Investment Research

02 July 2010

Weekly Focus
Fear of a major slowdown is mounting

Market Movers ahead

 ECB meeting on Thursday – questions are expected to centre around additional
liquidity measures and the ECB’s asset purchases.
 Developments in Euroland bond markets and news out of southern Europe.
 US non-manufacturing ISM – will it hold up better than its manufacturing sibling?
 Monetary policy meeting at the Bank of England is not expected to bring any
changes.
 Swedish industrial data and the government’s net borrowing needs.
 Norwegian CPI.
Global Update
 Global PMI’s have fallen – fundamentals suggest a slowdown, but the European debt
crisis has likely accelerated the decline.
 The Riksbank hiked rates by 25bp, as expected, and the repo path was revised slightly
higher in 2010 and 2011, but lower in 2012-13.
Contents
Market movers ahead ........................................... 2
Global update................................................................... 4
Scandi Update ................................................................ 6
Focus: FX Strategy - CHF: Risks remain
for an even stronger franc ................................. 7
Fixed Income: Slowdown fears push
yields lower ....................................................................11
FX: Dollar suffers on weak data ................12
Commodities: Costs catching up with
prices ...................................................................................13
Credit ...................................................................................14
Financial views...........................................................15
Macroeconomic forecast ..............................17
Financial forecast ...................................................18
Calendar ...........................................................................19

 The expiry of the one-year LTRO has brought the duration of Euroland money market
liquidity lower, which has put upward pressure on short-term rates.

 The G-20 summit highlighted the change in policy focus from coordinated global
growth support to a more diverse agenda. In Europe, focus is on public finances and
in Asia attention has turned to inflation fighting.

Focus
 The combination of general pressure on the euro and the SNB ceasing to intervene in
the FX market has opened the door to the downside in EUR/CHF.

 We see a high probability of further support for the Swiss franc in the coming months.
However, if the market’s faith in the euro improves, profit-taking could lead to a
sharp upward correction in EUR/CHF – a key risk to our forecast.

Leading indicators are rolling over Swedish Riksbank hikes repo rate
20 % m/m, AR Index 5.0 % 5.0
75 %
15 Riksbank repo rate
<< OECD leading indicator, OECD area 4.0 Repo rate forecast, April 4.0
10 4 mths lead 65
5 3.0 3.0
55
0 Editors
-5 45 2.0 2.0
-10
35 1.0 Riksbank repo rate 1.0
Allan von Mehren
-15
Global PMI man, new orders >> forecast, July +45 4512 8055
-20 25 0.0 0.0
98 00 02 04 06 08 10 05 06 07 08 09 10 11 12 13
alvo@danskebank.dk

Steen Bocian
Source: OECD, Ecowin and Danske Markets Source: Riksbanken and Danske Markets +45 45 12 85 31
steen.bocian@danskebank.dk

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Weekly Focus

Market movers ahead

Global
 The only major event coming up next week is the ECB meeting on Thursday. Until
The euro debt crisis will continue to be
then, markets will digest the US employment report and be driven by overall risk
key for markets
appetite. Developments in Euroland bond markets and news out of Southern Europe
bp 5Y CDS spreads bp
will be important to watch. 1000 1000

800 800
 In the US the coming week should be relatively quiet at least in terms of data and Greece
600 600
speeches. US markets are closed on Monday to observe Independence Day (4 July). Portugal
400 400
The ISM non-manufacturing index will be the primary release and we look for a 200 200
decline to 54.4 given the recent weakness in housing and equity markets. The weekly Spain
0 0
release of jobless claims could also attract attention given the recent increased dec jan feb mar apr maj jun
09 10
uncertainty about the state of the US labour market. After a stream of Fed speeches
this week, which have in general left an impression of the FOMC moving in a slightly Source: Reuters Ecowin and Danske Markets

more dovish direction, there is only one speech scheduled for next week. Minneapolis
Fed President Kocherlakota (non-voter) will deliver a speech on policy and regulation
on Wednesday. US non-manu ISM: new orders tanked
in May but employment improved
 In the euro area next week’s key event will be the ECB meeting on Thursday. It will 65 Index
Index
be yet another interesting meeting, and there are many relevant topics to discuss at the 56
60
51
Q&A session. On 30 June the one-year covered bond purchase programme was 55
46
completed. The ECB has bought EUR60bn as planned, which it now aims to hold to 50
45 41
maturity. Mr Trichet is likely to be questioned about whether the programme could be
40 Employment >> 36
reopened. Questions will also address the effect from the expiry of the one-year Long- << New orders
35 31
term refinancing operation (LTRO) on 1 July. Two new ECB operations have been 98 00 02 04 06 08 10
introduced to finance the EUR442bn that matures with the 1Y LTRO. Fifty four per
cent of the expiring liquidity was rolled, which was in line with expectations, and )
Source: Reuters Ecowin and Danske Markets
excess liquidity has thus declined. The ECB could be asked whether it plans to
introduce new liquidity facilities. There has been speculation about a new six-month
tender, which could explain the large roll in the six-day fine-tuning auction. Further, Can German factory orders continue
Mr Trichet could be asked about the Securities Market Programme (SMP), which up?
covers the ECB’s government bond purchases, and why the ECB is not doing more to 120 2005=100 133
keep sovereign spreads in PIIGS against Germany lower. Mr Trichet is however not 115 123
likely to get specific on the SMP, which we saw at the meeting last month. Besides 110
German factory orders >> 113
105
the ECB meeting, we look out for German factory orders. 100
103
93
95
 In the UK focus will be on Thursday’s publication of May industrial production 90 83
numbers and the BoE monetary policy meeting. While the June PMI and recent orders << German industrial production
85 73
98 00 02 04 06 08 10
data indicate a loss of momentum, the underlying trend remains for higher
manufacturing output. The BoE is not expected to bring any changes to the monetary
Source: Reuters Ecowin
policy setting, despite the recent tight budget, as Sentance is expected to remain the
sole advocate for a tighter policy.
 In Switzerland attention will focus on the June inflation numbers due out on Modest inflation in Switzerland
Tuesday. We expect the inflation rate to decline from 1.1% in May to 0.8% in June, 3,5 % y/y 3,5
% y/y
once again underlining that inflationary pressures do not necessitate early rate hikes. CPI
2,5 2,5
It is also worth keeping an eye on Monday’s retail sales data for May and the June
1,5 1,5
unemployment numbers due out on Thursday.
0,5 0,5

 Next week’s calendar is extremely light in Asia. In China there will be no major -0,5 -0,5

releases this week and in Japan the only major release will be machinery orders for -1,5 -1,5
05 06 07 08 09 10
May, which should confirm that business investments in Japan have bottomed out.

Source: Reuters Ecowin

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Weekly Focus

Scandies
 Denmark is heading for a rather heavy data calendar in the week ahead. Attention Machinery orders improving in Japan
will focus particularly on business sales and purchases of goods and services and the Domestic machinery orders
10 % 3m/3 % 3m/3m 10
trade balance data for May, which should give us a snapshot of the condition of
5 5
exports and hence tell us whether the recovery in the Danish economy is taking hold. 0 0
The coming week will also see the release of industrial production data for May, -5 -5
insolvencies and enforced sales of properties for June and current account numbers -10 -10

for May (Friday). -15 -15

-20 -20
 In Sweden, we see industrial data (orders, production) and the government’s net 06 07 08 09 10

borrowing needs. Usually none of the above data has the power to make a lasting
Source: Reuters Ecowin
impact on financial markets.

Due to the discrepancies in real ‘hard’ data and sentiment indicators, we tend to rely Danish exports are improving
more on hard industrial data than the various survey data presented. This has proven a 250 bn DKK 250
bn DKK
successful strategy throughout the crisis and we believe this will continue to be the 230 230
Exports - Purchaces
case. To be consistent with our latest growth forecasts, industrial production should 210
and sales by industri
210

average some 2% q/q in Q2, which means that the outcome for May should come 190 190
Exports - official
down somewhat compared with April not to render our industrial production forecast 170 170

obsolete. 150 150

01 02 03 04 05 06 07 08 09
The government’s borrowing need is expected by the Swedish National Debt Office
Source: Reuters Ecowin
(SNDO) to reach SEK18.9bn and we see no reason to deviate from that number – in
either direction.
Important input to Q2 GDP
 In Norway focus will be on the CPI numbers on Friday. We expect that the core
30 % y/y 30
Industrial Production ex Energy (vol)
measure will drop to 1.0% y/y in June from 1.5% in May. It is primarily due to a so- 20 Industrial Production, total (vol)
% y/y
20
10 Orders, total (vol) 10
called base effect, but it still underlines that inflation is currently not an issue in 0 0
Norway, and that Norges Bank is in no hurry to hike rates. Our forecast is below that -10 -10
-20 -20
of Norges Bank which expects 1.17% according to the latest monetary policy report. -30 -30
Headline inflation is expected to fall to 1.7% from 2.5%. -40 -40
08 09 10

Source: Statistics Sweden

Market movers ahead

Global movers Event Period Danske Consensus Previous
Mon 05-Jul 9:15 CHF Retail sales (real) y/y May 1.3%
Tue 06-Jul 9:15 CHF CPI m/m|y/y Jun -0.2%|0.8% -0.1%|1.1%
16:00 USD ISM (NAPM) non-manufacturing Index Jun 54.4 55.0 55.4
Wed 07-Jul 12:00 DEM Factory Orders m/m|y/y May 0.2%|.. 0.4%|24.9% 2.8%|29.6%
21:35 USD Fed's Kocherlakota (non-voter, neutral) speaks
Thu 08-Jul 1:50 JPY Machine orders m/m|y/y May 4.0%|9.4%
7:45 CHF Unemployment (sa) % Jun 4.0
10:30 GBP Industrial Production m/m|y/y May 0.4%3.2% -0.4%|2.1%
12:00 DEM Industrial production mm/|y/y May 0.8%|9.2% 0.9%|13.3%
13:00 GBP BoE rate announcement Jul 0.5% 0.5%
13:45 EUR ECB Announces Interest Rates 1.0% 1.0% 1.0%
14:30 USD Initial jobless claims 1000 460 472
14:30 EUR ECB's Trichet Speaks at ECB Monthly News Conference
Scandi movers Event Period Danske Consensus Previous
Thu 08-Jul 9:30 SEK CPI m/m|y/y Jun 0.1%|1.0% 0.1%|1.0% 0.2%|1.2%
Fri 09-Jul 9:30 SEK Industrial production m/m|y/y May 0.9%|7.3%
10:00 NOK Consumer prices m/m|y/y Jun -0.3%|1.7% -0.5%|2.5%

Source: Bloomberg and Danske Markets

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Weekly Focus

Global update
Everyone for themselves
The G-20 summit in Canada last week showed that the G-20 countries ambitions from
Recovery in global manufacturing
last year for coordinated macroeconomic support for the global economy and changes in losing steam
financial sector regulation are falling apart. Particularly, it has proved difficult to maintain
focus only on supporting growth. In Europe consolidation of public finances has now
become major priority. In Asia – particularly in China – focus has gradually shifted to
containing inflation and China cannot be expected to be as strong a growth engine for the
global economy as it has been since early-2008. And now there are signs that the global
recovery in manufacturing is starting to lose some steam. The big question is to what
degree this is just a temporary mid-term crisis or the prelude to a more severe slowdown?
Source: Reuters Ecowin and Markit
Euroland survives the expiry of one-year refinancing operation
The key event in the euro area this week has certainly been the expiry of the ECB one-
year long-term refinancing operation (LTRO) worth EUR442bn. European money
Euro area inflation to remain subdued
markets were nervous ahead of expiry. The accumulated roll of the LTRO was 54%
4.5 4.5
(EUR243bn) – in line with expectations. Read more here: Strategy: ECB - Duration on 4.0
% y/y % y/y 4.0
3.5 3.5
liquidity falls significantly 3.0 3.0
2.5 2.5
2.0 Euro area, CPI 2.0
On the data front, the week kicked off with the ECB report on monetary developments. 1.5 1.5
The report showed a decline in M3 growth to minus 0.2% y/y, which partly could be 1.0 1.0
0.5 0.5
explained by technical factors. On a positive note, the monetary data indicates that the 0.0 0.0
-0.5 -0.5
shrinking of bank credit may indeed have come to an end. For instance, loans to -1.0 -1.0
05 06 07 08 09 10
households continue to improve. The June unemployment report from the German
Bundesbank showed that the German unemployment rate remained at 7.7% in June. In Source: Reuters Ecowin
month-on-month terms, however, unemployment fell by 21,000, bringing the
accumulated drop in unemployment since the beginning of the year to 182,000. German
employment growth was positive during May. Final manufacturing PMI in German was Manufacturing PMI appears to have
revised 0.3 points higher, and is thus unchanged at 58.4 in June compared to May. peaked
Overall PMIs seems to have peaked a few months ago. The latest volatility in commodity 65 Germany 65
Index PMI manufacturing
60 60
prices lowered inflation in the euro area to 1.4% in June from 1.6% in May. There are France
55
"[Heading 2]"
55
Italy
currently very limited inflationary pressures in the euro area, and unless commodity 50
Spain
50
45 45
prices spike we should expect inflation to remain relatively subdued. 40 40
35 35
Another round of weak US data 30 30
25 25
This week’s round of data (excluding the employment report which was not yet released 05 06 07 08 09 10

at the time of writing) did nothing to ease market fears of a significant slowdown in
Source: Reuters Ecowin and Markit
economic activity in the second half of the year.

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Weekly Focus

The manufacturing ISM took an unusually large decline of 3.5 points with the new orders
A slowdown in US manufacturing
indices hit hard, see Flash Comment - US: manufacturing slowdown fast-forwarded by
production is in the cards
debt crisis. Fundamentals had been pointing to a slowdown in the manufacturing
65 Index 6 mth growth, AR %
<< ISM 15
production over H2, but the deterioration in financial markets has likely accelerated that 60
10
55 5
decline. While there is a direct negative impact from the decline in equity markets and
50 0
deterioration in credit markets there has likely also been a “sentiment effect” where 45 -5
-10
increased uncertainty has depressed demand. Consumers are also starting to react to the 40
-15
35 Manufacturing production >>
-20
deterioration and general rise in uncertainty. The conference board’s measure of 30 -25
consumer confidence fell back to its March level after two months of strong increases. 00 01 02 03 04 05 06 07 08 09 10

Furthermore, housing data is currently looking very weak. Pending home sales suffered a Source Reuters Ecowin and Danske Markets

significant decline of 30% in May which brings the index below the lows in 2008 and
2009. The level reflects the dynamics from the expiration of the first time home buyer
credit. The tax credit boosted sales during the spring, but this effect is now reversing as Home sales distorted by tax credit
home buyers have been moving forward the purchases of homes. While the tax credit has 7.5 ml units, SAAR Index, SA 135
made it very difficult to assess the underlying trend in the housing market, fundamentals 7.0 << Ex home sales 125

for home sales are relatively positive, as mortgage rates are close to an all time low and 6.5 115
6.0 105
household incomes are improving.
5.5 95
Pending home sales,
The recent weakness has also had an impact on the thinking of at least some FOMC 5.0 lagged 1 month>> 85
4.5 75
members. The tone in the Fed speeches over the recent week has in general been tilted in 00 01 02 03 04 05 06 07 08 09 10
a more dovish direction. Several speakers have mentioned the risks to the US economy
from the deterioration in financial market conditions induced by the European debt crisis. Source Reuters Ecowin and Danske Markets

This implies that the monetary policy normalisation process is effectively on standby but
so far, there is nothing that points to the Fed considering more QE.

Growth appears to be slowing in Asia

Data released in Asia during the past week suggests that growth is slowing. On balance it
Tankan suggest solid growth in Japan,
still looks it should be regarded as growth moderation from exceptionally strong growth
but poised to slow
in the previous quarters rather than a more severe slowdown. That said down side risk on
15
Diffusion, quarterly change % q/q AR
our growth forecast is increasing. Both China’s two manufacturing PMI’s declined in 10 10
GDP >>
5 5
June, see Flash Comment – China: Growth appears to be slowing. The manufacturing
0 0
PMIs suggests GDP growth is poised to slow to around 9% AR in H2 2010 from -5
-5
currently about 12% q/q AR. On the positive the risk of overheating in China is now -10
-10
-15
declining fast. In that sense, China is now building the foundation for a soft landing of -20
<<Tankan, Current conditions, all industri -15

the economy. On the policy front, the risk of aggressive monetary tightening from the -25 -20
96 98 00 02 04 06 08 10
People’s Bank of China (PBoC) is declining, although we still expect the PBoC to hike its
leading interest rate in Q3. Source: Reuters Ecowin and Danske Markets

In Japan the Tankan business survey for Q2 came in stronger than expected and suggests
that growth has remained very strong in Q2, but is poised to slow in the coming quarters,
Flash Comment - Japan: Recovery on track according to Tankan. On the other hand, May
data in general has been disappointing with industrial production declining marginally
0.1% m/m and the unemployment rate unexpectedly increasing to 5.1% from 5.0% in the
previous month. Overall these data are still consistent with GDP growth of close to 4%
q/q AR in Q2 and slowing to around 2% q/q AR in H2 10.

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Weekly Focus

Scandi Update
Denmark – revisions point to a more wobbly recovery
The most important indicators released during the past week were the revised Q1 GDP
Danish unemployment continues to
numbers. At first glance, there appeared to be no major changes in the data and with Q1
stabilise
GDP growth of 0.5%, the Danish economic recovery remained on track.
175 Thousands 175
Thousands
However, significant revisions to some of the GDP components left the impression of a 150 150

slightly weaker recovery. Both exports and investment were revised sharply down, 125 125

although this was offset by stronger consumer and public spending. Consumer spending 100 100
Unemployment
75 75
growth was revised up from 1.1% q/q to 1.7% q/q, while public spending growth was
50 50
adjusted upward from 2.5% to 3.4% for 2009 and also proved to be DKK1bn higher in
25 25
Q1 10 than believed so far. This once again underlines the need for better control of 00 01 02 03 04 05 06 07 08 09
public spending. As such, we welcome the fiscal package presented by the Danish
government, which aims for zero growth in public spending during 2011-13. Source: Statistics Denmark

The May jobless numbers supported our belief that Danish unemployment has peaked.
The official number of unemployed people declined once again, down by 2,000 from
April to May and unemployment has remained stable or slightly down since November
2009. Also, business indicators released during the week confirmed a more positive view
on the unemployment outlook and both the manufacturing and service industries expect to
expand their workforce during the coming months.
In spite of the improved labour market outlook, we do not expect a job recovery to be
waiting just around the corner. Danish businesses probably have further potential to
improve competitiveness and the economic recovery will only just be strong enough to
create new jobs in Denmark.

Sweden – Riksbank initiates hiking phase

The Riksbank decided to raise interest rates by 25bp to 0.5% and also to make its hiking
phase more front-loaded. Taken in isolation, such actions should make financial markets Swedish Riksbank forecasting
more inclined to trade rates up. However, two of the executive board members (Karolina flattener
5.0 % 5.0
Ekholm and Lars E O Svensson) decided to enter reservations to the decision and the Riksbank repo rate
%
4.0 Repo rate forecast, April 4.0
Riksbank made a slight downward revision to the repo rate path from 2012 onwards.
Furthermore, even the Riksbank itself seems to think that its view on the effects of fiscal 3.0 3.0

consolidation in Europe are too small, which is why its risk scenarios show a massive 2.0 2.0

downward bias in terms of repo rate outcomes. This leads the markets – and to some 1.0 Riksbank repo rate 1.0
extent ourselves – to think that the Riksbank might not even find the time to hike much forecast, July
0.0 0.0
into 2011, with flat or even negative interest rate expectations a consequence. 05 06 07 08 09 10 11 12 13

Source: Riksbank
Norway – no consumer spending spree
In spite of lower inflation, solid real wage growth continued low interest rates, record-
high house prices and stable unemployment, consumer spending in Norway remains in
the doldrums. As consumer spending was again subdued in May, we have revised our
estimate of consumer spending growth down to 0.4% for Q2 10 – and hence to 3.9% for
2010. Nonetheless, we expect overall growth in the Norwegian mainland economy to
remain just under 2% this year. Meanwhile, the June PMI numbers indicate that overall
industrial activity could now be accelerating in spite of signs of weakening growth in the
global economy. This could be because the long-awaited recovery in oil-related industries
has now taken off – a view that is supported by a significant contribution from domestic
new orders. Furthermore, Norges Bank’s regional network recently showed a large
improvement in market outlook for oil-related industries.

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Weekly Focus

Focus: FX Strategy - CHF: Risks remain for an even

stronger franc
EUR/CHF breaks below 1.31 for first time
The Swiss franc (CHF) has firmed more than 20% against the euro since the financial
crisis escalated in 2008, taking EUR/CHF below 1.31 for the first time. Since December Key points
last year alone, when the Swiss National Bank (SNB) first allowed the franc to strengthen
 EUR/CHF has broken below 1.31
significantly – after maintaining a floor below EUR/CHF via intervention since March
for the first time and might test
2009 – EUR/CHF has dropped by more than 12% (see chart 1).
even lower levels

 The combination of general

Chart 1: Swiss franc hits new peak against the euro
pressure on the euro and the
SNB ceasing to intervene in the
FX market has opened the door to
the downside in EUR/CHF

 We see a high probability that the

unwinding of CHF loans combined
with a favourable relative growth
and interest rate outlook will
further support the franc in the
coming months. We have
therefore decided to revise lower
our EUR/CHF forecast to 1.30
(1.37) for 3M, 1.28 (1.37) for 6M,
Source: Reuters EcoWin and 1.35 (1.41) for 12M – old
forecast in brackets
When a cork is kept below water  Increased speculative interest in
The explanation for the pronounced strengthening of the franc during the first six months the franc and the use of short
of the year can be found in two main factors: EUR/CHF positions as a hedge
against a euro collapse mean that
 General selling pressure on the EUR due to the European debt crisis: while the
the latest drop in EUR/CHF may
franc has firmed 10% against the euro since New Year, the effective franc index has
prove overdone. If the market’s
“only” firmed 6%. This suggests that while the drop in EUR/CHF does represents
faith in the euro improves, profit-
increased demand for the franc, it also very much represents an elevated risk premium
taking could lead to a sharp
placed on the euro.
upwards correction in EUR/CHF –
 Shift in Swiss monetary policy: the franc has strengthened significantly despite a key risk to our forecast
accelerating intervention from the SNB in the first five months of the year (FX
reserves have grown by CHF144bn in 2010 – more than triple the increase for all of
2009). At the same time, the economic outlook has improved further and core
inflation has inched higher, meaning the risk of deflation has eased. The combination
of a disproportionately large intervention requirement to prevent the franc
strengthening and the reduced risk of deflation (deflation risk was the reason the SNB
began to intervene in the FX market in 2009) have resulted in the SNB to a much
greater extent allowing the market to determine the price of the franc.

Senior Analyst
Kasper Kirkegaard
+45 45 13 70 18
kaki@danskebank.com

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Weekly Focus

Significant probability that EUR/CHF will trade even lower

Fundamental support for the franc remains strong and is helping to drive a substantial
speculative demand. The Swiss economy – by European standards – looks strong: growth
is outpacing Euroland, the budget deficit is modest, government debt levels are low and
the current account surplus is high. Moreover, all the evidence suggests the SNB will
tighten monetary policy before the ECB – likely at the December meeting, but possibly
already in September – meaning relative rates will, in contrast to previous economic
recovery periods, support the franc.

Chart 2: Relative rates have supported a lower EUR/CHF

1.75 225
EUR/CHF Bp
1.70 200
1.65
175
1.60
<< EUR/CHF spot 150
1.55
1.50 125
1.45
100
1.40
EUR-CHF 2Y swap spread >> 75
1.35
1.30 50
07 08 09 10
Source: Reuters EcoWin

As long as the euro remains under pressure (i.e. investors continue to demand a high risk
premium to hold euro) and the Swiss activity indicators remain strong, we see no reason
why EUR/CHF cannot drop further. Hence, in the short-to-medium-term, EUR/CHF
trading at levels between 1.25 and 1.30 should not be ruled out, as the unwinding of CHF
loans is currently reinforcing demand for the franc. Given the signal shift from the SNB
at its latest monetary policy meeting and that we see a significant risk of further
CHF loan closures, we have decided to revise lower our EUR/CHF forecast. We now
expect EUR/CHF at 1.30 in 3M (1.37), 1.28 in 6M (1.37) and 1.35 in 12M (1.41) – old
forecast in brackets.

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Weekly Focus

Chart 3: Risk picture still skewed towards a stronger franc

Source: Danske Markets

Significant risk to forecast – in both directions

Increased speculative interest in the franc and the use of short EUR/CHF positions as a
hedge against a euro collapse mean that the latest move lower in EUR/CHF may prove
overdone. If the market’s faith in the euro – and risky assets in general – improves, profit-
taking on long CHF positions could lead to a sharp upwards correction in EUR/CHF,
though probably not all the way back to levels above 1.45. Hence there are indications
that the latest drop in EUR/CHF represents an overshoot of what could be considered as
the fundamental level in the longer term (PPP estimate is 1.48). However, as long as the
Swiss economy continues to outperform and uncertainty on the euro remains high, we
expect that CHF will be able to maintain an “expensive” level against EUR for the rest of
the year.

There is also significant downside risks to EUR/CHF. In particular, further unwinding of

CHF loans could contribute to maintaining a high demand for the franc and even lower
levels for EUR/CHF. However, while we can conclude that borrowing in the Swiss franc
was significant ahead of the crisis (see table 1), there is great uncertainty about how much
of this borrowing remains - though recent trade suggests that there is still a significant
unwinding potential. CHF borrowing is under particular pressure in the economies
outside the eurozone (not least Hungary and Poland), as the currencies of these countries
have weakened significantly against the franc. And while declining interest rates over the
past year have meant that regular interest rate payments have not risen too steeply for the
average borrower (despite the strengthening of the CHF), the latest CHF strengthening
could result in forced closures, as the principal has increased.

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Weekly Focus

Borrowing in CHF – a market snapshot from before the crisis struck

Low interest rates and relatively modest exchange rate fluctuations compared to other low-
yielding currencies made the franc a popular loan currency in the years up to the global recession
in 2008. Especially in countries such as Hungary, Poland and Iceland, CHF loans rose
dramatically during the upswing and in 2007 accounted for 31%, 17% and 23%, respectively, of
total borrowing according to SNB estimates. Surveys in Hungary suggest that the bulk of these
loans were taken out at up to 40% below current exchange rates – hence the cost of borrowing
must have increased significantly for the average borrower.

Borrowing in CHF has also been significant in economies inside the eurozone and in economies
with a fixed exchange rate policy towards the euro. As can be seen from table 1, Austria,
Luxembourg and Denmark have been particularly keen on CHF loans.

Table 1: Loans to non-bank clients ( in CHF billion)

Swiss franc loans Share of foreign currency loans Share of total loans
2002/04 2007 2007 2007
Euroland
Austria 45 84 69% 13.4%
Germany 64 60 13% 1.2%
France 13 30 11% 0.8%
Luxembourg 24 25 24% 7.9%
Greece 2 10 31% 0.2%
Italy 8 8 20% 0.3%
Others 7 21 4% 0.3%
Total 163 238 15% 1.2%
Non Euroland
Hungary 1.2 32.6 56% 31.3%
Poland 6.1 30.9 69% 16.9%
UK 12 23.8 4% 0.5%
Iceland n/a 12.4 48% 23.0%
Denmark 1.4 9.4 28% 4.0%
Croatia 0.2 7.7 25% 16.4%
Others n/a 5.4 13% 0.3%
Total n/a 122.2 11% 1.8%

Source: Brown et al., “Swiss Franc Lending in Europe”, Swiss National Bank (SNB), February 2009.

10 | 02 July 2010
www.danskeresearch.com
Weekly Focus

Fixed Income: Slowdown fears push yields lower

Soft US data scares the market
Global bond yields have continued to fall over the past week. German Bunds are once
again yielding close to record lows in the 2.5-2.6% range and the yield on the US 10-year Key events of the week ahead
treasury has dropped below 3% for the first time since spring 2009.  ECB meeting.
The rapid move lower has mainly been driven by a round of negative surprises from the  US Non-manufacturing ISM.
US, where economic data has been weakening across the board and increased the concern
 Bond auction in Germany
of a hard landing in the second half of the year. Consequently, the spread between US and (EUR5bln 10yr) and Austria (5yr
German 10-year bonds have been tightening significantly. and 10yr).
Concerns for a hard landing in H2 and the European debt crisis are likely to remain key  Bond auction in US (USD12bn
themes in the fixed income market in the coming months. This implies that the high 10yr TIPS).
correlation to equity and credit markets is here for a while yet. Given our view that
leading indicators and underlying inflation will continue gradually lower over the course
of H2, the downward pressure on bond yields is likely to remain in place. That said we
believe that the bond markets have got a bit ahead of themselves with the current US German 10yr spread is tightening
valuation looking a little stretched. 4.25 % 150
<< US 10yr Treasury bp
4.00
3.75 100
We continue to believe that a global double-dip recession is quite unlikely and that 3.50
50
3.25
upcoming US labour market data will indicate that the recovery has become more 3.00 0
2.75 Spread >>
resilient. Furthermore, the earnings season is approaching and our equity research team 2.50 -50
<< 10yr German Bund
2.25
expects some encouraging news. In combination with evidence from incoming data we 2.00 -100
believe that market fears of a hard landing will moderate, which could support risk taking Jan Apr Jul Oct Jan Apr
09 10
and give a small lift to bond yields in the coming month. However, market volatility is
Source: Ecowin and Danske Bank
likely to remain high and caution is warranted.

EONIA rates move higher on less demand for liquidity

The two-year Schatz yield stands out as an exception this week. While the general trend
German 2Y yield
has been for lower bond yields, the two-year Schatz yield has been moving higher. This
has been driven by a steepening in the EONIA curve, following the roll of the EUR442bn
12-month LTRO from June 2009. While the total allotment of EUR132bn into the three-
month tender and the six-day fine-tuning operations was quite as expected, it was
surprising that so much was allocated into the six-day allotment. Generally, this leaves
the EONIA market with a much lower duration on money market liquidity. Indeed this
makes any future exit from the ECB more flexible, which in turn explains the steeper
EONIA curve and the increase in two-year Schatz yield.
Source: Bloomberg and Danske Bank

ECB meeting key event next week

The ECB meeting on Thursday is the key event for European fixed income markets next
week. The focus will be on the press conference and questions about the government
bond purchase programme and the liquidity operations. While there are plenty of options
for the ECB, it is not our main scenario that the ECB will announce new liquidity
measures or commit more explicitly to purchasing specific amounts of government debt.
That said the uncertainty surrounding the meeting is expected to be high.

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

11 | 02 July 2010
www.danskeresearch.com
Weekly Focus

FX: Dollar suffers on weak data

US data has disappointed over the past couple of weeks and double-dip fears have
resurfaced. Consumer confidence has sky-dived, unemployment claims are up, Weekly changes against EUR
manufacturing is slowing and the housing market is once again plummeting without the CHF
JPY
government incentives that boosted the market earlier this year. GBP
SEK
For a long time, the market reaction to weak US numbers has been weaker risk appetite, NOK
which has had a tendency to push EUR/USD lower. However, this week, EUR/USD USD
CAD
actually had a ‘textbook’ reaction to the negative US data surprises and EUR/USD has NZD
AUD
once again been pushed above 1.25 – a move that probably was reinforced by the many
-6.0%-4.5%-3.0%-1.5%0.0% 1.5%
short euro positions that are currently in place in light of the European debt crisis.
Source: Bloomberg
It is also noteworthy that relative rates currently are working against the dollar. The two-
year swap spread between Euroland and the US has widened by 45bp in just a month to
currently +44bp. However, we doubt that EUR/USD will continue to trade higher in the EUR-USD 2y swap spread has
coming months. We believe the market will soon start to focus on the European debt widened
1.50 EUR/USD 70
problems once again. It is also likely that that the European numbers will also start to Bp
1.45 60
<< EUR/USD spot
disappoint if the current weakness in the US economy continues. 1.40 50
1.35 40
1.30 30
Sterling has peaked for now 1.25 20
1.20 10
2Y EUR-USD swap spread >>
Since late May, EUR/GBP has traded around 6% lower as PIIGS debt concerns have put 1.15 0
Jan Feb Mar Apr May Jun
the psychologically important 0.80 level back within reach. However, UK-related factors 10

have also exerted downward pressure on the cross: (i) the ‘crisis budget’ to improve the Source: Ecowin
government’s balance has been well-received, seemingly convincing investors that harsh
austerity measures can sustain the UK’s top credit rating, without economic growth
coming to a standstill; and (ii) hawkish comments from BoE’s Sentance and his vote for a EUR/GBP short-term financial model
25bp hike at the last MPC meeting have fuelled speculation that the BoE may be moving 1.00
EUR/GBP
0.95
closer to reducing monetary stimulus. In our view, recent sterling strength seems 0.90

overdone; we still doubt that the UK will manage to avoid being downgraded, and despite 0.85
0.80
Sentance’s dissent, the MPC appears a long way from tightening policy. Also, our short- 0.75
0.70
term financial model indicates that an upward correction in EUR/GBP could be imminent. 0.65

Feb Apr Jun Aug Oct Dec Feb Apr Jun Aug Oct Dec Feb Apr Jun
08 09 10

Riksbank concerned about European debt crisis EUR/GBP Spot EUR/GBP

As widely expected, the Riksbank this week hiked rates by 25bp to 0.5%. However, the Source: Ecowin
bank was less hawkish than expected, saying that the fiscal tightening that some countries
need to undertake is expected to dampen GDP growth in the euro area and in Sweden in
the longer run. The Riksbank revised its rate path in 2012 down by 50bp. EUR/SEK trading on relative rates
-90 12.50
-80 bp 12.25
The market initially dumped the SEK as the downward revision was a surprise the -70 12.00
-60 11.75
-50 11.50
market. However, we still see value in Swedish kroner. Sweden is still well ahead of the -40
<< 2y swap spread SEK-EUR
11.25
-30 11.00
ECB and the Fed, and is the first major ‘non-commodity’ central bank to hike rates. -20
-10
10.75
10.50
0 10.25
10 10.00
EUR/SEK >>
20 9.75
In fact, the Riksbank perfectly expresses our view on the SEK in its Monetary Policy 30 9.50
40 9.25
50 9.00
report saying, “Fundamental factors indicate that the krona will strengthen over the Jan Mar May Jul Sep Nov Jan Mar May Jul
09 10
coming years to the levels prevailing before the crisis. Swedish public finances are sound,
and GDP growth in Sweden is expected to be higher than abroad. A higher Swedish Source: Ecowin

policy rate relative to other countries is also expected to contribute to a stronger krona Chief Analyst
rate.” Arne Lohmann Rasmussen
+45 45 12 85 32
arr@danskebank.dk

Senior Analyst
Sverre Holbek
+45 45 14 88 82
holb@danskebank.dk

12 | 02 July 2010
www.danskeresearch.com
Weekly Focus

Commodities: Costs catching up with prices

Weekly update: headwinds from sentiment and tailwinds from
storms
The past week has seen a further sell-off for both energy and base metals. In particular,
copper has been hit hard by the softness in economic data with notably the Chinese and Weekly changes
Euroland PMIs suggesting that the manufacturing cycle may now have peaked. Our LIFFE Wheat
economists point out that while the figures indicate above-trend growth for Q2, the
Gold
numbers also suggest that the industrial recovery is losing more steam, except in Italy and
Copper
Germany.
Aluminium
Although some headwinds from manufacturing sentiment are materialising now, oil ICE Brent
prices have received some support from the prospects of a distorting hurricane season this NY Gasoline
year. However, the first major tropical storm this year, Hurricane Alex, has so far evolved NY WTI
relatively favourably and stayed clear of oil fields. In addition, while grains have long
been lagging the rest of the commodity complex, the quarterly USDA report on US stocks -10 -5 0 5 10
and acreage released this week showed that stocks of wheat, corn and soybeans fell in Q2. Five-day change, %
In particular, corn saw a significant increase as the report also showed that farmers have Source: Bloomberg, Danske Markets.

planted fewer acres than previously estimated.

Forecast update: new price floors materialising

Week ahead
Crucially, the price slides seen not least in the base-metals complex imply that cost curves
may now be catching up with prices. For aluminium this is increasingly becoming an  Chinese trade data (Mon)
issue, as both alumina and energy costs are on the rise, meaning that marginal Chinese
producers could thus soon be squeezed out. Some producers of zinc and nickel are also on  EIA Short-Term Energy Outlook
the brink of loss-making production at current prices levels. This could lead to cutbacks (Wed)
in metals output in the near term. At the same time, the oil industry is also facing rising  Euro-zone industrial production
costs going forward: due to offshore drilling restrictions, stricter safety standards and an (Thu)
increase in insurance premiums, oil majors also look set to face higher pressure on
margins going forward. Overall, this suggests that both the oil and base metals markets  USDA WASDE (Fri)
are seeing price floors materialising now.
Overall, the message from our last Commodities Monthly remains intact, new price levels
have been reached but the course of direction is in our view higher than now. As a result,
we have made few changes to our price forecasts this time. Thus, we still look for Brent Danske Markets forecasts
to average USD81 in 2010 (previously USD80) and USD90 in 2011 as the rebound in
Al Cu
energy demand continues and supply restraint leads to stock draws. We expect aluminium 130 Matif Wheat Brent crude
to eventually see weakness from elevated stocks and unwinding of term deals, but will Steel
120
also receive potential support from the launch of a new ETF and rising costs. Copper
should benefit from an improving housing/construction sector whereas steel could see 110
some seasonal weakness over the summer but perform again later in the year as OECD
100
activity gains pace.
90
To put our outlook for the rest of 2010 into perspective: over the winter of 2009-10 we
saw a decoupling of commodities from the US dollar – during spring this year,
decoupling from fundamentals was a defining feature – later in the year, we expect to see
commodities re-couple with both the dollar and fundamentals, both of which should Source: EcoWin, Danske Markets.
eventually prove broadly supportive for prices. Read more in our recent Commodities Note: index with 10Q2=100.
Monthly.

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

13 | 02 July 2010
www.danskeresearch.com
Weekly Focus

Credit
Market commentary
It was a depressive start to the week for credit indices. European money markets started in
fragile mode ahead of the expiry of the 1Y liquidity facility on Thursday, as markets iTraxx Europe (5Y CDS)
feared a restricted access to liquidity for a number of banks. To bridge the resulting 250
bp

liquidity gap, the ECB conducted an unlimited 3M auction on Wednesday. The result of
200

that auction was better than feared as banks put in bids for less liquidity than anticipated,
indicating that access to liquidity is satisfactory for most. In the short term, fears of 150

systemic stress therefore seem to have abated although it must be stressed that market 100

confidence remains fragile, as illustrated by the negative reaction to the negative rating
50
news on Spain – which should not come as a surprise and be priced in already. The
iTraxx investment grade index currently trades at 134bp whereas the crossover index 0
Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-1

trades at 595bp. Cash market activity is relatively subdued with investors seeming to
Source: Markit
prefer World Cup football to outright bets in the credit market.

Like the Jabulani football, the direction in the credit market is hard to predict. We believe
that much of the bad news has already been discounted, but with weak consumer iTraxx Crossover (5Y CDS)
confidence numbers coming out from the US as well as ongoing fiscal challenges in many 1,400
bp
countries, growth is likely to slow in H2 2010. Substantial spread tightening therefore 1,200

seems unlikely in the short term. Still, we remain positive on non-financial credit on the 1,000

back of sound company fundamentals and improving credit metrics. 800

The primary market 600

400
After some busy weeks, activity in the primary market is levelling off slightly. Tensions
200
in the money market and a fast approaching summer holiday are likely culprits in our
0
view. Going forward, the next few weeks will probably decide whether we will see much Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10

primary market activity during the summer. If markets remain downbeat in the short term
Source: Markit
we believe the primary market will remain more or less inactive until the end of the
summer period. On the other hand, if markets regain confidence we believe that activity is
likely over the summer – as was the case last year.

Table 1. Selected new issues during the week

Bond spread on
issue date,
Name Rating Coupon Maturity Currency Size (bp)*
Credit Suisse Aa1/A+ FRN 3Y EUR 0.3bn 92
Deutsche Bahn Aa1/AA Fixed 15Y EUR 0.5bn 58bp
FIH (Gov. Guar.) Aaa/AAA FRN 3Y DKK 6.0bn 15
Corio Baa1/BBB+ Fixed 7.5Y EUR TBD 200-220
Veolia A3/BBB+ Fixed 11Y EUR TBD 130bp
Hertz B1/B Fixed 5Y EUR 0.4bn Yield 8.5%
Note: Ratings are Moody's and S&P. * Mid-Swaps for Fixed, Discount Margin for floating

Source: Danske Markets & Bloomberg

Senior Analyst
Henrik Arnt
+45 4512 8504
Henrik.arnt@danskebank.dk

14 | 02 July 2010
www.danskeresearch.com
Weekly Focus

Financial views
Equities
 Equity markets are discounting a recession due to the European crisis. This is a much
Equities and US 10Y yield
harder expectation than suggested by current leading indicators. Hence our worry is
for a hard landing. However, for now we place more probability on a slowdown with 1275 Index % 3.9
1225
positive growth rates and we believe that Q2 is likely to be a positive trigger for a 1175
3.7

very nervous global stock market. We expect the financial sector to be surrounded by 1125 3.5
1075 3.3
uncertainty for a longer period. In the short term, we expect the sector to perform in 1025 << S&P500
US 10-year gov bond >> 3.1
contrast to the significant underperformance seen in recent months and therefore 975
925 2.9
recommend a neutral stance (previously underweight). We reiterate our overweight Jan Feb Mar Apr May Jun
recommendations on Industrials, Consumer Staples and Energy. 10

Source: Reuters Ecowin

Fixed Income
 Global: Risk sentiment remains the key driver of global bond yields, as financial
markets continue to trade on the European debt crisis and the fear of a hard landing in
the global economy. Following the recent sharp decline in yields, bond markets are EUR/USD and USD/JPY
now pricing a substantial slowdown in H2. Until clear evidence of resilience in global 165 98
155 96
growth (i.e. solid job growth) and/or improvement in southern European debt markets << EUR/USD
145 94
materialises, bond yields will remain depressed. Over the coming months we look for
135 92
moderately higher yields as incoming data will dampen fears of a hard landing. 125 90
However, markets are likely to remain very volatile. 115 88
USD/JPY >>
105 86
 Euroland intra-spreads: We remain overweight on Germany, Italy, the Netherlands, Jul Sep Nov Jan Mar May
Austria and Ireland. We are underweight on France, Spain, Greece and Portugal. We 09 10

recommend 5Y Italy versus France and 30Y Italy versus Germany. Source: Reuters Ecowin

 Scandinavian government bonds are performing well relative to Euroland and we

remain overweight 10Y DGBs and 10Y SGBs vs France.
Credit Credit spreads
 The primary market has reopened and secondary market activity has also picked up 25.0 % points % points 6.5
slightly – going forward we expect liquidity to continue to improve. However, the 20.0 5.5
segregation of market access for northern and southern European issuers is becoming 15.0 4.5
clearer. Furthermore, banks are likely to remain under pressure for some time on the
10.0 3.5
back of sovereign distress and the austerity measures currently being undertaken.
5.0 US credit spread (Baa) >> 2.5

 We are positive on investment grade credit from non-financial companies. Company 0.0
<< Eur high yield spread
1.5
07 08 09 10
credit metrics are sound and we thus consider the default risk in the short- to medium-
term as very low. Furthermore, companies of high credit quality offer an alternative
Source: Reuters Ecowin
for investors seeking an exit from what they perceive to be risky sovereign exposure.
FX outlook
 The euro has received support as the ECB managed a reduction of its liquidity
provision without adding to already high market tension. Still, with Spain moving Commodity prices
closer to a downgrade, the focus of attention remains on the euro debt crisis and the 90 USD/barrel Index 4000
85 3750
uptick in EUR/USD is likely to be temporary. EUR/GBP has fallen sharply and while << Oil (WTI)
80 3500
we see long-term value in sterling, the move looks overdone. EUR/CHF has 75 3250
70 3000
continued to push to new all-time lows, but with speculative investors already long in
65 2750
LME metal prices >>
the Swiss franc, a near-term correction cannot be ruled out, although the long-term 60 2500
trend is for a stronger CHF. 55 2250
Jul Sep Nov Jan Mar May
09 10

Source: Reuters Ecowin

15 | 02 July 2010
www.danskeresearch.com
Weekly Focus

 The SEK sold off on a dovish Riksbank statement. However, sound fundamentals and
strong growth momentum should warrant lower levels of EUR/SEK going forward.

Commodities
 Although some headwinds from manufacturing sentiment are materialising for
commodities at the moment, bullish supply-side factors are increasingly in focus.
While some further softness cannot be ruled out we expect prices to have some
limited potential left this year.

16 | 02 July 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 2.2 4.1 -5.6 42.0 3.2
2011 1.9 2.5 0.5 1.3 0.2 3.5 3.5 1.8 4.0 -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
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.
Euroland 2009 -4.0 -0.5 2.3 -10.8 -0.8 -12.6 -11.4 0.3 9.4 -6.3 78.7 -0.7
2010 1.3 0.1 1.4 -2.0 0.4 7.9 5.8 1.4 9.8 -6.7 84.8 -0.3
2011 2.1 1.2 1.1 3.8 0.0 5.4 4.6 1.6 9.5 -6.0 88.5 -0.2
Germany 2009 -4.9 -0.1 3.4 -13.5 0.4 -14.5 -9.5 0.2 7.5 -3.5 73.0 4.0
2010 1.9 -1.0 2.1 9.9 0.1 8.9 8.8 1.0 8.1 -5.0 76.5 3.7
2011 2.7 1.7 1.4 7.4 0.0 7.0 6.7 1.2 7.6 -3.0 79.0 3.2
France 2009 -2.6 0.7 2.8 -7.0 -1.6 -10.7 -9.8 0.1 9.4 -8.3 78.0 -2.3
2010 1.6 1.3 1.7 -1.0 0.3 7.9 5.9 1.2 10.0 -8.5 82.0 -2.5
2011 1.8 1.4 1.0 4.2 0.1 6.2 6.2 1.5 9.7 -7.0 87.0 -2.2
Italy 2009 -5.1 -1.6 1.6 -13.1 -0.3 -19.2 -15.2 0.7 7.8 -5.3 114.6 -2.2
2010 1.3 0.9 1.3 0.1 0.2 8.0 6.0 1.9 8.6 -5.0 116.0 -2.0
2011 2.0 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 -0.3 -0.5 1.8 -5.6 0.0 7.2 4.6 0.9 20.1 -10.0 66.0 -4.1
2011 1.0 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
Year GDP 1 cons.1 cons.1 inv.1 build.2 ports1 ports1 tion1 ploym.3 budget4 debt4 acc.4

USA 2009 -2.4 -0.6 1.8 -18.3 -0.6 -9.6 -13.9 -0.3 9.3 -9.9 83.8 -2.9
2010 3.3 2.7 0.3 2.9 1.2 12.1 11.3 1.6 9.4 -10.2 91.6 -3.9
2011 3.2 2.7 9.4 2.8 -0.4 6.4 6.4 1.6 9.4 -8.8 96.8 -3.8
Japan 2009 -5.2 -1.1 1.6 -14.4 -0.3 -24.1 -16.9 -1.4 4.7 -8.0 220.0 2.8
2010 3.3 2.2 1.6 -1.1 -0.1 23.7 2.6 -1.0 4.3 5.2 220.4 3.4
2011 2.1 1.7 1.0 2.5 0.0 5.4 5.4 0.1 - - - 3.0
China 2009 8.7 - - - - - - -0.7 4.3 -3.3 23.6 5.8
2010 10.2 - - - - - - 3.3 4.0 -2.2 20.5 4.8
2011 9.5 - - - - - - 3.5 4.0 -2.2 20.5 5.5
UK 2009 -4.9 -3.2 2.8 -14.9 -1.2 -10.6 -13.3 2.2 7.6 -10.4 68.6 -1.3
2010 1.3 0.9 3.0 -2.0 1.1 4.4 0.9 3.2 8.0 -10.7 80.3 -2.0
2011 2.3 2.6 2.2 2.2 1.3 6.9 5.0 2.1 8.1 -8.8 88.2 -1.2

Switzer- 2009 -1.5 1.2 2.5 -3.7 1.0 -9.3 -5.7 -0.5 3.7 1.4 38.8 8.3
land 2010 2.0 1.8 0.5 2.1 -0.7 7.0 5.0 1.0 3.8 -1.0 40.0 9.0
2011 1.7 1.6 1.0 1.5 -0.2 4.0 4.0 1.2 3.5 -0.5 39.0 10.0

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

17 | 02 July 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 02-Jul 0.13 0.53 0.98 3.01 125.0 - 595.8
+3m 0.13 0.45 1.30 3.60 115 - 647
+6m 0.13 0.45 1.45 3.60 118 - 631
+12m 0.75 1.15 1.95 3.60 127 - 587
EUR 02-Jul 1.00 0.78 1.44 2.89 - 125.0 744.9
+3m 1.00 0.65 1.30 3.00 - 115 744.0
+6m 1.00 0.65 1.35 3.10 - 118 744.0
+12m 1.00 1.00 1.65 3.40 - 127 745.0
JPY 02-Jul 0.10 0.24 0.46 1.17 110.0 88.0 6.77
+3m 0.10 0.24 0.50 1.45 109 95 6.83
+6m 0.10 0.30 0.65 1.55 117 99 6.36
+12m 0.10 0.30 1.00 1.60 130 102 5.73
GBP 02-Jul 0.50 0.73 1.44 3.39 82.3 151.9 904.8
+3m 0.50 0.70 1.55 3.60 84.0 137 886
+6m 0.50 0.75 1.60 3.75 85.0 139 875
+12m 0.50 0.75 1.95 4.05 82.0 155 909
CHF 02-Jul 0.25 0.11 0.55 1.89 133.6 106.8 557.7
+3m 0.25 0.15 0.60 2.00 130 113 572
+6m 0.50 0.50 0.95 2.15 128 108 581
+12m 1.00 1.00 1.60 2.50 135 106 552
DKK 02-Jul 1.05 1.13 1.79 3.04 744.9 595.8 -
+3m 1.05 1.10 1.60 3.20 744 647 -
+6m 1.05 1.10 1.65 3.25 744 631 -
+12m 1.05 1.35 1.95 3.50 745 587 -
SEK 02-Jul 0.25 0.81 1.70 2.94 959.5 767.4 77.6
+3m 0.50 0.80 2.00 2.70 940 817 79.1
+6m 1.00 1.30 2.30 2.90 920 780 80.9
+12m 1.50 1.90 3.00 3.45 920 724 81.0
NOK 02-Jul 2.00 2.78 3.16 4.09 805.8 644.4 92.4
+3m 2.00 2.65 3.20 4.30 765 665 97.3
+6m 2.50 3.00 3.50 4.45 760 644 97.9
+12m 3.25 3.75 4.25 4.80 760 598 98.0
PLN 02-Jul 3.50 3.77 4.59 5.37 414.3 331.3 179.8
+3m 3.50 4.10 5.00 5.85 395 343 188
+6m 3.50 4.10 5.20 6.10 395 335 188
+12m 3.50 4.10 5.80 6.35 390 307 191

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
02-Jul Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011
NYMEX WTI 73 81 81 80 85 87 89 92 94 82 91
ICE Brent 72 79 81 79 84 86 88 91 93 81 90
Copper 6,330 7,274 7,072 7,200 7,500 8,000 8,400 8,600 8,700 7,261 8,425
Zinc 1,740 2,307 2,067 1,900 2,000 2,100 2,150 2,200 2,250 2,069 2,175
Nickel/1000 19 20 23 21 22 22 23 23 24 21 23
Steel 430 464 491 460 475 500 510 530 550 473 523
Aluminium 1,926 2,199 2,131 2,100 2,100 2,150 2,200 2,300 2,400 2,132 2,263
Gold 1,212 1,110 1,194 1,200 1,150 1,100 1,050 1,000 1,000 1,164 1,038
Matif Mill Wheat 140 126 131 132 123 120 127 127 127 128 125
CBOT Wheat 500 518 490 470 450 475 500 500 500 482 494
CBOT Corn 364 389 379 375 410 420 430 440 450 388 435
CBOT Soybeans 957 969 932 975 990 1,000 1,010 1,020 1,030 967 1,015

Source: Danske Markets

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Weekly Focus

Calendar
Key Data and Events in Week 27

Monday, July 5, 2010 Period Danske Bank Consensus Previous

- USD Independence Day - Market closed
9:15 CHF Retail sales (real) y/y May 1.3%
9:45 ITL PMI Services, Final Index Jun 53,6 53.5 53.7
9:50 FRF PMI Services, Final Index Jun 61.6 61.6 61.6
9:55 DEM PMI Services, Final Index Jun 54.6 54.6 54.6
10:00 EUR PMI Services, Final Jun 55.4 55.4 55.4
10:00 EUR PMI Composite, Final Index Jun 56.0 56.0 56.0
10:30 GBP PMI Services Jun 55.0 55.4
11:00 EUR Retail sales m/m|y/y May 0.3%|-0.5% 0.5%|-0.2% -1.5%|-1.8%

Tuesday, July 6, 2010 Period Danske Bank Consensus Previous

6:30 AUD RBA monetary policy meeting 4.50% 4.50% 4.50%
7:00 JPY Leading Economic Index, preliminary Index May 98.9 101.7
9:15 CHF CPI m/m|y/y Jun -0.2%|0.8% -0.1%|1.1%
9:30 DKK Industrial production m/m May -0.8%
9:30 DKK Business Sales May
9:30 DKK Enforced sales (s.a.) Jun 455
16:00 USD ISM (NAPM) non-manufacturing Index Jun 54.4 55.0 55.4

Wednesday, July 7, 2010 Period Danske Bank Consensus Previous

8:45 FRF Trade Balance EUR bn. May -4.2
10:00 NOK Manufacturing Production m/m|y/y May 0.5%|.. 0.2%|3.0%
11:00 EUR GDP, s.a. - Final q/q|y/y 1st quarter 0.2%|0.6% 0.2%|0.6% 0.2%|0.6%
12:00 DEM Factory Orders m/m|y/y May 0.4%|24.9% 2.8%|29.6%
13:00 USD MBA Mortgage applications 8.8%
16:00 CAD Ivey PMI index Jun 64.0 62.7
21:35 USD Fed's Kocherlakota (non-voter, neutral) speaks

Thursday, July 8, 2010 Period Danske Bank Consensus Previous

- JPY Eco Watchers Survey: Current Index Jun 47.7
1:50 JPY Machine orders m/m|y/y May 4.0%|9.4%
1:50 JPY Current Account Total JPY bn (s.a.) May 1199.8 1379.6
1:50 JPY Money supply M2+CD y/y Jun 3.1% 3.1%
1:50 JPY Bank Lending y/y Jun -2.0%
3:30 AUD Employment change Jun 15.0k 26.9k
7:45 CHF Unemployment (sa) % Jun 4.0
9:30 SEK CPI m/m|y/y Jun 0.1%|1.0% 0.1%|1.0% 0.2%|1.2%
10:30 GBP Industrial Production m/m|y/y May 0.4%3.2% -0.4%|2.1%
12:00 DEM Industrial production mm/|y/y May 0.8%|9.2% 0.9%|13.3%
13:00 GBP BoE rate announcement Jul 0.5% 0.5%
13:45 EUR ECB Announces Interest Rates 1.0% 1.0% 1.0%
14:30 USD Initial jobless claims 1000 460 472
14:30 EUR ECB's Trichet Speaks at ECB Monthly News Conference
21:00 USD Consumer credit bn. USD May -2.0 1.0
Source: Danske Markets

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Weekly Focus

Calendar - continued

Friday, July 9, 2010 Period Danske Bank Consensus Previous

8:00 DEM Inflation (HICP), Final m/m | y/y Jun 0.0%|0.8% 0.0%|0.8%
8:45 FRF Manufacturing production m/m|y/y May 0.5%|7.0% 0.4%|8.5%
8:45 FRF Industrial production m/m|y/y May 0.3%|6.0% -0.3%|7.9%
9:30 SEK Industrial production m/m|y/y May 0.9%|7.3%
9:30 DKK Current account DKK bn May 6.5 7.8
9:30 DKK Trade Balance DKK bn May 5.8
10:00 NOK Consumer prices m/m|y/y Jun -0.3%|1.7% -0.5%|2.5%
10:00 NOK Core inflation(CPI-ATE) m/my/y Jun -0.1%|1.0% ..|1.1% 0.1%|1.5%
10:00 NOK Producer prices m/m|y/y Jun -0.5%|18.4%
10:00 ITL Industrial production m/m|y/y May 1.0%|9.3% 1.0%|8.7%
10:30 GBP PPI - Output m/m|y/y Jun 0.1%|5.7% 0.3%|5.7%
13:00 CAD Unemployment rate Jun 8.1% 8.1%
13:00 CAD Net change in employment Jun 20000 24700

During the week Period Danske Bank Consensus Previous

Fri 02 - 07 GBP Halifax house prices m/m|y/y Jun -0.4%|6.9%
Source: Danske Markets

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Weekly Focus

Disclosure
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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
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