danske bank weekly focus 28 may 2010

8/9/2019 Danske Bank Weekly Focus 28 May 2010

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www.danskeresearch.com

Investment Research

Market movers ahead

Next week two important US data reports are due to be released. The manufacturingISM index is expected to decline moderately, while a massive increase in non-farm

payrolls of 700,000 is expected.

The Bank of Canada is likely to begin hiking interest rates on Tuesday. InEuroland markets willfocus on event risks related to the debt crisis. Bad news can

quickly spook the markets. European key indicators next week are expected to paint apicture of strong growth momentum, but declining confidence.

In Asia manufacturing PMIs are expected to show a slight fall. Chinas official NBSmanufacturing PMI could generate some negative headlines.

At the G20 finance minister meeting in South Korea next weekend the European debtcrisis will be high on the agenda.

In Scandinavia retail sales are expected to confirm that demand is picking up.Global update

The past week has been a volatile cocktail of concern about fiscal sustainability inEurope, the health of the financial sector in southern Europe, the impact of new

financial regulation and added geopolitical uncertainty on the Korean Peninsula.

Many markets were completely dried up at the beginning of the week and stockmarkets were in steep decline. It looked pretty ugly. The absence of more bad news

has contributed to an improving market situation at the end of the week.

In terms of data, the week has been positive with strong Euroland industrial orders,for example, and strong US consumer confidence.

Focus

The US manufacturing cycle is approaching an inflection point with productioncatching up on demand. We look for a peak in the pace of manufacturing growth and

expect the ISM to begin to move lower within a few months.

Stocks recover slightly after steepdecline EUR/USD weakening

Source: Reuters Ecowin Source: Reuters Ecowin

28 May 2010

Editors

Allan von Mehren

+45 4512 8055

[email protected]

Steen Bocian

+45 45 12 85 31

[email protected]

Weekly FocusSigns of relief

Contents

Market movers ahead ........................................... 2

Global update................................................................... 4

Scandi Update ................................................................ 6

Focus US: Euro crisis could speed up

manufacturing slowdown .................................. 8Equities: Back to fundamentals ................ 11

Fixed Income: Rates - Relief time ............ 12

FX: Extreme EUR decline ................................. 13

Commodities: defying fundamentals . 14

Financial views........................................................... 15

Macroeconomic forecast .............................. 17

Financial forecast ................................................... 18

Calendar ........................................................................... 19


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2 | 28 May 2010www.danskeresearch.com

Weekly Focus

Market movers ahead

Global

In the US, next week includes the release of the two most important data reports. On

Tuesday the manufacturing ISM index is expected to show a moderate decline, to60.0. This is based on a weakening in regional PMIs, along with increasing

uncertainty stemming from the recent turmoil in financial markets. A further

deterioration in credit and equity markets may pose a risk to US growth. The second

big release of the week will be the May employment report on Friday. We expect a

massive increase in non-farm payrolls of 700,000. This jump is primarily driven by

hiring for the census, giving a temporary boost to employment. Census workers are

expected to leave the federal payrolls relatively quickly. Excluding census we look for

a 200,000 reading. The coming week also includes data for pending home sales. There

is a risk of a decline here as Aprils home buyers might not have been able to take

advantage of thefirst time home buyer tax creditthat expired at the end of the month.

In Canada the Bank of Canada has abandoned its previous commitment to unchangedinterest rates until Q3, and with the Canadian economy looking strong, Tuesday is

likely to see the bank start its hiking cycle. However, the fiscal crisis brewing in

Europe is a risk to this view.

In Euroland markets will focus on event risks related to the debt crisis. Bad newsabout the Spanish banking sector or other trouble spots could easily spook the

markets. In terms of economic indicators there will be plenty of data to dig into.

Monetary developments may show signs of improvements in loan flows, but M3

growth will nevertheless decline due to base effects. Euro area flash inflation is likely

to show an increase to 1.6% in May from 1.5% in April, but there is little reason for

concern as inflationary pressures are not mounting at present. German unemployment

may have declined further to 7.7% in May as German growth is likely to have beenstrong despite the debt crisis, while euro area unemployment is projected to remain

stable at 10.0%. Final PMIs are likely to post small downward revisions to the flash

estimates. Finally we get revised euro area GDP for Q1 10. We would not be

surprised to see an upward revision to the somewhat disappointing 0.2% q/q growth

first announced.

In the UK, focus will be on PMIs and house prices. Despite the fact thatmanufacturing and service PMIs are expected to decline slightly, sentiment indicators

are indicating strong UK expansion. House prices are still on the rise, fuelled by low

rates.

Swiss Q1 GDP out on Tuesday is expected to confirm a maturing recovery. With afirm improving cyclical position of the economy, pressure is building for the SNB to

gradually step away from its current emergency setting of monetary policy.

In Asia focus next week will mainly be on the release of manufacturing PMIs acrossAsia. In our view, growth in manufacturing activity probably peaked in Q1 10 and for

that reason we are likely to see a slight decline in manufacturing PMIs in most Asian

countries in the coming months. We suspect that Chinas official NBS manufacturing

PMI might generate some negative headlines, because it could drop substantially

(from 55.7 to 53.0 in May) albeit largely due to seasonal distortions. We expect the

more reliable HSBC manufacturing PMI to decline only marginally in May.

Eurozone M3 growth remains innegative territory

Source: Reuters Ecowin

ISM and non-farm payroll key events

next week

Source: Ecowin and Danske Markets

In China PMIs suggest that growth inindustrial production will ease

Source: Reuters Ecowin and Markit

85 90 95 00 05 10

28

33

38

43

48

53

58

63

-750

-550

-350

-150

50

250

450

650 1000 persons Index


3/21


Weekly Focus

In Japan we expect industrial production to have increased a solid 2.7% m/m. Thisstrong gain comes on the back of even stronger gains in exports in April and so far it

appears that the recovery in industrial activity has maintained its momentum in Q2 in

Japan. Consequently Japan is one of the few Asian countries were we expect

manufacturing PMIs to have improved in May.

Finally, focus will be on comments surrounding the G20 finance ministers meetingin South Korea on 4-5 June. We expect no major news regarding a possible Chinese

revaluation. The European debt crisis will be high on the agenda and uncertainty

created by the European debt crisis has probably postponed a Chinese revaluation into

Q3.

Scandies

In Denmark the coming week will see quite a few important data releases. First, weexpect Q1 GDP growth to have picked up, with projected growth of 0.4% q/q in

Q1 10. Second, April retail sales numbers are expected to show an increase of 0.5%

m/m. Third, the week ahead will see the release of data on insolvencies andforeclosures of real estate for May 2010.

In Sweden confidence data are being published this week, with both PMIs and theNational Institute for Economic Researchs Business and Consumer Confidence

surveys. In addition, on Tuesday, the Riksbank will publish its Financial Stability

Report. If the Riksbank feels that the uncertainty has made a July hike (priced in) less

probable, the arguments will be chiselled out from its view of the impact on financial

markets.

We expect Norwegian retail sales to have recovered in April following a marginaldecline in March, although reports from retail shops do not point to a spending spree.

All things considered, our cautious estimate is that retail sales grew 0.3% m/m in

April, but the calendar adjustment leaves us with upside risk to this estimate. We look

for a moderate decline in PMI to 51.0 in May. Norges Bank seems highly likely to

reintroduce its currency purchases in the FX market. Based on the new forecasts of

the oil-adjusted budget deficit and tax receipts from oil companies, we expect the day-

to-day purchasing need to be around NOK100m.

Market movers ahead

Source: Bloomberg and Danske Markets

Global movers Event Period Danske Consensus Previous

Mon 31-May 2:25 U SD F ed's Be rnanke (vote r, neutr al ) spea ks

11:00 EUR CPI Flash estimate y/y May 1.6% 1.7% 1.5%

Tue 01-Jun 10:30 GBP PMI, Manufacturing Index May 57.7 57.9 58.0

16:00 USD ISM Manufacturing Index May 60.0 59.5 60.4

Thu 03-Jun 16:00 USD ISM (NAPM) non-manufacturing Index May 55.7 56 55.4

Fri 04-Jun 14:30 USD Nonfarm payroll 1000 May 700 500 290

14:30 USD Unemployment % May 9.8% 9.8% 9.9%

During the week Fri 04 - 05 OTH G20 Finance Ministers , Central Bankers Meet

Scandi movers Event Period Danske Consensus Previous

Tue 01-Jun 8:30 SEK Swedbank PMI survey Index May 62.0 64.0

9:00 NOK PMI Index May 51.0 52 51.9

Wed 02-Jun 16:00 DKK Currency reserves DKK bn May 404.1

Swedish surveys imply consecutive

growth


Danish GDP growth set to pick up

Source: Reuters Ecowin and Danske Research

Norwegian consumer spending has

disappointed


PMIServices

IndustryHouseholds

08 09 10

-3.5

-2.5

-1.5

-0.5

0.5

1.5

-3.5

-2.5

-1.5

-0.5

0.5

1.5 STD Net balances

00 02 04 06 08 10

320

325

330335

340

345

350

355

360

365

320

325

330335

340

345

350

355

360

365DKK bn DKK bn

GDP

02 03 04 05 06 07 08 09 10

90

95

100

105

110

115

120

90

95

100

105

110

115

120

Index 2005=100

Retail sales


4/21


Weekly Focus

Global update

A volatile cocktail

The past week has been a volatile cocktail of continued concern about sustainability ofpublic finances in Europe, concern about the health of the financial sector (particularly in

Southern Europe), concern about the impact of the new financial regulation and added

geopolitical uncertainty on the Korean Peninsula. Money markets remained stressed as

illustrated by the elevated 3M Libor OIS spread, albeit with some signs of the stress

easing late last week. Outside Europe, there is increasing focus on the European debt

crisis and both the US and China acknowledge that it is here that the battle to stabilise the

global economy will have to be fought in the short run. Hence, discussions about Chinas

exchange rate policy have temporarily faded into the background and the European debt

crisis featured high on the agenda at the US-China summit and is likely to be at the top of

G20 agenda in connection with the finance ministers meeting on 4-5 June. China was

directly drawn into the efforts to stabilise financial markets when it denied speculationthat it plans to reduce its exposure to European debt.

Euroland - struggling to gain market confidence

On the data front, we got more good news out of the euro area. Industrial orders increased

a massive 5.2% m/m in March. Even though this number is usually highly volatile, the

continued strength in manufacturing orders bodes well for the general direction of

industrial production in the months ahead. Hence, industrial production will continue to

be an important driver of the recovery in the euro area. We look for above-trend growth

in Q2, with Germany in particular looking strong for the coming quarters. In its monthly

bulletin, the German Bundesbank said that the latest financial market turbulence has not

yet affected the real economy in Germany and it concludes that the German economyremains on a recovery path, and that economic output will probably expand strongly in

the second quarter.

Otherwise limited data releases and most eyes have been on the ongoing euro debt crisis.

In Spain, Cajasur one of Spains regional cajas or savings banks was taken over by the

Bank of Spain, raising renewed fairs over the Spanish banking sector. During the week,

Banco Espaa asked lenders to increase provision. On Tuesday, the IMF released the

annual Article IV consultation on the Spanish economy with a very clear message.

Reform is needed now! Key challenges, according to the IMF, are the need for a more

flexible labour market, fiscal consolidation, and banking sector consolidation. Going

forward, we expect Spain to take on tough measures to rebalance the economy. This week

austerity measures for 2010-11 were approved in parliament to accelerate the reduction of

the fiscal deficit measures included a 5% wage reduction for public workers. We expect

more measures to be implemented. An increase of the retirement age is another issue that

will be discussed. These kinds of discussions have also been seen in France this week.

The IMF also released Article IV on Italy. The language was softer, but the message

clear: further reform is needed, competitiveness should be improved, and the banking

sector needs more capital. The Italian government this week gave details on how it aims

to rein in the deficit over the coming years as austerity measures were announced.

Public budgets: Tough times lies ahead

Source: Reuters Ecowin and Danske Markets

Note: Public budgets, % of GDP, SGP: Stability and

growth impact

"[Heading 2]"

Fiscal consolidation accelerated


Note: Public budgets, % of GDP, SGP: Stability and

growth impact

Stress increasing in the interbank

market


New SGP Change

2009 - -11.2% -

2010 -9.3% -9.8% 0.5%

2011 -6.5% -7.5% 1.0%

2012 -4.4% -5.3% 0.9%

2013 -3.0% -3.0% 0.0%

Spain

New SGP Change

2009 - -9.3% -

2010 -7.3% -8.3% 1.0%

2011 -4.6% -6.6% 2.0%

2012 -4.6% -4.6% 0.0%2013 -2.8% -2.8% 0.0%

Portugal


5/21


Weekly Focus

US - Strong data flow continued in April and into May

There are still limited signs of impact in the data from the financial turmoil in the few

pieces of May data that have been released. For instance, Conference Board Consumer

Confidence rose to the highest level since April 2008, confirming the recent improving

trend in consumer spending, which is tracking another 3.0-3.5% AR gain in Q2. But thejury is still out and the turmoil may show up when we start receiving June data.

April housing data got another lift from the expiration of the first time home buyer credit,

which expired last month. While it is likely that home sales will see a setback as the boost

from the credit fades away, there are signs of genuine improvement in housing turnover.

This was indicated by the recent NAHB reading, which saw a significant improvement in

expectations of future sales. The recent solid new home sales is likely to support housing

construction, which is set to contribute positively to GDP growth in Q2. Despite a soft

reading in April, the impressive trend continued in durable goods orders, which is up

almost 20% over a year ago, with signs of reacceleration going into Q2. Also orders for

capital equipment remain on a solid trend, up 21.5% AR over the past quarter.

Elsewhere, focus has been on the deterioration of the US money market, which has been

behind some of the hit to risk appetite and credit markets. The debate has been going on

whether the Fed should do more to prevent a further deterioration, e.g. by launching

further liquidity facilities. However, the market functioning is still not poor enough to

make any use of the programmes. Hence, we think that the bar is relatively high for

further Fed intervention, but do not rule out a cut in the penalty rate on the swap line (see

Strategy US: Thoughts on the Fed and the money markets).

Drop in consumer prices is stimulus, not intensifying deflation

Data released in Japan in the past week. Exports in April soared 6% m/m suggesting that

the recovery in industrial production in Japan will remain strong in the coming months.

On the other hand, unemployment in April unexpectedly increased for the second month

in a row to 5.1%, which put the strength of the Japanese labour market into question.

Finally the decline in consumer prices intensified in April, where CPI excluding fresh

food declined 1.5% y/y after dropping 1.2% y/y in the previous month. However, the

decline in consumer prices in April was solely due to the abolition of several fees

(including high school fees) as part of the governments latest stimulus package. The

termination of some fees is estimated to have shaved 0.5% off consumer prices in April.

Hence, the drop in consumer prices in April should really be regarded as a stimulus to the

Japanese economy and not intensifying deflation.

Private consumption still appears

solid in the US

Source: Reuters Ecowin and Danske

Durable goods orders suggest capex is

improving


Recovery in Japans exports continues


80 85 90 95 00 05 10

20

30

40

50

60

70

80

90

100110

120

130

-5

-3

-1

1

3

5

7 % y/y IndexConference Board Expectations3 mth's avergae >>


6/21


Weekly Focus

Scandi Update

Denmark Concrete austerity plan

The government reached a deal with the Danish Peoples Party during the week on a so-

called recovery plan. We view it as positive that a plan for consolidating public financesis now in place and that it is very specific. Denmark joins a stream of European countries

now spelling out exactly how they plan to bring public finances back into balance.

We believe it is important for Denmark to meet the EUs convergence criteria. Denmark

has chosen a model for its exchange rate that has made it particularly vulnerable to

financial markets confidence in its economy, so it is crucial to be squeaky clean.

The main income-boosting element of the plan is that income tax thresholds will not rise

in line with prices and wages in 2011-13. In other words, an extra year has been added to

the freeze proposed in the governments original plan. In real terms, this means that

people will pay slightly more income tax and so contribute DKK6.6bn in 2013 towards

plugging the gap in public finances. The increase in the threshold for top-rate tax is alsoto be put back by a further year.

In contrast to this, the halving of the period for which unemployment benefit is payable

from four to two years will play less of a role in the coming three-year period. This move

will save around DKK5bn in the longer term, but less in the short term because those who

are already unemployed will not be covered by the new rules. A reduction in the duration

of unemployment benefit makes good sense economically and has previously been

recommended by the wise men of the Economic Council and by the Labour Market

Commission.

On the other hand, local government spending has been spared and indexation of

transfer payments will be permitted after all. That said, local authorities cannot look

forward to an all-you-can-eat buffet. For one thing, there needs to be zero growth in

expenditure. For another, the governments tools for curbing local government spending

will be strengthened. It may nevertheless prove difficult to keep local government

spending down, and so it is still uncertain whether this part of the governments plan can

be put into practice.

The specific elements of the plan will always be open to debate, but in purely economic

terms at least there are some very sound sources of income, which means that the plan

will not be welcomed by everyone. The fact is, though, Denmark cannot afford not to take

action. The government deficit has reached a size where there is a need for change and

it is crucial for the consolidation process to be concrete and fast-acting.

Sweden

First indications regarding Q2 GDP growthDuring the past week we have received the first few data on economic developments in

Q2 via, inter alia, April retail sales and trade balance (including export and import prices)

numbers. And even though there might be said to have been some disappointment in

relation to market expectations, the numbers are still consistent with decent quarterly

growth rates and thus with a continuous hawkish tone from the Riksbank. In short, the

numbers out for the Swedish economy thus far do not imply a postponed first hike or

even a flatter Riksbank repo rate path.

Danish government deficit

Source: Statistics Denmark, Danske Research

The Riksbanks repo rate forecast

Source: Riksbank

00 02 04 06 08 10

-7

-5

-3

-1

2

4

6

-7

-5

-3

-1

2

4

6General govt. budget bal. % GDP

08 09 10 11 12

0.0

1.0

2.0

3.0

4.0

5.0

0.0

1.0

2.0

3.0

4.0

5.0% %


7/21


Weekly Focus

Norway Automatic stabilisers

At the beginning of the current public debt crisis, it was suggested in some quarters that

Norwegian industry could be facing a three-headed troll. First, lower growth in Europe

would have a direct effect through lower market growth for Norwegian exporters.

Second, the financial turmoil would result in higher interest rates and tighter creditstandards at banks. Third, NOK could appreciate considerably against EUR due to the

currency unions public debt problems. Once again, though, the market has shown us that

fears of this kind of total meltdown were unwarranted. When the outlook becomes

sufficiently bleak, investors completely lose their appetite for risk, leading to substantial

net sales of NOK. The latest foreign exchange statistics from Norges Bank show that

foreign banks sold NOK19bn during the previous week, the highest level since October

2008, causing NOK to depreciate substantially, including against EUR. The automatic

stabilisers are in good working order.

Weekly (net) purchases of NOK

Source: Norges Bank

07 08 09 10

-40000

-30000

-20000

-10000

0

10000

20000

30000

-40000

-30000

-20000

-10000

0

10000

20000

30000mln. mln.

>


8/21


Weekly Focus

Focus US: Euro crisis could speed up manufacturingslowdown

V-shaped manufacturing recovery to peak soon

Over the past three quarters, the US manufacturing sector has experienced a classic

V-shaped recovery. By April this year manufacturing production was up almost 8% since

the trough in June 2009 and is currently running at an 8-10% annual pace.

The manufacturing ISM index reached a cycle high of 60.4 in April. Fundamentals now

suggest that leading manufacturing indicators are very close to a peak, and that the pace

of manufacturing growth is bound to slow in H2 10.

This should not come as a great surprise. As with earlier manufacturing recoveries, the

inventory dynamics initially provided a forceful boost, as the cutback in production was

excessive compared with the decline in demand. However, as the recovery matures and

output catches up with demand, production growth should eventually settle down to moreaverage levels.

As the chart to the right indicates, we are close to this point in the cycle. Production has

been expanding faster than demand over the past quarters, and the gap between the two

has narrowed. This implies that inventories are about to stabilise and that the restocking

will soon begin.

Usually this marks an important point in the cycle because the ISM (i.e. the growth rate in

manufacturing production) is driven by the relationship between inventories and demand,

as illustrated by the chart above. When inventory growth picks up relative to demand

growth, the ISM moves lower and manufacturing growth slows. This is likely to take

place within the next few months.

Fundamentals suggest moderate slowdown from strong levels

The big issue is how hard the landing will be. Generally, fundamentals are suggesting that

the descent in the ISM will be relatively moderate.

First, there are relatively limited signs of overshooting at the current stage of the

manufacturing cycle. Although production has increased significantly, it has not yet fully

closed the gap on demand. In fact, real inventories of finished manufacturing goods are

still declining albeit at a slower pace and manufacturing re-stocking is probably still a

few months away. At the same time, real demand for manufacturing goods is running at a

10% AR, which is much faster than in the 2002 recovery.

Second, demand growth is broadly based. Unlike the previous recovery which wassolely driven by domestic consumer demand consumption, capex and exports are all

contributing positively this time around. From this perspective, the manufacturing

recovery looks relatively solid.

Third, monetary conditions remain very supportive with a zero fed funds rate and plenty

of excess liquidity in the system.

Hence, barring any shocks to the system, we should be in for a relatively orderly

slowdown in the ISM, as suggested by the ISM model which forecast a decent to 56-57

by October.

Key points

The manufacturing cycle isapproaching an inflection point

with production catching up on

demand. We look for the ISM to

begin to move lower within a

few months.

Fundamentals provide limitedsigns of overshooting and

generally point to a moderate

decline in the ISM in H2 10.

Contagion from the Euro debt

crisis is the main risk.

The direct impact via slowingexports to Europe is minimal,

but the deterioration in credit

and equity markets poses a

more serious risk to the

manufacturing cycle and the

US recovery.

Senior Analyst

Peter Possing Andersen

+45 45 13 70 19

[email protected]

Production catching up with demand


Senior Analyst

Signe Roed-Frederiksen

+45 45 12 82 29

[email protected]

02 03 04 05 06 07 08 09

82.5

85.0

87.590.0

92.5

95.0

97.5

100.0

102.5

82.5

85.0

87.590.0

92.5

95.0

97.5

100.0

102.5Index 2007=100 Index 2007=100

Manufacturing production

Manufacturing & trade sales


9/21


Weekly Focus

Contagion from the Euro crisis could fast-forward the setback

However, this is exactly the big issue currently. How severe will the contagion from the

Euro debt crisis be? As always, the answer will depend on the duration and the magnitude

of the shock, which is impossible to predict. However, we can try to assess the damage

already done.

Basically, there are two obvious channels of contagion: (1) a direct channel in terms of

the trade flow and exchange rate, and (2) an indirect channel via interlinked global

financial markets.

The direct impact through trade flow is likely to be limited.

First, exports to Euroland account for only 10% of total US exports and total exportsare only 11% of GDP.

Second, the contribution to export growth from Euroland has been zero over the pastyear. Hence, the entire improvement in the export sector has taken place in areas that

are likely to be only second-order affected by the crisis.

Third, the broad real effective dollar exchange rate has strengthened little despite thesharp decline in EUR/USD. Furthermore, there is usually a relatively long lag fromchanges in the exchange rate to the impact on trade flows (6-12 months).

The bigger issue is the indirect contagion through the deterioration of global financial

markets. As we have emphasised previously (seeResearch US: Manufacturing recovery

ahead, 22 January 2009) financial conditions and in particular credit conditions are

very important for the manufacturing cycle, as they tend to amplify the inventory

dynamics.

Since late April, global financial conditions have indeed been deteriorating (seeMonitor

Euro debt crisis watch). The S&P500 is down by 10% from its peak, there are severe

signs of strains in the USD money market, and long-term credit spreads are widening.

The good, the bad and the ugly scenario

In an effort to quantify the impact from the European debt crisis on the manufacturing

cycle we have created three scenarios, which we apply to our ISM model in combination

with the fundamental outlook.

1. No shock all financial variables on end-April levels.2. Current shock all financial variables on 25 May levels.3. Global crisis this shock is calibrated to resemble a further worsening c.f. the table

below.

Assumption on key financial variables

Source: Danske Markets

2010 2011 2010 2011 2010 2011

S&P500 1265 1391 1069 1176 891 980

10 year govenrment bond 3.7 3.7 3.1 3.1 2.5 2.5

Real Effective Exchangerate 87 87 90 90 95 95

Credit Spread* 241 241 310 310 400 400

Libor Spread 15 15 26 26 100 100

NYMEX WTI 85 85 70 70

Year end

Current ShockNo Shock

Year end Year end

Global Crisis

Our ISM model suggests the

slowdown should be moderate


Euro area is of marginal importance

for exports


Credit spread widening


90 95 00 05 10

30

35

40

45

50

5560

65

30

35

40

45

50

5560

65 Index Index

ISM

Model +6months (1987-present)

08 09 10

-25

-20

-15

-10

-5

0

5

10

1520

-25

-20

-15

-10

-5

0

5

10

1520 %-point %-point

Annual contribution to USexports from Euroarea

Annual contribution to USexports from non-euro countries

Jan

08

May Sep Jan

09

May Sep Jan

10

May

150

350

550

750

950

1150

1350

200

250

300

350

400

450

500

550

600

650 bp bpCDX 10yr X-over >>


10/21


Weekly Focus

The above financial shocks have a direct impact on the manufacturing sector but also an

indirect impact via changes in underlying fundamentals such as private consumption,

inventory accumulation, capex , etc. We take both of these channels into account.

The no shock scenario can be used as a baseline and as an assessment of the underlying

dynamics of the manufacturing cycle. The decline in the ISM will be very gradual at 0.6points per month on average until Q1 11, when the ISM should stabilise around 53. This

is a relatively shallow dip as the this corresponds to GDP growth of around 3.5% which is

well above trend growth.

The current shock scenario is an estimate of the damage currently done to the

manufacturing cycle if conditions remain in the current state. On top of the direct impact

on production caused by a deterioration in credit conditions and equity markets, the

current shock will also dampen capex, private consumption spending and inventory

accumulation. Demand growth will thus peak at a lower level and the decline in demand

growth will be fast-forwarded. The net impact will be a faster and deeper decline in the

ISM with the ISM bottoming at 50 in early 2011 before converging towards the no

shock path.

This underlines that with the current better shape of fundamentals, it would take a large

shock to bring the economy into recession. That said, with the ISM dropping nine points

over 12 months, markets would probably start pricing in some probability of a double-dip

in the US economy. The market impact could thus be significant but we have probably

seen much of the reaction already on the back of the recent turmoil.

The new global crisis shockcan be used as a benchmark for the impact of the crisis if

financial conditions continue to worsen. In that case, the direct and indirect impact on the

US manufacturing sector would be severe. Our model estimates that the ISM would

decline at a fast pace over the coming six months and drop to 47 by spring next year.

Although our model estimates that the ISM bottoms above recession level, dynamics tend

to be nonlinear in extreme events. The model is thus probably underestimating the true

depth of the downturn and we see a large probability of the US economy being pushed

into recession in such a scenario as a negative feedback loop between financial markets

and the real economy takes hold.

Estimated path of the ISM in the three

scenarios


Demand dynamics in each scenario


07 08 09 10 11 12

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65Index Index

ISM No shock

Global crisis

Currentshock

Jun Oct Feb Jun Oct Feb Jun Oct

09 10 11

0

1

2

3

4

5

6

7

0

1

2

3

4

5

6

7%- change, 6 month %- change, 6 month

Nominal demand growth

Global crisis

Current shock

No shock


11/21


Weekly Focus

Equities: Back to fundamentals

Fear of ghosts from the past

The equity market has recently been gripped by deep fears of a repeat of the events ofautumn 2008, when the collapse of Lehman Brothers sent shock waves through the global

economy and tipped it into a spiralling recession. This time it is the sovereign debt crisis

plaguing the eurozone nations that is the basis of the fear, which via banking stocks and a

massive weakening of the euro expanded a regional equity crisis into a crisis on a global

scale. Fears of a sustained economic downturn in Europe have been further stoked by the

cutbacks that various EU governments have planned for 2011-12. Europe and the US are

pushing through new financial regulations that spark concerns of overkill in the financial

sector while uncoordinated actions such as Germanys unilateral ban on naked short-

selling merely increase the uncertainty surrounding the hard-pressed financial sector.

But 2010 is not 2008In our opinion, however, the current situation remains manageable and is therefore very

different from the Lehman Brothers crisis. The eurozones centre of gravity France,

Italy and Germany is seeing stable to falling interest rates, which means that the bulk of

companies and private individuals in the eurozone have experienced a slight improvement

in their long-term financing options. Uncertainty with respect to a possible sovereign

default in Greece is the factor that may prolong the markets downturn. However, the

timing is largely impossible to predict and in fact the eurozones stability package that

is currently allowing Greece to fund itself at 5% and not 19% (that Greece government

bond yields reached three weeks ago) has radically reduced the chances of a Greek

collapse.

Back to fundamentals

The downturn of the past few weeks has seen Nordic, European and US equities tumble

10-11% from their peaks in April. However, it would be much too premature to discard

the long-term market healing that started in Q1 09. This is the engine designated to keep

driving global equity markets forward following the 2008-09 recession. At present, the

equity market is close to completely pricing out this recovery, as demonstrated by the

market now discounting zero growth in corporate earnings over the next five years. Over

an economic cycle, close to 10% is discounted on average, so when the market reckons

on close to zero annual earnings growth over a five-year period it is being overly

negative. What should support the fundamental improvement in corporate earnings in the

coming quarters are: A) Falling financing rates in the major economies that will continue

to stabilise the benchmark global housing markets; B) Further robust economic expansion

in Emerging Markets, which as a group are free of the deep indebtedness of governments,

households and financial institutions seen in the OECD countries; C) The non-financial

OECD corporate sector which, given its lack of excessive debt and marked improvement

in productivity in recent years, has the resources to invest in jobs, capex and M&A; and

D) The weakened euro, which means that European companies remain competitive

despite a weak regional economy.

Chief Analyst

Morten Kongshaug

+45 45 12 80 57

[email protected]


12/21


Weekly Focus

Fixed Income: Rates - Relief time

Fear is the short-term risk

Since the German ban hit the news last week, a vicious circle of increasing risk aversion

has been taking place stocks plunge, credit spreads widen, swap spreads increase,

German yields drop and the curve flattens. Further, even though markets are moving in

the other direction today, one swallow does not make a spring.

However, we believe current market movements are exaggerated. Even assuming an

investor is quite bearish on Euroland growth (despite the current level of leading

indicators), the US and Asian economies are in reasonably good shape with the direct

threat to the global economy from low or no growth in Euroland limited. When was the

last time the Euroland consumer was the global growth engine? Despite the deteriorated

outlook in Euroland, the markets current fears are excessive.

The risk that increasing risk aversion will continue, escalating into a vicious spiral, is

significant and will persist in the coming days and weeks. Another risk lies in thefinancial system where Euroland banking troubles could develop into a global disaster

killing the global recovery although we regard this as fairly unlikely.

Banks globally are generally better capitalised and liquidity buffers are considerably

larger than they were before the Lehman Brothers collapse. Furthermore, any future

losses will not be hidden in clever derivative constructions such as following the sub-

prime collapse.

Higher yields in coming weeks as relief rally continues

We expect some relief on bond markets in the coming weeks as the crisis takes a step

back. Governments and central banks have worked hard to counter the crisis. We expect

implementation of the EUR720bn package to help ease fears in the coming months. Fiscal

belt-tightening in Italy, Spain and Portugal should also go some way to help secure the

credibility of fiscal programmes.

This should not be over-interpreted as a happy days are here again view. Still, even

given massive headwinds facing Euroland and especially PIIGS, recent market

movements appear overdone.

ECB a lone buyer

Huge concerns remain concerning the long-term sustainability of public finances in

PIIGS countries. However, Italy has joined Spain and Portugal in announcing further

austere fiscal measures, tightening public finances by EUR24bn in order to reduce thedeficit from 5% of GDP in 2010 to 2.7% in 2012. While such tightening has been called

for by markets and pundits alike for some time, they are now also stoking fears

concerning the growth outlook and prospects for banks in Euroland, mainly in PIIGS.

The ECB has succeeded in reducing yields through its buying, though the central bank

remains the sole buyer. Real money and other deep pocket accounts are still seizing the

opportunity to dump PIIGS bonds. There is no buying interest despite the fact that the

ECB is acting as a backstop, which is a little surprising. So far ECB buying has

concentrated on the 0-3 year segments in Greece, Portugal and Ireland.

Key events of the week ahead

Risk aversion and money markettension will set the tone on fixed

income markets in the coming

week.

G20 meeting. The FX market andthe eurozone debt crisis are the

main points of interest.

ISM and the US labour marketreport are the most important

economic data on the agenda.

The debt crisis has sent German yields

to record lows will it last?

Source: Ecowin

2-year yield in Greece and Germany

Source: Ecowin

Senior Analyst

Jesper Fischer-Nielsen

+45 45 12 85 18

[email protected]

Jan

08

May Sep Jan

09

May Sep Jan

10

May

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

10 year

% bp

2 year

0

2

4

6

8

10

12

14

16

18

20

0

2

4

6

8

10

12

14

16

18

20

Nov

2009

Dec

2009

Jan

2010

Feb

2010

Mar

2010

Apr

2010

May

2010

%%

Germany Greece


13/21


Weekly Focus

FX: Extreme EUR decline

Is the latest EUR/USD slide different from past extrememovements?

The recent slump in EUR/USD may appear erratic but the pair has on previous occasions

also experienced quite sharp movements. Defining an extreme movement as when the

annualised one-month change in the pair exceeds 100%, we find that this has only

occurred 14 times since the euro was introduced in 1999.

Judging from past extreme movements, we find that the current slide in EUR/USD

appears to be only a little different from other extreme movements. The decline

follows roughly the same pattern, even though the decline in the first half of May appears

a little more dramatic than average. EUR/USD has, however, continued lower since the

latest extreme movement was detected (12 May), but history would suggest that

there should be some kind of consolidation over the coming days or weeks.

Looking at expected volatility instead we find that the most recent rise conflicts with

that which is usually observed around extreme EUR/USD spot movements. This

implies either that: (1) markets have become overly nervous and that volatility is

currently very expensive; or (2) volatility was too cheap to begin with and now has

adjusted to a fairer level. W think the first option is probably the most likely one-month

historical volatility now exceeds its 10-year average by two standard deviations, which

has only happened twice before. The latter option is less likely as both actual and implied

one-month volatilities were around fair value levels (of roughly 10%).

From a fundamental perspective, we still believe it is likely that the euro will fall

further against the dollar though, as the solvency problems within the eurozone remain,

massive aid packages have been introduced without being able to prop up the euro, euro

rates are likely to stay low for a prolonged period and investors remain sceptical about theentire euro situation.

Strong DKK despite rate reduction but for how long?

On Wednesday, the Danish Central Bank decided to lower both the deposit rate and

the current account for the second time in only two weeks to stem the strengthening

of the krone and to curb further currency inflow. It seems as if the bank has

succeeded. EUR/DKK forwards are now lower than spot up to one year, implying that it

is not a sweet deal to be short EUR/DKK any longer unless the central bank allows the

spot rate to fall further below the central parity of 7.44038. The chance of additional

currency inflow and rate cuts has therefore diminished.

The Australian dollar shows strong potential

The past months sell-off in risky assets has brought about a significant correction in the

Australian dollar. The AUD sell-off appears overdone, however, when benchmarked

against the relatively cyclical position of the Australian economy and given our

expectation of further rate hikes in H2 10. With the money market currently pricing no

hikes on the 12-month horizon, the AUD has the potential to recover strongly if the

market begins pricing in rate hikes again which is also why we currently view a long

AUD/USD spot position as the most attractive risk normalisation trade.

Another tough week for the euro


EUR/USD before and after extremes

(1M annualised change > 100%)

Source: Danske Markets, Reuters EcoWin

1M implied EUR/USD volatility before

and after extremes

Source: Danske Markets, Reuters EcoWin

Senior Analyst

John Hydeskov

+45 45 12 84 97

[email protected]

0% 2% 4% 6%

JPY

CHF

NOK

SEK

USD

GBP

CAD

NZD

AUD


14/21


Weekly Focus

Commodities: defying fundamentals

It would seem natural to ask what has happened to fundamentals after a month during

which commodities have largely seen intraday movements guided by swings in global

risk appetite. The causes are not very different compared with previous months:continued fears over southern European debt problems, monetary policy tightening in

China and concerns about the effects of financial regulation. However, their influence on

markets for risky assets has clearly been bigger in recent weeks. Investor sentiment has

continued to deteriorate despite the attempts of EU policymakers to stem the euro

confidence crisis. While commodities most sensitive to the business cycle such as

metals and oil have suffered distinct losses, gold has surged to new record highs on

safe-haven demand.

Still, our economists anticipate that the rescue package, which EU policymakers

eventually agreed upon in mid-May will ultimately do its job in stabilising borrowing

conditions for debt-ridden countries, see Q&A on the EU debt crisis. However, they also

stress that the road to recovery in the eurozone will most likely be a rather bumpy one andthat event and political risk remain high. Notably, we should not forget that commodities

is one area that politicians seem keen to regulate in order to limit any price impact of the

speculative segment. Also, the risk of another set-back in global risk appetite is certainly

still pertinent and could continue to weigh in the short term.

In our view, as long as Europe avoids a more broad-based debt crisis, and an outright

banking crisis, global growth should not be endangered by recent events as the recovery

momentum currently appears remarkably strong. Indeed, we think that commodity

markets have to a large degree been defying fundamentals recently, essentially pricing in

a double-dip recession in Europe which is not our base scenario. Although the fact that

fiscal tightening will arrive sooner than previously anticipated in the euro area should

weigh on growth, commodity-intensive regions such as Asia and the US may in factsee even stronger activity levels than previously forecast. Crucially, we are now

witnessing the first decisive indications that commodities are about to see an OECD

demand recovery. For metals, this has been under way for some time now but new is an

expansion in not least US demand for oil.

Although the longer-term global growth outlook seems broadly intact, we cannot rule out

the possibility of further setbacks in the near term. One of the things to look out for is

appreciation of the Chinese yuan. We reckon that commodity markets may be spooked by

this at first sight but that the complex will eventually benefit from more balanced growth.

Also, our FX team now looks for EUR/USD to move lower on a six-month horizon,

arguing that political risks and relative rates could weigh on the single currency for

months to come. Further out, dollar weakness could set in however. As a re-coupling ofcommodities with the dollar may be occurring at present, this could affect prices.

On the whole, we expect a re-coupling with supply-demand factors in the months to come,

benefiting not least cyclical products such as base metals and oil, in particular distillates.

Importantly, we view the recent correction as just that: a setback adjusting prices levels,

leaving the course of commodities essentially unchanged. Hence, forecast revisions this

time mainly relate to a revised EUR/USD profile and some level corrections. Notably, we

now look for Brent to average USD80 (prev. 86) this year and USD90 (prev. 94) in 2011.

SeeCommodities Monthly: Correction not a change in direction, published May 27.

Monthly changes

Source: Bloomberg, Danske Markets.

PMIs strong but signs of a soft patch

06 07 08 09 10

30

35

40

45

50

55

60

65

30

35

40

45

50

55

60

65 index indexEuro zone PMI

China PMI

US ISM

Global PMI

Source: EcoWin, Danske Markets.

More EUR weakness ahead but worst

is probably over

90 pct. region 50 pct. region Spot (incl. DB forecast) Forwar d

Jun

09

Aug Oct Dec

10

Feb Apr Jun Aug Oct Dec

11

Feb Apr Jun

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

EUR/USD

Source: Bloomberg EcoWin, Danske Markets.

Note: historical EUR/USD spot rate, DanskeMarkets forecasts, forward rates and uncertainty

priced on the option market.

Senior Analyst

Christin Tuxen

+45 4513 [email protected]

-20 -10 0 10 20

ICE Brent

API2 coal

Aluminium

Copper

Gold

LIFFE Wheat

% m/m
http://danskeresearch.danskebank.com/link/ResearchEuroland20052010/$file/ResearchEuroland_20052010.pdfhttp://danskeresearch.danskebank.com/link/ResearchEuroland20052010/$file/ResearchEuroland_20052010.pdfhttp://danskeresearch.danskebank.com/abo/CommoditiesMonthly270510/$file/CommoditiesMonthly_270510.pdfhttp://danskeresearch.danskebank.com/abo/CommoditiesMonthly270510/$file/CommoditiesMonthly_270510.pdfhttp://danskeresearch.danskebank.com/abo/CommoditiesMonthly270510/$file/CommoditiesMonthly_270510.pdfhttp://danskeresearch.danskebank.com/abo/CommoditiesMonthly270510/$file/CommoditiesMonthly_270510.pdfhttp://danskeresearch.danskebank.com/link/ResearchEuroland20052010/$file/ResearchEuroland_20052010.pdf


15/21


Weekly Focus

Financial views

Equities

Our overall view is that the stock markets will return to the bullish trend due tocontinued global economic expansion and due to overly nervous investors who have

now priced in close to zero growth in corporate earnings over the coming five years.

Hence we see the recent market correction as a buying opportunity. However,

investors should still recognise that, in the short term, the high risk profile of the

market may continue due to very uncertain economic conditions for the Financials

sector. We reiterate our European/Nordic recommendations to underweight Financials

and overweight Industrials and Health Care. The latter two are main beneficiaries of a

weaker EUR and a stronger USD.

Fixed Income

Risk aversion is the only driver of yields at the moment. If the rebound in risky assetscontinues, both German and US yields will follow suit by moving higher. However, if

the crisis escalates once again, yields will once again drop faster than a lead balloon.

We expect some relief in bond markets in the coming weeks as the crisis takes a stepback. Governments and central banks have done much to counter the crisis and we

expect the implementation of the EUR720bn package to help ease fears. Fiscal belt-

tightening in Italy, Spain and Portugal also goes some way to help the credibility of

fiscal programmes.

Euroland intra-spreads: We remain overweight in Germany, Italy, the Netherlands,Austria and Ireland. We underweight France, Spain, Greece and Portugal. We

recommend 5Y Italy versus France and 30Y Italy versus Germany.

Scandinavian government bonds are performing well and we remain overweight 2YDGBs and 5Y SGBs vs. France and long 10Y DGBs vs. France. We are long NOK

T-bills on an outright basis with open currency exposure.

Credit

The credit market remains somewhat sidelined with limited flow and no activity in theprimary market. Banks remain under some pressure as sovereign debt fears refuse to

go away despite the fiscal bailout of Greece and the other southern European countries.

From a fundamental perspective we are positive on investment grade credit. Companycredit metrics are currently sound and we thus consider the default risk in the short to

medium term as very low. The ongoing fiscal concerns continue to affect banks and

we are cautious, as the effects of fiscal tightening will be felt on the loan book quality.

FX Outlook

EUR/USD trades with heightened volatility lower on Euroland debt woes andhigher on position squaring and hopes/fears of co-ordinated central bank intervention

to prop up the euro. We think the euro will remain under pressure in the coming

months. EUR/CHF has spiked on short squeezes, but we think the pair will return

lower soon. EUR/GBP is likely to trend lower but risks of credit downgrade and crisis

budget loom. AUD looks oversold and is likely to rebound.

Equities and US 10Y yield


EUR/USD and USD/JPY


Credit spreads


Commodity prices


Nov

09

Jan

10

Feb Mar Apr May

3.1

3.2

3.3

3.4

3.5

3.6

3.7

3.8

3.9

4.0

875

925

975

1025

1075

1125

1175

1225

1275 Index %US 10-year gov bond >>

07 08 09 10

1.5

2.5

3.5

4.5

5.5

6.5

0.0

5.0

10.0

15.0

20.0

25.0 % points % points

>

May

09

Sep Nov Jan

10

Mar May

2000

2250

2500

2750

3000

3250

3500

3750

4000

55

60

65

70

75

80

85

90USD/barrel Index

LME metal prices >>


16/21


Weekly Focus

After having fallen substantially against the euro as financial turmoil escalated,Scandinavian currencies, SEK and NOK, have rebounded nicely. We still like the

Scandies, but recommend caution as markets are very nervous at the moment. Selling

EUR/SEK and EUR/NOK on rallies appears to be the best strategy at the moment.

Commodities While we cannot rule out the possibility of further setbacks to commodity prices in

the near term, we view the recent price action as a correction and not a change of

course. With the prospects for global growth broadly intact, a re-coupling with

supply-demand factors is likely to benefit cyclical products in the months to come.


17/21


Weekly Focus

Macroeconomic forecast

Source: OECD and Danske Bank. 1) % y/y. 2) % contribution to GDP growth. 3) % of labour force. 4) % of GDP.

Macro forecast, Scandinavia

Denmark 2009 -4.9 -4.6 2.5 -12.0 -1.7 -10.3 -13.2 1.3 3.5 -2.8 38.8 4.02010 1.8 2.7 1.2 -2.3 0.8 2.7 2.6 2.0 4.6 -5.6 42.0 3.22011 1.9 2.5 0.5 1.3 0.2 3.5 3.5 1.8 5.0 -4.5 46.5 2.5

Sweden 2009 -4.9 -0.8 2.1 -15.3 -1.5 -12.5 -13.4 -0.3 8.4 -1.3 39.5 7.62010 1.8 2.2 4.6 0.4 0.5 3.5 6.8 1.4 10.3 -2.8 43.1 5.92011 2.0 1.8 1.5 2.2 0.0 4.4 4.2 2.4 10.3 1.0 44.0 6.8

Norway 2009 -1.4 0.1 5.0 -7.9 -1.8 -4.2 -9.6 2.2 3.1 8.0 26.0 19.02010 3.1 5.0 3.1 -0.5 1.0 2.3 5.6 2.5 3.3 12.0 26.0 24.92011 1.7 4.4 2.5 0.0 0.0 1.4 7.3 1.9 3.4 10.0 - 17.0

Macro forecast, Euroland

Euroland 2009 -3.9 -0.6 2.2 -10.9 -0.7 -13.0 -11.7 0.3 9.6 -7.0 79.8 -0.72010 1.8 0.3 1.7 -0.1 0.5 6.8 4.9 1.0 9.8 -7.2 83.7 -0.42011 2.2 1.5 1.6 4.7 0.1 5.3 5.4 1.5 9.5 -6.1 87.4 -0.6

Germany 2009 -5.0 0.5 2.5 -12.3 0.4 -14.5 -8.5 0.2 7.5 -3.5 73.0 4.02010 2.8 0.7 1.7 5.7 0.1 8.9 7.5 1.0 8.1 -5.0 76.5 3.72011 2.3 2.1 1.4 5.5 0.0 6.4 7.4 1.2 7.6 -3.0 79.0 3.2

France 2009 -2.2 0.8 1.6 -7.0 -1.4 -10.9 -9.6 0.1 9.4 -8.3 78.0 -2.32010 0.4 1.5 1.9 0.9 -0.6 5.7 6.5 1.2 10.0 -8.5 82.0 -2.52011 1.4 1.2 1.0 3.5 0.0 6.2 6.2 1.5 9.7 -7.0 87.0 -2.2

Italy 2009 -4.8 -1.6 1.6 -13.1 -0.3 -19.2 -15.2 0.7 7.8 -5.3 114.6 -2.22010 1.5 0.9 1.3 0.1 0.2 8.0 6.0 1.9 8.6 -5.0 116.0 -2.02011 2.2 1.0 1.0 5.2 0.1 8.4 7.2 2.0 8.3 -4.5 117.5 -1.7

Spain 2009 -3.7 -5.1 5.0 -15.5 0.0 -12.0 -18.2 -0.3 18.1 -11.2 54.3 -5.22010 -0.9 -0.5 1.8 -5.6 0.0 7.2 4.6 0.9 20.1 -10.0 66.0 -4.1

2011 0.9 0.7 0.2 0.2 0.0 6.1 4.1 1.9 19.8 -8.5 73.0 -3.2Finland 2009 -7.8 -2.1 0.7 -13.4 0.0 -24.3 -22.3 0.0 8.2 -2.2 44.0 1.4

2010 1.5 0.2 0.0 -4.0 0.0 4.0 2.0 1.4 10.0 -3.8 49.0 1.42011 2.5 1.5 0.5 3.5 0.0 9.0 5.5 2.0 9.2 -3.3 52.0 2.2

Macro forecast, Global

USA 2009 -2.4 -0.6 1.8 -18.3 -0.7 -9.6 -13.9 -0.3 9.3 -9.9 83.8 -3.02010 3.3 2.5 1.5 1.7 1.0 11.8 9.5 1.9 9.5 -10.6 93.2 -3.42011 3.0 2.4 8.5 8.6 -0.1 5.0 21.3 1.8 8.7 -8.3 98.3 -3.2

Japan 2009 -5.2 -1.1 1.6 -19.3 -0.3 -24.2 -17.1 -1.3 4.7 -8.0 220.0 1.92010 2.7 1.9 1.3 1.3 -0.1 18.7 1.1 -0.7 4.3 5.2 220.4 2.02011 2.1 1.6 1.0 5.3 0.0 5.1 4.7 0.3 - - - 2.5

China 2009 8.7 - - - - - - -0.9 4.3 -3.3 23.6 4.82010 9.7 - - - - - - 3.4 4.0 -2.2 20.5 5.22011 9.5 - - - - - - 3.7 4.0 -2.2 20.5 5.7

UK 2009 -4.9 -3.0 2.8 -16.2 0.0 -10.6 -13.3 2.2 7.5 -8.6 68.6 -2.62010 1.3 0.2 3.0 -5.2 0.0 4.4 0.9 2.5 8.1 -11.5 80.3 -2.42011 2.1 2.0 2.2 2.6 0.0 6.9 5.0 1.7 7.9 -8.7 88.2 -2.0

2009 -1.4 1.3 2.1 -1.5 1.3 -10.9 -6.4 -0.5 3.7 -0.7 39.3 8.7

2010 1.6 1.2 1.4 1.5 -1.0 5.2 2.9 0.5 4.8 -2.4 41.9 10.22011 1.7 1.4 0.7 1.0 0.1 4.1 3.7 0.9 4.6 -2.9 41.0 10.9

Year GDP

1

Private

cons.

1

Public

cons.

1

Fixed

inv.

1

Stock

build.

2

Ex-

ports

1

Im -

ports

1

Infla-

tion

1

Unem-

ploym.

3

Public

budget

4

Current

acc.

4

Public

debt

4

Current

acc.4

Public

cons.1

Fixed

inv.1

Stock

build.2

Ex-

ports1

Current

acc.4

Im -

ports1

Public

debt4

Public

budget4

Ex-

ports1

Infla-

tion1

Unem-

ploym.3

Switzer-

land

Year GDP1

Private

cons.1

Im -

ports1

Public

debt4

Public

budget4

Year GDP1

Private

cons.1

Public

cons.1

Fixed

inv.1

Stock

build.2

Infla-

tion1

Unem-

ploym.3


18/21


Weekly Focus

Financial forecast


Bond and money markets

Currency

vs USD

Currency

vs DKK

USD 28-May - 599.6

+3m - 620+6m - 648

+12m - 587

EUR 28-May 124.1 744.1

+3m 120 744.0

+6m 115 745.0

+12m 127 746.0

JPY 28-May 91.2 6.57

+3m 95 6.53

+6m 99 6.54

+12m 102 5.74

GBP 28-May 145.8 874.1

+3m 143 886

+6m 139 898

+12m 155 910

CHF 28-May 114.9 521.7

+3m 115 539

+6m 119 544

+12m 111 529DKK 28-May 599.6 -

+3m 620 -

+6m 648 -

+12m 587 -

SEK 28-May 778.6 77.0

+3m 792 78.3

+6m 817 79.3

+12m 724 81.1

NOK 28-May 640.1 93.7

+3m 638 97.3

+6m 661 98.0

+12m 598 98.2

PLN 28-May 327.7 183.0

+3m 333 186

+6m 348 186

+12m 311 189

Equity markets

Regional

Price trend

12 mth.

Regional recommen-

dations

USA 0% to +10% Underweight

Japan 0% to +10% Neutral

Emerging markets (USD) 0% to +10% Overweight

Pan-Europe (EUR) 0% to +10% Neutral

NordicsSweden 0% to +10% Neutral

Norway 0% to +10% Neutral

Denmark 0% to +10% Neutral

Commodities

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011

NYMEX WTI 81 78 80 85 87 89 92 94 81 91

ICE Brent 79 79 79 84 86 88 91 93 80 90Copper 7,274 7,300 7,500 7,800 8,200 8,600 8,650 8,700 7,468 8,538

Zinc 2,307 2,150 2,200 2,400 2,500 2,500 2,550 2,550 2,264 2,525

Nickel/1000 20 24 22 23 23 23 23 23 22 23

Steel 464 525 550 575 580 585 590 600 529 589

Aluminium 2,199 2,200 2,250 2,300 2,400 2,400 2,400 2,400 2,237 2,400

Gold 1,110 1,175 1,150 1,100 1,050 1,000 1,000 1,000 1,134 1,013

Matif Mill Wheat 126 133 133 132 127 133 133 133 131 132

CBOT Wheat 518 480 470 450 475 500 500 500 480 494

CBOT Corn 389 370 375 400 410 420 430 440 384 425

CBOT Soybeans 969 960 975 1,000 1,025 1,050 1,075 1,100 976 1,063938

467

2.97

3.90

4.40

4.26

4.50

4.70

2.90

3.60

3.15

5.34

5.85

6.10

6.35

4.20

2.04

2.25

2.30

2.50

4.90

3.60

3.70

1.55

1.60

1.65

3.54

3.85

4.00

3.55

20112010

3.90

3.41

3.75

3.50

3.25

3.40

3.55

71

22

6,855

1,909

1,213

137

71

450

2,039

369

26-May

-5% to +5%

-5% to +5%

-5% to +5%

-5% to +5%

-5% to +5%

-5% to +5%

High

High

Low

Average

High

High

3.16

4.40

Currency

vs EUR2-yr swap yield

Risk

Low -5% to +5%

Price trend

3 mth.

1.26

1.32

0.49

1.50

0.55

1.67

1.25

1.25

1.65

1.30

85.1

142.6

744.1

84.0

83.0

82.0

138

137

141

966.2

794.3

406.6

760

400

400

950

940

920

765

395

124.1

-

-

-

-

113.2

744

745

746

0.50

0.65

1.00

120115

127

114

114

130

1.33

0.70

0.85

1.50

1.47

2.10

1.45

1.90

1.70

1.75

1.90

5.80

5.20

5.00

4.00

3.30

1.80

1.85

2.101.50

1.10

0.80

2.70

760

2.65

2.90

3.35

3.60

2.30

0.25

0.30

0.30

0.30

4.10

3.76

0.25

0.75

1.25

1.25

0.54

0.70

0.25

0.71

0.11

0.250.35

1.25

0.65

0.65

3.50

2.00

0.50

0.75

1.50

3.50

2.25

2.50

3.50

3.50

4.10

4.10

0.25

0.75

1.00

0.50

1.90

0.25

0.10

1.20

3.30

1.00

0.10

0.50

0.25

1.05

1.00

0.65

0.75

0.75

1.00

0.10

0.10

0.50

10-yr swap yield

0.64

1.05

1.05

1.05

3m interest rate

0.50

Average

Key int.

rate

0.13

0.130.13

1.00

3.00

0.25

1.00


19/21


Weekly Focus

Calendar


Key Data and Events in Week 22

Period Danske Bank Consensus Previous

- USD Memorial Day - Market closed

1:15 JPY Manufacturing PMI Index May 53.8 53.5

1:50 JPY Industrial production, preliminary m/m|y/y Apr 2.7%|33.4% 2.5%|27.4% 1.2%|31.8%

2:25 USD Fed's Bernanke (voter, neutral) speaks

3:10 USD Fed's Evans (non-voter, neutral) speaks

5:00 NZD Business Confidence Index May 49.5

7:00 JPY Housing starts y/y Apr 6.6% -2.4%

9:15 SEK Consumer confidence Index May 17.7 19.5

9:30 DKK GDP, preliminary q/q|y/y 1st quarter 0.4%| 0.3%| 0.2%|-3.2%

10:00 EUR M3 Money supply y/y Apr -0.5% -0.2% -0.1%

10:00 NOK Retail sales m/m|y/y Apr 0.3%| 0.3%| -0.1%|13.3%

10:00 NOK Credit indicator (C2) y/y Apr 3.9% 3.9% 3.9%

11:00 EUR Consumer confidence Net balanc May -19 -18 -18

11:00 EUR CPI Flash estimate y/y May 1.6% 1.7% 1.5%

11:00 ITL Flash CPI m/m|y/y May 0.3%|1.7% 0.9%|1.6%

11:00 EUR Businesss Climate Indicator Index May -0.10 0.25 0.23

11:00 EUR Economic Confidence Index May 101.1 100.6

11:00 EUR Services Confidence Index May 4 6 5

11:30 USD Fed's Plosser (non-voter, hawk) speaks

12:00 EUR Business confidence (industrial) Net balanc May -9 -6 -7

14:30 CAD GDP q/q ann. 1st quarter 5.8% 5.0%

14:30 CAD GDP m/m Mar 0.5% 0.3%


3:00 CNY NBS Manufacturing PMI Index May 53.0 54.5 55.7

4:25 USD Fed's Evans (non-voter, neutral) speaks

4:30 CNY HSBC Manufacturing PMI Index May 54.8 55.4

6:30 AUD RBA monetary policy meeting Jun 4.50% 4.50% 4.50%

7:45 CHF GDP q/q|y/y 1st quarter 0.7%|1.8% 0.7|0.6%

8:30 SEK Swedbank PMI survey Index May 62.0 64.0

9:00 NOK PMI Index May 51.0 52.0 51.9

9:15 ESP PMI, manufacturing Index May 51.5

9:30 CHF PMI Index May 64.4 65.9

9:30 DKK Retail sales, volume m/m|y/y Apr 0.5%| 2.9%|8.1%

9:30 SEK Riksbank Financial Stability Report

9:45 ITL PMI, manufacturing Index May 53.2 53.5 54.3

9:50 FRF PMI Manufacturing, final Index May 56.2 56.2 56.2

9:55 DEM Unemployment rate % May 7.7% 7.8% 7.8%

9:55 DEM PMI Manufacturing, final Index May 58.1 58.3 58.3

10:00 EUR PMI, manufacturing Index May 55.7 55.9 55.9

10:30 GBP PMI, Manufacturing Index May 57.7 57.9 58.0

11:00 EUR Unemployment % Apr 10.0% 10.0%

15:00 CAD BoC announces key policy interest rate 0.50% 0.50% 0.25%

16:00 USD ISM Manufacturing Index May 60.0 59.5 60.4

16:00 USD ISM prices paid Index May 77.0 73.0 78.0

16:00 USD Construction spending m/m Apr 0.0% 0.2%

19:00 USD Auction of USD42 bn 2-year notes


1:50 JPY Monetary Base y/y May 2.9%

3:30 AUD GDP 1st quarter 0.6%|2.6% 0.9%|2.7%

9:15 CHF Retail sales, Real y/y Apr 4.0%

10:30 GBP Mortgage Approvals 1000 Apr 48.9

10:30 GBP PMI, Construftion Index May 58.2

11:00 EUR Euroland PPI m/m|y/y Apr 0.7%|2.6% 0.6%|0.9%

13:00 USD MBA Mortgage Applications

16:00 USD Pending home sales m/m Apr 6.0% 5.3%

16:00 DKK Currency reserves DKK bn May 404.1

23:00 USD Total Vehicle Sales m May 11.40 11.21

Monday, May 31, 2010

Tuesday, June 1, 2010

Wednesday, June 2, 2010


20/21


Weekly Focus

Calendar - continued



1:50 JPY Capital Spending y/y 1st quarter -9.6% -17.3%

8:45 FRF Unemployment % May 10.1% 10.0%

9:50 FRF PMI services, final Index May 61.8 61.9 61.99:55 DEM PMI Services, final Index May 53.7 53.7 53.7

10:00 EUR PMI, services Index May 56.0 56.0 56.0

10:30 GBP PMI, services Index May 55.6 55.3

11:00 EUR Retail sales m/m|y/y Apr |0.2% -0.1%|0.0%

13:30 USD Fed's Lockhart (non-voter, neutral) speaks

14:15 USD ADP Unemployment 1000 May 58 32

14:30 USD Unit labour cost q/q 1st quarter -1.0% -1.6% -1.6%

14:30 USD Initial jobless claims 1000

16:00 USD Factory Orders m/m (revised) Apr 1.4% 1.3% (1.1%)

16:00 USD ISM (NAPM) non-manufacturing Index May 55.7 56.0 55.4

17:15 USD F ed' s Bernanke (voter, neutral) speaks

18:15 USD F ed' s Rosengren (voter, dove) s peaks

19:15 USD F ed' s Hoenig (voter, hawk) s peaks


- OTH G20 Finance Ministers, Central Bankers Meet

9:40 CHF SNBs Hi ldebr and speaks in Interl aken

11:00 EUR GDP, Preliminary q/q|y/y 1st quarter 0.3%| 0.2%|0.5% 0.2%|0.5%

13:00 CAD Unemployment rate May 8.0% 8.1%

13:00 CAD Net change in employment May 20000 108700

14:30 USD Nonfarm payroll 1000 May 700 500 290

14:30 USD Average hourly earnings m/m|y/y May 0.1%| 0.0%|1.6%

14:30 USD Unemployment % May 9.8% 9.8% 9.9%

14:30 USD Nonfarm payroll - private 1000 May 200 210 231

15:30 USD Fed's Lockhart (non-voter, neutral) speaks

16:00 CAD Ivey PMI May 59.5 58.7


Fri 28 - 04 DEM Retail sales m/m|y/y Apr -2.4%|2.7%

Tue 01 - 05 GBP Halifax house prices m/m|y/y May 0.3%|7.4% -0.1%|6.6%

Wed 02 - 04 GBP Nationwide House Prices m/m|y/y May 0.4%|9.7% 0.4%|9.7% 1.0%|10.5%

Friday, June 4, 2010

During the week

Thursday, June 3, 2010


21/21

Weekly Focus

DisclosureThis report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank.

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Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals

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Financial models and/or methodology used in this report

Calculations and presentations in this report are based on standard econometric tools and methodology.

Risk warning

Major risks connected with recommendations or opinions in this report, including as sensitivity analysis of

relevant assumptions, are stated throughout the text.

First date of publication

Please see the front page of this research report.

Expected updates

This report is updated on a weekly basis

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danske bank weekly focus 28 may 2010

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