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Investment Research — General Market Conditions

1 July 2010

Danske Daily
Key news
Market movers today: Today
Moody’s places Spain on review for a possible downgrade – equities react negatively
to the news. Riksbank board meeting [Tex
Six-day repo auction from ECB,
The main event today is the six-day refinancing operation from the ECB and the
and Spanish government bond
Spanish government bond auction as well as Euroland PMIs and the US ISM tonight.
auction
In Scandinavia, all focus will be on the Riksbank meeting.
Euroland PMIs and US ISM data
SEK and NOK weaken modestly against EUR, while EUR/USD is looking to test the
Speech by ECB’s Stark
122 level.

Market overview
Markets Overnight 07:30 1 day +/-,%

US equity markets declined yesterday as Moody’s placed Spain on review for a S&P500 (clo se) 1030.7  -1.01
S&P500 fut (chng fro m clo se) 1021.3  -0.52
downgrade. Moody’s has Spain on a AAA rating and said that if Spain’s rating were Nikkei 9190.6  -2.05
lowered it would be at most by two notches. The reason for the possible downgrade is the Hang Seng 20129.0  -0.59

fiscal challenges, growth prospects and concerns over rising funding costs. S&P lost 1%, 17:00 07:30 +/-, bp

while the Dow lost 1.2% in yesterday’s trade. It should come as no surprise if Spain is US 2y gov 0.62 0.60  -1.6
US 10y gov 2.96 2.92  -4.7
downgraded as it is trading more like a A-country, than a AAA-country. However, it
supports concerns regarding a renewed economic slowdown given the weaker-than- iTraxx Europe (IG) 124 129  4.9
iTraxx Xover (Non IG) 472 576  103
expected US job market data released yesterday. Spain is likely to face higher yields at its
+/-, %
5Y bond auction today, at which it is expected to sell as much as EUR3.5bn. EUR/USD 1.226 1.222  -0.34
USD/JPY 88.450 88.310  -0.16
Germany got a new president yesterday, as Merkel’s candidate won. It took three voting EUR/CHF 1.32 1.31  -0.75
EUR/GBP 0.819 0.818  -0.16
sessions before Christian Wulff got the necessary votes, and an initial lack of sufficient EUR/SEK 9.525 9.547  0.23
support should be seen as the discontent Merkel is facing at the moment over the EU EUR/NOK 7.96 7.99  0.46

sovereign debt problems. USD


Oil Brent, USD 75.3 74.4  -1.16
The US House of Representatives approved the financial overhaul bill yesterday, moving Gold, USD 1243.0 1240.3  -0.21
Note:
a step closer to enacting the broadest rewrite of Wall Street rules. The bill has to be * The iTraxx Europe Index shows the spread
approved by the US Senate, where a vote is not expected until mid-July. development for the most liquid investment grade CDS
contracts in the euro credit market.
Asian equity markets followed negative sentiment from the US. On top of the possible
**The iTraxx Europe Crossover shows the spread
downgrade of Spain, Chinese manufacturing growth slowed as shown by a decline in the development of the most liquid non-investment grade
CDS contracts in the euro credit market.
PMI. Hence, major indices are down this morning – the Nikkei by 2% and Hang Seng by
Source: Bloomberg
0.6%.

Not surprisingly, US bond yields declined on the back of the fall in the equity market
with a modest decline in the 10Y treasury yield. The decline in bond yields has continued
this morning in Asian markets.

In the FX markets the response to the possible downgrade of Spain has been fairly muted
with small moves in EUR/USD as well as SEK and NOK versus EUR. Both NOK and
SEK have weakened modestly against EUR on the back of the decline in equities this
morning. EUR is again testing the 122 level versus the dollar, and USD/JPY is testing the
Chief Analyst
88 level. Jens Peter Sørensen
+45 45 12 85 17
jenssr@danskebank.dk

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Global Daily
Focus today: The ECB’s 12-month EUR442bn long-term refinancing operation (LTRO)
Manufacturing ISM due today
conducted in June 2009 expires today. The markets will be watching today’s six-day fine-
65 Index 65
tuning operation closely to see how much liquidity is allocated on top of yesterday’s 60
Index
60
EUR132bn three-month tender. Global PMIs are due and focus is on the US ISM. We 55 55
50 50
look for the index to hold steady at 59.7, which leaves us moderately above the consensus 45 45
ISM manufacturing
expectation of 59. Claims data will also be in the spotlight, as the number of first-time 40 40
35 35
filings for unemployment benefits has failed to decline for much of the year. Finally, US 30 30
pending home sales data for May will reveal how negative the fallout from the expiry of 00 01 02 03 04 05 06 07 08 09 10

the first-time home-buyer credit is. Source: Reuters Ecowin

Fixed income markets: We expect less than EUR50bn to be allocated at the ECB’s six-
day fine-tuning auction today. This would indicate less stress in the banking sector and
US S&P500 future
could send EOINIA rates higher and add upward pressure on the 2yr Schatz yield. In the
long maturities, the downward pressure on yields continues – in particular in the US – as
1097 1097
risky asset markets remain shaky on the ongoing debt concerns and weak economic data.
1077 1077
However, if today’s US manufacturing ISM arrives at our estimate, this could help to 1057 1057
stabilise the markets and might event send long bond yields higher. This morning the 1037 1037

bond auctions in France and in particular Spain (after Moody’s announcement to put its 1017 1017
Tue Wed Fri Mon Tue Thu
rating on review) will be followed closely.
Source: Danske Markets
FX markets: Today, the FX market will focus on the European PMI numbers and not
least the US ISM. Yesterday, we saw some recovery to the euro after the market asked for
less liquidity from the ECB auction than feared. EUR/GBP was pushed higher in the US 10y gov yield
afternoon to above 0.82 after the cross had traded briefly below 0.81 in the morning – the
3.27 3.27
lowest level for more than 18 months. We think the risk is still on the upside for 3.17 3.17
EUR/GBP. Yesterday, we presented our short-term bearish view on sterling in FX 3.07 3.07
Crossroads. 2.97 2.97

2.87 2.87
Tue Wed Fri Mon Tue Thu

Scandi Daily Source: Danske Markets


Denmark: No major events.

Sweden: Swedish June PMI data are due to be released at 08:30 (local time). PMI like
Global FX
most other survey data have been super-strong of late, pointing to a robust recovery in
EUR/USD (LHS) USD/JPY (RHS)
manufacturing activity during the spring. A minor correction from 66.0 to 64.0 is
1.245 90.8
expected but that would not change the overall impression to any significant degree. The
1.235 89.9
top-line, however, is the Riksbank rate announcement an hour later which will be
1.225 89
accompanied by a new monetary policy report. Anything but a (25bp) hike would indeed
1.215 88.1
be a surprise given the fact that the recovery appears to be on safe ground. The Riksbank Tue Wed Fri Mon Tue Thu
will probably hike the growth forecast for 2010 (currently 1.8%) but also adjust the 2011
Source: Danske Markets
number (3.7%) somewhat downwards. The big question mark is how the renewed
financial market tension and issues related to the European debt problems will be dealt
with. We would assume that the Riksbank will present an alternative (risk) scenario with Scandi FX
a less benign growth outlook based on tougher fiscal austerity abroad.
EUR/SEK (LHS) EUR/NOK (RHS)

Norway: Yesterday, we got another weak retail sales number from Norway underlining 9.61 8.03

that private consumption might be weaker than expected. Today’s PMI is expected to 9.57 7.98

9.53 7.93
show that the manufacturing sector is also struggling. We expect the PMI indicator to
9.49 7.88
drop marginally from 50.1 in May to 50.0 in June. Yesterday, we posted an update on the
Tue Wed Fri Mon Tue Thu
scandi currencies in FX Crossroads. We highlighted that currently we favour the SEK
over the NOK, and with a rate hike from the Riksbank on the agenda today the risk is still Source: Danske Markets

on the downside for NOK/SEK.

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Key figures and events


Thursday, July 1, 2010 Period Danske Bank Consensus Previous
8:00 DEM German retail sales Index Jun 0.4%|-0.6% -0.5% (r)|..
8:30 SEK Swedbank PMI Index Jun 64 66.0
9:00 NOK PMI Index Jun 50.0 50.5 50.1
9:15 ESP PMI Manufacturing, Final Index Jun
9:30 CHF PMI Index Jun 66.0 66.4
9:30 DKK Unemployment, s.a. K (%) May 114.3 (4.1%) 4.1% (4.1%)
9:30 DKK Retail sales, volume m/m|y/y May 3.0%| 0.0%| -4.2%|-7.1%
9:30 SEK Riksbank, Rate decision Jun 0.50% 0.50% 0.25%
9:45 ITL PMI Manufacturing, Final Index Jun 53.7 53.8 54.0
9:50 FRF PMI Manufacturing, Final Index Jun 54.9 54.9
9:55 DEM PMI Manufacturing, Final Index Jun 58.1 58.1 58.1
10:00 EUR PMI Manufacturing, Final Index Jun 55.6 55.6 55.6
10:30 GBP PMI Manufacturing Index Jun 57.5 58.0
10:30 ESP Spain to sell EUR 3.5 bln bonds
11:00 FRF Franche to sell EUR 7.5 bln bonds
14:30 USD Initial jobless claims 1000 455 457
16:00 USD ISM prices paid Index Jun 70.7 70 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 -14.2%| 6.0%|24.6%
16:00 USD Construction spending USD bn May -0.6% 2.7%
17:00 ECB ECBs Starck speaks in Frankfurt
23:00 USD Total Vehicle Sales m Jun 11.40 11.64

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Today’s market data: 01 July 2010


STOCKS
S&P500 Intraday, % Eurostoxx Intraday, %
1.60 1.6 Clo se +/-
DJSTOXX50 2360  0.1%
0.50 0.50 1.00 1
Max 1.0 Max 1.6 OM XC20 393  0.5%
-0.10 Min -1.3 -0.10 0.40
Min -0.8 0.4
OM XS30 1006  1.2%
0.6 0.6 OSE B X 328  0.0%
-0.70 -0.70 -0.20 -0.2
Clo se +/-
-1.30 -1.30 -0.80 -0.8 DOW JONES 9774  -1.0%
15 16 17 18 19 20 21 09 10 11 12 13 14 15 16 17 18 NA SDA Q 2109  -1.2%
Grey line indicates closing of Danish markets
Grey line indicates opening of US markets
1mo nth  -3.7% 1mo nth  -1.4% S&P 500 1031  -1.0%
Year-to -date  -7.6% Year-to -date  -8.7% NIKKEI (07:30) 9191  0.1%

FX & COMMODITIES
O il,
EUR/USD Intraday E UR 17:00 07:30 +/- G o ld, $ B re nt , $
123.0 123.0 USD 122.60 122.18  -0.42 07:30 1240.30 74.38
JP Y 108.44 107.90  -0.54 1day  -1.95  -0.63
122.6Max ## 122.6 GB P 81.90 81.78  -0.13 1mo nth  14.65  1.64
Min ## NOK 795.54 799.18  3.64 Year-t-date  143.35  -3.58
122.2 0.4 122.2 SEK 952.49 954.65  2.16
DKK 744.89 744.92  0.03 CRB C R B , R aw
121.8 121.8 P LN 413.89 415.57  1.68 1M f ut ure Indus t ria ls
07 10 13 16 19 22 01 04 US D 17:00 07:30 +/- 07:30 258.52 477.21
JP Y 88.45 88.31  -0.14 1day  2.25  -6.16
1mo nth  -0.11 GB P 149.69 149.43  -0.26 1mo nth  6.13  -4.19
Year-to -date  -21.03 CHF 107.84 107.40  -0.44 Year-t-date  -24.86  -6.28

YIELDS & INTEREST RATES


USD-Yields Intraday S pre a d,
P o lic y R a t e 3M bp 17:00 07:30 +/-, bp
0.66
USD2Y USD10Y USD 0.25 0.53 28 USD 10Y 2.96 2.92  -5
2.98
0.64 Max 0.7 Max 3.0 EUR 1.00 0.77 -23 USD 30Y 3.93 3.87  -5
Min 0.6 Min 2.9 2.95
GB P 0.50 0.73 23 JP Y 10Y 1.09 1.08  -1
0.62
0 0 DKK 1.05 1.12 7
2.92 SEK 0.25 0.79 54 07:30(-1)* 17:00 +/-, bp
0.60
NOK 2.00 2.79 79 DEM 10Y 2.55 2.58  2
0.58 2.89 P LN 3.50 3.77 27 DKK 10Y 2.66 2.68  2
07 10 13 16 19 22 01 04 SEK 10Y 2.62 2.67  6
USD2Y (lhs) USD10Y (rhs) NOK 10Y 3.50 3.50  1
P LN 10Y 6.00 5.95  -5
* As of closing previous trading day

10Y Yield Spread to Germany


US Yield Curve German Yield Curve
4.0 3.36 4.0 4.0 -0.1 3.0
3.5 6.0
3.0 3.0 -0.6
3.0 2.5
5.0
2.5 -1.1
2.0 1.52 2.0 2.0 4.0
0.93 2.0 -1.6
1.0
0.78
0.47 1.0 1.5
## M ax 0.000 1.5 ## M ax # # # 3.0
0.34 -2.1
0.000.09 1.0 ## M in -3.050 1.0 ## M in # # # 2.0
0.0 0.0 0.5 -2.6
0.5 1.0
USD JPYGBPFRF ITL DKKSEKNOKPLN 0.0 -3.1
-1.0 -1.0 0.0 0.0
USD2Y USD5Y USD10Y
DEM2Y DEM5YR DEM10Y
-2.0 -1.50 -2.0 D-t-D +/-, bp (right axis)
07:30 (left axis) D-t-D +/-, bp (right axis)
1 month ago (left axis) 07:30 (left axis)
1 month ago (left axis)

C re dit s pre a d, iT ra xx Credit spreads S wa p S pre a d, bp**

160 900 17:00 07:30 +/-


07:30 1day 1mo nth 140 800 USD 10Y 6 8  2
120 700
Euro pe (IG) 129  -4  6 JP Y 10Y 9 10  1
100 600
HiVo l 192  -7  4 500
80
Xo ver (N-IG) 576  -10  0 400 07:30(-1)* 17:00 +/-
60 300
40 EUR 10Y 33 32  0
200
20 100 DKK 10Y 38 36  -2
Finan. Sr. 161  -8  -11 0 0 SEK 10Y 36 34  -2
Finan. Sub. 242  -14  -16 Jul Aug Sep Nov Dec Feb Mar May Jun NOK 10Y 57 58  1
No n-finan. 242  -14  -16 iTraxx Europe (IG) (left axis)
iTraxx Xover (Non IG) (right axis) * As of closing previous trading day
* Ask price ** Ask price

So urce: B lo o mberg 7:30(-1) o g 17:00 refers to the previo us (trade) day

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