Scandi markets today. Fixed income markets. FX markets

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1 Investment Research General Market Conditions 20 October 2014 Danske Daily Market movers today Few things on the agenda today. No tier 1 data up for release so focus will again be on central bank talk and market sentiment. The ECB s Coeuré is scheduled to speak but speeches from other ECB members last week do not point to any immediate action. First line of defence seems to be verbal intervention, highlighting that more measures can be taken if necessary. Over the rest of the week focus will be on a number of speeches from Fed members to gauge where their trigger level is for continued asset purchases. On the data front US CPI, euro flash PMI and Chinese data for GDP and flash PMI will be in focus. There are few signs that activity data in the euro area or China is about to bottom so we do not expect markets to get support from this side. Technically there were some positive signs in the market on Thursday and Friday which could indicate some improvement in risk appetite in the very short term. However, we still see a risk that a short-term bounce could be followed by a further leg down in risk appetite see also Strategy: The straw that broke the camel s back. Selected market news A very volatile week with significant swings in equity markets and bond yields ended on Friday with a strong rebound in risk assets where the S&P500 index rose 1.3% while yields on 10-year US treasuries rose nearly 4bp to 2.194%. Friday s rally was supported by some dovish comments from the Bank of England s chief economist, Andy Haldane, saying that he favoured delayed interest rate rises given the recent evidence of a weaker global economy, lower inflation pressures and low wage growth. In Asia this morning, the rebound in risk assets extended and especially the Japanese equity market rallied and the yen has weakened against all G10 currencies as an unconfirmed story in the Japanese press has renewed speculation that a pension fund reform might be imminent and might force the state-owned pension fund, Government Pension Investment Fund (GPIF), to increase its allocation target for shares to about 25% from currently 12% and boost its holdings of foreign bonds and shares to about a combined target of 30%. Friday s data releases out of the US also contributed to the improved sentiment as the University of Michigan measure for US consumer confidence rose to its highest level since 2007 at 86.4 in October from 84.6 September. This was well above the consensus estimate of 84.0 and especially the forward-looking component boosts the improvement supported by lower gasoline prices and a robust job market. Moreover, housing starts also came out better than expected, rising 6.3% in September. According to an article on wsj.com, a gas deal between Ukraine and Russia seems to be moving closer as officials from both countries yesterday confirmed an agreement on a price of USD385 per 1,000 cubic metres of gas for winter gas supplies. According to Ukrainian President Petro Poroshenko, officials from Ukraine, Russia and the European Union will meet on Tuesday in an attempt to finalise the agreement. Market overview 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 shows 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 Selected readings from Danske Bank Weekly Focus: Slowdown fears unsettle markets Senior Analyst Morten Helt [email protected] 1 day,% S&P500 (close) S&P500 fut (chng from close) Nikkei Hang Seng :00, 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 USD Oil Brent, USD Gold, USD Today [Tex Important disclosures and certifications are contained from page 4 of this report.

2 Scandi markets today Denmark: Today we are publishing our new forecasts on the Danish economy. We have revised down our growth forecasts for this year and next due to weak figures in Q3 and increased global uncertainty. While we still expect private consumption to pick up going forward, we have become less optimistic regarding exports. Fixed income markets Focus in the fixed income market this week will be the initial asset purchases under the ECB s third covered bond programme (CBPP3). Although the initial purchases under the first two covered bond programmes were rather small (less than 2bn in the first week for each programme), a positive surprise with aggressive buying is somewhat needed, especially after the poor risk sentiment last week. Although the direct effect of the purchases is limited to the covered bond markets, one must not neglect the spill-over effect on all fixed income markets as (i) investors need to place the money they get from selling bonds to the ECB (portfolio rebalancing), (ii) the purchases add liquidity with direct effect on the money markets and short end of bond markets, and (iii) the signalling effect of ECB actively working on expanding their balance sheet. FX markets We expect the DXY index to continue to consolidate this week on mixed US data and a more dovish tone from the Fed. We believe that EUR/USD and USD/JPY are particularly vulnerable to a correction where we expect the correction in EUR/USD will stop ahead of 1.30/1.31 and in USD/JPY around 105/106. It is noteworthy that while the market has priced out Fed and now only expects the central bank to begin its tightening cycle in October 2015, the USD correction has been modest. In our view, this is because the US economy is still the best in class and will continue to deliver the highest expected return. The USD rally will resume within the coming weeks. In the Scandies, there are early signs of a stabilisation and retracement in EUR/NOK as oil prices are rebounding. EUR/NOK is likely to continue to be vulnerable to the volatility in oil prices but we believe that the market is too bearish on the impact of falling oil investments on Norway s growth. EUR/NOK should trend lower when oil prices stabilise. We expect EUR/SEK to edge higher ahead of the Riksbank meeting on 28 October when we expect the central bank to cut interest rates by 15bp. This should however mark the high in EUR/SEK and it should trend lower thereafter on Swedish growth outperformance. Key figures and events US S&P500 future Thu Fri Tue Wed Thu Mon US 10y gov yield Thu Fri Tue Wed Fri Mon Global FX Scandi FX EUR/USD (LHS) EUR/SEK (LHS) USD/JPY (RHS) EUR/NOK (RHS) Thu Fri Tue Wed Thu Mon Monday, October 20, 2014 Period Danske Bank Consensus Previous 10:00 EUR Current account EUR bn Aug EUR ECB's Coeure speaks in London Source: Bloomberg and Danske Bank Markets 9.05 Thu Fri Tue Wed Thu October

3 Today s market data: 20 October DJSTOXX % 0 Max 2.2 Max 3.4 OM XC % Min Min - OM XS % OSE BX % Grey line indicates closing of Danish markets S&P500 Intraday, % DOW JONES NASDAQ 1 month -6.2% 1 month -8.2% S&P Year-to-date 2.1% Year-to-date -2.2% NIKKEI () % EUR/USD Intraday JPY day Max ## GBP month Min ## NOK Year-t-date SEK DKK CRB C R B, R aw PLN JPY day -6 1 month GBP month Year-to-date CHF Year-t-date * The chart plot s - 23:00 Fri and 23:00 Sun t o Mon STOCKS FX & COMMODITIES YIELDS & INTEREST RATES Go ld, $ 1M future USD-Yields Intraday Spread, 0.39 P o licy R ate 3M bp 17:00, bp USD2Y USD10Y 2.23 USD USD 10Y Max 0.4 Max 2.2 EUR USD 30Y Min 0.3 Min GBP JPY 10Y USD2Y 0 (lhs) DKK USD10Y SEK (-1)* 17:00, bp (rhs) NOK DEM 10Y Eurostoxx Intraday, % Grey line indicates opening of US markets EUR 17: USD PLN DKK 10Y Oil, B rent, $ SEK 10Y NOK 10Y PLN 10Y * The chart plot s - 23:00 Fri and 23:00 Sun t o Mon * As of closing previous trading day Close Close % % 1.3% Industrials Y Yield Spread to Germany USDJPYGBPFRF ITL DKKSEKNOKPLN US Yield Curve German Yield Curve ## M ax ## M ax ### ## M in ## M in ### USD2Y USD5Y USD10Y D-t-D, bp (right axis) (left axis) 1 month ago (left axis) DEM2Y DEM5YR DEM10Y D-t-D, bp (right axis) (left axis) 1 month ago (left axis) Non-finan. C redit spread, it raxx s. 11* 1 day 1 month Credit spreads USD 10Y * Ask price ** Ask price Swap Spread, bp** Europe (IG) JPY 10Y HiVol Xover (N-IG) (-1)* 17: EUR 10Y DKK 10Y Finan. Sr SEK 10Y Oct Dec Jan Mar Apr Jun Jul Sep Oct Finan. Sub NOK 10Y itraxx Europe (IG) (left axis) itraxx Xover (Non IG) (right axis) :00 * As of closing previous trading day USD 17: October

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