Investment Research General Market Conditions 19 December 2014
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1 Investment Research General Market Conditions 19 December 2014 Danske Daily Market movers today Market overview In terms of data releases we have a quiet day ahead of us. German GfK consumer confidence should continue to trend higher supported by the lower oil price and improvements in the labour market despite weaker manufacturing data during Around noon the ECB will announce the last 3y LTRO repayment in 2014 and there is a risk a large amount of liquidity will be repaid before year-end. However, last week s take-up on the TLTRO and the repayment of the 3Y LTRO has had a net injection on excess liquidity of EUR90bn and excess liquidity should remain high over year-end as we only expect banks to repay EUR15bn on the LTRO. Fed s Lacker (non-voter, hawk) and Evans (non-voter, dove) are scheduled to speak. While Evans makes opening remarks, Lacker will speak on the economic outlook and he is more likely to elaborate on his view on the decision at the FOMC meeting. 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 market news This morning, Bank of Japan - as expected - left monetary policy unchanged at the bank s December meeting. The bank thus maintains the JPY80trn target for the annual, rise in the monetary base and will continue its second-to-none purchases of assets such as government bonds, equities and real estate investment trust in order to boost its balance sheet. After its relatively aggressive and pre-emptive easing move on 31 October, we believe the bank is unlikely to ease again soon. Although Yellen at Wednesday s FOMC meeting talked down the direct influence of the Russian turmoil on the US economy, the situation in Russia remains very much in focus. At yesterday s traditional yearly press conference president Putin blamed the west for the economic troubles and repeatedly claimed that the rouble s significant drop in recent months is a consequence of external factors. Putin s tone on the economy was, however, at the same time surprisingly dovish and liberal. He opposed capital controls, did not view the recent interest rate hike as the right choice, but stated that macroeconomic stability had demanded the decision. Putin backed the decision to let the rouble float and opposed spending FX reserve on rouble support. He said that the difficult times could last up to two years, and oil reserves are a good protection. Putin also hoped that banks will not raise interest rates on home loans after the interest rate decision, but did say that the situation indeed is difficult. While the FOMC s statement and Yellen s comment on Wednesday in many ways had a hawkish twist, the committee s pledge to remain patient before hiking the federal funds rate from the historical low has together with Putin s liberal tone supported general risk sentiment, sparking a relief rally. Global equities moved higher and US stocks continued the rebound in last night s US session with S&P500 up 2.4% for the day the biggest two-day rally in almost two years. With the outlook for higher rates, US treasuries sold off and the 10Y US rate is now up roughly 12bp since the FOMC meeting. Meanwhile Brent crude continues its volatile fluctuations around USD60/bbl. We will continue to look for evidence that USD60/bbl marks a point of price support, thereby giving the first indication of the oil sell-off losing steam. 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 Selected readings from Danske Bank Research Global: Oil price to bottom when non-opec output rise halts déjà vu No 2, 18 December 2014 Flash Comment: FOMC meeting - It all depends on the data, 17 December 2014 Analyst Kristoffer Lomholt klom@danskebank.dk T Important disclosures and certifications are contained from page 5 of this report.
2 Scandi markets today Norway. The labour market has held up surprisingly well given the slowdown in oilrelated industries. This is partly because many have found employment in other industries, presumably because we are talking about highly skilled labour, but it is probably also partly because the big wave of redundancies came in September, and notice periods are typically three months. This means that we should begin to see an effect on registered unemployment from December onwards and we expect it to climb to 2.7% this month. We also expect our preferred jobless measure, gross unemployment, which includes those on job creation schemes, to increase by 600 people m/m. US S&P500 future Wed Fri Mon Tue Thu Fri Fixed income markets Risk appetite is back in financial markets and together with market expectations that the ECB will announce a QE programme next year it bodes well for another positive day for peripheral and semi-core bonds. The auction calendar is empty for EGB markets today as almost all countries except Italy are done with funding for this year. US 10y gov yield In Scandinavia we have the last T-bill auction this year in Denmark (MAR15 and Jun 15 papers). The debt office sold more than DKK12bn at the last auction and the outstanding amount is close to the 2015 target at DKK30bn, so we should expect a somewhat smaller amount going to the market this time. Danish T-bills still offer value for USDdenominated investors taking advantage of the FX-forward in USD/DKK that gives an extra 30bp in yield pick-up from an USD perspective. In Norway Norges Bank will publish its funding plan for 2015 at 12:00 CET. Market focus will be on the planned NGB sale, which we expect unchanged around NOK70bn. Focus will also be on whether a longer NGB bond (15y) will be announced or not. The latter was initially planned for 2014 but the plan was later abandoned due to lack of investor interest. If a longer NGB bond is announced, it could weigh on the long end of the NGB curve. The Finnish debt office will also publish its Quarterly Review with a brief issuance outlook for Finally, Fitch will have Sweden up for review. Given the strong fiscal position any change in the AAA rating is highly unlikely. FX markets It has been a very volatile week in FX markets. Looking at our FX short-term financial models going into the week s last trading day, we observe the biggest G10 misalignments in USD pairs, suggesting that the USD is currently cheap. While we do agree on the USD looking attractive even more so after the FOMC meeting Wednesday - we still emphasise that the USD will remain highly vulnerable to temporary corrections lower before year-end. This is the case as speculative long USD accounts remain stretched, thereby exposing the greenback to profit taking when the current relief rally in risk-assets wanes. While both NOK and SEK look cheap at current levels according to our models, we still prefer to stay sidelined as liquidity remains weak exposing the currencies to erratic moves lower as stops are triggered. The weekly flow data from Norges Bank, for instance, revealed that last week - when EUR/NOK moved from 8.80 to 9.20 foreign banks that we see as proxy for speculative accounts net sold Norwegian kroner for just NOK2bn. At the current oil price, we see the rouble equilibrium to be around 60 roubles against the US dollar and around 74 against the euro. Fear premiums are, however, very important factors at times of sparking volatility Wed Thu Mon Tue Wed Fri Global FX EUR/USD (LHS) USD/JPY (RHS) Wed Thu Mon Tue Wed Fri Scandi FX EUR/SEK (LHS) EUR/NOK (RHS) Wed Thu Mon Tue Wed 2 19 December
3 Yesterday s rate cut from the Swiss National Bank (SNB) shows that the bank is proactive and willing to defend the floor with all means possible. Importantly, it also shows that the SNB can and will act between its monetary policy meetings. Hence, should the interest rate cut turn out to be insufficient in limiting the pressure on the currency, additional measures could be introduced before the next meeting on 19 March For now, however, we expect the SNB to await possible policy announcements from the ECB and going forward a flexible balance sheet remains the SNB s primary monetary policy instrument. We expect EUR/CHF to edge gradually higher towards 1.24 in 12M, driven mainly by a reversal of safe-haven flows and an increase in Swiss portfolio investments abroad. In FX Top Trades 2015, 3 December, we recommended positioning for a weaker CHF through a long USD/CHF position and a short CHF/DKK position. Yesterday s rate cut supports our calls and we still find the positions attractive. Key figures and events Friday, December 19, 2014 Period Danske Bank Consensus Previous 8:45 FRF Business confidence Index Dec :00 EUR Current account EUR bn Oct 30 10:00 NOK Unemployment % Dec 2.70% 2.60% 12:00 EUR ECB announces 3-year LTRO repayment 14:30 CAD CPI m/m y/y Nov... 2,30% 0,10% 2,40% 14:30 CAD Retail sales m/m Oct -0,40% 0,80% 16:00 USD Fed's Evans (non-voter, dovish) speaks 18:30 USD Fed's Lacker (non-voter, hawkish) speaks 3 19 December
4 Today s market data: 19 December 2014 STOCKS S&P500 Intraday, % Eurostoxx Intraday, % Close 2.10 DJSTOXX % Max 2.8 Max 3.4 OMXC % 1.30 Min Min OMXS % OSE BX % Close DOW JONES % Grey line indicates closing of Danish markets Grey line indicates opening of US markets NASDAQ % 1 month 0.6% 1 month -1.1% S&P % Year-to-date 11.5% Year-to-date 2.2% NIKKEI (07:30) % FX & COMMODITIES EUR/USD Intraday EUR 17:00 07:30 Gold, $ USD : JPY day Max GBP month Min 123 NOK Year-t-date SEK DKK CRB Oil, Brent, $ CRB, Raw Industrials YIELDS & INTEREST RATES USD-Yields Intraday Spread, 0.66 Policy Rate 3M bp 17:00 07:30, bp USD2Y USD10Y 2.22 USD USD 10Y Max 0.7 Max 2.2 EUR USD 30Y Min 0.6 Min GBP JPY 10Y DKK SEK :30(-1)* 17:00, bp USD2Y (lhs) USD10Y (rhs) 2.10 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 DKKSEKNOKPLN US Yield Curve 3.00 Max Max Min 00 0 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 Dec Feb Mar May Jun Aug Sep Oct Dec 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 -3 1 month GBP month Year-to-date CHF Year-t-date December
5 Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors upon request. Risk warning Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates Danske Daily is updated on a daily basis. First date of publication Please see the front page of this research report for the first date of publication. Price-related data is calculated using the closing price from the day before publication December
6 General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank, pursuant to SEC Rule 15a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to "U.S. institutional investors" as defined in SEC Rule 15a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA, but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission December
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