Investment Research General Market Conditions 26 February 2015

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1 Investment Research General Market Conditions 26 February 2015 Market movers today Euro money supply and lending figures. The credit impulse points to higher euro GDP growth and the positive development is set to continue in In December last year, loans to the private sector turned positive for the first time since mid This reflects that on the supply side the ECB has finished its stress tests and asset quality review, implying banks can focus on lending out to the private sector. Added to this, the QE programme should give cheaper and more accessible credit. On the demand side, private consumption, in particular, is strengthening and banks have also reported that demand for loans from enterprises is increasing. Also keep an eye on M1 growth that has picked up and points to a decent euro recovery this year. German unemployment. After a decline in January we expect it to be flat in February. The trend continues to be down, though. US inflation is expected to drop sharply from 0.8% to % y/y (consensus is for a decline to -0.1% y/y). More interesting, though, will be core inflation where we look for an unchanged rate of 1.6% y/y in line with consensus. Core inflation is likely to be one of the measures the Fed watches closely in order to decide the time of lift-off on rates. US durable goods orders and jobless claims are also on tap today. Danish manufacturing confidence data. Selected market news A day of consolidation. After an uneventful European session, US stocks were also little changed on Wednesday, as market participants digested Tuesday s news on Greece and Yellen s testimony. Yellen testified again yesterday, this time before the House Financial Services Committee. However, she provided no new information on the monetary policy outlook. There were no major data releases, with the only figure of interest being new home sales. The figure declined % to 481,000 in January but it came in better than expected (consensus: 470,000). Overall, housing market data continue to be soft, which was also noted by Yellen in her testimony on Tuesday. Mario Draghi defends stance on Greece. In a testimony given before the European Parliament, Draghi said that the ECB had had no choice to suspend the waiver on Greek bonds being used as collateral. However, he added that it would be reinstated when the ECB becomes convinced that Greece is on track with its bailout programme (see coverage in Wall Street Journal). 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 RB minutes soft - no surprise, 25 February China: HSBC PMI improves in February, major distortions from Chinese New Year unlikely, 25 February T EU extends deadline for France to meet budget deficit target. The European Commission gave France another two years until 2017 to bring its deficit below the EUimposed limit of 3% of GDP. Moreover, the Commission decided not to penalise Italy and Belgium for increasing their public debt, despite running a level well above the 60% of GDP limit (see Reuters). Senior Analyst Sverre Holbek holb@danskebank.dk Important disclosures and certifications are contained from page 5 of this report.

2 Scandi markets Denmark. Figures for manufacturing confidence in February are due for release. We expect the indicator to climb from -13 in January to -9 in February, which should be seen as a normalisation, as confidence is still very low relative to actual economic conditions. Also December figures for the number of employees are due for release. This series is a good indicator for the development in the official employment figures from the national accounts that are released on Friday. Currently, employment increased by 3,000 in Q4 according to this monthly series. Fixed income markets Following yesterday s ECB tenders we now have the full liquidity picture from the maturity of the 3y LTROs. As expected, the existing ECB operations showed their flexibility with a 43bn net increase in the 1-week MRO and a 36bn increase from the 3m LTRO. The total of 79bn almost meet the repayment of the remaining 3Y LTRO of 92bn that settles today. Excess liquidity will start to rise with ECB QE purchases (likely to start in two weeks time). It will drive money market rates further down in the front and force investors further out on the curve and in lower credit in their hunt for yield. The demand for the periphery is still very strong as shown by the two auctions yesterday. Spain sold some EUR7bn in a new 15Y benchmark deal with an outright yield of 1.98% and 105bp to mid-swaps. It was oversubscribed almost three times as the order book was above EUR2bn. Portugal sold EUR1.5bn in a tap of the 10Y with a bid-to-cover of Initially it had planned to sell only up to EUR1.25bn. Furthermore, the market had rallied into the auction but the performance continued and 10y PGB ended up below 2%. Today, the Italian debt office is in the market, where it is tapping in 5y floater (CCTeu), 5Y BTPS and a new 10Y BTPS - it plans to sell almost EUR9bn, with the bulk in the 10Y benchmark (EUR4.5bn) and EUR2.5bn in the 5Y benchmark. Given the strong demand for Spain and Portugal yesterday we expect that the Italian auctions will be flying. Finally, Denmark is selling T-bills. According to the normal issuance schedule for the T- bills, the Danish debt office will introduce a new T-bill, the DGTB 0% Sep-15. Normally, it would sell some DKK10-15bn at the inaugural auction in order to build up liquidity in the new T-bill but it might be different this time given the pressure on the DKK. It might follow the pattern from the last T-bill auction when it chose not to sell. We expect it to sell the new T-bill at tomorrow s auction even though it might add to the confusion. A fair price in our view is somewhere between 80-85bp. FX markets The GBP has performed strongly so far in February appreciating more than 3% against both the EUR and the USD. Fundamentally, the recovery remains on track in the UK and we are still optimistic regarding the British economy. Today s second release of Q4 GDP growth should confirm this view and show a solid growth of 0.5% q/q mainly driven by domestic demand and, in particular, private consumption. We expect EUR/GBP to drop further on a three to six months horizon targeting the cross at 0.72 in 6M as a rate increase from the Bank of England is moving closer. In the short term, however, the UK election is likely to cap the full GBP upside potential and given that EUR/GBP now is oversold both technically and according to our short term financial models, we stress that the risk of a temporary bounce has increased markedly. Implied volatility has declined over the past week but the election risks still appear to be priced in the market with US S&P500 future Tue Wed Thu Mon Tue Thu US 10y gov yield Tue Wed Fri Mon Tue Thu Global FX EUR/USD (LHS) USD/JPY (RHS) Tue Wed Fri Mon Tue Thu Scandi FX EUR/SEK (LHS) EUR/NOK (RHS) Tue Wed Fri Mon Tue 2 26 February

3 maturities above the 3M tenor trading substantially higher relative to the front end of the curve. This might reduce the upside risk for EUR/GBP later in the spring. In the Scandi FX markets, Norges Bank s weekly flow released yesterday shows that foreign banks (proxy for speculative flows) net bought the Norwegian currency last week worth NOK4.6bn. Since mid January foreign banks have been net NOK buyers of roughly NOK17bn, suggesting a high NOK sensitivity to the downside should the unemployment figures tomorrow disappoint. Since Friday, EUR/DKK has hovered in the high end of the de facto trading range above the central rate of as the market has started speculating in a beginning normalisation of monetary policy in Denmark. We expect Danmarks Nationalbank to cap EUR/DKK in the range of in 12M. Key figures and events Thursday, February 26, 2015 Period Danske Bank Consensus Previous 8:00 DEM GfK consumer confidence Net. Bal. Mar :00 ESP GDP, final q/q y/y 4th quarter 0.7%.. 0.7% 2.0% 9:00 DKK Industrial confidence Index Feb :30 SEK Trade balance SEK bn Jan :30 SEK Household lending % y/y Jan :55 DEM Unemployment % Feb 6.5% 6.5% 6.5% 10:00 EUR Money supply (M3) y/y Jan 3.6% 3.8% 3.6% 10:00 EUR Loans to Households (adj. for sales and sec.) y/y Jan 0.9% 0.8% 10:00 EUR Loans to NFCs (adj. for sales and sec.) y/y Jan -0.8% -% 10:30 GBP GDP, preliminary q/q y/y 4th quarter 0.5% 2.7% 0.5% 2.7% 0.5% 2.7% 11:00 EUR Economic confidence Index Feb :00 EUR Industrial confidence Net bal. Feb :00 EUR Service confidence Net bal. Feb :00 EUR Business climate indicator Net bal. Feb 11:00 EUR Consumer confidence, final Net bal. Feb :00 ITL Business confidence Index Feb :30 USD CPI m/m y/y Jan -0.3%I% -0.6% -0.1% -0.4% 0.8% 14:30 USD CPI - core m/m y/y Jan 0.1%I1.6% 0.1% 1.6% % 1.6% 14:30 USD Durable Goods Orders m/m Jan 1.6% -3.3% 14:30 USD Initial jobless claims :30 CAD CPI m/m y/y Jan % -0.1% 1.5% 16:00 DKK Press release from Danish CB if any changes to policy rates (no press release if no changes) 19:00 USD Fed's Lockhart speaks on US outlook at banking conference 3 26 February

4 Today s market data: 26 February 2015 STOCKS S&P500 Intraday, % Eurostoxx Intraday, % Close DJSTOXX % Max 0.5 Max 0.3 OMXC % Min Min - - OMXS % OSE BX % Close DOW JONES % Grey line indicates closing of Danish markets Grey line indicates opening of US markets NASDAQ 4967 % 1 month 2.8% 1 month 2.8% S&P % Year-to-date 2.7% Year-to-date 11.6% NIKKEI (07:30) % FX & COMMODITIES EUR/USD Intraday EUR 17:00 07:30 Gold, $ USD : JPY day 5.64 Max 114 GBP month Min NOK Year-t-date SEK DKK CRB Oil, Brent, $ CRB, Raw Industrials YIELDS & INTEREST RATES USD-Yields Intraday Spread, 0.63 Policy Rate 3M bp 17:00 07:30, bp USD2Y USD10Y 2.00 USD USD 10Y Max 0.6 Max 2.0 EUR USD 30Y Min 0.6 Min GBP JPY 10Y USD2Y (lhs) 0 DKK USD10 SEK :30(-1)* 17:00, bp Y (rhs) NOK DEM 10Y PLN DKK 10Y SEK 10Y NOK 10Y PLN 10Y * As of closing previous trading day 10Y Yield Spread to Germany USD JPY GBP FRF ITL -4 DKKSEKNOKPLN US Yield Curve Max 00 0 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 Apr May Jul Aug Oct Nov Jan 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 USD 17:00 07:30 07: JPY day month 1.26 GBP month 7.90 Year-to-date CHF Year-t-date February

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