Investment Research General Market Conditions 09 February 2015

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1 Investment Research General Market Conditions 09 February 2015 Danske Daily Market movers today The combination of ECB s QE announcement, a weaker euro and low oil prices should lift investor confidence and we expect the Euro Area Sentix Investor survey for February to surprise on the upside and increase to 4.0 in February from 0.9. The Fed will release the January LMCI which should get a boost from Friday s strong US labour market report (see US: very strong employment report, 6 February 2015). German Chancellor Angela Merkel is to meet President Barack Obama in Washington today as Merkel will try to secure a diplomatic solution to the escalating Ukraine crisis. The visit comes after the latest round of talks between France, Germany, Ukraine and Russia failed to result in a peace accord at the weekend. Monetary policy in Denmark and Danmarks Nationalbank will likely be in the spotlight today as downward pressure on EUR/DKK prevails. For more on Scandi markets see page 2. Selected market news Since lowering the key policy rate for the fourth time in three weeks on Thursday, governor of Danmarks Nationalbank (DN), Lars Rohde, has toured several domestic and international media departing from the DN norm of not commenting on monetary policy. The message from Rohde has been clear, DN stands committed to maintain the fixed exchange rate policy and has unlimited ammunition to do so. In our view, DN will outlast the present DKK appreciation pressure, albeit it will likely undertake additional FX intervention purchases to keep pace with ECB bond purchases and further restore credibility in the peg. A lower key policy rate or more controversial instruments, such as bond purchases, may also come into play. Another 83 were slashed of the US oil rig count last week, leaving it at the lowest level since December The steep decline in the US oil rig count over the past couple of months signals that consolidation on the supply side in the oil market is under way. It has supported a recovery of the price for Brent crude to around USD58/bbl and more consolidation in combination with rising demand should lift the oil price further over the course of the year. Chinese foreign trade data published this weekend disappointed, highlighting weak domestic demand. Last week the People s Bank of China cut the reserve requirement (see China: PBoC cuts reserve requirement but aggressive easing unlikely, 4 February 2015), which should support domestic demand going forward. Market overview USD Oil Brent, USD Gold, USD Note: * The itraxx Europe Index shows the spread development for the most liquid investment grade CDS contracts in the euro credit market. **The itraxx Europe Crossover show the spread development of the most liquid non-investment grade CDS contracts in the euro credit market. ***The Markit CDX North America Investment Grade Index shows the spread development for the most liquid investment grade CDS contracts in the US credit market. Source: Bloomberg 07:30 1 day,% S&P500 (close) S&P500 fut (chng from close) Nikkei Hang Seng :00 07:30, bp US 2y gov US 10y gov itraxx Europe (IG) itraxx Xover (Non IG) , % EUR/USD USD/JPY EUR/CHF EUR/GBP EUR/SEK EUR/NOK Selected readings from Danske Bank US: very strong employment report, 6 February 2015 Battle to weaken DKK continues, 6 February 2015 Today [Tex Senior Analyst Jens Nærvig Pedersen jenpe@danskebank.dk Important disclosures and certifications are contained from page 5 of this report.

2 Scandi markets In Denmark, we expect exports of goods excluding vessels and aircraft in December to have fallen 2% m/m, due mainly to a drop in oil and food prices, as exports are calculated in current prices. There was also a slight rise in the effective exchange rate, although the effect of this will probably be minor. It is worth noting that once we exclude oil and food, exports are still performing well, which is supported by the rise in Danske Bank s export barometer in December. We expect the trade surplus excluding vessels and aircraft and the current account surplus to be at DKK6.4bn and DKK11.5bn in December, respectively. Fixed income markets Still a lot of focus on the Danish currency peg after another rate cut last week. While we believe the peg will hold, Danmarks Nationalbanken (DN) will probably have to keep fending off the pressure for some time. The four rate cuts have pushed Cibor fixings further into negative territory and the Danish swap curve has steepened versus the EUR swap curve. While the pressure on the DKK should eventually decline and DN can normalise rates a bit, we still believe there is an attractive roll in the Danish swap curve - especially compared to the EUR curve, where there is very little carry/roll left. Danish mortgage bonds also continue to offer great value in the current environment. The US labour market continues to show strength and this underpins one of our long-held views that the Fed will start hiking earlier compared to what is priced into the markets. Following a long period of outperformance in US fixed income market versus EUR we expect this to reverse again, especially in the 2-5Y segment, as rate hikes are eventually priced into the curve. If rates move higher in the US we expect a parallel move in the curve. In the government bond market we have a relatively dense issuance calendar this week. Starting with the periphery Portugal will be tapping in the Oct-25 (Wednesday) and also Italy will be coming to the market on Thursday. Ireland will later today announce details on Thursday s tap auction, which we expect will be in the 10Y. In the core the Netherlands will be printing in the Jan-20 (Tuesday), Austria in the Oct-24 and in the May-34 (Tuesday), while Germany will be launching a new Schatz (Mar-17) on Wednesday. This implies a negative net cash flow of around EUR19bn this week as there are no redemptions. FX markets Needless to say, USD strength was omnipresent in the FX market following the superstrong payroll report on Friday. With the report underlining the positive developments in both job creation and earnings growth, the Fed should be able to see through any adverse effects on the US economy from the notable drop in EUR/USD brought about by not least ECB QE. For now, the cross may continue to take its cue from the unprecedented divergence of central-bank policies but we stress that it is exactly the current EUR weakness that will pave the way for a rebound later. This week the cross could be challenged further on the downside by Greece's talks with its EU partners. Separately, while Canada also saw healthy job numbers for January, highlighting the positive spillover effect from the US, USD/CAD edged higher on Friday due to the outlook for a dovish Bank of Canada with the oil price at the current level; we see limited upside in the pair due to our call for an oil rebound in H2. Otherwise, the Bank of England Inflation Report is set to take centre stage this week: wage growth will likely be essential for the MPC but provided this is on track, the BoE should be looking to hike later this year, well ahead of market pricing. US S&P500 future Thu Fri Mon Wed Thu Mon US 10y gov yield Thu Fri Tue Wed Thu Mon Global FX EUR/USD (LHS) USD/JPY (RHS) Thu Fri Tue Wed Thu Mon Scandi FX EUR/SEK (LHS) EUR/NOK (RHS) Thu Fri Tue Wed Fri 2 09 February

3 Key figures and events Monday, February 9, 2015 Period Danske Bank Consensus Previous 0:50 JPY Bank lending y/y Jan 2.60% 6:00 JPY Consumer confidence Index Jan :00 JPY Eco Watchers Survey Outlook (Current) Index Jan :00 DEM Trade balance EUR bn Dec :00 DKK Current account DKK bn Dec :00 DKK Trade Balance ex ships and aircraft DKK bn Nov :00 DKK Good exports ex vessels & aircraft (s.a.) m/m y/y Dec -% -2.9% -2.3% -% 9:00 CHF SNB Sight Deposits 10:30 EUR Sentix Investor Confidence Index Feb :00 USD Fed's LMCI m/m Jan 6.10% 3 09 February

4 Today s market data: 09 February 2015 DOW JONES NASDAQ 1 month % 1 month 1% S&P % Year-to-date -0.2% Year-to-date 8.6% NIKKEI (07:30) % EUR 17:00 07:30 * The chart plots 07:30-23:00 Fri and 23:00 Sun to 07:30 M on STOCKS Grey line indicates closing of Danish markets EUR/USD Intraday Grey line indicates opening of US markets FX & COMMODITIES USD-Yields Intraday Spread, 1.98 Policy Rate 3M bp 17:00 07:30, bp 0.64 USD2Y USD10Y USD USD 10Y Max 0.7 Max 1.93 EUR USD 30Y Min Min 1.8 GBP JPY 10Y USD2Y (lhs) DKK USD SEK :30(-1)* 17:00, bp Y (rhs) NOK DEM 10Y PLN DKK 10Y SEK 10Y S&P500 Intraday, % Eurostoxx Intraday, % Close 0.40 DJSTOXX % Max 0.8 Max OMXC % 0 Min Min OMXS % 0.4 OSE BX % NOK 10Y PLN 10Y * The chart plots 07:30-23:00 Fri and 23:00 Sun to 07:30 M on * As of closing previous trading day Close Gold, $ USD : JPY day Max 115 GBP month Min NOK Year-t-date SEK DKK CRB CRB, Raw YIELDS & INTEREST RATES % -0.4% Oil, Brent, $ 10Y Yield Spread to Germany USD-1 JPY GBP FRF ITL DKKSEKNOKPLN US Yield Curve Max Max Min Min #### USD2Y USD5Y USD10Y D-t-D, bp (right axis) 07:30 (left axis) 1 month ago (left axis) German Yield Curve DEM2Y DEM5YR DEM10Y D-t-D, bp (right axis) 07:30 (left axis) 1 month ago (left axis) Non-finan. Credit spread, itraxx s. 11* 07:30 1 day 1 month Credit spreads USD 10Y * Ask price ** Ask price Swap Spread, bp** Europe (IG) JPY 10Y HiVol Xover (N-IG) :30(-1)* 17: EUR 10Y DKK 10Y Finan. Sr SEK 10Y Feb Mar May Jun Aug Sep Nov Dec Feb Finan. Sub NOK 10Y itraxx Europe (IG) (left axis) itraxx Xover (Non IG) (right axis) :00 * As of closing previous trading day 07: PLN M future Industrials USD 17:00 07:30 07: JPY day month GBP month Year-to-date CHF Year-t-date February

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