Investment Research

28 May 2010

Weekly Focus
Signs of relief

Market movers ahead

 Next week two important US data reports are due to be released. The manufacturing
ISM index is expected to decline moderately, while a massive increase in non-farm Contents
payrolls of 700,000 is expected. Market movers ahead ........................................... 2
 The Bank of Canada is likely to begin hiking interest rates on Tuesday. Global update................................................................... 4
Scandi Update ................................................................ 6
 In Euroland markets will focus on event risks related to the debt crisis. Bad news can Focus US: Euro crisis could speed up
quickly spook the markets. European key indicators next week are expected to paint a manufacturing slowdown .................................. 8
picture of strong growth momentum, but declining confidence. Equities: Back to fundamentals................11
Fixed Income: Rates - Relief time ............12
 In Asia manufacturing PMIs are expected to show a slight fall. China’s official NBS
FX: Extreme EUR decline .................................13
manufacturing PMI could generate some negative headlines.
Commodities: defying fundamentals .14
 At the G20 finance minister meeting in South Korea next weekend the European debt Financial views...........................................................15
crisis will be high on the agenda. Macroeconomic forecast ..............................17
 In Scandinavia retail sales are expected to confirm that demand is picking up. Financial forecast ...................................................18
Calendar ...........................................................................19
Global update
 The past week has been a volatile cocktail of concern about fiscal sustainability in
Europe, 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 stock
markets 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 production
catching 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 steep

decline EUR/USD weakening

Editors

Allan von Mehren

+45 4512 8055
Source: Reuters Ecowin Source: Reuters Ecowin alvo@danskebank.dk

Steen Bocian
+45 45 12 85 31
steen.bocian@danskebank.dk

www.danskeresearch.com
Weekly Focus

Market movers ahead

Global
In the US, next week includes the release of the two most important data reports. On ISM and non-farm payroll key events
Tuesday the manufacturing ISM index is expected to show a moderate decline, to next week
60.0. This is based on a weakening in regional PMIs, along with increasing 650 1000 persons Index
63
ISM >>
450
uncertainty stemming from the recent turmoil in financial markets. A further 58
250 53
deterioration in credit and equity markets may pose a risk to US growth. The second 50 48
big release of the week will be the May employment report on Friday. We expect a -150 43
-350 38
massive increase in non-farm payrolls of 700,000. This jump is primarily driven by -550
<< Non-farm payrolls, 3 mth's avg.
33
hiring for the census, giving a temporary boost to employment. Census workers are -750 28
85 90 95 00 05 10
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 Source: Ecowin and Danske Markets
is a risk of a decline here as April’s home buyers might not have been able to take
advantage of the first time home buyer tax credit that expired at the end of the month.
 In Canada the Bank of Canada has abandoned its previous commitment to unchanged
interest 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 news
about the Spanish banking sector or other trouble spots could easily spook the Eurozone M3 growth remains in
negative territory
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 been
strong 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 Source: Reuters Ecowin
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 that
manufacturing 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 a
firm improving cyclical position of the economy, pressure is building for the SNB to In China PMIs suggest that growth in
gradually step away from its current emergency setting of monetary policy. industrial production will ease
60 Diffusion % 3m/3m
 In Asia focus next week will mainly be on the release of manufacturing PMIs across << NBS PMI, SA
8

6
Asia. In our view, growth in manufacturing activity probably peaked in Q1 10 and for 55
4
that reason we are likely to see a slight decline in manufacturing PMIs in most Asian 50 2
countries in the coming months. We suspect that China’s official NBS manufacturing <<HSBC PMI
0
45 Industrial production >>
PMI might generate some negative headlines, because it could drop substantially -2

(from 55.7 to 53.0 in May) – albeit largely due to seasonal distortions. We expect the 40 -4
05 06 07 08 09 10
more reliable HSBC manufacturing PMI to decline only marginally in May.
Source: Reuters Ecowin and Markit

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Weekly Focus

 In Japan we expect industrial production to have increased a solid 2.7% m/m. This Danish GDP growth set to pick up
strong gain comes on the back of even stronger gains in exports in April and so far it
365 DKK bn 365
DKK bn
appears that the recovery in industrial activity has maintained its momentum in Q2 in 360 360
355 355
Japan. Consequently Japan is one of the few Asian countries were we expect 350 350
GDP
345 345
manufacturing PMIs to have improved in May. 340 340
335 335
 Finally, focus will be on comments surrounding the G20 finance ministers’ meeting 330 330
325 325
in South Korea on 4-5 June. We expect no major news regarding a possible Chinese 320 320
revaluation. The European debt crisis will be high on the agenda and uncertainty 00 02 04 06 08 10

created by the European debt crisis has probably postponed a Chinese revaluation into
Q3. Source: Reuters Ecowin and Danske Research

Swedish surveys imply consecutive

Scandies growth
 In Denmark the coming week will see quite a few important data releases. First, we 1.5 STD Net balances 1.5

expect Q1 GDP growth to have picked up, with projected growth of 0.4% q/q in 0.5 0.5
-0.5 -0.5
Q1 10. Second, April retail sales numbers are expected to show an increase of 0.5%
-1.5 -1.5
m/m. Third, the week ahead will see the release of data on insolvencies and -2.5 -2.5

foreclosures of real estate for May 2010. -3.5 -3.5

08 09 10

 In Sweden confidence data are being published this week, with both PMIs and the PMI Industry
Services Households
National Institute for Economic Research’s Business and Consumer Confidence
surveys. In addition, on Tuesday, the Riksbank will publish its Financial Stability Source: Reuters Ecowin
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 Norwegian consumer spending has
markets. disappointed
120 120
Index 2005=100

 We expect Norwegian retail sales to have recovered in April following a marginal 115
Retail sales
115

decline in March, although reports from retail shops do not point to a spending spree. 110 110

105 105
All things considered, our cautious estimate is that retail sales grew 0.3% m/m in
100 100
April, but the calendar adjustment leaves us with upside risk to this estimate. We look
95 95

for a moderate decline in PMI to 51.0 in May. Norges Bank seems highly likely to 90 90
02 03 04 05 06 07 08 09 10
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-
Source: Reuters Ecowin
to-day purchasing need to be around NOK100m.

Market movers ahead

Global movers Event Period Danske Consensus Previous
Mon 31-May 2:25 USD Fed's Bernanke (voter, neutral) speaks
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

Source: Bloomberg and Danske Markets

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Weekly Focus

Global update
A volatile cocktail
The past week has been a volatile cocktail of continued concern about sustainability of
Stress increasing in the interbank
public finances in Europe, concern about the health of the financial sector (particularly in
market
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 China’s
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
Source: Reuters Ecowin
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 speculation
that it plans to reduce its exposure to European debt.
Public budgets: Tough times lies ahead
Euroland - struggling to gain market confidence Spain
On the data front, we got more good news out of the euro area. Industrial orders increased New SGP Change
a massive 5.2% m/m in March. Even though this number is usually highly volatile, the 2009 - -11.2% -
continued strength in manufacturing orders bodes well for the general direction of 2010 -9.3% -9.8% 0.5%
industrial production in the months ahead. Hence, industrial production will continue to 2011 -6.5% -7.5% 1.0%
be an important driver of the recovery in the euro area. We look for above-trend growth 2012 -4.4% -5.3% 0.9%
in Q2, with Germany in particular looking strong for the coming quarters. In its monthly 2013 -3.0% -3.0% 0.0%
bulletin, the German Bundesbank said that the latest financial market turbulence has not Source: Reuters Ecowin and Danske Markets
yet affected the real economy in Germany and it concludes that the German economy Note: Public budgets, % of GDP, SGP: Stability and
remains on a recovery path, and that “economic output will probably expand strongly in growth impact
the second quarter”.
"[Heading 2]"

Otherwise limited data releases and most eyes have been on the ongoing euro debt crisis.
In Spain, Cajasur – one of Spain’s regional cajas or savings banks – was taken over by the Fiscal consolidation accelerated
Bank of Spain, raising renewed fairs over the Spanish banking sector. During the week,
Portugal
Banco España asked lenders to increase provision. On Tuesday, the IMF released the
New SGP Change
annual Article IV consultation on the Spanish economy with a very clear message.
2009 - -9.3% -
Reform is needed now! Key challenges, according to the IMF, are the need for a more
2010 -7.3% -8.3% 1.0%
flexible labour market, fiscal consolidation, and banking sector consolidation. Going
2011 -4.6% -6.6% 2.0%
forward, we expect Spain to take on tough measures to rebalance the economy. This week
2012 -4.6% -4.6% 0.0%
austerity measures for 2010-11 were approved in parliament to accelerate the reduction of
2013 -2.8% -2.8% 0.0%
the fiscal deficit – measures included a 5% wage reduction for public workers. We expect
Source: Reuters Ecowin
more measures to be implemented. An increase of the retirement age is another issue that
Note: Public budgets, % of GDP, SGP: Stability and
will be discussed. These kinds of discussions have also been seen in France this week.
growth impact
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.

4| 28 May 2010
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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
Private consumption still appears
pieces of May data that have been released. For instance, Conference Board Consumer
solid in the US
Confidence rose to the highest level since April 2008, confirming the recent improving
Conference Board Expectations 130
7 % y/y Index 120
trend in consumer spending, which is tracking another 3.0-3.5% AR gain in Q2. But the 3 mth's avergae >>
5 110
jury is still out and the turmoil may show up when we start receiving June data. 100
3 90
80
1 70
April housing data got another lift from the expiration of the first time home buyer credit, 60
-1
which expired last month. While it is likely that home sales will see a setback as the boost 50
-3 << Personal consumption 40
3 mth's average 30
from the credit fades away, there are signs of genuine improvement in housing turnover. -5 20
This was indicated by the recent NAHB reading, which saw a significant improvement in 80 85 90 95 00 05 10

expectations of future sales. The recent solid new home sales is likely to support housing Source: Reuters Ecowin and Danske
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 Durable goods orders suggest capex is
capital equipment remain on a solid trend, up 21.5% AR over the past quarter. improving
3 mth AR, % q/q AR, % 18
Elsewhere, focus has been on the deterioration of the US money market, which has been 20
8
10
behind some of the hit to risk appetite and credit markets. The debate has been going on -2
0
whether the Fed should do more to prevent a further deterioration, e.g. by launching -10 -12

further liquidity facilities. However, the market functioning is still not poor enough to -20 << Manufactures shipm ents, non-def.
-22
cap. goods. ex. air (const. pric es)
make any use of the programmes. Hence, we think that the bar is relatively high for -30 Equipment & Software spending,
-32

-40 constant prices >> -42

further Fed intervention, but do not rule out a cut in the penalty rate on the swap line (see
96 98 00 02 04 06 08 10
Strategy US: Thoughts on the Fed and the money markets).
Source: Reuters Ecowin and Danske 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
Recovery in Japan’s exports continues
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 120 Jan. 2008 =100 Jan. 2008 =100 120
110 Korea 110
in a row to 5.1%, which put the strength of the Japanese labour market into question.
100 China 100
Finally the decline in consumer prices intensified in April, where CPI excluding fresh 90 90
food declined 1.5% y/y after dropping 1.2% y/y in the previous month. However, the 80 80
70 Taiwan Japan 70
decline in consumer prices in April was solely due to the abolition of several fees
60 60
(including high school fees) as part of the government’s latest stimulus package. The 50 50
07 08 09 10
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 Source: Reuters Ecowin and Danske Markets
Japanese economy and not intensifying deflation.

5| 28 May 2010
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Weekly Focus

Scandi Update
Denmark – Concrete austerity plan
The government reached a deal with the Danish People’s Party during the week on a so-
called recovery plan. We view it as positive that a plan for consolidating public finances Danish government deficit
is now in place and that it is very specific. Denmark joins a stream of European countries 6 General govt. budget bal. % GDP 6
now spelling out exactly how they plan to bring public finances back into balance. 4 4
2 2
We believe it is important for Denmark to meet the EU’s convergence criteria. Denmark -1 -1

has chosen a model for its exchange rate that has made it particularly vulnerable to -3 -3
-5 -5
financial markets’ confidence in its economy, so it is crucial to be squeaky clean. -7 -7
00 02 04 06 08 10
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 Source: Statistics Denmark, Danske Research
the freeze proposed in the government’s 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 also
to 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 government’s 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 government’s 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 growth

During 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) The Riksbank’s repo rate forecast
numbers. And even though there might be said to have been some disappointment in 5.0 %
%
5.0

relation to market expectations, the numbers are still consistent with decent quarterly 4.0 4.0

growth rates and thus with a continuous hawkish tone from the Riksbank. In short, the 3.0 3.0

numbers out for the Swedish economy thus far do not imply a postponed first hike or 2.0 2.0

even a flatter Riksbank repo rate path. 1.0 1.0

0.0 0.0
08 09 10 11 12

Source: Riksbank

6| 28 May 2010
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Weekly Focus

Norway – Automatic stabilisers

At the beginning of the current public debt crisis, it was suggested in some quarters that
Weekly (net) purchases of NOK
Norwegian industry could be facing a three-headed troll. First, lower growth in Europe
30000 30000
would have a direct effect through lower market growth for Norwegian exporters. mln. mln.

20000 20000
Second, the financial turmoil would result in higher interest rates and tighter credit Foreign banks>>

standards at banks. Third, NOK could appreciate considerably against EUR due to the 10000 10000

currency union’s public debt problems. Once again, though, the market has shown us that 0 0

fears of this kind of total meltdown were unwarranted. When the outlook becomes -10000 -10000

sufficiently bleak, investors completely lose their appetite for risk, leading to substantial -20000 -20000
<< Norges Bank
net sales of NOK. The latest foreign exchange statistics from Norges Bank show that -30000 -30000

foreign banks sold NOK19bn during the previous week, the highest level since October
-40000 -40000
2008, causing NOK to depreciate substantially, including against EUR. The automatic 07 08 09 10

stabilisers are in good working order. Source: Norges Bank

7| 28 May 2010
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Weekly Focus

Focus US: Euro crisis could speed up manufacturing

slowdown
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 Key points
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  •The manufacturing cycle is
suggest that leading manufacturing indicators are very close to a peak, and that the pace approaching an inflection point
of manufacturing growth is bound to slow in H2 10. with production catching up on
demand. We look for the ISM to
This should not come as a great surprise. As with earlier manufacturing recoveries, the
begin to move lower within a
inventory dynamics initially provided a forceful boost, as the cutback in production was
few months.
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 more
 Fundamentals provide limited
average levels.
signs of overshooting and
As the chart to the right indicates, we are close to this point in the cycle. Production has generally point to a moderate
been expanding faster than demand over the past quarters, and the gap between the two decline in the ISM in H2 10.
has narrowed. This implies that inventories are about to stabilise and that the restocking Contagion from the Euro debt
will soon begin. crisis is the main risk.
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,  The direct impact via slowing
as illustrated by the chart above. When inventory growth picks up relative to demand exports to Europe is minimal,
growth, the ISM moves lower and manufacturing growth slows. This is likely to take but the deterioration in credit
place within the next few months. and equity markets poses a
more serious risk to the
Fundamentals suggest moderate slowdown from strong levels manufacturing cycle and the
The big issue is how hard the landing will be. Generally, fundamentals are suggesting that US recovery.
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
Production catching up with demand
closed the gap on demand. In fact, real inventories of finished manufacturing goods are
102.5 102.5
still declining – albeit at a slower pace – and manufacturing re-stocking is probably still a Index 2007=100 Index 2007=100
100.0 100.0
few months away. At the same time, real demand for manufacturing goods is running at a 97.5 97.5
10% AR, which is much faster than in the 2002 recovery. 95.0 95.0
92.5 92.5
Second, demand growth is broadly based. Unlike the previous recovery – which was 90.0 90.0

solely driven by domestic consumer demand – consumption, capex and exports are all 87.5 87.5
Manufacturing & trade sales
85.0 85.0
Manufacturing production
contributing positively this time around. From this perspective, the manufacturing 82.5 82.5
recovery looks relatively solid. 02 03 04 05 06 07 08 09

Third, monetary conditions remain very supportive with a zero fed funds rate and plenty Source: Reuters Ecowin and Danske Markets
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
Senior Analyst
by October. Signe Roed-Frederiksen
+45 45 12 82 29
sroe@danskebank.dk

Senior Analyst
Peter Possing Andersen
+45 45 13 70 19
pa@danskebank.dk

8| 28 May 2010
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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 Our ISM model suggests the
of the shock, which is impossible to predict. However, we can try to assess the damage slowdown should be moderate
65 Index Index 65
already done.
60 60
Basically, there are two obvious channels of contagion: (1) a direct channel in terms of 55 55
50 50
the trade flow and exchange rate, and (2) an indirect channel via interlinked global 45 ISM 45
financial markets. 40 40
Model +6months (1987-present)
35 35
The direct impact through trade flow is likely to be limited. 30 30
90 95 00 05 10
 First, exports to Euroland account for only 10% of total US exports and total exports
are only 11% of GDP. Source: Reuters Ecowin and Danske Markets

 Second, the contribution to export growth from Euroland has been zero over the past
year. 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. Euro area is of marginal importance
 Third, the broad real effective dollar exchange rate has strengthened little despite the for exports
sharp decline in EUR/USD. Furthermore, there is usually a relatively long lag from 20 20
%-point %-point
15 15
changes in the exchange rate to the impact on trade flows (6-12 months). 10
Annual contribution to US
10
exports from Euroarea
5 5
The bigger issue is the indirect contagion through the deterioration of global financial 0 0
markets. As we have emphasised previously (see Research US: Manufacturing recovery -5 -5
-10 -10
ahead, 22 January 2009) financial conditions – and in particular credit conditions – are -15 -15
very important for the manufacturing cycle, as they tend to amplify the inventory -20 Annual contribution to US -20
exports from non-euro countries
-25 -25
dynamics. 08 09 10

Since late April, global financial conditions have indeed been deteriorating (see Monitor
Source: Reuters Ecowin and Danske Markets
– 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

Credit spread widening
In an effort to quantify the impact from the European debt crisis on the manufacturing
650 bp CDX 10yr X-over >> bp
cycle we have created three scenarios, which we apply to our ISM model in combination 600 1350

with the fundamental outlook. 550 1150

500
950
450
1. No shock – all financial variables on end-April levels. 400 750
350 550
2. Current shock – all financial variables on 25 May levels. 300
250 350
3. Global crisis – this shock is calibrated to resemble a further worsening c.f. the table 200 << Moody's baa credit spread 150
below. Jan May Sep Jan May Sep Jan May
08 09 10

Source: Reuters Ecowin and Danske Markets

Assumption on key financial variables

No Shock Current Shock Global Crisis

2010 2011 2010 2011 2010 2011
Year end Year end Year end
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
Source: Danske Markets

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Weekly Focus

The above financial shocks have a direct impact on the manufacturing sector but also an
Estimated path of the ISM in the three
indirect impact via changes in underlying fundamentals such as private consumption,
scenarios
inventory accumulation, capex , etc. We take both of these channels into account.
65 Index 65
Index
60 ISM No shock 60
The ‘no shock’ scenario can be used as a baseline and as an assessment of the underlying Current 55
55
shock
dynamics of the manufacturing cycle. The decline in the ISM will be very gradual at 0.6 50 50
45 45
points per month on average until Q1 11, when the ISM should stabilise around 53. This Global crisis
40 40
is a relatively shallow dip as the this corresponds to GDP growth of around 3.5% which is 35 35

well above trend growth. 30 30

07 08 09 10 11 12

The ‘current shock’ scenario is an estimate of the damage currently done to the
Source: Reuters Ecowin and Danske Markets
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 Demand dynamics in each scenario
growth will be fast-forwarded. The net impact will be a faster and deeper decline in the
7 7
%- change, 6 month %- change, 6 month
ISM with the ISM bottoming at 50 in early 2011 before converging towards the ‘no 6 6
5 Nominal demand growth 5
shock’ path.
4 No shock 4
3 3
This underlines that with the current better shape of fundamentals, it would take a large
2 Current shock 2
shock to bring the economy into recession. That said, with the ISM dropping nine points 1 1
Global crisis
over 12 months, markets would probably start pricing in some probability of a double-dip 0 0
Jun Oct Feb Jun Oct Feb Jun Oct
in the US economy. The market impact could thus be significant but we have probably 09 10 11

seen much of the reaction already on the back of the recent turmoil. Source: Reuters Ecowin and Danske Markets

The ‘new global crisis’ shock can 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.

10 | 28 May 2010
www.danskeresearch.com
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 of
autumn 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 Germany’s unilateral ban on naked short-
selling merely increase the uncertainty surrounding the hard-pressed financial sector.

But 2010 is not 2008

In our opinion, however, the current situation remains manageable and is therefore very
different from the Lehman Brothers’ crisis. The eurozone’s 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 market’s downturn. However, the
timing is largely impossible to predict and in fact the eurozone’s 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
Mokon@danskebank.com

11 | 28 May 2010
www.danskeresearch.com
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, Key events of the week ahead
German yields drop and the curve flattens. Further, even though markets are moving in  Risk aversion and money market
the other direction today, ‘one swallow does not make a spring’. tension will set the tone on fixed
However, we believe current market movements are exaggerated. Even assuming an income markets in the coming
week.
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  G20 meeting. The FX market and
threat to the global economy from low or no growth in Euroland limited. When was the the eurozone debt crisis are the
main points of interest.
last time the Euroland consumer was the global growth engine? Despite the deteriorated
outlook in Euroland, the markets’ current fears are excessive.  ISM and the US labour market
report are the most important
The risk that increasing risk aversion will continue, escalating into a vicious spiral, is economic data on the agenda.
significant and will persist in the coming days and weeks. Another risk lies in the
financial system where Euroland banking troubles could develop into a global disaster
killing the global recovery although we regard this as fairly unlikely. The debt crisis has sent German yields
to record lows – will it last?
Banks globally are generally better capitalised and liquidity buffers are considerably
5.0 % bp 5.0
larger than they were before the Lehman Brothers collapse. Furthermore, any future 4.5 4.5
losses will not be hidden in clever derivative constructions such as following the sub- 4.0
10 year
4.0
3.5 3.5
prime collapse. 3.0 3.0
2.5 2.5
2.0 2 year 2.0
Higher yields in coming weeks as relief rally continues 1.5 1.5
1.0 1.0
We expect some relief on bond markets in the coming weeks as the crisis takes a step 0.5 0.5
Jan May Sep Jan May Sep Jan May
back. Governments and central banks have worked hard to counter the crisis. We expect 08 09 10

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

belt-tightening in Italy, Spain and Portugal should also go some way to help secure the
credibility of fiscal programmes.
2-year yield in Greece and Germany
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 20 Germany Greece 20
18 18
16 16
movements appear overdone. 14 14
12 12
10 10
ECB – a lone buyer 8
6
8
6
4 4
Huge concerns remain concerning the long-term sustainability of public finances in 2 2
0 0
PIIGS countries. However, Italy has joined Spain and Portugal in announcing further Nov Dec Jan Feb Mar Apr May
2009 2009 2010 2010 2010 2010 2010
austere fiscal measures, tightening public finances by EUR24bn in order to reduce the
Source: Ecowin
deficit 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.

Senior Analyst
Jesper Fischer-Nielsen
+45 45 12 85 18
jfis@danskebank.dk

12 | 28 May 2010
www.danskeresearch.com
Weekly Focus

FX: Extreme EUR decline

Is the latest EUR/USD slide different from past extreme
movements?
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 Another tough week for the euro
annualised one-month change in the pair exceeds 100%, we find that this has only AUD
occurred 14 times since the euro was introduced in 1999. NZD
CAD
Judging from past extreme movements, we find that the current slide in EUR/USD
GBP
appears to be only a little different from other extreme movements. The decline USD
follows roughly the same pattern, even though the decline in the first half of May appears SEK
a little more dramatic than average. EUR/USD has, however, continued lower since the NOK
latest extreme movement was detected (12 May), but history would suggest that CHF
JPY
there should be some kind of consolidation over the coming days or weeks.
0% 2% 4% 6%
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 Source: Reuters Ecowin

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 EUR/USD before and after extremes
adjusted to a fairer level. W think the first option is probably the most likely – one-month (1M annualised change > 100%)
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 the
entire euro situation. Source: Danske Markets, Reuters EcoWin

Strong DKK despite rate reduction – but for how long?

1M implied EUR/USD volatility before
On Wednesday, the Danish Central Bank decided to lower both the deposit rate and
and after extremes
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 Source: Danske Markets, Reuters EcoWin
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.

Senior Analyst
John Hydeskov
+45 45 12 84 97
johy@danskebank.dk

13 | 28 May 2010
www.danskeresearch.com
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 Monthly changes
risk appetite. The causes are not very different compared with previous months:
continued fears over southern European debt problems, monetary policy tightening in LIFFE Wheat
China and concerns about the effects of financial regulation. However, their influence on Gold
markets for risky assets has clearly been bigger in recent weeks. Investor sentiment has Copper
continued to deteriorate despite the attempts of EU policymakers to stem the euro
Aluminium
confidence crisis. While commodities most sensitive to the business cycle – such as
API2 coal
metals and oil – have suffered distinct losses, gold has surged to new record highs on
safe-haven demand. ICE Brent

Still, our economists anticipate that the rescue package, which EU policymakers -20 -10 0 10 20
% m/m
eventually agreed upon in mid-May – will ultimately do its job in stabilising borrowing
Source: Bloomberg, Danske Markets.
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 and
that event and political risk remain high. Notably, we should not forget that commodities
PMIs strong but signs of a soft patch
is one area that politicians seem keen to regulate in order to limit any price impact of the
65 index 65
speculative segment. Also, the risk of another set-back in global risk appetite is certainly index
60 Euro zone PMI Global PMI 60
China PMI
still pertinent and could continue to weigh in the short term. 55 55
50 50
In our view, as long as Europe avoids a more broad-based debt crisis, and an outright 45
US ISM
45

banking crisis, global growth should not be endangered by recent events as the recovery 40 40
35 35
momentum currently appears remarkably strong. Indeed, we think that commodity 30 30
markets have to a large degree been defying fundamentals recently, essentially pricing in 06 07 08 09 10

a double-dip recession in Europe which is not our base scenario. Although the fact that
Source: EcoWin, Danske Markets.
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 fact
see even stronger activity levels than previously forecast. Crucially, we are now
More EUR weakness ahead – but worst
witnessing the first decisive indications that commodities are about to see an OECD
is probably over
demand recovery. For metals, this has been under way for some time now but new is an 1.6

expansion in not least US demand for oil. 1.5

EUR/USD

1.4

Although the longer-term global growth outlook seems broadly intact, we cannot rule out 1.3

1.2

the possibility of further setbacks in the near term. One of the things to look out for is 1.1

appreciation of the Chinese yuan. We reckon that commodity markets may be spooked by 1.0

0.9

this at first sight but that the complex will eventually benefit from more balanced growth. 0.8

Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun
Also, our FX team now looks for EUR/USD to move lower on a six-month horizon, 09
90 pct. region 50 pct. region
10
Spot (incl. DB forecast) Forward
11

arguing that political risks and relative rates could weigh on the single currency for Source: Bloomberg EcoWin, Danske Markets.
months to come. Further out, dollar weakness could set in however. As a re-coupling of Note: historical EUR/USD spot rate, Danske
commodities with the dollar may be occurring at present, this could affect prices. Markets’ forecasts, forward rates and uncertainty
priced on the option market.
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.
See Commodities Monthly: Correction – not a change in direction, published May 27.

Senior Analyst
Christin Tuxen
+45 4513 7867
tux@danskebank.dk

14 | 28 May 2010
www.danskeresearch.com
Weekly Focus

Financial views
Equities
 Our overall view is that the stock markets will return to the bullish trend due to
Equities and US 10Y yield
continued global economic expansion and due to overly nervous investors who have
4.0
now priced in close to zero growth in corporate earnings over the coming five years. 1275 Index %
3.9
US 10-year gov bond >>
1225
Hence we see the recent market correction as a buying opportunity. However, 3.8
1175 3.7
1125
investors should still recognise that, in the short term, the high risk profile of the 1075
3.6
3.5
market may continue due to very uncertain economic conditions for the Financials 1025 << S&P500 3.4
975 3.3
sector. We reiterate our European/Nordic recommendations to underweight Financials 925 3.2
875 3.1
and overweight Industrials and Health Care. The latter two are main beneficiaries of a Nov Jan Feb Mar Apr May
09 10
weaker EUR and a stronger USD.
Source: Reuters Ecowin

Fixed Income
 Risk aversion is the only driver of yields at the moment. If the rebound in risky assets
continues, both German and US yields will follow suit by moving higher. However, if EUR/USD and USD/JPY
the crisis escalates once again, yields will once again drop faster than a lead balloon.
165 98
<< EUR/USD
 We expect some relief in bond markets in the coming weeks as the crisis takes a step 155 96
145 94
back. Governments and central banks have done much to counter the crisis and we 135 92
expect the implementation of the EUR720bn package to help ease fears. Fiscal belt- 125 90
115 88
tightening in Italy, Spain and Portugal also goes some way to help the credibility of USD/JPY >>
105 86
fiscal programmes. May Jul Sep Nov Jan Mar May
09 10
 Euroland intra-spreads: We remain overweight in Germany, Italy, the Netherlands,
Source: Reuters Ecowin
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 2Y
DGBs and 5Y SGBs vs. France and long 10Y DGBs vs. France. We are long NOK Credit spreads
T-bills on an outright basis with open currency exposure. 25.0 % points % points 6.5
<< Eur high yield spread
20.0 5.5
Credit 15.0 4.5
 The credit market remains somewhat sidelined with limited flow and no activity in the 10.0 3.5
primary market. Banks remain under some pressure as sovereign debt fears refuse to 5.0 2.5
US credit spread (Baa) >>
go away despite the fiscal bailout of Greece and the other southern European countries. 0.0 1.5
07 08 09 10
 From a fundamental perspective we are positive on investment grade credit. Company
credit metrics are currently sound and we thus consider the default risk in the short to Source: Reuters Ecowin
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 Commodity prices

 EUR/USD trades with heightened volatility – lower on Euroland debt woes and 90 USD/barrel Index 4000
85 3750
higher on position squaring and hopes/fears of co-ordinated central bank intervention << Oil (WTI)
3500
80
to prop up the euro. We think the euro will remain under pressure in the coming 3250
75
3000
70
months. EUR/CHF has spiked on short squeezes, but we think the pair will return 2750
65 2500
LME metal prices >>
lower soon. EUR/GBP is likely to trend lower but risks of credit downgrade and crisis 60 2250
budget loom. AUD looks oversold and is likely to rebound. 55 2000
May Sep Nov Jan Mar May
09 10

Source: Reuters Ecowin

15 | 28 May 2010
www.danskeresearch.com
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.

16 | 28 May 2010
www.danskeresearch.com
Weekly Focus

Macroeconomic forecast
Macro forecast, Scandinavia
Private Public Fixed Stock Ex- Im- Infla- Unem- Public Public Current
Year GDP 1 cons.1 cons.1 inv.1 build.2 ports1 ports1 tion1 ploym.3 budget4 debt4 acc.4

Denmark 2009 -4.9 -4.6 2.5 -12.0 -1.7 -10.3 -13.2 1.3 3.5 -2.8 38.8 4.0
2010 1.8 2.7 1.2 -2.3 0.8 2.7 2.6 2.0 4.6 -5.6 42.0 3.2
2011 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 7.6
2010 1.8 2.2 4.6 0.4 0.5 3.5 6.8 1.4 10.3 -2.8 43.1 5.9
2011 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 19.0
2010 3.1 5.0 3.1 -0.5 1.0 2.3 5.6 2.5 3.3 12.0 26.0 24.9
2011 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

Private Public Fixed Stock Ex- Im- Infla- Unem- Public Public Current
Year GDP 1 cons.1 cons.1 inv.1 build.2 ports1 ports1 tion1 ploym.3 budget4 debt4 acc.4

Euroland 2009 -3.9 -0.6 2.2 -10.9 -0.7 -13.0 -11.7 0.3 9.6 -7.0 79.8 -0.7
2010 1.8 0.3 1.7 -0.1 0.5 6.8 4.9 1.0 9.8 -7.2 83.7 -0.4
2011 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 4.0
2010 2.8 0.7 1.7 5.7 0.1 8.9 7.5 1.0 8.1 -5.0 76.5 3.7
2011 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 -2.3
2010 0.4 1.5 1.9 0.9 -0.6 5.7 6.5 1.2 10.0 -8.5 82.0 -2.5
2011 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 -2.2
2010 1.5 0.9 1.3 0.1 0.2 8.0 6.0 1.9 8.6 -5.0 116.0 -2.0
2011 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 -5.2
2010 -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 -3.2
Finland 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 1.4
2011 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

Private Public Fixed Stock Ex- Im- Infla- Unem- Public Public Current
1 1 1 1 2 1 1 1 3 4 4 4
Year GDP cons. cons. inv. build. ports ports tion ploym. budget debt acc.
USA 2009 -2.4 -0.6 1.8 -18.3 -0.7 -9.6 -13.9 -0.3 9.3 -9.9 83.8 -3.0
2010 3.3 2.5 1.5 1.7 1.0 11.8 9.5 1.9 9.5 -10.6 93.2 -3.4
2011 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 1.9
2010 2.7 1.9 1.3 1.3 -0.1 18.7 1.1 -0.7 4.3 5.2 220.4 2.0
2011 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 4.8
2010 9.7 - - - - - - 3.4 4.0 -2.2 20.5 5.2
2011 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 -2.6
2010 1.3 0.2 3.0 -5.2 0.0 4.4 0.9 2.5 8.1 -11.5 80.3 -2.4
2011 2.1 2.0 2.2 2.6 0.0 6.9 5.0 1.7 7.9 -8.7 88.2 -2.0
Switzer- 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
land 2010 1.6 1.2 1.4 1.5 -1.0 5.2 2.9 0.5 4.8 -2.4 41.9 10.2
2011 1.7 1.4 0.7 1.0 0.1 4.1 3.7 0.9 4.6 -2.9 41.0 10.9
Source: OECD and Danske Bank. 1) % y/y. 2) % contribution to GDP growth. 3) % of labour force. 4) % of GDP.

17 | 28 May 2010
www.danskeresearch.com
Weekly Focus

Financial forecast
Bond and money markets
Key int. Currency Currency Currency
3m interest rate 2-yr swap yield 10-yr swap yield
rate vs EUR vs USD vs DKK
USD 28-May 0.13 0.54 1.26 3.41 124.1 - 599.6
+3m 0.13 0.25 1.30 3.90 120 - 620
+6m 0.13 0.35 1.45 3.75 115 - 648
+12m 1.00 1.25 1.90 3.50 127 - 587
EUR 28-May 1.00 0.70 1.32 2.97 - 124.1 744.1
+3m 1.00 0.65 1.25 3.25 - 120 744.0
+6m 1.00 0.65 1.25 3.40 - 115 745.0
+12m 1.00 1.00 1.65 3.55 - 127 746.0
JPY 28-May 0.10 0.25 0.49 1.33 113.2 91.2 6.57
+3m 0.10 0.30 0.50 1.55 114 95 6.53
+6m 0.10 0.30 0.65 1.60 114 99 6.54
+12m 0.10 0.30 1.00 1.65 130 102 5.74
GBP 28-May 0.50 0.71 1.50 3.54 85.1 145.8 874.1
+3m 0.50 0.65 1.70 3.85 84.0 143 886
+6m 0.50 0.75 1.75 4.00 83.0 139 898
+12m 0.50 0.75 1.90 4.20 82.0 155 910
CHF 28-May 0.25 0.11 0.55 2.04 142.6 114.9 521.7
+3m 0.25 0.25 0.70 2.25 138 115 539
+6m 0.25 0.25 0.85 2.30 137 119 544
+12m 0.75 0.75 1.50 2.50 141 111 529
DKK 28-May 1.05 1.20 1.67 3.15 744.1 599.6 -
+3m 1.05 1.25 1.80 3.55 744 620 -
+6m 1.05 1.25 1.85 3.60 745 648 -
+12m 1.05 1.50 2.10 3.70 746 587 -
SEK 28-May 0.25 0.64 1.47 2.90 966.2 778.6 77.0
+3m 0.50 0.80 2.10 3.60 950 792 78.3
+6m 0.75 1.10 2.30 3.90 940 817 79.3
+12m 1.50 1.90 3.30 4.40 920 724 81.1
NOK 28-May 2.00 2.70 3.16 4.26 794.3 640.1 93.7
+3m 2.25 2.65 3.35 4.50 765 638 97.3
+6m 2.50 2.90 3.60 4.70 760 661 98.0
+12m 3.00 3.30 4.00 4.90 760 598 98.2
PLN 28-May 3.50 3.76 4.40 5.34 406.6 327.7 183.0
+3m 3.50 4.10 5.00 5.85 400 333 186
+6m 3.50 4.10 5.20 6.10 400 348 186
+12m 3.50 4.10 5.80 6.35 395 311 189

Equity markets
Price trend Price trend Regional recommen-
Risk
3 mth. 12 mth. dations
Regional
USA Low -5% to +5% 0% to +10% Underweight
Japan High -5% to +5% 0% to +10% Neutral
Emerging markets (USD) High -5% to +5% 0% to +10% Overweight
Pan-Europe (EUR) Low -5% to +5% 0% to +10% Neutral
Nordics
Sweden Average -5% to +5% 0% to +10% Neutral
Norway High -5% to +5% 0% to +10% Neutral
Denmark High -5% to +5% 0% to +10% Neutral

Commodities
2010 2011 Average
26-May Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011
NYMEX WTI 71 81 78 80 85 87 89 92 94 81 91
ICE Brent 71 79 79 79 84 86 88 91 93 80 90
Copper 6,855 7,274 7,300 7,500 7,800 8,200 8,600 8,650 8,700 7,468 8,538
Zinc 1,909 2,307 2,150 2,200 2,400 2,500 2,500 2,550 2,550 2,264 2,525
Nickel/1000 22 20 24 22 23 23 23 23 23 22 23
Steel 450 464 525 550 575 580 585 590 600 529 589
Aluminium 2,039 2,199 2,200 2,250 2,300 2,400 2,400 2,400 2,400 2,237 2,400
Gold 1,213 1,110 1,175 1,150 1,100 1,050 1,000 1,000 1,000 1,134 1,013
Matif Mill Wheat 137 126 133 133 132 127 133 133 133 131 132
CBOT Wheat 467 518 480 470 450 475 500 500 500 480 494
CBOT Corn 369 389 370 375 400 410 420 430 440 384 425
CBOT Soybeans 938 969 960 975 1,000 1,025 1,050 1,075 1,100 976 1,063

Source: Danske Markets

18 | 28 May 2010
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Weekly Focus

Calendar
Key Data and Events in Week 22

Monday, May 31, 2010 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%

Tuesday, June 1, 2010 Period Danske Bank Consensus Previous

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

Wednesday, June 2, 2010 Period Danske Bank Consensus Previous

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

Source: Danske Markets

19 | 28 May 2010
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Weekly Focus

Calendar - continued

Thursday, June 3, 2010 Period Danske Bank Consensus Previous

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 61.9
9:55 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 Fed's Bernanke (voter, neutral) speaks
18:15 USD Fed's Rosengren (voter, dove) speaks
19:15 USD Fed's Hoenig (voter, hawk) speaks

Friday, June 4, 2010 Period Danske Bank Consensus Previous

- OTH G20 Finance Ministers, Central Bankers Meet
9:40 CHF SNBs Hildebrand speaks in Interlaken
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

During the week Period Danske Bank Consensus Previous

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%
Source: Danske Markets

20 | 28 May 2010
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Weekly Focus

Disclosure
This report has been prepared by Danske Research, which is part of Danske Markets, a division of Danske Bank.
Danske Bank is under supervision by the Danish Financial Supervisory Authority.

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Danske Bank research reports are prepared in accordance with the Danish Society of Investment Professionals’
Ethical rules and the Recommendations of the Danish Securities Dealers Associations.

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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21 | 28 May 2010
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