Investment Research General Market Conditions 18 December 2015

Investment Research General Market Conditions 18 December 2015 Danske Daily Market Movers Following the recent very intense days with a rate hike in the US (Wednesday) and monetary policy meetings in Norway (Thursday) and Japan (Friday morning), we are in for a relatively quiet day in terms of data releases today. The main data release today is the first release of December s US service PMI that is expected to decline a bit to 55.9 from 56.1 in November. This is still a decent level, which points to further growth in the service sector. In Norway, unemployment figures will be released at 10:00 CET. Market overview 07:30 1 day,% S&P500 (close) 2041.9-1.50 S&P500 fut (chng from close) 2017.7-0.35 Nikkei 19011.5-1.77 Hang Seng 21889.5 8 17:00 07:30, bp US 2y gov 0.99 0.97-2.0 US 10y gov 2.25 2.21-4.2 Fed's Lacker (voter, hawkish) is scheduled to speak tonight. He will give his 2016 US economic forecast. Finally, note that Spain is set to hold general elections on Sunday. Recent polls suggest that the current right-wing government party, the People s Party (PP), will win the elections. However, PP is likely to need support from the centre anticorruption party Ciudadanos to form a majority government. Selected Market News Risk sentiment declined last night as the relief rally following the Fed rate hike faded and concerns about the continued downward pressure on the oil price and growth outlook weighted on risk appetite. US equity markets traded lower with the SP500 index closing 1.5% lower and Asian equity markets also trade lower this morning, while Brent Crude oil trades just above the USD37/barrel mark. Despite expectations on the contrary, we got a little surprise from the Bank of Japan (BoJ) this morning. As expected, the BoJ maintains its target for the annual rise in monetary base at JPY80trl but it announced some changes to its quantitative and qualitative monetary easing (QQE) programme. Among the most important changes, BoJ announced that it will extend the average remaining maturity of Japanese government bond purchases to about 7-12 years from the beginning of next year (from currently 7-10 years). Moreover, the BoJ will establish a new programme for purchasing ETFs at an annual pace of about JPY300bn next year. The new programme will be an addition to its current JPY3trl of annual purchases of exchange-traded funds (ETFs). Under this new programme, the bank will purchase ETFs composed of stocks issued by firms that are proactively making investments in physical and human capital. In addition, the BoJ has expanded eligible collateral for the provision of credit and now accepts foreign currencydenominated loans and housing loan portfolios. The BoJ announcement initially triggered a large jump in Japanese equities and in USD/JPY, with the Topix index temporarily up 2% as both the extension of maturity on BoJ s JGB holdings and not least a boost of ETF purchases fuelled sentiment. However, the gains were quickly erased after the details in the announcement were digested and as the size of the ETF expansion overall was seen as a disappointment. itraxx Europe (IG) 79 79 0.2 itraxx Xover (Non IG) 325 327 1.3, % EUR/USD 82 85 0.28 USD/JPY 122.760 121.920-8 EUR/CHF 8 8-4 EUR/GBP 0.728 0.727-0.12 EUR/SEK 9.270 9.267-3 EUR/NOK 9.48 9.51 0.28 USD Oil Brent, USD 37.1 37.2 0.27 Gold, USD 1052.0 1057.1 0.49 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 Selected readings from Danske Bank Norges Bank Review Denmark: Danish independent rate hike has moved closer FOMC Review Senior Analyst Morten Helt +45 45 12 85 18 mohel@danskebank.dk Today [Tex Important disclosures and certifications are contained from page 5 of this report. www.danskeresearch.com

Scandi Markets Norway. The NAV unemployment figure will be released at 10:00 CET. We expect the unemployment rate to increase to 3.0% in December from 2.9% in November. US S&P500 future 2066 2066 Fixed Income Markets The market rallied significantly yesterday after the sell-off in recent days - the slow hand of the Federal Reserve combined with the oil price is providing support for the fixed income markets and the trading range for Bunds between 40bp and 75bp continues to hold. We like to buy Bunds versus swaps around 30bp even though issuance of Bunds is picking up in 2016 but net supply is very low and if we include QE, it is very negative. There is positive carry on the trade as it rolls down the ASW-spread curve. Spain will hold elections on Sunday - this has almost been forgotten with all the central bank meetings and movements in the oil price. However, focus will now turn towards the Spanish general election on Sunday. We have recently seen a pick-up in the polls for the left-wing anti-austerity party Podemos and together with the centre anti-corruption party Ciudadanos they are looking to gain almost 40% of the vote on Sunday - this will make it difficult for either the current right-wing government (PP - the People s Party) or the opposition (socialists) to gain an absolute majority. PP is set to win the election as the economy is showing solid signs of a recovery but PP will most likely need support from Ciudadanos to form a majority government. If the government with PM Rajoy wins the election, this should be positive for the spread to EU peers as the fundamentals for Spain are looking much better than in e.g. Italy. Furthermore, it will ensure that the reform process stays on track and political chaos like we saw in the aftermath of the Portuguese election should be avoided. If there is political uncertainty after the election and spreads widen, we will use this to add to our long position in Spain (this is one of our top trades for 2016) as the gross supply of Spanish government bonds is expected to decline significantly in 2016 as the gross issuance is expected to be EUR115bn versus EUR139bn in 2015. 2046 2046 2026 2026 2006 2006 1986 1986 Wed Fri Mon Tue Wed Fri US 10y gov yield 2.37 2.37 2.27 2.27 2.17 2.17 2.07 2.07 Wed Thu Mon Tue Wed Fri Global FX EUR/USD (LHS) USD/JPY (RHS) 1.11 123 1.1 122.1 9 121.2 8 120.3 Wed Thu Mon Tue Wed Fri FX Markets The Norges Bank on Thursday left interest rates unchanged as we had expected. In addition, it is less certain that it will cut rates in March than we had expected with the rate path implying a 40-60% probability of a rate cut. However, the long end of the revised rate path was even more dovish than we had expected, implying a 100% probability of another 25bp rate cut in H1 16 and a 44% probability of an additional rate cut on a 12M horizon. We see limited short-term EUR/NOK downside potential due to poor NOK December liquidity, limited year-end risk appetite and oversupply limiting the short-term upside potential for the oil price. We expect EUR/SEK to gradually test lower levels and Thursday s very strong labour market data are helping the bullish sentiment towards the SEK. We see a EUR/SEK trading range of 9.10-9.50 but with risks tilted to the lower end of the range. Scandi FX EUR/SEK (LHS) EUR/NOK (RHS) 9.38 9.59 9.33 9.53 9.28 9.47 9.23 9.41 Wed Thu Mon Tue Wed The USD strengthened further on Thursday in line with our expectations as upside risks to short-end US yields should drive further strength near term, particularly versus EM and commodity currencies. We see the downside in EUR/USD as more limited given very stretched positioning and we expect the recent trading range of 5-1.10 to hold. 2 18 December 2015 www.danskeresearch.com

Key figures and events Friday, December 18, 2015 Period Danske Bank Consensus Previous 9:00 DKK House prices (Association of Danish Mortgage Banks) q/q y/y 3rd quarter 10:00 NOK Unemployment % Dec 3.0% 3.0% 2.9% 10:00 EUR Current account EUR bn Oct 29.4 14:30 CAD CPI m/m y/y Nov 0.2% % 15:45 USD Markit services PMI, preliminary Index Dec 56.1 15:45 USD Markit composite PMI, preliminary Index Dec 55.9 19:00 USD Fed's Lacker (voter, hawkish) speaks Source: Bloomberg, Danske Bank Markets 3 18 December 2015 www.danskeresearch.com

Today s market data: 18 December 2015 STOCKS S&P500 Intraday, % Eurostoxx Intraday, % Close 0 0 DJSTOXX50 3096 1.3% 2.40 2.4 Max 0.4 Max 2.9 OMXC20 998 1.2% -0 Min -1.8-0 1.80 Min 1.8 OMXS30 1438 0.7% -1.20-1.20 1.20 1.2 OSE BX 601 -% Close -1.80-1.80 0 DOW JONES 17496-1.4% 15 16 17 18 19 20 21 09 10 11 12 13 14 15 16 17 18 Grey line indicates closing of Danish markets Grey line indicates opening of US markets NASDAQ 5003-1.4% 1 month -2.0% 1 month -4.9% S&P500 2042-1.5% Year-to-date -0.8% Year-to-date 3.1% NIKKEI (07:30) 19011 1.3% FX & COMMODITIES EUR/USD Intraday EUR 17:00 07:30 Gold, $ 108.8 108.8 USD 108.20 108.50 0.30 07:30 1057.12 JPY 132.83 132.29-4 1 day 5.98 108.5 Max 109 108.5 GBP 72.77 72.68-9 1 month -13.58 Min 108 NOK 948.05 950.73 2.68 Year-t-date -127.74 108.2 0.3 108.2 SEK 926.99 926.69-0.30 DKK 746.13 746.11-2 CRB Oil, Brent, $ 37.23 0.17-6.91-20.10 CRB, Raw Industrials 399.98-0.97-2.55-92.13 YIELDS & INTEREST RATES USD-Yields Intraday Spread, 3 2.28 Policy Rate 3M bp 17:00 07:30, bp USD2Y USD10Y USD 0 3 3 USD 10Y 2.25 2.21-4 1Max Max 2.3 EUR 5-0.13-18 USD 30Y 2.96 2.92-5 2.25 Min Min 2.2 USD2Y GBP 0 8 8 JPY 10Y 0.30 0.28-2 0.99 (lhs) 0 0 DKK 5-9 -14 USD102.22 0.97 Y (rhs) SEK -0.35-0.39-4 07:30(-1)* 17:00, bp NOK 0.75 1.17 42 DEM 10Y 5 1-5 0.95 2.19 07 10 13 16 19 22 01 04 PLN 1.50 1.62 12 DKK 10Y 0 0.89-11 SEK 10Y 0.99 0 1 NOK 10Y 1.50 1.50 0 PLN 10Y 3.07 2.96-12 * As of closing previous trading day 10Y Yield Spread to Germany 2.5 2.36 2.0 1.61 1.5 1.25 3 0.90 0.34 0.29 0.39 USD JPY GBP FRF ITL DKKSEKNOKPLN - -0.32 2.5 2.0 1.5-3.0 2.5 2.0 1.5 US Yield Curve -0.4-0.9-1.4-1.9-2.4 3.00 Max 00 0 Max 00-2.9 0.4 0 Min -4.420-3.4 0.3 0 Min #### -3.9-4.4 USD2Y USD5Y USD10Y D-t-D, bp (right axis) 07:30 (left axis) 1 month ago (left axis) 0.9 0.8 0.7 0.2 0.1 German Yield Curve - -1.5-2.5-3.5-4.5-5.5 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 100 90 80 Credit spreads USD 10Y * Ask price ** Ask price Swap Spread, bp** Europe (IG) 79 0 8 70 JPY 10Y -8-7 0 300 HiVol 101 0 15 60 250 50 200 Xover (N-IG) 327 0 30 40 07:30(-1)* 17:00 30 150 EUR 10Y 0 20 100 10 50 DKK 10Y 33 34 2 Finan. Sr. 76 0 5 0 0 SEK 10Y 43 41-2 Dec Feb Mar May Jun Jul Sep Oct Dec Finan. Sub. 161 0 9 NOK 10Y 57 60 3 itraxx Europe (IG) (left axis) itraxx Xover (Non IG) (right axis) 450 400 350 17:00 * As of closing previous trading day 07:30 107.9 107.9 PLN 428.50 430.18 1.68 1M future 07 10 13 16 19 22 01 04 USD 17:00 07:30 07:30 170.70 JPY 122.76 121.92-0.84 1 day -1.11 1 month 1.90 GBP 148.70 149.28 8 1 month -12.90 Year-to-date -12.48 CHF 99.74 99.42-0.32 Year-t-date -59.26 Source: Bloomberg, Danske Bank Markets 4 18 December 2015 www.danskeresearch.com

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