Danske Daily. Market Movers. Selected Market News

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1 Investment Research General Market Conditions 13 August 2015 Market Movers Focus will continue to be on Chinese exchange rate policy and not least to what degree the People s Bank of China (PBoC) attempts to manage the exchange rate through intervention in the FX market. Any signs that the pace of depreciation of CNY is slowing will be positive for market sentiment. The Greek parliament will today vote on the broad range of austerity and reform measures that has been agreed with the creditor institutions in connection with the new 3-year bail-out agreement. In the euro area the ECB s account of its monetary meeting will be released today. In the data calendar the most important event today is retail sales for July in the US, which is one of the figures that could have a considerable impact on the FOMC meeting in September. Retail sales have disappointed recently but they should improve. Watch out for the Swedish inflation print today. For more on Scandi markets see page 2. Selected Market News The People s Bank of China (PBoC) both through intervention and a press briefing overnight indicated that it will manage the exchange rate and will only gradually move towards a floating exchange rate. The bank raised the USD/CNY fixing today by 1.1% to which again is consistent with the new market-based fixing method it announced earlier in the week. CNY initially weakened but has again strengthened after the PBoC intervened in the FX market. USD/CNY is currently trading around At a press briefing this morning deputy governor Yi Gang said that the PBoC will step in when the market is distorted and that managed exchange rate fluctuations suit China well. However, Yi also said the PBoC has stopped intervention as a normal operation and that its aim in the long run is a market-determined rate. Yi s comment suggests that this has not been a big bang adjustment towards a floating exchange rate but it will be a gradual and managed process. This suggests that the pace of depreciation of CNY will now at least slow substantially. Overall this has been positive for market sentiment overnight. Asian stock markets are mostly higher this morning and Asian currencies with the exception of JPY have strengthened against USD. If CNY stabilises in the coming days the impact of the Chinese currencies as the main market driver will probably gradually wane. Crude oil prices are little changed with Brent lingering just off the USD50/bbl mark but we expect downward pressure to return near term. A perfect storm has hit the oil market but we emphasise three factors in particular which have delivered bearish surprises this year. First, oil markets are struggling to adjust to a new normal where prices are less influenced by OPEC and more by market forces. Second, the shale-oil cost curve appears to have seen a marked downward shift recently. Third, OPEC continues to pump recordhigh volumes of crude. This new uncertainty has sent oil into troubled waters. 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 Strategy: CNY follow-up - clarifications and confusion FX Strategy China s big bang: CNY devaluation T Important disclosures and certifications are contained from page 5 of this report.

2 Scandi Markets The stage appears to be set for yet another blow to the Riksbank's inflation forecast when it comes to July inflation (data due to be released at 09:30 CET). We expect CPIF inflation to print a mere 0.4 % y/y in July, compared with the Riksbank's 0.7% forecast. Fixed Income Markets The European fixed income market continues to be driven by the spill-over effects of the devaluation of the Chinese currency as there are significant key economic data releases on Thursday. We have final inflation data for the euro area and focus will be on the effects that lead to surprisingly higher preliminary core inflation. However, the data should not have much impact on the market as the downward pressure on inflation continues as seen in the decline in break-even inflation rates and 5y5y forward swap inflation rate on the back of China and the oil price. The ECB is publishing minutes from the meeting in July - again there should be few surprises. Yesterday, peripheral bond yields increased and spreads to core-eu widened driven to some extent by a sudden decline in the BTP future as well as low liquidity in the market. We expect to see a rebound in the spreads today and remain committed to being long Spain against Italy and swaps. The ASW spread on 10Y Germany continues to grind higher and the Bund spread is again "testing" 40bp. The "demand" for the Bund was also reflected in yesterday's Bund auction as the bid-to-cover rose to 1.3 from 1.1. In Scandinavia, the focus is on Swedish inflation data, where we are looking for another rate cut by the Riksbank and the recent spread tightening between Sweden and Germany is likely to continue despite a solid performance of SGBs in recent days. The 5Y SGB- Germany yield spread is back below 0bp and the 10Y spread is trading at 2bp. The spread is likely to fall below 0bp shortly. FX Markets China s FX reform remained the focus in global FX markets on Wednesday with the market realising that the daily USD/CNY fixing will reflect the previous day s closing level, triggering further depreciation in the CNY. As such, Beijing has once and for all given up control of the fixing and the opportunity to use that as a policy signal for future FX direction. However, it remains in control of USD/CNY spot which was seen on Wednesday just before yesterday s onshore closing when the PBoC intervened aggressively, pushing down USD/CNY. Expect the bank to show its hand in coming days which should gradually stabilise USD/CNY but at a much higher level than previously. The CNH/CNY spread will remain in place near term given heightened risk premium but it should also narrow over time as the volatility in USD/CNY falls. US S&P500 future Tue Wed Fri Mon Wed 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 Thu The CNY depreciation has hit Asia ex. Japan (AXJ) currencies hard and is also impacting major currencies particularly EUR. This is understandable as the market is factoring in a declining likelihood of the Fed beginning its rate hiking cycle. This could drive further EUR/USD gains near term. However, we still think the Fed is keen to get started with its rate hiking cycle which eventually should drive renewed EUR/USD losses. Swedish inflation will take centre stage today. We expect CPIF to come out significantly below the Riksbank s and consensus expectations. This should drive renewed EUR/SEK gains as the market raises its expectations for a rate cut in early September. However, we expect the high from December 2014 at to hold August

3 Key figures and events Thursday, August 13, 2015 Period Danske Bank Consensus Previous 1:01 GBP RICS House Price Balance % Jul :50 JPY Machine orders m/m y/y Jun -4.8% 17.4% 0.6% 19.3% 8:00 DEM HICP, final m/m y/y Jul 0.1% 0.3% 0.1% 0.3% 0.1% 8:45 FRF HICP m/m y/y Jul 0.3% -% 0.3% -0.1% 0.3% 9:00 ESP HICP, final m/m y/y Jul -0.1% -0.1% -1.6% -0.1% 9:30 SEK Underlying inflation CPIF m/m y/y Jul -0.4% 0.4% -0.2% 0.6% 9:30 SEK CPI m/m y/y Jul -% -0.6% -0.3% -0.4% 10:00 GLO LME Stocks 13:30 EUR ECB account of monetary policy meeting 14:30 USD Retail sales m/m Jul % % -0.3% 14:30 USD Retail sales control group m/m Jul % % -0.1% 14:30 USD Retail sales less autos m/m Jul 0.4% 0.4% -0.1% 14:30 USD Retail sales less autos and gas m/m Jul % % -0.2% 14:30 USD Import prices m/m y/y Jul -1.1% -1% -0.1% -1% 14:30 USD Initial jobless claims 1000 Source: Bloomberg, Danske Bank Markets 3 13 August

4 Today s market data: 13 August 2015 STOCKS S&P500 Intraday, % Eurostoxx Intraday, % Close 0 DJSTOXX % Max 0.6 Max -0.9 OMXC % 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 -3.6% S&P % Year-to-date 1.3% Year-to-date 10.2% NIKKEI (07:30) % FX & COMMODITIES EUR/USD Intraday EUR 17:00 07:30 Gold, $ USD : JPY day Max 112 GBP month Min NOK Year-t-date SEK DKK CRB Oil, Brent, $ CRB, Raw Industrials YIELDS & INTEREST RATES USD-Yields Intraday Spread, 2.19 Policy Rate 3M bp 17:00 07:30, bp 0.70 USD2Y USD10Y USD USD 10Y Max 0.7 Max EUR USD 30Y Min 0.6 Min 2.0 USD2Y GBP JPY 10Y (lhs) DKK USD Y (rhs) 2.07 SEK :30(-1)* 17:00, bp 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 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 Aug Sep Nov Dec Feb Mar May Jun Aug 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 1.34 GBP month Year-to-date CHF Year-t-date -36 Source: Bloomberg, Danske Bank Markets 4 13 August

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