemployment is climbing, the coming week’s unemployment data from the 50000 50000
Norwegian Labour and Welfare Administration (NAV) for June will probably 40000 40000
30000 30000
indicate a continued downward trend. As can be seen from the chart, NAV’s figures 00 02 04 06 08 10
generally pick up a turnaround in the labour market earlier than the LFS data.
Source: Statistics Norway, Norwegian Labour and
Welfare Administration

3| 25 June 2010
www.danskeresearch.com
Weekly Focus

Market movers ahead

Global movers Event Period Danske Consensus Previous
Wed 30-Jun 11:30 CHF KOF Swiss leading indicator Index Jun 2.15 2.16
Thu 01-Jul 1:50 JPY Tankan - Large Manufacturing Index (outlook) Index 2nd quarter 1 (4) -3 (1) -14 (-8)
1:50 JPY Tankan - Non-manufacturing Index (outlook) Index 2nd quarter -7 (1) -7 (-3) -14 (-10)
16:00 USD ISM, manufacturing Index Jun 59.7 59.0 59.7
Fri 02-Jul 14:30 USD Nonfarm payroll 1000 Jun -50 -110 431
Scandi movers Event Period Danske Consensus Previous
Thu 01-Jul 9:30 DKK Consumer confidence Jun 2.0 3.0

Source: Bloomberg and Danske Markets

4| 25 June 2010
www.danskeresearch.com
Weekly Focus

Global update
Another week of mid-summer blues
Another eventful week has passed. On Monday the markets woke to the news that China
will abandon its de-facto peg of CNY to USD, which has effectively been in place since Risk appetite under pressure again
mid-2008. Instead, it will return to a managed float targeting a basket of currencies. This 1225 Index
Index
1225
1200 1200
boosted market confidence and risk appetite continued to recover early Monday. 1175
S&P500
1175
However, markets soon ran out of steam as concerns about the European debt situation 1150 1150
1125 1125
returned to the agenda and another bunch of surprisingly weak US housing data and UK
1100 1100
budget tightening added to the concerns of a second half slowdown. 1075 1075
1050 1050
Generally, the markets remain very uncertain as opinion continues to sway between a jan feb mar apr maj jun
10
double-dip scenario and a sustained rebound. The onus of proof is definitely with the
optimists currently. With leading indicators beginning to move lower – albeit from very Source: Reuters Ecowin and Danske Markets

strong levels – and continued negative newsflow out of Europe, we think this could be the
case for a while. That said, however, the markets already seem to be pricing a relatively
dire scenario. Hence, an indication of cyclical strength – either from the labour market or
from strong Q2 earnings – could be positive for risk appetite in the near term.

The mixed dataflow continues in the US

This week’s FOMC meeting provided very little news. As widely expected, the "[Heading 2]"

committee downgraded the growth assessment slightly on the recent deterioration of Home sales on a bumpy ride
financial conditions and weaker housing data. The outlook remains for a moderate 9.0 Units, mln. SAAR
Units, mln. SAAR
8.5
recovery and the Fed continues to signal that rates will be kept exceptionally low for an 8.0
7.5
extended period. Over the past month, the market has adjusted its policy rate expectations 7.0
6.5 Total home sales
considerably lower, as the recent market turmoil has derailed the process towards 6.0
with 6m avg

normalisation. An initial hike to 0.50% is not expected before June 2011, which leaves 5.5
5.0
our forecast for a March hike somewhat on the hawkish side. 4.5
04 05 06 07 08 09 10

Homes sales data for May disappointed badly with both new and existing home sales
declining. While existing home sales remain above their cyclical trough, new home sales Source: Reuters Ecowin and Danske Markets

declined to an all-time low. The setback in new home sales was driven by a negative
payback from the expiration of the first-time-buyer tax credit, while the surprising drop in
existing home sales was related to problems with the processing of contracts. We are
quite convinced that the recent data is overstating the weakness, just as the prior months Strong capex recovery
have been overstating the strength due to the home buyer credit. The average picture still 40 % 3m/3m, AR 40
% 3m/3m, AR
30 30
shows an improvement with the annualised rate of total home sales still remaining about a 20 20
10 10
million above its cyclical trough. 0 0
-10 -10
Industry data continues to look solid, with new orders ex. transport up by 0.9% m/m over -20 -20
-30 -30
Non-defence capital goods
the past month. Moreover, the details show that the demand for capital equipment -40 orders ex. aircraft -40
-50 -50
remains strong. Capital goods orders ex. defence and aircrafts is up by 28.7% AR 3m/3m, 96 98 00 02 04 06 08 10

which is the highest since 1997. Hence, there is little sign of a slowdown in the business
sector. Despite the recent more mixed data, we continue to expect Q2 GDP growth of Source: Reuters Ecowin and Danske Markets

3.5% q/q AR, but some downside seems to be emerging to our 3.2% Q3 forecast.

5| 25 June 2010
www.danskeresearch.com
Weekly Focus

Strong euro area momentum, but production set to slow

This week ifo, PMI and industrial orders confirmed that growth momentum is strong, but
that a slowdown in industrial production is to be expected as the recovery matures. Ifo Ifo expectations have peaked
expectations declined, but the level nevertheless confirms that the rebound in Germany is % y/y Index (2000 =100) 115
110
8
intact despite the debt crisis. We believe data will confirm that German growth has been 105
100
2
95
strong in Q2 and we expect the economy to keep the momentum going in Q3. 90
-4
85
Ifo expectations >>
80
The June flash PMI surveys indicate that we will see robust economic expansion in the -10 << German industrial production 75
-16 70
euro area in Q3. The German manufacturing sector still looks rather strong, while French 65
-22 60
manufacturing is trailing. On the other hand, the French service sector appears to be 92 94 96 98 00 02 04 06 08 10
expanding at a rapid pace. Employment components support further labour market
stabilisation in the euro area. New orders and new export orders have declined for a Source: Reuters Ecowin and Danske Markets

couple of months.

Euro area industrial orders only increased 0.9% m/m in April. The new orders report thus PMI new orders have peaked
sent the same signal as the confidence indicators. Namely that we should expect to see a 2,0 %, q/q Index 78
70
slowdown in industrial production growth in coming months. Keep in mind though that 1,5 << GDP
1,0 63
the poor April reading came after a very strong March reading. We are still on an upward 0,5 55
0,0 48
trend with substantial momentum. -0,5 40
-1,0 Euro, composite PMI, new orders >> 33
-1,5 25
China abandons USD peg, but will it be appreciated -2,0 18
-2,5 10
At the weekend China announced that it will abandon the de-facto USD peg that has been 98 00 02 04 06 08 10

in place since mid-2008 when the global financial crisis accelerated. Instead, it will return
Source: Reuters Ecowin and Danske Markets
to a managed float targeting a basket of currencies. This will largely be a return to the
exchange rate system from before the financial crisis accelerated in mid-2008. However,
we might see more two-way volatility in the USD/CNY exchange rate. PBoC has tried to China abandons USD peg
tone down expectations of a major appreciation. PBoC has effectively ruled out a major
one-off revaluation and since Monday CNY has appreciated by less than 0.5% against
USD. The announcement just ahead of the G20 summit this weekend is no coincidence.
China without doubt believes there could be a significant political payoff from just a
minor appreciation. This will probably be enough to avoid China’s exchange rate policy
becoming a major issue at the G20 summit and it has reduced the likelihood of a trade
war with the US, albeit China will probably have to deliver more to satisfy US Congress.

We have not made any major changes to our CNY forecast. We still expect CNY to
appreciate by about 4% against USD over the next year, which is a bit more than the Source: Reuters Ecowin and Danske Markets
market currently expects. This will not be enough to have any substantial macroeconomic
impact. We estimate it will shave 0.2% off GDP growth and reduce China’s trade balance
Strong Asian exports
surplus by USD12bn (0.2% of GDP). Nonetheless it will be a slight contribution to
avoiding overheating in China and rebalancing the global economy. 120 Jan. 2008 =100 Jan. 2008 =100 120
Korea
110 China 110
On the surface, Japan’s trade data for May looked a little bit weak as exports in current 100 100

prices declined 1.2% m/m. However, real exports increased 0.9% m/m following a solid 90 90
Japan
80 80
increase in the previous month and real imports surged for the second month in a row. As 70
Taiwan
70
seen in the chart, recent export data have actually been quite strong with no clear sign of a 60 60

slowdown in Q2. Nonetheless, we do expect growth in exports to start slowing in the 50 50

07 08 09 10
coming months.
Source: Reuters Ecowin and Danske Markets

6| 25 June 2010
www.danskeresearch.com
Weekly Focus

Scandi update
Denmark – Consumers feeling blue again
We had an insight during the week into how consumers have taken the government's
Danish consumer confidence back in
recovery package, with consumer confidence tumbling from 3.0 in May to -1.5 in June.
negative territory
Seasonal variations account for part of this, but this is far from the whole answer, as Index Index
15 15
seasonally-adjusted confidence fell from 1.6 to minus 1.3, which is a drop of almost three 10 10

points. 5 5
0 0

Consumer confidence took a knock across the board – in terms of both the current -5
Consumer confidence, sa
-5
-10 -10
situation and the situation in a year’s time. A dimmer view of the situation in a year’s -15 -15

time for both the economy as a whole and households’ own finances is not so surprising, -20
00 01 02 03 04 05 06 07 08 09 10
-20

given all the talk about spending cuts, the shelving of tax reductions and lower child Source: Statistics Denmark, Danske Research
benefit. On the other hand, it is somewhat mystifying that households are suddenly now
much more downbeat about the current situation, especially as incoming economic data
have been improving and both unemployment and employment have been largely
unchanged of late after several successive quarters of deterioration. In fact, consumers
also reckon that unemployment has peaked and will be marginally lower this time next
year, although they are less positive here than they were in May.

All in all, the confidence data are fuelling concerns that the recent improvement in private
consumption may have run out of steam. But it is too early to draw any firm conclusions
on the basis of the June figures and it will be interesting to see how consumer confidence
pans out in the coming months, as talk of recovery packages and austerity measures
presumably fade somewhat into the background. We remain cautiously optimistic about
private consumption.

Sweden – Still going strong

Last week we received a batch of information from the National Institute for Economic
Research (NIER). As expected it was all good news: The business and consumer Getting stronger by the day
confidence surveys strengthened leading the economic tendency indicator to a level 125 Net balances (100 = normal) 125
Economic tendency
consistent with a growth situation “much better than normal”. In addition, the NIER 115 115

revised its forecasts in a generally more positive direction. However, despite being 105 105

positive on Swedish and international growth, the NIER still advocates very low rates for 95 95

– as is the more fashionable wording – ‘an extended period of time’. Furthermore, the 85 85

75 75
NIER is apparently more worried about the fiscal situation in many advanced economies
90 92 94 96 98 00 02 04 06 08 10
and therefore states that risks to the international forecasts – and hence, Swedish export
growth – are mainly on the downside. Source: Swedish National Debt Office

7| 25 June 2010
www.danskeresearch.com
Weekly Focus

Norway – Negative real interest rates?

As expected, Norges Bank left interest rates alone at Wednesday's meeting. The new
monetary report revised down the expected interest rate path by 40-70bp, more or less as Debt-to-income ratio remains high
200 200

we predicted. It appears that the next rate increase may not come until December, which % %
190 190

is rather later than we previously anticipated. The bank’s projections of economic growth < < H o u s e h o ld d e b t a s p c t . o f d is p o s a b le in c o m e
180 180

both domestically and abroad seem slightly on the low side and our own macro forecasts
170 170

suggest a roughly 50bp higher interest rate path over the next two to three years. Norges
160 160

Bank’s projections also indicate negative real mortgage rates (nominal mortgage rates 150 150

lower than wage inflation) for five successive years from 2009 to 2013. With the 140 140

household debt-to-income ratio still up at 190%, low real interest rates bring an 130 130
02 03 04 05 06 07 08 09

underlying risk of instability in the housing market and banks’ balance sheets further
Source: Statistics Norway, Danske Bank
ahead. We expect this to prompt Norges Bank to step up its rate increases in 2011-13. It is
therefore worth keeping an eye on growth in lending to households and house prices.

8| 25 June 2010
www.danskeresearch.com
Weekly Focus

Focus: Research - Fiscal tightening is unlikely to kill

growth
 The debt crisis has accelerated fiscal tightening in the euro area. If the tightening is
accelerated too much, it will kill growth. Government expenditures rocketed

 We have estimated the impact of the tightening that has already been put forward.
This is projected to dampen euro area growth by 1.0 percentage points in 2011.

 The debt crisis has also resulted in significant euro weakening. This counters the
negative impact of the fiscal tightening as it improves euro area competitiveness.

 Euro weakening is estimated to lift euro area growth in 2011 by 0.8 percentage points.
The net effect of fiscal tightening and euro depreciation on growth is modest.

 The most open economies should benefit the most from the euro weakening while the Source: Reuters Ecowin and own calculations
negative impact of the debt crisis is felt the most in southern Europe.

 The negative impact from fiscal tightening is also countered by a positive growth
Mind the gap
contribution from interest rates, which due to the debt crisis are expected to stay low
52,5 % of GDP, 4q moving average % of GDP 52,5
for longer.
50,0 50,0
Greek government expenditures
 The overall effect of the debt crisis might however be somewhat more negative as the 47,5 47,5
45,0 45,0
crisis has increased uncertainty and resulted in tighter credit conditions, affecting the
42,5 42,5
weaker countries and institutions most. 40,0
Greek government revenues
40,0
37,5 37,5
From recovery plan to austerity measures 35,0 35,0
01 02 03 04 05 06 07 08 09
When the financial crisis hit the real economy in late 2008, there was a general agreement
to combat the crisis with a more lax fiscal policy. In the EU, this materialised as the Source: Reuters Ecowin and own calculations

European Economic Recovery Plan put forward by the European Commission in

November 2008, which asked for countries to undertake discretionary spending cuts
Debt below 60% of GDP... nope
worth around 1.2% of GDP. Most euro area member states thus undertook fiscal easing –
120 % of GDP % of GDP 120
even those with a budgetary situation that suggested they should in fact tighten. Fiscal
110 110
Greece
budgets then deteriorated rapidly – primarily as a result of automatic stabilisers, but also 100 100
due to the discretionary measures. 90 90
80 80
Euro area
The recession has now ended and it is time to tighten fiscal policy as was already foreseen 70 70
in the recovery plan. The process has, however, been speeded up by the European debt 60
Germany
60
50 50
crisis. Financial markets have pressured countries to deliver more and quicker fiscal
00 01 02 03 04 05 06 07 08 09
tightening than politicians would have otherwise opted for. Most notably, Greece, Spain
and Portugal have put forward additional austerity measures since the debt crisis hit. Source: Reuters Ecowin and own calculations

Germany has also presented a strict austerity plan despite its ‘safe haven’ status.

Can austerity kill growth?

There are concerns that the accelerated fiscal tightening will kill growth. We have
estimated the fiscal tightening taking into account new measures recently announced by
some countries. We calculate that fiscal tightening will equal around 1.5% of GDP in
2011 and somewhat less in 2012-13. The impact on growth will depend on the design of
the specific measures and is notoriously difficult to estimate. Senior Economist
Frank Øland Hansen
+45 4512 85 26
franh@danskebank.dk

Senior Analyst
Lars Tranberg Rasmussen
+45 45128534
laras@danskebank.dk

9| 25 June 2010
www.danskeresearch.com
Weekly Focus

According to simulations on the new OECD model, a reduction in euro area fiscal
expenditure by 1% of GDP will reduce the euro area GDP level by 0.8% in the first year
and about the same in year two, but diminishing thereafter. It should be noted that a fiscal
rule has been applied in the OECD simulation, so that the 1% decline in expenditure is
followed by a 0.2% annual decline in taxes for five years.

In the short run, expenditure cutting tends to dampen growth more than tax rises.
Euro weakening
Estimates on the impact of various fiscal instruments can be found in a recent OECD
paper on The Effects of Fiscal Policy on Output. Here the impact of a 1% of GDP
reduction in government consumption (not total government expenditure) is found to be a
0.6% reduction in GDP after a year while a 1% of GDP increase in income tax only
dampens activity by 0.2% after a year. The austerity measures put forward so far have
focused more on expenditure cutting than increasing revenues. We assess that roughly
two-thirds of the budget tightening comes from expenditure cutting. Using the results
from the new OECD model and assuming that the impact on activity of rising revenues is
roughly half of that of reducing expenditures, we find that fiscal tightening will lower
GDP growth by about 1.0% in 2011, 0.7% in 2012 and 0.6% in 2013. Source: Reuters Ecowin

Euro depreciation to the rescue

The negative growth impact of fiscal tightening is countered by the positive impact from
euro depreciation, which was to a large extent triggered by the debt crisis. The overall Fiscal tightening countered by euro
effect of the debt crisis on euro area growth might thus be much smaller than the above depreciation
calculations indicate. The nominal effective exchange rate has declined 14% since it Impact on GDP
2010 2011 2012 2013
growth, %-point
peaked in late October last year. According to the new OECD model, a 10% depreciation
Fiscal tightening 0,0 -1,0 -0,7 -0,6
increases the GDP level by 0.7% in the first year, 1.3% in year two and 1.7% in year
Euro depreciation 1,0 0,8 0,6 0,1
three. Compared with a situation where the effective exchange rate had remained at its
Combined effect 1,0 -0,2 -0,1 -0,5
peak level, the euro depreciation is then estimated to enhance euro area GDP growth by
Source: Danske Markets
roughly one percentage point this year, 0.8 percentage points in 2011, 0.6 percentage
points in 2012 and 0.1 percentage points in 2013.

The combined effect of fiscal tightening and euro depreciation is thus to increase
growth by 1.0 percentage point in 2010, while growth is dampened by 0.2 percentage
points in 2011 and 0.1 percentage points in 2012.
Exports to non-euro area
The ‘back of the envelope’ calculations that we have presented here are clearly based on a 70 70
% of GDP % of GDP
number of debatable assumptions. The conclusion should nevertheless be pretty clear. 60 60
Ireland
The fiscal tightening expected to take place in the coming years will dampen growth 50 50
40 40
significantly. But it isn’t strong enough to push the economy back into recessionary Germany
30 30
territory. Most importantly, the euro depreciation that has resulted from the debt crisis 20 20
Spain
gives a boost to growth this year and should significantly counter the drag from fiscal 10 10
Greece
policy in 2011-12. 0 0
96 98 00 02 04 06 08 10

Source: Reuters Ecowin and own calculations

10 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Winners and losers from a weaker euro

The most open economies will benefit the most from the euro weakening while the
negative impact of the debt crisis is felt the most in southern Europe. The winners are
Ireland and Germany with exports to non-euro area countries at 53% of GDP and 24% of
GDP respectively, while Spain and Greece have non-euro area export shares of around
10% of GDP.

Lower rates
The negative impact from fiscal tightening is also countered by a positive growth
contribution from interest rates, which due to the debt crisis are expected to stay low for Lower rates
longer. Lower rates may add about 0.2 percentage points to euro area growth in 2011. 3,5 3,5
% %
3,0 3,0
Countries and banks with lower ratings are however suffering from higher spreads and German 10 year government bonds
2,5 2,5
the drying-up of credit markets. This amplifies the bipolar nature of the euro area 2,0 2,0
...5 year
recovery. 1,5 1,5
...2 year
1,0 1,0

Confidence crisis is a key risk to growth 0,5 0,5

0,0 0,0
A key risk for the growth outlook is an escalation of the debt crisis. Global leading jan feb mar apr maj jun
10
indicators are currently coming off their recent peaks, indicating that global growth
Source: Reuters Ecowin
momentum is about to decline. If this decline gets traction, the ‘double-dip’ camp will
raise their voices and fears about fiscal sustainability might get another hit, which would
put upward pressure on sovereign funding costs and cause more negative dynamics in
But wider spreads
money and credit markets. If confidence sinks again, it is easy to imagine higher risk
15,0 %-point, 5-year spread to Germany 15,0
premiums materialising, which would be a significant blow to the fragile recovery. While Greece
12,5 12,5
this effect is difficult to gauge, it could push the euro area back into recession if
10,0 10,0
conditions gets worse.
7,5 7,5
Portugal
5,0 5,0
Ireland
2,5 2,5
Spain Italy
Euro area: fiscal outlook 0,0 0,0
jan feb mar apr maj jun
10
Fiscal tightening from previous year, % GDP,
% of GDP EUR bn Source: Reuters Ecowin
2010 2011 2012 2013 2010 2011 2012 2013 Total
Germany -2.5% 0.4% 1.0% 0.8% -61.4 10.1 26.1 21.5 -3.7
France 0.0% 2.2% 0.9% 1.2% 0.0 44.8 19.1 26.6 90.4
Italy -0.1% 0.7% 0.8% 0.0% -1.6 11.3 13.5 0.0 23.2 Confidence indicators have peaked
Spain 3.7% 3.7% 1.5% 1.7% 39.2 40.0 17.1 20.4 116.8
150 Indeks PMI composite >> Indeks 65
Netherlands -1.3% 0.9% 0.4% 0.0% -7.5 5.4 2.5 0.0 0.3
Belgium 1.4% 0.5% 0.7% 0.0% 4.8 1.8 2.6 0.0 9.2 100 55
Greece 8.1% 4.6% 2.0% 1.8% 18.8 10.4 4.6 4.3 44.4
50 45
Austria -1.1% 0.7% 0.6% 0.5% -3.1 2.0 1.8 1.6 2.3
Portugal 2.0% 4.1% 1.8% 1.6% 3.4 7.2 3.3 3.0 16.8 0 35
Finland -1.1% 0.5% 0.5% 0.5% -2.0 0.9 1.0 1.0 1.9 -50 Belgium "leading" indicator (+50) >>
25
<< ZEW expectations
Ireland 5.2% 2.2% 1.7% 1.6% 8.4 3.8 3.0 3.0 19.7
Ifo expectations (minus 50) >>
-100 15
Others -0.2% 1.4% 0.6% 0.0% -0.4 1.2 0.8 0.5 2.8
92 94 96 98 00 02 04 06 08 10
Total 0.0% 1.5% 1.0% 0.8% -1 139 95 82 324

Source: Danske Markets Source: Reuters Ecowin

11 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Equities: Looking for signs of sustained upswing

Focus on stock market performance
Leading indicators for OECD and BRIC have all shown significant growth softness since
the start of Q2 10. This softness has already been spotted by investors who are now Key events of the week
pricing in below-trend earnings expectations in global and US stocks and a full-scale
 ISM Manufacturing
double-dip recession for European equities. What is not yet priced into the stock market is
the possibility of a speedy and deep economic setback in H2 10 and 2011. This is what is  US change in private employment
currently worrying investors. In the coming week, we look out for the following data that
 Chinese PMI
in various ways could indicate market direction.
 Eurozone PPI
Pace of deceleration of economic activity
Source: Danske Markets Equities
ISM manufacturing for June (1 July) and Chinese PMI for June (30 June) are both
important global industrial cycle indicators. We have recently seen signs of deceleration
in both ISM and Chinese PMI, although both have stayed in a high range for months. The
importance lies in the pace of the deceleration in the global industry cycle. A forceful
downturn right now – without clear signs of the consumer cycle taking over from the
industrial cycle – could exacerbate investors’ economic concerns.
Sustainability of the economic upswing OECD LEI & S&P1200 Global
Economic sustainability needs strong private demand, and next week will see the release
of some important data. In Europe, we will receive eurozone private consumption proxy
releases from German and Spanish retail sales for May (28+29 June) while indications
of the US durable consumption trend can be derived from US domestic vehicle sales for
June (1 July). The most important piece of data on the ‘sustainability agenda’ is however
the US job report for June (2 July) where a strong number on private employment
should remove fears of the job-less recovery triggered by the May report. Another early
indicator of future and sustainable consumption is EU residential credit growth, which is
given as a part of the Eurozone M3 for May (28 June).
Source: Danske Markets Equities, Reuters Ecowin
European company pricing power
One of our concerns remains deflation in output prices which could erode corporate
earnings in the coming months if it continues. Eurozone PPI for May (2 July) should
provide an indication of how domestic European companies are affected by the
weakening of the euro via the higher prices on imports. We know that exports will be
positively affected by the weaker euro but what about domestic-oriented companies?
Cost of imports should, together with the underlying trend in final goods pricing, give an
indication of domestic companies’ corporate profitability.
Earnings momentum likely to strengthen in Q2 earnings season
While in the long run it is worrisome for the global economy that companies are not
hiring, it is, in the short run, very positive for company earnings. Since Q1 reports and
before the Q2 earnings season starts, corporate earnings revisions have been positive and
pre-announcements for Q2 suggest that S&P500 companies will report strong earnings.
We think Q2 is likely to be a positive trigger for the very nervous global stock market.

Analyst
Rikke Michaela Greve
+45 45128056
rikg@danskebank.com

12 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Fixed Income: Rates - Risk on, risk off is the name of

the game
Risk on, risk off is the name of the game
Markets continue to be almost universally ruled by risk. However, the link is maybe not Key events of the week ahead
quite as strong as previously. That said it could be a game of risk on – risk off all through
the summer with risk appetite dictating movements in yields and rates.  G20 meeting

It is hard to point to a single factor changing the risk sentiment – perhaps it is doomsday  ISM and non-farm payrolls. Look
fatigue or the start of the World Cup! Economic news over the period has been less than for a strong increase in private
payrolls
stellar with especially US data disappointing. The relatively confident actions from the
ECB and the SNB perhaps also helped paint a picture of central banks in control. Finally  How is the debt crisis impacting
a relatively well-received Spanish auction, the planned publication of bank stress tests M3 and the credit growth in the
and recently the change in Chinese FX policy (see Flash Comment - China resumes euro area?
appreciation) may also have added to the optimism.
5-year spread vs Germany
More differentiation between bond yields in the euro area 1400 bp 1400
A closer look at the intra-European bond spreads shows a mixed picture – the stronger the 1200 1200
Greece
country the better the performance seems to describe the movements in recent weeks. For 1000 1000
800 800
instance spreads between France and the Netherlands on the one hand and Germany on
600 600
the other have narrowed significantly recouping the lion’s share of the widening seen in 400 400
recent weeks. Also Italy has performed very well in June so far. 200 200
bp
0 0
On the other hand, spreads between Greece and Germany continue to widen and the Jan Apr Jul Oct Jan Apr
09 10
Portuguese spread has also had a very hard time. There remains great doubt about the Source: Ecowin
long-term will and ability of Greece to repay its debts. Many fear that once the Greek
primary budget surplus turns positive some time down the road a debt restructuring will
5-year spread vs Germany
become too tempting compared to continued austere belt tightening.
500 500
bp bp
450 450
It is clearly positive that markets have begun to discriminate more instead of the 400 400
Portugal
indiscriminate selling seen very early this month. It is also positive if markets and 350 350
300 300
Spain
economies can move on without Greece performing – given the troubles facing Greece 250 250
200 200
and the ongoing default risk that will probably remain high for a long time. It is also 150 Ireland 150
100 100
noticeable that it is the countries where ECB buying has been the strongest that have had 50 Italy 50
it the hardest so far this month. 0 0
Dec Jan Feb Mar Apr May Jun
09 10
The important country going forward seems to be Spain due to the size of the economy, Source: Ecowin
the financial system and the size of its challenges in reducing its deficit, halting the debt
explosion and digesting the housing market bubble.
5-year spread vs Germany
More risk-on than risk-off days to come 120
bp bp
120

100 100
We expect the economic data to support risk appetite in the weeks and months ahead -
80 80
e.g. we look for a strong labour market report this week and expect ISM to hold up Belgium
60 60
reasonably well.
40 40
Netherlands
We also believe that the combined actions by the EU, IMF and not least the ECB will 20 20
France
keep the lid on the eurozone debt crisis. The upcoming publication of stress tests on banks 0 0
Mar Apr May Jun
10
may also help ease fears on financial markets a little.
Source: Ecowin

Senior Analyst
Jesper Fischer-Nielsen
+45 45 12 85 18
jfis@danskebank.dk

13 | 25 June 2010
www.danskeresearch.com
Weekly Focus

FX: Sweden’s Riksbank in focus

The Riksbank meeting on 1 July is set to be the all-dominating event in the Scandinavian
Weekly change against EUR, %
markets next week. Like other analysts, we forecast a rate hike of 25bp. While the hike
should not come as any great surprise, it is expected to give a further boost to the Swedish JPY
krona (SEK). SEK is already popular with investors due to the healthy state of GBP
CHF
government finances in Sweden and an export-driven economy that has finally shifted up
USD
a gear. The hike will mark Sweden as the first major, non-commodity-dominated country NZD
to raise interest rates this year. SEK
AUD
That said, the rate hike is not entirely a foregone conclusion. The past week saw Norges CAD
Bank revise down its interest rate forecast considerably on worries about developments in NOK

the European economy and the consequences of the fiscal tightening that is happening in -3.0% -1.5% 0.0% 1.5% 3.0%
Europe at the moment. So far, however, a majority of Riksbank members have denied this
Source: Bloomberg
will have any significance for Swedish monetary policy. One should also remember that
the policy rate in Norway is 2.0% but just 0.25% in Sweden. If, contrary to expectations,
the Riksbank follows Norges Bank and keeps rates unchanged, a major sell-off in SEK
could ensue. In other words the risk to SEK is not symmetrical.

UK’s crisis budget boosts pound

The UK’s new Chancellor of the Exchequer, George Osborne, last week presented his Relative rates support SEK
long-awaited crisis budget. Government benefits will be cut significantly and VAT is to
be raised by 3 percentage points to 20%. The budget was viewed as relatively tight by the
market and has in the market’s opinion removed – at least for some time – the risk of a
credit rating downgrade by the international rating agencies. Moody’s has already
announced that the budget supports the country’s current Aaa credit rating, while S&P on
the other hand has stated that a sustained effort is needed to maintain the UK’s top rating.
Overall, though, the budget has lent support to the pound and EUR/GBP has fallen to
0.82 – its lowest level since late 2008. Source: Ecowin

However, we doubt the pound will continue to be firm. The tight budget will limit growth
and render a rate hike from the Bank of England unnecessary for a very long time. The
risk is rather that the central bank may be forced to soften monetary policy further via a
return to quantitative easing. Furthermore, S&P’s comments underline that the risk of a
downgrade remains. It is also worth noting that the UK’s budget projections are based on
growth expectations that the majority of economists consider rather optimistic.
Yuan strengthening limited so far
G20 meeting with less focus on China 6.835 6.835

6.830 6.830
Given China’s recent revaluation of the yuan, Chinese exchange rate policy is no longer 6.825
USD/CNY
6.825

expected to attract as much attention as earlier at the coming weekend’s G20 meeting, 6.820 6.820

6.815 6.815

though there could still be criticism centred on whether China is letting its currency 6.810 6.810

6.805 6.805
appreciate quickly enough. Since last weekend the Chinese yuan has strengthened by 6.800 6.800

around 0.5% against the greenback. However, the market only expects a further firming 6.795
January February March April May June
6.795

10
of 2% over the next 12 months, which in our opinion is below what the US would like to
Source: Ecowin
see. Nevertheless, the big themes at G20 will be the rolling back of expansive fiscal
policies and financial regulation.

Chief Analyst
Arne Lohmann Rasmussen
+45 4512 8532
arr@danskebank.dk

14 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Commodities: Economy in focus

Following a start to the week with risk “on” and decent commodity price rises after the
Chinese announced that they would allow the yuan to appreciate, commodities retreated Weekly changes
again towards the end of the week as the market was spooked by the softer tone struck by
economic data out of both the US and Euroland. Oil rose close to USD80 and copper hit
USD6,700 on Monday on speculation that a rise in purchasing power in China would fuel
imports of commodities. Simultaneously, gold prices hit new record highs as safe-haven
demand was replaced by inflation fears.
Although we think that USD80 will be tested again, it is worrisome that US crude stocks
continue to see build at a time of year when an increase in refining operations should start
to take its toll. However, one of the reasons of the lack of seasonal adjustment in
inventories is that refiners have extended the maintenance period this year, leading to
weaker-than-usual demand for crude. However, the uptick in refining margins as
highlighted by higher distillate and gasoline crack spreads recently suggests that refining
capacity utilisation could be on the rise. This should lead crude stock to come down but in Source: Bloomberg, Danske Markets.
order for oil prices to move firmer into the USD80-90 range, product demand would have
to show more pronounced strength.
IEA: economy to remain key driver for oil prices US crude oil stocks keep rising
This week the International Energy Agency (IEA) published its Medium-Term Oil
Market Report in which two oil-demand scenarios are assessed: a higher- and a lower-
GDP scenario (with the former the IEA’s base case based on IMF growth projections).
The report stressed that the shape and extent of the economic recovery is likely to remain
the primary driver of oil market balances in the years to come, and also emphasised that
the unusually uncertain economic environment could add to price volatility.
In the higher-GDP outlook, demand growth averages +1.4% y/y after 2009 but oil
intensity is expected to gradually improve as efficiency gains take effect. As a result of
waning non-OPEC supply, the market tightens substantially and OPEC spare capacity is Source: EcoWin, Danske Markets.
projected to fall below 5% in 2014. While this scenario has the potential to lead to higher
prices, the IEA stresses that a diminishing price elasticity of demand means that income
effects will likely outweigh any price effects on demand. Total consumption is thus Crack spreads widening
forecast to average 89 mb/d by 2014 (vs. 83 mb/d in 2009). In contrast, the lower-GDP
scenario entails significantly lower demand growth of below 0.5% y/y. But, at the same
time, non-OPEC supply is lower as investment declines as well. On balance, the IEA
estimates that OPEC spare capacity would in this case be close to current levels of around
8%. This situation would lead to a relatively comfortable market which could imply lower
price volatility.
In any case, demand growth is likely to be driven mainly by the non-OECD region and to
arise predominantly from transportation and petrochemical sectors, with the latter leading
to a rise in relative demand for lighter fuels. Refining is expected to adapt to these
structural changes as new upgraded capacity is coming on stream. The IEA also sees Source: EcoWin, Danske Markets.

global usage of biofuels bounce back after having been pushed down the energy agenda
during the recession, notwithstanding the ongoing “fuel vs. foodstuffs” debate. Regarding
financial flows, the agency stressed the lack of firm evidence that speculators drive prices
but warned that regulatory crack-downs may add to volatility.
Although we largely agree with the IEA on the demand outlook and see risks to our case
for crude prices to head into the USD80-90 range towards the end of the year as chiefly
on the downside in the short term, we also think the oil cost curve has seen an important
upward level shift following recent restrictions on deepwater drilling. Thus, longer term,
we probably have to become used to USD70+ oil prices.
Senior Analyst
Christin Tuxen
+45 4513 7867
tux@danskebank.dk

15 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Financial views
Equities
 Equity markets are already discounting a recession due to the European crisis. This is
a much harder expectation than suggested by current leading indicators. Hence our Equities and US 10Y yield
worry is a hard landing. For now however we place more probability on a slowdown 4.0
1275 Index %
with positive growth rates and we think that Q2 is likely to be a positive trigger for a US 10-year gov bond >> 3.9
1225 3.8
very nervous global stock market. We expect the financial sector to be surrounded by 1175 3.7
1125 3.6
uncertainty for a longer period. Still, in the short term, we expect the sector to perform 3.5
1075
in contrast to significant underperformance in recent months and therefore 3.4
1025
<< S&P500 3.3
recommend a neutral stance (previously underweight). We reiterate our overweight 975 3.2
925 3.1
recommendations on Industrials, Consumer Staples and Energy. Dec Jan Feb Mar Apr May Jun
09 10

Fixed Income Source: Reuters Ecowin

 Global: A game of risk on/risk off all through the summer with risk appetite dictating
movements in yields and rates could be on the cards.
 If risk appetite rebounds further, yields will eventually follow suit by moving higher. EUR/USD and USD/JPY
We expect some relief in bond markets in the coming weeks as the crisis takes a step
165 98
back. In addition, continued strong macro data out of the big countries should provide
155 << EUR/USD 96
some cushioning.
145 94

 Euroland intra-spreads: We remain overweight on Germany, Italy, the Netherlands, 135 92

125 90
Austria and Ireland. We are underweight on France, Spain, Greece and Portugal. We
115 88
recommend 5Y Italy versus France and 30Y Italy versus Germany. USD/JPY >>
105 86
 Scandinavian government bonds are performing well and we remain overweight 2Y Jun Aug Oct
09
Dec Feb Apr
10
Jun

DGBs and 5Y SGBs vs France and long 10Y DGBs vs France. We are long on
Source: Reuters Ecowin
Norwegian krone T-bills on an outright basis with open currency exposure.

Credit
 The primary market has reopened and secondary market activity has also picked up
Credit spreads
slightly; going forward we expect liquidity to continue to improve. However, the
segregation of market access for Northern and Southern European issuers is becoming 25.0 % points % points 6.5

clearer. Furthermore, banks are likely to remain under pressure for some time on the 20.0 5.5

back of sovereign distress and the austerity measures currently being undertaken. 15.0 4.5

 We are positive on investment grade credit from non-financial companies. Company 10.0 3.5

credit metrics are currently sound and we thus consider the default risk in the short to 5.0 US credit spread (Baa) >> 2.5
<< Eur high yield spread
medium term as very low. Furthermore, companies of high credit quality offer an 0.0 1.5
07 08 09 10
alternative for investors seeking an exit from what they perceive to be risky sovereign
exposure. Source: Reuters Ecowin

FX Outlook
 EUR/USD failed to break 1.24 as risk appetite ran out of steam. We think
dysfunctional debt markets in Southern Europe and relative rates will weigh on the Commodity prices
euro going forward. The UK emergency budget calmed markets but we find only
90 USD/barrel Index 4000
limited downside potential in EUR/GBP now – risk/reward is bad. The Swiss central 85 3750
<< Oil (WTI)
bank now sounds less concerned about the CHF appreciation and it seems that market 80 3500
forces will now play a more important role in setting the value of the Swiss franc, 75 3250
70 3000
which in our view points to further appreciation.
65 2750
LME metal prices >>
 SEK and NOK are expected to benefit further from rate hikes and strong 60 2500
55 2250
fundamentals. SEK is attractive ahead of the Riksbank meeting (1 July).
Jun Aug Oct Dec Feb Apr Jun
09 10

Source: Reuters Ecowin

16 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Commodities
 After a short-lived recovery during which oil rose close to USD80 again, commodities
have in general again been sold off in the past week. We look for prices to remain
relatively steady around newfound levels in the near term but still project rising prices
later in the year as the strength of the OECD recovery could surprise the market.

17 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Macroeconomic forecast
Macro forecast, Scandinavia
Private Public Fixed Stock Ex- Im- Infla- Unem- Public Public Current
Year GDP 1 cons.1 cons.1 inv.1 build.2 ports1 ports1 tion1 ploym.3 budget4 debt4 acc.4

Denmark 2009 -4.9 -4.6 2.5 -12.0 -1.7 -10.3 -13.2 1.3 3.5 -2.8 38.8 4.0
2010 1.8 2.7 1.2 -2.3 0.8 2.7 2.6 2.2 4.1 -5.6 42.0 3.2
2011 1.9 2.5 0.5 1.3 0.2 3.5 3.5 1.8 4.0 -4.5 46.5 2.5
Sweden 2009 -4.9 -0.8 2.1 -15.3 -1.5 -12.5 -13.4 -0.3 8.4 -1.3 39.5 7.6
2010 1.8 2.2 4.6 0.4 0.5 3.5 6.8 1.4 10.3 -2.8 43.1 5.9
2011 2.0 1.8 1.5 2.2 0.0 4.4 4.2 2.4 10.3 1.0 44.0 6.8
Norway 2009 -1.4 0.1 5.0 -7.9 -1.8 -4.2 -9.6 2.2 3.1 8.0 26.0 19.0
2010 3.1 5.0 3.1 -0.5 1.0 2.3 5.6 2.5 3.3 12.0 26.0 24.9
2011 1.7 4.4 2.5 0.0 0.0 1.4 7.3 1.9 3.4 10.0 - 17.0

Macro forecast, Euroland

Private Public Fixed Stock Ex- Im- Infla- Unem- Public Public Current
Year GDP 1 cons.1 cons.1 inv.1 build.2 ports1 ports1 tion1 ploym.3 budget4 debt4 acc.4
Euroland 2009 -4.0 -0.5 2.3 -10.8 -0.8 -12.6 -11.4 0.3 9.4 -6.3 78.7 -0.7
2010 1.3 0.1 1.4 -2.0 0.4 7.9 5.8 1.4 9.8 -6.7 84.8 -0.3
2011 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 4.0
2010 1.9 -1.0 2.1 9.9 0.1 8.9 8.8 1.0 8.1 -5.0 76.5 3.7
2011 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 -2.3
2010 1.6 1.3 1.7 -1.0 0.3 7.9 5.9 1.2 10.0 -8.5 82.0 -2.5
2011 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 -2.2
2010 1.3 0.9 1.3 0.1 0.2 8.0 6.0 1.9 8.6 -5.0 116.0 -2.0
2011 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 -5.2
2010 -0.3 -0.5 1.8 -5.6 0.0 7.2 4.6 0.9 20.1 -10.0 66.0 -4.1
2011 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 1.4
2010 1.5 0.2 0.0 -4.0 0.0 4.0 2.0 1.4 10.0 -3.8 49.0 1.4
2011 2.5 1.5 0.5 3.5 0.0 9.0 5.5 2.0 9.2 -3.3 52.0 2.2

Macro forecast, Global

Private Public Fixed Stock Ex- Im- Infla- Unem- Public Public Current
Year GDP 1 cons.1 cons.1 inv.1 build.2 ports1 ports1 tion1 ploym.3 budget4 debt4 acc.4

USA 2009 -2.4 -0.6 1.8 -18.3 -0.6 -9.6 -13.9 -0.3 9.3 -9.9 83.8 -2.9
2010 3.3 2.7 0.3 2.9 1.2 12.1 11.3 1.6 9.4 -10.2 91.6 -3.9
2011 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 2.8
2010 3.3 2.2 1.6 -1.1 -0.1 23.7 2.6 -1.0 4.3 5.2 220.4 3.4
2011 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 5.8
2010 10.2 - - - - - - 3.3 4.0 -2.2 20.5 4.8
2011 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 -1.3
2010 1.3 0.9 3.0 -2.0 1.1 4.4 0.9 3.2 8.0 -10.7 80.3 -2.0
2011 2.3 2.6 2.2 2.2 1.3 6.9 5.0 2.1 8.1 -8.8 88.2 -1.2
Switzer- 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
land 2010 2.0 1.8 0.5 2.1 -0.7 7.0 5.0 1.0 3.8 -1.0 40.0 9.0
2011 1.7 1.6 1.0 1.5 -0.2 4.0 4.0 1.2 3.5 -0.5 39.0 10.0
Source: OECD and Danske Bank. 1) % y/y. 2) % contribution to GDP growth. 3) % of labour force. 4) % of GDP.

18 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Financial forecast
Bond and money markets
Key int. Currency Currency Currency
3m interest rate 2-yr swap yield 10-yr swap yield
rate vs EUR vs USD vs DKK
USD 25-Jun 0.13 0.54 1.04 3.20 123.5 - 602.8
+3m 0.13 0.45 1.30 3.60 115 - 647
+6m 0.13 0.45 1.45 3.60 118 - 631
+12m 0.75 1.15 1.95 3.60 127 - 587
EUR 25-Jun 1.00 0.74 1.31 2.90 - 123.5 744.3
+3m 1.00 0.65 1.30 3.00 - 115 744.0
+6m 1.00 0.65 1.35 3.10 - 118 744.0
+12m 1.00 1.00 1.65 3.40 - 127 745.0
JPY 25-Jun 0.10 0.25 0.48 1.22 110.7 89.7 6.72
+3m 0.10 0.24 0.50 1.45 109 95 6.83
+6m 0.10 0.30 0.65 1.55 117 99 6.36
+12m 0.10 0.30 1.00 1.60 130 102 5.73
GBP 25-Jun 0.50 0.73 1.45 3.44 82.5 149.7 902.1
+3m 0.50 0.70 1.55 3.60 84.0 137 886
+6m 0.50 0.75 1.60 3.75 85.0 139 875
+12m 0.50 0.75 1.95 4.05 82.0 155 909
CHF 25-Jun 0.25 0.11 0.60 1.95 135.8 110.0 548.1
+3m 0.25 0.15 0.60 2.00 137 119 543
+6m 0.25 0.25 0.80 2.10 137 116 543
+12m 0.75 0.75 1.45 2.45 141 111 528
DKK 25-Jun 1.05 1.13 1.64 3.04 744.3 602.8 -
+3m 1.05 1.10 1.60 3.20 744 647 -
+6m 1.05 1.10 1.65 3.25 744 631 -
+12m 1.05 1.35 1.95 3.50 745 587 -
SEK 25-Jun 0.25 0.73 1.70 2.99 959.3 777.0 77.6
+3m 0.50 0.80 2.00 2.70 940 817 79.1
+6m 1.00 1.30 2.30 2.90 920 780 80.9
+12m 1.50 1.90 3.00 3.45 920 724 81.0
NOK 25-Jun 2.00 2.69 3.13 4.12 802.1 649.6 92.8
+3m 2.00 2.65 3.20 4.30 765 665 97.3
+6m 2.50 3.00 3.50 4.45 760 644 97.9
+12m 3.25 3.75 4.25 4.80 760 598 98.0
PLN 25-Jun 3.50 3.75 4.59 5.38 410.9 332.8 181.1
+3m 3.50 4.10 5.00 5.85 395 343 188
+6m 3.50 4.10 5.20 6.10 395 335 188
+12m 3.50 4.10 5.80 6.35 390 307 191

Equity markets
Price trend Price trend Regional recommen-
Risk
3 mth. 12 mth. dations
Regional
USA Low -5% to +5% 0% to +10% Underweight
Japan High -5% to +5% 0% to +10% Neutral
Emerging markets (USD) High -5% to +5% 0% to +10% Overweight
Pan-Europe (EUR) Low -5% to +5% 0% to +10% Neutral
Nordics
Sweden Average -5% to +5% 0% to +10% Neutral
Norway High -5% to +5% 0% to +10% Neutral
Denmark High -5% to +5% 0% to +10% Neutral

Commodities
2010 2011 Average
25-Jun Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011
NYMEX WTI 76 81 78 80 85 87 89 92 94 81 91
ICE Brent 76 79 79 79 84 86 88 91 93 80 90
Copper 6,694 7,274 7,300 7,500 7,800 8,200 8,600 8,650 8,700 7,468 8,538
Zinc 1,875 2,307 2,150 2,200 2,400 2,500 2,500 2,550 2,550 2,264 2,525
Nickel/1000 19 20 24 22 23 23 23 23 23 22 23
Steel 448 464 525 550 575 580 585 590 600 529 589
Aluminium 1,965 2,199 2,200 2,250 2,300 2,400 2,400 2,400 2,400 2,237 2,400
Gold 1,245 1,110 1,175 1,150 1,100 1,050 1,000 1,000 1,000 1,134 1,013
Matif Mill Wheat 130 126 133 133 132 127 133 133 133 131 132
CBOT Wheat 478 518 480 470 450 475 500 500 500 480 494
CBOT Corn 346 389 370 375 400 410 420 430 440 384 425
CBOT Soybeans 959 969 960 975 1,000 1,025 1,050 1,075 1,100 976 1,063

Source: Danske Markets

19 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Calendar
Key Data and Events in Week 26

Monday, June 28, 2010 Period Danske Bank Consensus Previous

- DEM Inflation (HICP), Prelimnary m/m | y/y Jun 0.2%|1.0% 0.2%|1.0% 0.1%|1.2%
1:50 JPY Retail trade m/m|y/y May -0.1%|4.8% 0.5%|4.9%
9:30 SEK Trade balance SEK bn May 7.8 6.9
10:00 EUR M3 Money supply y/y May 0.1%|0.4% -0.2%|-0.1%
10:00 DEM Retail sales m/m|y/y May 1.0%|-3.1%
14:30 USD Personal income m/m May 0.5% 0.5% 0.4%
14:30 USD Private consumption expenditure, monthly index May -0.1% 0.1% 0.0%
18:30 USD Fed's Warsh (voter, neutral) speaks

Tuesday, June 29, 2010 Period Danske Bank Consensus Previous

- NOK Credit indicator (C2) y/y May 4.1% 4.0%
1:30 JPY Household Spending y/y May 0.3% -0.7%
1:30 JPY Unemployment rate % May 5.0 5.0 5.1
1:30 JPY Job-to-applicant ratio May 0.49 0.49 0.48
1:50 JPY Industrial production, preliminary m/m|y/y May 0.2%|20.5% 0.0%|20.3% 1.3%|25.9%
7:00 JPY Small Business Confidence Index Jun 46.7
8:00 CHF Consumption indicator May 1.763
8:45 FRF Consumer confidence Net bal. Jun -38
9:00 ESP Inflation (HICP), Preliminary y/y Jun 1.8%
9:30 SEK Retail sales m/m|y/y May 1.0%|0.3% -0.2%|-1.2%
10:30 GBP Net Consumer Credit GBP bn Jun 0.0 -0.1
10:30 GBP Mortgage Approvals 1000 May 50.8 49.9
10:30 GBP Broad money M4 m/m|y/y Jun 0.0%|2.8%
11:00 EUR Business Climate Indicator Index Jun 0.34
11:00 EUR Industrial Confidence Net balanc Jun -6 -6
11:00 EUR Consumer confidence Net balanc Jun -18 -17
11:00 EUR Services confidence Net balanc Jun 3
16:00 USD Consumer confidence Index Jun 63.0 62.5 63.3

Wednesday, June 30, 2010 Period Danske Bank Consensus Previous

1:15 JPY Manufacturing PMI Index Jun 55.0 54.7
3:30 JPY Wages y/y May 0.8% 1.5%
9:30 DKK GDP q/q|y/y 1st quarter 0.2%|-3.2% 0.2%|-3.2%
9:55 DEM Unemployment rate % Jun 7.6 7.7 7.7
10:00 NOK Retail sales, s.a. m/m|y/y May 0.8%| 0.2%|-5.1%
10:30 GBP GDP, final q/q|y/y 1st quarter 0.3%|-0.2% 0.3%|-0.2%
11:00 EUR CPI Flash estimate y/y Jun 1.5% 1.5% 1.6%
11:00 ITL Inflation (HICP), Preliminary m/m|y/y Jun 0.2%|1.5% 0.2%|1.5% 0.1%|1.6%
11:30 CHF KOF Swiss leading indicator Index Jun 2.15 2.16
13:00 USD MBA Mortgage applications Index -5.9%
15:45 USD Chicago PMI Index Jun 60.1 59.0 59.7
19:30 USD Fed's Lockhart (non-voter, neutral)
Source: Danske Markets

20 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Calendar - continued

Thursday, July 1, 2010 Period Danske Bank Consensus Previous

1:50 JPY Tankan - Large Manufacturing Index (outlook) Index 2nd quarter 1 (4) -3 (1) -14 (-8)
1:50 JPY Tankan - Non-manufacturing Index (outlook) Index 2nd quarter -7 (1) -7 (-3) -14 (-10)
3:00 CNY NBS Manufacturing PMI Index Jun 53.0 53.3 53.9
3:30 AUD Retail sales m/m May 0.3% 0.6%
4:30 CNY HSBC Manufacturing PMI Index Jun 52.5 52.7
8:30 SEK Swedbank PMI Index Jun 64.5 66.0
9:00 NOK PMI Index Jun 50.0 50.0 50.1
9:15 ESP PMI Manufacturing, Final Index Jun
9:30 DKK Unemployment, s.a. K (%) May 114.3 (4.1%) (4.1%)
9:30 DKK Retail sales, volume m/m|y/y May 3.0%| -4.2%|-7.1%
9:30 SEK Riksbank, Rate decision Jun 0.50% 0.25%
9:30 CHF PMI Index Jun 66.0 66.4
9:45 ITL PMI Manufacturing, Final Index Jun 53.7 53.9 54.0
9:50 FRF PMI Manufacturing, Final Index Jun 54.9 54.9
9:55 DEM PMI Manufacturing, Final Index Jun 58.1 58.2 58.1
10:00 EUR PMI Manufacturing, Final Index Jun 55.6 55.7 55.6
10:30 GBP PMI Manufacturing Index Jun 57.5 58.0
14:30 USD Initial jobless claims 1000 460 457
16:00 USD ISM prices paid Index Jun 75.0 72.0 77.5
16:00 USD ISM, manufacturing Index Jun 59.7 59.0 59.7
16:00 USD Pending home sales m/m|y/y May -15.2%| 6.0%|24.6%
16:00 USD Construction spending USD bn May -0.6% 2.7%
23:00 USD Total Vehicle Sales m Jun 11.40 11.64

Friday, July 2, 2010 Period Danske Bank Consensus Previous

1:50 JPY Monetary Base y/y Jun 3.7%
9:00 NOK Unemployment nsa. (NAV) % Jun 2.8% 2.7%
10:30 GBP PMI Construction Index Jun 58.3 58.5
11:00 EUR Euroland PPI m/m|y/y May 0.2% 0.9%|2.8%
11:00 EUR Unemployment % May 10.1 10.1 10.1
14:30 USD Unemployment % Jun 9.7% 9.8% 9.7%
14:30 USD Nonfarm payroll 1000 Jun -50 -110 431
14:30 USD Private payrolls 1000 May 200 113 41
16:00 USD Factory Orders m/m May -0.5% 1.2%
16:00 DKK Currency reserves (Change) DKK bn Jun 440.5 (36.4)

During the week Period Danske Bank Consensus Previous

Mon 28 - 30 GBP Nationwide House Prices m/m|y/y Jun 0.3%|8.9% 0.5%|9.8%
Source: Danske Markets

21 | 25 June 2010
www.danskeresearch.com
Weekly Focus

Disclosure
This 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
Bank Research Policy. Employees within the Danske Bank Research Departments have been instructed that any
request that might impair the objectivity and independence of research shall be referred to Research Management
and to the Compliance Officer. Danske Bank Research departments are organised independently from and do not
report to other Danske Bank business areas. Research analysts are remunerated in part based on the over-all
profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other
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

Disclaimer
This 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
Bank’s 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
representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from
reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or
short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned
herein. The Equity and Corporate Bonds analysts are not permitted to invest in securities under coverage in their
research sector. This publication is not intended for retail customers in the UK or any person in the US. Danske
Markets is a division of Danske Bank A/S. Danske Bank A/S is authorized by the Danish Financial Supervisory
Authority and is subject to provisions of relevant regulators in all other jurisdictions where Danske Bank A/S
conducts operations. Moreover Danske Bank A/S is subject to limited regulation by the Financial Services
Authority (UK). Details on the extent of our regulation by the Financial Services Authority are available from us
on request. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and
may not be reproduced in whole or in part without permission.

This publication has been prepared by the correspondent of Auerbach Grayson & Company Incorporated
(“AGC”) named above on the date listed above.

We are distributing this publication in the U.S. and any U.S. person receiving this report and wishing to effect
transactions in any security discussed herein, should do so only with a representative of Auerbach Grayson &
Company Incorporated. Additional information on recommended securities is available on request.

22 | 25 June 2010
www.danskeresearch.com