Morning Report

05.01.2012

Back to a more sober view

NOK & 3m NIBOR 8.00 7.80 7.60 7.40
3m ra.

3.40 3.20 3.00 2.80 2.60

EURNOK

While Tuesday's market action was coloured by renewed optimism, sobriety returned yesterday. The European service sector is struggling with lack of demand, European banks are struggling with their funding and the Italian government is struggling with too high interest rates. Let's start with the latter. Simple schematic calculations for Italian public finances show that if GDP growth and the budget balance excluding interest payments remain around their 20-year average, and the average government borrowing rate is 6%, then government debt will remain at 120% of GDP. If the rate exceeds 6%, national debt will increase over time. But the exact "pain threshold" is hard to determine. A country can survive for a while with substantially higher interest rates on new debt, both because many long-term loans continue to run at comfortably low interest rates, but also because it may draw on cash reserves and/or sell of other assets. But the higher the interest rate, the faster the debt will increase. And this is self-reinforcing: High interest rates increase the risk of default, which means that lenders will demand higher interest rates. The market seems to have established a kind of consensus that the pain threshold lies around 7%. When the government bond rate hit 7% for Greece, Ireland and Portugal, closed doors and Troika rescue packages were quick to follow. Italy's ten-year rate reached 7% for the first time in over fourteen years in the beginning of November, but change of government and expectations of more aggressive measures following the 8-9 December EU Summit pulled rates down towards 6% in early December. Since then they have risen, however, and thus far this year they have traded at close to 7%, serving as a reminder that a "final" solution to the Euro crisis still is far off. France (whose AAA is hanging by a thread) will today undertake a bond auction with announced maturities of 10-30 years. Support for this will set the tone for the market. The banks' funding situation has not eased in the new year, with spreads on new loans around levels last seen during the financial crisis three years ago. The Italian Unicredit yesterday had to offer a discount of 43% in its 7.5 billion capital-raising. Elsewhere, Spanish authorities warned that they will set aside an additional 50 billion (4% of Spanish GDP) to cover up for expected losses in the banking sector. Also, for three days in a row there has also been an unusually high usage of the ECB's marginal lending facility, despite the fact that these face a "penalty rate" of 1.75%, and despite also ECB preChristmas 489 in new three-year loans to banks. Many us included - has believed that these loans in part could be used to finance sovereign borrowing. When the ECB offers banks three-year loans at currently 1%, and the Italian government borrows three-year money at 5%, there is 4% in pure profit to pocket - as long as Italy stays solvent, that is. So far, it appears that banks prefer to have money left as deposits with the ECB rather than lend them out to each other (cf. the high lending under the marginal lending facility) or to Italy and other heavily indebted countries. The final services-PMI in December was slightly higher than expected, and also somewhat higher than the flash estimate. But 48.8 is still the fourth consecutive month below 50. Tellingly for two-speed Europe, France and (especially) Germany are above 50, while Italy and Spain are below for the sixth month in a row. On a more positive note, the flash estimate showed that CPI inflation in the Eurozone fell to 2.8% in December. This will provide households with badly needed purchasing power and facilitate more rate cuts. We expect the ECB to cut its refi rate from 1% to % this spring. US industrial orders rose a solid 1.8% in November after two weak months. This was as expected. Today sees the release of several appetizers before Friday's key US employment report: Challenger reporting the number of layoffs, ADP reporting private sector jobs growth, weekly initial claims and the ISM for the service sector. Not unexpectedly, the euro was back as the currency market prgelknabe yesterday, with a decline of 0.9% against the dollar and 0.6% against the pound. EURGBP is now at its lowest level since September 2010. Stock markets fell, most in Italy and Spain, while the major US indices ended about unchanged. oystein.dorum@dnb.no Yesterday's key economic events (GMT) 08:58 EZ PMI Services 10:00 EZ CPI, flash estimate 15:00 US Manufacturing orders Todays key economic events (GMT) 07:00 Germany Retail sales 13:15 US ADP employment 13:30 US Initial claims 15:00 US ISM services As of Dec Dec Nov As of Nov Dec Week 52 Dec Unit Index y/y % m/m % Unit m/m % 1000 1000 Index Prior 47.7 3.0 -0.2r Prior 0.7 206 381 52.0 Poll 48.3 2.8 1.7 Poll 0.0 178 375 53.0 Actual 48.8 2.8 1.8 DNB

25-Nov 15-Dec 4-Jan

SEK & 3m STIBOR 9.5 9.3 9.1 8.9 25-Nov 15-Dec

3m ra.

2.80 2.70 2.60 2.50 2.40 4-Jan

EURSEK

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Morning Report
05.01.2012

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 118 112 106 100 25-Nov 15-Dec
NOK TWI ra.

100 98 96 94 4-Jan
$/b

EUR vs GBP & CHF 0.87 0.86 0.85 1.15 0.84 1.10 0.83 25-Nov 15-Dec 4-Jan 1.25 1.20
GBP r.a CHF

FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK

Prior 76.71 1.294 0.829 1.219 7.690 8.845 7.438 5.940 7.748 0.870 9.278 6.836 8.924 1.151 10.677

Las t 76.83 1.291 0.828 1.219 7.683 8.846 7.436 5.951 7.751 0.870 9.284 6.854 8.927 1.154 10.688

% 0.2% -0.3% -0.1% 0.0% -0.1% 0.0% 0.0% 0.2% 0.0% -0.1% 0.1% 0.3% 0.0% 0.3% 0.1%

In 1 m ...3 m 80 80 1.30 1.30 0.84 0.84 1.23 1.23 7.80 7.80 9.20 9.10 7.45 7.45 6.00 6.00 7.50 7.50 0.85 0.86 9.3 9.3 7.08 7.00 5.66 5.60 1.18 1.17 10.95 10.83

...6 m ...12 m 80 90 1.25 1.25 0.82 0.82 1.23 1.30 7.70 7.70 9.00 9.00 7.45 7.45 6.16 6.16 7.70 6.84 0.86 0.86 9.4 9.4 7.20 7.20 5.76 6.48 1.17 1.17 10.98 10.98

FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB

USD 1.0300 1.0150 0.9444 20.10 5.7610 1.5598 7.7672 122.91 0.2789 2.6744 0.5420 0.7848 3.4936 1.2914 31.7850

% -0.67% 0.19% 0.30% 0.59% 0.23% -0.12% -0.01% 0.17% 0.10% 0.22% 0.22% -0.38% 0.49% 0.33% -0.15%

EURSEK & OMXS 9.4 9.2 9.0 8.8 25-Nov 15-Dec 500 450 400 350 4-Jan

OMXS ra. EURSEK

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

NIBOR Prior 2.50 2.87 3.17 3.32 2.80 3.09 3.32 3.52

SWAP AN D MONEYM AR KET RATES STIBOR EUR IBOR Las t Prior Last Prior 2.37 2.37 2.37 0.93 2.81 2.64 2.65 1.27 3.11 2.71 2.71 1.55 3.28 2.77 2.77 1.73 2.78 1.97 1.95 1.38 3.10 2.06 2.06 1.73 3.34 2.26 2.27 2.08 3.53 2.38 2.38 2.42

Last 0.91 1.26 1.53 1.71 1.38 1.73 2.09 2.41

USD LIBOR Prior 0.30 0.58 0.81 0.97 0.85 1.26 1.70 2.12

Last 0.30 0.58 0.81 0.97 0.84 1.27 1.70 2.12

Gov. Bonds, 10y 2.00 1.75 3.00 2.50

2.00 1.50 1.50 25-Nov 15-Dec 4-Jan

NOK, ra. SEK

10y 10y yield vs bund

NORW AY Prior Las t 116 112.35 2.31 2.27 0.40 0.35

GOVERNM ENT BONDS SW EDEN GERMANY US Prior Last Prior Last Prior 116.966 116.85 100.67 100.69 100.14063 1.71 1.72 1.92 1.92 1.98 -0.21 -0.21 0.07

Last 100.16 1.99 0.07

13 12 11

JPY and DowJones

10 25-Nov

15-Dec

79 78 77 76 75 4-Jan

In 3m 6m 12m

INTEREST RATE FORECASTS NORW AY SW EDEN GERMANY 3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 2.60 3.50 2.25 2.25 1.05 2.50 2.40 3.75 1.95 2.50 0.90 2.75 2.30 4.25 1.75 3.00 0.90 3.25

US 3m libor 10y s wap 0.55 2.25 0.55 2.50 0.50 3.00

USDJPY ra. DowJones, 1000

USD and gold 1900 1.42 1800 1.38 1700 1.34 1600 1.30 1500 1.26 25-Nov 15-Dec 4-Jan
EURUSD ra. Gold

FRA NOK MAR JUN SEP DEC FRA SEK MAR JUN SEP DEC

3m 2.61 2.32 2.27 2.29 3m 2.37 1.97 1.75 1.73

Prior 2.60 2.31 2.26 2.28 Prior 2.38 1.99 1.76 1.73

chg 0.01 0.01 0.01 0.01 chg -0.01 -0.02 -0.01 0.00

MISCELLANEOUS TWI Today % Stock ex. Today % NOK 96.07 - 0.10 Dow Jones 12,418.4 0.2% SEK 117.38 - 0.35 Nasdaq 2,648.4 0.0% EUR 101.79 - 0.13 FTSE100 5,668.5 -0.6% USD 80.27 0.17 Eurostoxx50 2,349.9 -1.7% GBP 81.60 - 0.1 Dax 6,111.6 -0.9% Comm. Today Last Nikkei225 8,488.7 0.0% Brent spot 114.5 114.5 Oslo 391.13 -0.8% Brent 1m 114.2 113.7 Stockholm 460.95 -1.1% -1.5% Spot gold 1613.0 1613.0 Copenhagen 508.52 Sources to all tables and graphics: Reuters and DNB Markets

Morning Report
05.01.2012
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