Investment Research

13 August 2010

Weekly Focus
Fear of a slump

Market Movers ahead

 US Senior Loan Officer survey with details on credit conditions and demand for loans
will be released on Monday. Local business surveys are expected to show some
strengthening while housing starts and building permits are expected to fall.
 The Euro area is facing a calm week in terms of macro data. ZEW expectations are
likely to decline as market sentiment has turned more sour.
 In Asia focus turns to Japanese GDP data for Q2. Consensus is for 0.6% q/q GDP
growth but we see some downside risk to that forecast. USD/JPY has declined to a
new low and speculation is rising over potential intervention from the Bank of Japan.
 In Scandinavia attention will be on Norwegian Q2 GDP figures. We expect moderate
growth.
Global Update
 Financial markets have become increasingly concerned about the risk of a slump with
long-lasting repercussions. Data has turned softer in both Asia and the US.
 The Fed decided to bring its exit to a halt and as a result we have postponed our
expectations for a first Fed hike until Q4 11.
Contents
Market movers ahead ........................................... 2
Global update................................................................... 4
Scandi Update ................................................................ 6
Focus: “Agflation” scenario unlikely
despite wheat rally .................................................... 8
Equities: Only hard landing will have
negative effect on stock market ..............13
Fixed Income: Fed exit on hold ....................14
FX: USD recovers despite soft Fed .......15
Commodities: Price correction................16
Credit ...................................................................................17
Financial views...........................................................18
Macroeconomic forecast ..............................19
Financial forecast ...................................................20
Calendar ...........................................................................21

 Euro area growth was strong in Q2, pulled up by Germany. Declining industrial
production in June has raised concerns about growth in Europe too.

 European government bond spreads widened. On Thursday the ECB was seen
purchasing government bonds in the market and spreads began to narrow.

Focus
 Wheat prices have rallied since early July. We assess the fundamental situation in the
grains market and conclude that the recent rally is overdone and that a global food
crisis is not imminent. In an alternative ‘agflation’ scenario, the impact on inflation is
notable – in particular in emerging markets.

Bond yields in record lows USD/JPY declines further

3.5 3.5 150 150
% %
3.0 3.0 140 140
USD/JPY
2.5 2.5 130 130
German 10 year government bonds
2.0 2.0 120 120
...5 year Editors
1.5 1.5 110 110
...2 year
1.0 1.0 100 100 Allan von Mehren
0.5 0.5 90 90 +45 4512 8055
0.0 0.0 80 80 alvo@danskebank.dk
jan feb mar apr maj jun jul aug 94 96 98 00 02 04 06 08 10
10 Steen Bocian
Source: Reuters Ecowin Source: Reuters Ecowin +45 45 12 85 31
steen.bocian@danskebank.dk

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Weekly Focus

Market movers ahead

Global
 Next week’s US data release calendar is quite full. The Fed’s July Senior Loan
Officer survey to be released on Monday should shed some light on developments in US housing data remains weak
credit conditions but also give an indication of the demand for loans. Local business 20 % m/m
% m/m
20
15 Building permits 15
surveys from Philadelphia and New York are expected to show some strengthening, 10 10
5 5
likely reflecting a catching-up effect to the manufacturing ISM. Data for the housing 0 0
market is still difficult to predict due to lagged effects from the first-time home buyer -5
-10
-5
-10
credit, but as these effects die out, the fear is that the weak housing figures are a sign -15 Housing starts -15
-20 -20
of real underlying weakness. Hence, next week we expect both housing starts and -25 -25
Jun Sep Dec Mar Jun Sep Dec Mar Jun
building permits to fall, along with a weakening of the NAHB index. We anticipate a 08 09 10
continued increase in US industrial production and rising producer prices driven by
Source: Ecowin
July’s oil price increases.
 In the euro area, the only economic release of interest in the coming week is the
ZEW to decline
German ZEW indicator on Tuesday. The ZEW expectations index has declined since
100 100
April on the back of the escalation of the European debt crisis. Meanwhile ZEW 75
Net balance Expectations
75
current conditions have increased significantly, reflecting a strong German rebound. 50 50
25 25
Recently the debt crisis has faded somewhat and risky assets have advanced. This was 0 0
German Zew...
-25 -25
reflected in Sentix investor confidence, which advanced significantly in August. The -50 -50
Sentix indicator is usually a good predictor of German ZEW expectations, which -75
Current conditions
-75
-100 -100
indicate a positive ZEW release next week. However, market conditions have turned 00 01 02 03 04 05 06 07 08 09 10

more sour over recent weeks as fears of global slowdown rise. We thus expect a slight
decline in ZEW expectations. Source: Reuters Ecowin

 UK retail sales are more important than inflation data next week as BoE is more
worried about economic prospects than price pressures, which was the message from UK retail sales are trending down – but
the past week’s Inflation Report. Retail sales have fallen more than surveys suggest, have fallen more than indicated by
but we fear that weak data will continue. Housing data is also rapidly losing steam. surveys
The BoE Minutes will probably show that most members preferred an unchanged
base rate at the meeting on monetary policy earlier on the month – if sole dissenter
Sentance also joined the ranks, markets will interpret it as the MPC is getting more
dovish. GBP strengthened last week as USD struck back but is overbought according
to relative rates.
 Switzerland is heading for a light data calendar in the coming week. No central bank
speeches are on the agenda, and the only indicator likely to attract a little attention is
the July trade balance due on Thursday. The main focus will be on exports, which Source: Reuters Ecowin

should give an indication of the way GDP growth is heading.

 In Asia focus turns to Japanese GDP data for Q2. Industrial production data points to GDP growth likely to slow in Japan
a clear slowing of growth in Q2 as it grew only 0.2% q/q following a rise of 4.2% q/q
15 % q/q
in Q1. Consensus is for GDP growth of 0.6% q/q but we see some downside risk to 10
% q/q 12.5
<< Industrial production
that. Focus will also be on USD/JPY which has declined to a new record low and 5
7.5
2.5
speculation is rising over potential intervention from BoJ. Comments from BoJ and 0
-2.5
-5
the finance minister have been mixed on the issue. There is no data scheduled in -10
Japan GDP >>
-7.5

China but focus is again turning to CNY as it depreciated versus USD in the past -15 -12.5
-20 -17.5
week after softer Chinese data. This throws some uncertainty over whether China is 00 01 02 03 04 05 06 07 08 09
hesitating a bit on the appreciation of CNY.
Source: Reuters Ecowin

2| 13 August 2010
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Weekly Focus

Scandies
 Denmark appears to have a quiet week ahead as far as economic indicators are
concerned. Monday will see the release of Q2 wage data by the Danish Employers’ Slowing wage growth in Denmark
Association and Wednesday the publication of July car sales data. It will be % y/y
5.0
% y/y
5.0

interesting to see if car sales indicate a growing appetite for spending by Danish 4.5
Wage growth
4.5

households following the disappointing retail sales and payment card transaction data 4.0 4.0

3.5 3.5
published recently.
3.0 3.0

 No significant market movers are expected in Sweden in the coming week. 2.5 2.5

2.0 2.0
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
 Q2 GDP numbers are due out in Norway in the coming week. There is no getting
away from the fact that economic growth in Norway has been disappointing in recent Source: Danish Employers’ Association
quarters given the low level of interest rates and unemployment and the global
upswing. Part of the reason has been lower activity in the oil-related industry and
households being cautious with their interest rate gains. The leading indicators
suggest that growth was increasing towards the end of Q2 and that this has continued
into Q3. We therefore expect that mainland GDP rose 0.4% q/q despite modest
consumption growth and indications of a negative contribution from net exports. Keep
an eye on the effect on GDP of the sharp fall in power production in Q2. This is
supply-side driven and provides no information on economic development, but it will
affect overall production growth.

Market movers ahead

Global movers Event Period Danske Consensus Previous
Mon 16-Aug - USD Senior loan officers survey
14:30 USD Empire Manufacturing m/m Aug 7.5 8.25 5.08
19:00 USD NAHB Housing Market Index Index Aug 13 15 14
1:50 JPY GDP,preliminary q/q|ann. 2nd quarter 0.6%|2.3% 1.2%|5.0%
Tue 17-Aug 10:30 GBP CPI m/m|y/y Jul -0.1%|3.2% -0.2%|3.1% 0.1%|3.2%
11:00 DEM ZEW economic sentiment Index Aug 20.3 20.6 21.2
14:30 USD PPI m/m|y/y Jul 0.5%|4.5% 0.2%|4.2% -0.5%|2.8%
14:30 USD Housing starts 1000 (m/m) Jul 540 (-1.6%) 560 (2.0%) 549 (-5.0%)
14:30 USD Building Permits 1000 (m/m) Jul 568 (-2.5%) 576 (-1.2%) 583 (2.1%)
15:15 USD Industrial production m/m Jul 0.4% 0.5% 0.1%
Wed 18-Aug 10:30 GBP BoE Minutes
Thurs 19-Aug 8:15 CHF Trade balance bn CHF Jul 1.82 1.77
10:30 GBP Retail Sales incl. Auto fuel m/m|y/y Jul 0.5%|1.2% 0.4%|1.1% 0.7%|1.3%
16:00 USD Philadelphia Fed. Index Aug 6.0 7.5 5.1
Scandi movers Event Period Danske Consensus Previous
Mon 16-Aug - DKK Wage growth (DA) y/y 2nd quarter 2.6%
Wed 18-Aug - DKK New car sales, july Jul
Thurs 19-Aug 10:00 NOK GDP (mainland) s.a. q/q|y/y 2nd quarter 0.1%|…
10:00 NOK GDP (total) s.a. q/q|y/y 2nd quarter -0.1%|…

Source: Bloomberg and Danske Markets

3| 13 August 2010
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Weekly Focus

Global update
Fear of a downturn intensifies
This week financial markets became increasingly concerned about the risk of a slump Stock markets turn sour
with long-lasting repercussions. Data has turned softer in Asia – particularly in China – 1225 4000
Index Index
and recent US data has been weak. In the US, initial claims data weakened further and is 1200
<< S&P500
3900
1175 3800
now at a level which is quite concerning and suggesting that the labour market may be 1150
DAX >>
3700
1125 3600
slowing further. As a result of the disappointing signals from macro data, stock prices 1100 3500
fell, yields went lower, the oil price fell to below USD78/bbl and EUR/USD weakened. 1075 3400
1050 3300
Due to increased concerns, the Fed decided to bring its exit to a halt and as a result we 1025 3200
1000 3100
have postponed our expectations for a first Fed hike until Q4 11. dec feb mar apr maj jun jul aug
09 10
The euro area provided very strong Q2 GDP figures, pulled up by 2.2% q/q growth in Source: Reuters Ecowin and Danske Markets
Germany, but industrial production declined in June, so concerns about European growth
are materialising too.

European government bond spreads widened with Irish spreads widening the most, driven EUR/USD weakens
partly by concerns about the full cost of saving the Irish financial sector. On Thursday, 1.50 EUR/USD 1.50

the ECB was seen purchasing government bonds in the market and spreads began to 1.45 1.45
1.40 1.40
narrow.
1.35 1.35
1.30 1.30
Weak US data tilts the Fed in a more dovish direction 1.25 1.25
1.20 1.20
The round of weak US data received over the most recent months – both for the labour
1.15 1.15
market and private consumption – has caused increased worries about the economic jan feb mar apr maj jun jul aug
10
recovery within the FOMC: the slowdown in the US economy has been more pronounced Source: Reuters Ecowin and Danske Markets
in the first half of the year than preliminary data had suggested. While a slowdown in the
manufacturing sector had been widely anticipated, what is worrying the Fed and us, is
that the high growth rates in the early phase of the recovery have not been enough to spur FOMC puts a floor on the balance
sheet
a convincing recovery in the labour market.

This increased concern was reflected in the FOMC statement. The FOMC revised
downward the near-term growth outlook and decided to reinvest the principal payments
from the Fed’s portfolio of Agency and MBS holdings in longer-term Treasuries. This
implies that the balance sheet will be held constant and effectively puts the exit strategy
on hold. While the amount of treasuries to be bought is insignificant, the decision sends a
strong signal to markets. It provides a clear indication that rate hikes remain in the
indefinite future and that the central bank is prepared for another round of quantitative
Source: Reuters Ecowin and Danske Markets
easing if necessary. Given a softer H2 outlook and the FOMC shifting to an easing bias,
we have revised our Fed Funds forecast. We now expect the first Fed Funds rate hike in
Q4 11.
ISM signals slowdown
Renewed concerns about euro area periphery 65 Index Index 65
60 60
This week government bond spreads widened again with Irish spreads widening the most, 55 55
driven by renewed concerns in particular about the full cost of the Irish banking crisis. 50 50
45 45
This was partly fuelled by the fact that two banks bid at the ECB’s weekly dollar liquidity 40
ISM manufacturing
40
providing auction – the first time there have been any bids since May – indicating that 35 35
30 30
they could not raise dollars in the market though dollar liquidity should be plenty. On 00 01 02 03 04 05 06 07 08 09 10

Source: Reuters Ecowin and Danske Markets

4| 13 August 2010
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Weekly Focus

Thursday, the ECB purchased Irish government bonds and spreads narrowed. The ECB
has not been buying government bonds for significant amounts over the past four weeks, European spreads widen
but might now ‘restart’ the programme with more significant buying.
11.0 %-point, 2-year spread to Germany 3.25
10.5 << Greece 3.00
Industrial production in the euro area declined 0.1% m/m in June, but GDP growth in Q2 10.0 2.75
9.5 2.50
has nevertheless been impressive – particularly in Germany where growth stood at 2.2% 9.0 2.25
8.5 2.00
q/q, the highest quarterly growth rate in decades. Greece is at the other end of the 8.0 Portugal >> 1.75
7.5 Ireland >> 1.50
spectrum with a 1.5% q/q decline in GDP and unemployment that reached 12% in May. 7.0 Spain >> 1.25
6.5 Italy >> 1.00
The disappointing June production data could be a forewarning of a new slump in 6.0 0.75
juni juli august
Europe, but we do not think so. Orders and confidence indicators still signal strong 10

Source: Reuters Ecowin and Danske Markets

growth. Nevertheless, a slowdown should be expected after the strong Q2 performance
and given the weakness in other regions we are aware that euro area growth prospects
could quickly deteriorate.
Strong German growth
On Wednesday, the Slovak parliament rejected its contribution to the aid package for
Greece, but did approve its participation in the loan facility for countries in trouble. The 130 Index (2000=100) Index 130
Spain
125 125
Commission regretted this ‘breach of solidarity’, but said that Slovakia’s decision would
120 Netherlands 120
not have any negative implication for the disbursement of the instalments of the loan. 115
Euroland
115
France
110 110

More signs of slowing in Asia 105

Germany
105
100 Italy 100
The past week offered more evidence that growth in Asia is coming down. In particular, 95 95
China is seeing activity come off the boil. Industrial production growth fell to 13.4% y/y 00 01 02 03 04 05 06 07 08 09

in July, down from a peak of 19.2% y/y late last year. House prices also show signs of Source: Reuters Ecowin and Danske Markets
cooling off, with annual growth rates falling again to 10.3% from 11.4% in June. A
Chinese slowdown has been expected – and needed – as inflationary pressures have been
building. But the recent data suggests that this cooling of the economy is happening faster More cooling signs in China
than projected. Chinese tightening measures have included reducing credit growth and
40 40
measures to dent activity in housing. China has also told large companies to improve 30
%, 3 mth change %, 3 mth change
30
China imports
energy efficiency in order to meet its target of a 20% reduction in energy intensity over 20 20
10 10
2005-2011. This has contributed to the decline in industrial activity. 0 0
-10 -10
Trade data also painted a picture of a slowing Chinese economy. Import growth levelled -20 -20
Actual 3m mov.avg.
-30 -30
off to 22.7% y/y in July after rising more than 80% y/y six months’ ago. Export growth is -40 -40
still growing strongly, which means that the Chinese trade balance rose significantly. This 06 07 08 09 10

is putting global imbalances back in the spotlight – not least after US trade figures
Source: Reuters Ecowin and Danske Markets
showed the opposite development in July. With US growth facing headwinds, this could
put protectionism back on the agenda in the US. Interestingly, China put a stop to the
appreciation of CNY this week and instead it depreciated against USD. It may be an
CNY depreciating this week
effect of the weakening of EUR as China has said it will increasingly steer CNY against a
6,84 6,84
basket of currencies including EUR. It might also be the weaker data that is leading the 6,83 6,83
Chinese authorities to backtrack on the gradual appreciation. It clearly throws uncertainty 6,82
USD/CNY
6,82
6,81 6,81
into the outlook for CNY. 6,80 6,80
6,79 6,79
In India, industrial production growth has also showed the first signs of coming down. 6,78 6,78
6,77 6,77
Production increased in June, but annual growth fell to 7.1% y/y from 11.3% y/y in May. 6,76 6,76
aug okt dec feb apr jun aug
09 10

Kilde: Reuters Ecowin

5| 13 August 2010
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Weekly Focus

Scandi Update
Denmark – Record current account surplus
The week's most talked-about release was undoubtedly the balance of payments for June.
Record current account surplus in
The current account showed a surplus of no less than DKK8.5bn for the month and a Denmark
record surplus of almost DKK80bn over the past 12 months. This is a clear signal that the 80

70
Mia. kr

Danish economy remains competitive – something which is not really in doubt, despite 60

50
Betalingsbalancen over 12 måneder
the persistent scare stories. That said, these movements in the current account do 40

30

exaggerate the health of the Danish economy and Danish industry. The record surplus is
20

10

due primarily to the very sharp downturn in domestic demand during the crisis, with
0

-10

-20

record falls in both investment and private consumption in 2009. -30

-40

-50

While the current account took the prize for the week's most talked-about release, it was

jan-66

jan-71

jan-76

jan-81

jan-86

jan-91

jan-96

jan-01

jan-06
apr-67
jul-68
okt-69

apr-72
jul-73
okt-74

apr-77
jul-78
okt-79

apr-82
jul-83
okt-84

apr-87
jul-88
okt-89

apr-92
jul-93
okt-94

apr-97
jul-98
okt-99

apr-02
jul-03
okt-04

apr-07
jul-08
okt-09
not the most important. Growth is everything right now, and the figures for industrial Source: Statistics Denmark, ADAM
production and exports of goods in June suggested that recent quarters' progress in the
Danish economy continued in Q2. Industrial production was a particular surprise with
growth of 1.2% from May to June despite a sharp increase in May. Goods exports, on the
other hand, were a disappointment in June, but both industrial production and goods
exports performed well over Q2 as a whole, showing growth of 2.7% and 2.1%,
respectively. The current account data also revealed a big increase in exports of services
in Q2, so there is now much to suggest that exports in particular are propelling the Danish
economy forward, while consumption seems to have been treading water of late.

Finally, the week brought disappointing inflation figures. Headline inflation climbed from
1.7% in June to 2.3% in July, and core inflation (which excludes energy and food) from
1.4% to 1.7%. Tax increases in isolation pushed up inflation by 0.6pp in July. On balance,
we still reckon that inflation this year will end up at 2.2%.

Sweden - Inflation stays on track

Inflation outcome in July was a pretty boring story, no surprises to speak about. CPIF
turned out as expected (1.7 % y/y) while CPI landed at 1.1 % y/y, 0.1 percentage points Fundamentals pull down CPIF
lower than expected (although that is well within the normal forecast error). Hence, there
3.0 CPIF
is no reason to expect any reaction from Riksbank based on this outcome.
2.5
A look at price components does not reveal anything out of the ordinary either; they were 2.0
in line with our forecasts. Clothing and shoe prices fell 6.7 % (normal July sales) and 1.5
petrol prices fell 2.7 % while electricity prices and mortgages costs rose 0.6 % and 2.3 %
1.0
respectively, all very close to our calls.
0.5
The July outcome means that our inflation forecast remains largely intact. As the chart on
maj-09

maj-10

maj-11
jan-09

jan-10

jan-11
sep-09

sep-10

sep-11

the right shows, lower CPIF suggests that the price increases for a majority of goods and
services are moderating, which is also backed by fundamental variables such as unit Danske Markets Riksbank
labour costs and currency movement. Hence, it is solely Riksbank’s rate hikes and as a Source: Danske Markets
consequence higher mortgage costs that pull up CPI in our forecast. Our and Riksbank’s
inflation forecast for the next year or so are quite similar.

6| 13 August 2010
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Weekly Focus

Norway – Central bank less gloomy than expected

As expected, Norges Bank left interest rates alone at its meeting during the week. Nor
were there any major surprises in its assessment of the economic and financial situation.
All in all, things have panned out largely as expected since the bank published its
monetary policy report in June. If anything, the bank was perhaps a little less downbeat
about the global economy than the market currently seems to be. At the press conference,
governor Svein Gjedrem attached particular weight to the tail risk associated with the
sovereign debt crisis in Europe having decreased significantly since June, although
economic data have been somewhat weaker. The bank is therefore preparing for interest
rates in Norway to normalise gradually even if the Fed and the ECB keep their rates
unchanged for a long period. Gjedrem noted that there is more to the world than just
Europe and the US, pointing to strong growth in a number of countries in Asia and Latin
America, and it was probably the first time that economic growth in Colombia has come
up at a Norges Bank press conference.

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Weekly Focus

Focus: “Agflation” scenario unlikely despite wheat rally

Global wheat prices have rallied since early July as estimates of notably Russian
production have been revised on an extended period of drought. We assess the Key points
fundamental situation in the grains market and conclude that the recent rally is overdone
 Global wheat prices have rallied
and that a new global food crisis is not imminent. Still, the recent price surge could put
upward pressure on inflation in the near term in not least emerging markets but we view on weather-related supply
the risk of an “agflation” scenario as unlikely. concerns. We view the recent
price surge as overdone however
Russian drought leads rally in wheat as the global wheat market
European milling wheat prices have risen from EUR140 per tonne to above EUR220 in remains well-supplied. The risk of
less than two months, levels not seen since the summer of 2008. In recent days, wheat a new global food crisis is small in
prices have come off a peak however to now trade just above EUR200. our view-
The panic rise was more or less solely caused by a supply shock. Wheat has risen on fears  We view the recent price surge
that Black-Sea production would be severely harmed by a prolonged period of very dry as overdone as the global wheat
weather. Russia accounts for 9% of global production and 14% of exports but also output market remains well-supplied and
from other major exporters in the region such as Ukraine and Kazakhstan may be at risk look for LIFFE prices to retreat to
from an ongoing drought. In an attempt to contain domestic price rises, Russia last week
EUR175 per tonne before year-
announced an export ban to take effect from 15 August until year-end. Crucially, ongoing
end.
wildfires may not only destruct this season’s crop but could potentially hinder next
season’s plantings of winter wheat.  As a result, we expect the
inflationary impact to be limited. If
Further adding to likely production shortfalls is the fact that Canadian wheat was hit hard
anything, emerging markets are
by heavy rains earlier in the year and Pakistani crop is now threatened by flooding.
most at risk of an “agflation”
Combined with the fact that record harvests in recent years have led farmers to plant less
scenario.
wheat, wheat stocks look set to decline significantly this year. This has spurred fears of a
global food crisis similar to the one that hit the global economy in 2007/08 when rising
food prices led consumer prices to surge and inflation-targeting central banks to hike
interest rates despite a significant slowdown in economic activity.

Wheat price rally on Black-Sea production shortfall Wheat production by region

Production
United States EU-27 China India Russia Other

9%

33%
20%

9% 17%

12%

Source: USDA, Danske Markets.

Source: EcoWin, Danske Markets.

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

8| 13 August 2010
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Weekly Focus

Current situation is very different from 2007/08 crisis

In our view, the situation in the global grains market is very different from the one in
2007/08 and provided no hoarding or new trade barriers are introduced, we look for
markets to calm down in the near term and for the inflationary impact to be limited.
Longer term, the surge in wheat does however highlight a range of structural problems in
the agricultural sector.

First of all, global stocks of wheat are ample at present. Measured in terms of the stocks-
to-use ratio, the market is well supplied with stocks available to honour almost 1/3 of
yearly consumption; in the US the corresponding figure is above 80%. This is rather
different from the situation in the summer of 2008 when US stocks-to-use ratio was
running at a mere 10%. In its August WASDE report, the US Department of Agriculture
projected a small decline in the ratio for the 2010/11 season from 28% to 26%, but this is
still a very comfortable level.

Wheat market fairly loose... ... but getting a little tighter this year

250000 Wheat, world stocks (1000 ton) 0.33 World, stocks-to-use (%)

200000 0.3

150000 0.27

100000 0.24

50000 0.21

0
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
2010

Source: USDA, Danske Markets. Source: USDA, Danske Markets.

Second, we should not forget that a supply reaction can happen fast in the grains market:
when farmers observe higher prices they usually increase plantings of the grain in Plantings decline on record harvests
question for the next season. This is indeed what has been seen in recent years after
80 US area planted (mn acres)
bumper harvests led to booming inventories. The planting season is about to start in US area harvested
Australia and Argentina, which makes for a quick reaction to Black-Sea crop damage. 60

Third, prices of other grains and soft commodities have followed wheat up only to a very 40
limited extent (barley is the exception though). This highlights that the recent panic is so
20
far mainly contained to wheat. Notwithstanding, it cannot be ruled out that higher prices
on wheat could crowd out plantings of other crops such as soybeans and corn. Stocks of 0
these grains are also at decent levels but in particular the corn/maize market is somewhat 2008/09 2009/10 2010/11
tight and could thus be vulnerable to production shortfalls arising from planting Est. Proj.
substitution. Source: USDA, Danske Markets.

Fourth, the demand side should provide only limited support to prices. Crucially, we are
currently in a different stage of the business cycle than was the case in 2008 when
capacity utilisation was high and underlying inflationary pressure significant as a result.
Also, with focus shifting to second-generation biofuels, which use biomass etc. rather
than grains as input, demand from the energy sector - and thus spill-over between food
and energy sectors - should be limited.

9| 13 August 2010
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Weekly Focus

Finally, whereas the 2007/08 rally was likely to have been partly caused by a rise in
speculative positions, this does not seem to have been the case to the same extent this Short covering in wheat
time round. Leading up to the price spike speculators were on average net short wheat but
an extensive short-covering rally has reversed the situation such that non-commercials are
now net long. During the recent rally the ratio of non-commercial positions to total open
interest has in fact declined. This suggests that speculative flows into the sector have in
fact been reduced.

Overall, it is important to note that the current shock is rather different from the 2007/08
one which arose from a demand shock: global grains stocks were low, the global
Source: EcoWin, Danske Markets.
economy was booming, regulatory changes spurred demand for grains for biofuel
production and financial interest in commodities was accelerating.

“Agflation” scenario unlikely in the near term but longer-term

outlook highly uncertain
The UN Food and Agricultural Organisation has made an attempt to calm the markets,
saying that global inventories are indeed sufficient to compensate for the production. This Little tightness across grain types
week the OECD joined the UN in playing down the impact of the Russian drought. We
35% Stocks-to-use, %
largely agree with the view that there is little reason to panic as things are now, but the
30%
short and the longer term implications of the wheat crisis are likely to differ. 25%
We look for wheat prices to continue the downward correction and to retreat to EUR175 20%
15%
per tonne before year-end as the market wakes up to reality which remains elevated
10%
global wheat stocks. During the course of 2011, wheat prices could rise a little from this
5%
newfound level as global demand ticks higher alongside close-to-trend economic growth 0%
(and sustained population growth). This assumes no further trade restrictions and a Total Wheat Coarse Rice,
“normal” planting reaction to this year’s production shortfall. Notably, US and European Grains Grains milled
farmers stand to benefit from the price increases as their crops have developed neatly
Source: USDA, Danske Markets.
while Black-Sea producers face a tough time.

Having said that, risks that the recent rally could spur further price rises along the grains
physical supply/demand chain remain. Wheat, corn and rice are fairly close substitutes in
consumption as well as production and thus while the price rises so far are mainly
restricted to wheat, spill-over cannot be ruled out. This could make the price rises more Milling wheat: Danske forecast vs. fwd
broad-based and fuel inflation to a larger degree. Notwithstanding, there is little tightness
in neither wheat, coarse grains (incl. corn) or rice.

Also, speculation remains a joker and was at least partly blamed for the 2007/08 spike.
However, investor interest in commodities has been muted in this recovery phase despite
loads of liquidity. Part of the reason for the limited flows into commodities as an asset
class is the contango structure that prevails in most futures markets, not least in grains:
when putting their money in commodity futures investors thus incur a negative roll yield
due to the downward-sloping curve which must then be made up for by an even larger Source: EcoWin, Danske Markets.
upward move in price levels.

10 | 13 August 2010
www.danskeresearch.com
Weekly Focus

Inflationary impact to be limited

The fact that price rises have so far been contained to the wheat market suggests little
imminent pressure on consumer prices. On the whole, we do not expect “agflation”, i.e. Euroland: Inflation in main and
inflationary pressure induced by rising prices of agricultural products, to become a agflation scenario
prevalent phenomenon within our forecast horizon. 4.5 %
4.0 %
4.5
4.0
3.5 3.5
3.0 3.0
Euroland: Expect only small inflationary effect from wheat rally 2.5 Agflation scenarium 2.5
2.0 2.0
The impact of the recent increase in global wheat prices on inflation in the euro area is set 1.5
Hovedscenarium 1.0
1.5
1.0
to be modest. Food products weigh 14.0% in euro-area inflation and the component most 0.5 0.5
0.0 0.0
affected by a surge in wheat prices – namely “bread and cereals” - only amounts to 2.6%. -0.5 -0.5
-1.0 -1.0
In addition, the wheat component of the total cost of e.g. a bread is small (wages etc. is 05 06 07 08 09 10 11
making up the greater part of the price). Our main scenario for wheat prices is in line with
euro-area food price inflation at 1.1% this year and 2.2% in 2011 and with overall Source: Ecowin and Danske Markets

inflation reaching 1.5% in 2010 and 1.7% in 2011.

In an “agflation” scenario where wheat prices increase another 30% and we have spill-
over to other grains etc, we estimate that euro-area food price inflation will reach 1.8%
this year and 3.5% next year which results in inflation reaching 1.7% and 2.0% in 2010
and 2011, respectively. This could be enough to trigger the ECB to hike rates earlier than
anticipated. The impact on inflation in 2010 is modest because increases in grain prices
have their biggest impact on inflation with a 3-4 months lag. US food CPI and CRB foodstuff index
30 %-change 6M AR
At the peak of the 2007/08 food price rally, Matif Milling wheat had increased 82% y/y in %-change 6M AR 4.0
20
3.0
March 2008. Four months later euro-area food price inflation peaked at 7.0% and overall 10
2.0
inflation peaked at 4.0%. 0 1.0
-10 0.0
-20 CPI food, sa >> -1.0
US: Insignificant impact on inflation from spike in wheat prices -30 << CRB foodstuff index -2.0
-40 -3.0
The recent run-up in wheat prices will not lead us to change our current forecast for US 90 92 94 96 98 00 02 04 06 08 10
consumer price inflation of 1.6% y/y in 2010 and 2011.
Source: Ecowin and Danske Markets
The impact on the CPI food index from the current “wheat price shock” will be a minor
0.3pp to the six month annualised inflation rate over the coming months as the shock
feeds through to consumer prices with a lag. With the food index weighing just below
14% in the overall CPI index this means that the current spike in wheat prices will add a
insignificant 0.04pp to our current estimate of annual headline CPI over the coming six
months before fading away gradually.
In an alternative “agflation” scenario with a general increase in prices on agricultural
products and a run-up in the overall CRB foodstuffs index, we would get a more
significant impact on US CPI. Assuming an increase in the CRB foodstuff index of 30%
over the coming three months followed by a levelling out, this would start to show up in
the CPI food index in about six months. The peak effect of such a shock would occur in
spring 2011 with a boost to annual consumer food price inflation of around 6pp. CPI food
would then gradually return to the underlying trend by end 2011.
The overall impact on headline CPI in 2011 in an “agflation” scenario would be a boost
of 0.5pp taking annual CPI to 2.1% for the year, which is still a relatively low inflation
rate. With the Fed targeting primarily core inflation, we do not expect any monetary
policy reaction to such a shock. On the contrary, a run-up in food inflation works as a tax
increase for the consumer and risks pushing real private consumption lower dampening
overall economic growth. Senior Economist
Frank Øland Hansen
+45 45128526
franh@danskebank.dk

Senior Analyst
Signe Roed-Frederiksen
+45 45128229
sroe@danskebank.dk

11 | 13 August 2010
www.danskeresearch.com
Weekly Focus

Emerging markets: effects of rising grains prices potentially

large
Food makes up a larger share of the consumption expenditure in most emerging markets
including China, hence the risk of an “agflation” spiral is clearly higher in these countries.
For example, in China food makes up 34% of the consumer-price index whereas the
corresponding figure for Russia is 40%. In addition, many developing countries not least
in Asia are closer to capacity limits than the developed world and hence face larger
inflationary pressure. Indeed, policy tightening has already been initiated as a result in a
range of countries.

On the whole, at current levels of grains price increases and amid a slowing global-
growth environment, double-digit inflation rates do not seem likely for most developing
countries as a result of grains prices alone. Also, government subsidies are an integral part
of the food pricing structure in many emerging markets, and thus world grains prices
should have less than one-for-one impact on domestic ones.

12 | 13 August 2010
www.danskeresearch.com
Weekly Focus

Equities: Only hard landing will have negative effect on

stock market
Equity market has already discounted mid-cycle slowdown in
H2 10
The ISM manufacturing index has been on the retreat for the past three months, so the
global industrial cycle is clearly slowing. However, this is not in itself a problem for Key events of the week
global equity markets. What is worrying equity markets is that the global consumption
cycle is apparently not picking up at the same rate as the industrial cycle is easing. This  US leading indicators

adds up to a slowdown scenario with lower growth than many analysts, among others the  Philadelphia Fed
Fed, had expected just a few months ago. However, in our view, the market has already
discounted much lower growth than current indicators portend, and given this the equity  US industrial production

market should be able to return 5-10% for the rest of the year. What could alter our view  NAHB Housing Market Index
on performance would be indications of a very pronounced slowdown. Potential triggers
for this would be rising private sector unemployment and/or the Chinese housing bubble  German ZEW, current situation

bursting. The pace of deceleration intensifying would also suggest a harder landing. Now Source: Danske Markets Equities
after a solid Q2 earnings season, the focus is back to macro numbers. Hence, we would
focus on the following data in the week ahead.

What to watch for signs of the industrial cycle slowing Key earnings reports of the week
The most important numbers in the coming week are the Philadelphia Fed for August
 AP Møller Mærsk – H2 10
(19 August) – which is the earliest indicator of developments in ISM manufacturing – and
US Leading Indicators for July (19 August). More specific indicators for the profile of  Walmart Stores – Q2 10
the industrial deceleration will arrive earlier in the week with US Industrial Production
 Target – Q2 10
for July (17 August). European macroeconomic numbers out last week showed positive
growth for German industrial exports, especially to the euro area, signalling increasing  Abercrombie & Fitch – Q2 10
investment in capacity. Further indications of this may come from the German ZEW
 Home Depot – Q2 10
survey current situation for August (17 August). Earnings-wise, the main event will be
the half-year results from transport giant AP Møller Mærsk (H2 10, 18 August). The Source: Danske Markets Equities, Reuters Ecowin
company’s outlook for H2 10 will be indicative of activity in the global transport sector
and in China.

What to watch for signs of the consumption cycle accelerating

Of increasing importance and also a sign of consumer confidence is the US NAHB
Housing Market Index for August (16 August). The US housing market has recently
been showing signs of deterioration. Uncertainty about wealth and job security is
extremely negative for consumer confidence and private consumption. US retail giant
Walmart Stores will release its quarterly results on 17 August and this will be a major
pointer for both US and global retail sales. The more upmarket retail chain Target will
also be reporting its quarterly results (18 August) and this should both help confirm the
picture presented by Walmart and give an indication of premium goods sales. Also giving
some indication of developments at the more expensive end of the retail spectrum will be
results from Abercrombie & Fitch (17 August) and Home Depot (17 August). Both
could surprise due to the positive earnings revisions in the industry this reporting season.

Analyst
Rikke Michaela Greve
+45 45128056
rikg@danskebank.com

13 | 13 August 2010
www.danskeresearch.com
Weekly Focus

Fixed Income: Fed exit on hold

Fed move to easing bias and push bond yields even lower
This week the Fed announced it will reinvest principal payments from its Agency/MBS
portfolio in long-term treasuries – mainly the 2-10 segment – to prevent the Fed balance Key events of the week ahead
sheet from shrinking. This will increase the net demand in this segment by USD150-  US NAHB housing market index
200bn per year from 2011 and effectively put the Fed exit on hold. (16 August)
It also indicates that further quantitative easing could be under consideration if the data  Ireland to sell 2014 and 2020
picture continues to worsen throughout H2. Although some of the market reaction has bonds (17 August)
been front-loaded ahead of the meeting, bond yields have continued down following the US housing start and building
meeting. To investors the Fed is now signalling that the ‘extended period’ is even more permits (17 August)
prolonged than before, which has flattened the money market curve significantly.  Germany to sell 10-year bonds
The market has postponed the hike in the Fed funds rate to November 2011 and does not (18 August)
expect it to reach 2% before summer 2013. We have revised our forecast and now  US empire manufacturing (16
expect the Fed to deliver its first hike in Q4 11 (see Flash Comment – FOMC: Fed puts August)
exit on hold).  US Philadelphia Fed index (19
August)
On the back of the dovish Fed statement and the recent deterioration in the outlook, the
curve has flattened and long bond yields have moved lower in both the US and Germany.  Fed speeches from Bullard and
Evans (19 August)
New yield forecasts
The 10-year US Treasury benchmark is now yielding 2.73% - the lowest since March
2009. In Germany the bund is yielding 2.41%, which is record low. Although the markets US money market curve flattens
may be somewhat overbought we believe there is a risk of even lower bond yields in 2.00 %
%
2.00

the short-term. Investors will increasingly speculate in further QE on any negative data 1.50 Futures 1 month ago 1.50
Fed funds
surprises and risk appetite has begun to deteriorate. 1.00
Futures
1.00

0.50 0.50
We do not expect bond yields to move higher in the coming six months. Slowdown in 0.00 0.00
leading indicators, easing underlying inflation pressures and dovish central banks are -0.50
Danske
-0.50
likely to cap bond yields. Generally, our forecast is below the forward market in both the 08 09 10 11

US and Euroland/Germany. See our revised yield forecasts here.

Source: Bloomberg, Ecowin and Danske Markets

Next week’s focus is on US data and risk appetite

Next week there are no big events in Europe apart from bond auctions in Ireland and
Germany. In the US focus will be on housing data, which have been exceptionally weak 10 year bund yield close to record low
after the expiry of the first-time-home buyer tax credit and on manufacturing surveys
5.5 % 5.5
%
from the New York and Philadelphia areas. Generally, we expect data to be a bit 5.0 US 10yr Treasury yield 5.0
disappointing, which could push yields further down – in particular if risk appetite 4.5 4.5
4.0 4.0
deteriorates further. 3.5 3.5
3.0 3.0
10yr German Bund yield
2.5 2.5
2.0 2.0
07 08 09 10

Source: Ecowin and Danske Markets

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

14 | 13 August 2010
www.danskeresearch.com
Weekly Focus

FX: USD recovers despite soft Fed

Last week the Fed announced it would be re-investing principal payments from its
Agency and Mortgage Backed Securities in longer-term Treasuries and thereby keep its Weekly changes
balance sheet constant. It effectively puts the exit process from quantitative easing on
hold for now.

The knee-jerk reaction was a weakening of the dollar against the euro and the yen. The
new stimuli from the Fed will further add to dollar liquidity in the market and will
everything equal push US rates lower. The move underlines that the Fed has a strong
commitment to keep rates low for an ‘extended period’. However, the dollar quickly
reversed the losses and we saw a significant drop in EUR/USD from 1.33 to below 1.28.

Investors became concerned that the US economy is in fact in worse shape than
previously thought: the FOMC might have some deeper understanding of the economy.
The language from the FOMC statement also clearly illustrated that the committee has Source: Bloomberg

been negatively surprised by the weakness in economic data. The worries about the US
economy became a global issue and investors decided to rush back into the dollar – a
typical safe-haven reaction.

We will be publishing new FX forecasts on 16 August. They will – like our current
forecasts – imply a stronger dollar on a three- to six-month horizon. We do not expect the EUR/USD surprise index
dollar appreciation to be the result of higher official US rates though – our US economist 150
125
Index EUR surprises relative to USD
1.60
1.55
EUR/USD >>
does not see the first rate hike in the US before late 2011 and with already record low US 100
75
1.50
1.45

interest rates the downside is rather limited. In the eurozone, on the other hand, interest 50 1.40
25 1.35

rates could still fall – not least relative to the US – particularly if the current strong 0 1.30
-25 1.25

European numbers come to an end as the headwinds from lower Asian and US growth are -50 << Relative economic surprises
(EUR-USD) USD surprises relative to EUR
1.20
-75 1.15
felt down the road. Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun
09 10
Jul Aug

Source: Bloomberg
Forecasting FX movements is, to a certain degree, about forecasting relative surprises in
the market. If we take a closer look at a so-called surprise index that trails economic
surprises relative to expectations, it is obvious that currently the market has been
surprised about the strength of European numbers relative to US numbers. We believe the
picture might change in the autumn. The market might have become a bit too euphoric
about European numbers and too pessimistic about US numbers. When Europe starts to
feel the current cold winds from the US and Asia, the picture is expected to reverse,
adding to euro glooms.

Strong SEK performance

SEK set for an exciting autumn
10.3 10.3

In this week’s issue of FX Crossroads we took a closer look at the outlook for the SEK. 10.2
10.1
10.2
10.1
EUR/SEK

The Swedish krone has strengthened significantly against the euro this year and it is no 10.0
9.9
10.0
9.9

longer significantly undervalued. However, we still believe that strong macro numbers 9.8
9.7
9.8
9.7

and rate hikes from the Riksbank will add further to SEK strength going forward. 9.6
9.5
9.6
9.5
9.4 9.4
However, there are a few important events to follow in the coming months. The general 9.3 9.3
Jan Feb Mar Apr May Jun Jul Aug
election on 19 September could create some nervousness in the market, with the outcome 10

highly uncertain. But more importantly we keep an eye on the long SEK position Source: Bloomberg

currently held by the Swedish Debt Office. It is expected to be unwound during the
autumn. It could limit the gains for the SEK going forward.
Chief analyst
Arne Lohmann Rasmussen
+45 4512 8532
arr@danskebank.dk

15 | 13 August 2010
www.danskeresearch.com
Weekly Focus

Commodities: Price correction

Commodity prices have corrected in recent days. Oil has again fallen to close to
USD76/bbl after hitting USD82 last week. Metals have also been feeling the squeeze, Weekly changes, %
with copper and aluminium almost 5% off their peaks. Wheat has been an obvious LIFFE Wheat
exception due to the heat wave in Russia. You can read more about the outlook for wheat
Gold
and the consequences for global inflation in this week’s theme article.
Copper
Aluminium
Weaker US growth outlook puts oil price under pressure
API2 coal
Commodities are traditionally very business cycle-sensitive, and as there has been a string
ICE Brent
of numbers – especially from the US (employment, new orders and housing market) –
indicating weaker economic growth, it is no surprise to see commodities under pressure. -7.5 -5.0 -2.5 0.0 2.5
Five-day change, %
It is important to note here that oil prices in particular were supported by strong US
demand – not least for distillates – in Q2. If the US economy now faces a serious Source: Bloomberg

slowdown this support will evaporate, although so far there is nothing in the numbers to
indicate that US oil demand is falling appreciably. Overall demand was 19.5mb/d in the
Oil prices under pressure
past week, which equates to an increase of around 4% compared to the same week last
year. The oil market’s focus at the moment is on the US “driving season”, when petrol
consumption peaks. Petrol consumption in the US is currently 3% higher than in 2009.
Likewise, US demand for jet fuel continues to climb. However, US oil consumption is
unlikely to grow quite so fast in H2 2010. The same picture applies to China, where the
latest industrial indicators suggest growth will slow to some extent in the coming months.

In our view the US economy is not headed for a double-dip recession. However, given
that global oil stocks are quite considerable at the moment, the current bearish trend Source
might continue in the coming week. Nevertheless, we still believe that the oil market will
find very robust support around USD70/bbl and indeed we doubt that prices will fall this
far. Looking ahead to Q4, we still expect a further increase in oil prices as the economic
OPEC’s quota compliance falling
data begin to show that there will be no double dip in the US economy. Likewise, we also
expect that the long-awaited decline in oil stocks will materialise. 100
OPEC compliance %
80
New oil report from the International Energy Agency 60
The International Energy Agency published its latest oil market report last week. This 40
leading agency yet again revised up its expectations for oil demand in 2010 and 2011. 20
The IEA’s forecast is now for an increase of 2.2% in 2010 and 1.5% in 2011, bringing it 0
quite close to our own estimates. The upward revision is in itself positive for prices,
though it is offset somewhat by supply also being revised up. Non-OPEC supply is now
expected to rise by 0.9mb/d. Given that the production of NGL is expected to increase by
0.6mb/d, there is only scope for a very modest increase in OPEC production if global Source: EIA
stocks are to decline going forward. This currently seems to be proving difficult for
OPEC – its quota compliance fell further in July to 53% from 58% in June.

Chief Analyst
Arne Lohmann Rasmussen
+45 4512 8532
arr@danskebank.dk

16 | 13 August 2010
www.danskeresearch.com
Weekly Focus

Credit
Market commentary
After some strong weeks negativity has crept back into the financial markets sending
equities lower and credit spreads wider. As is normally the case, the widening of spreads iTraxx Europe (5Y CDS)
started with CDS indices with cash bonds lagging but in the latest trading sessions cash 250
bp
bonds have come under more pressure with Tier 1 leading the way.
200

Credit-specific news have been scarce throughout the week and the moves wider are
150

therefore mainly a reaction to the negative sentiment in the equity market after the FOMC
meeting on Tuesday. Fundamentally, we think the short to medium term outlook for 100

credit is quite good for several reasons. First, companies are still acting conservatively 50

with modest investments and ongoing focus on cost cutting and generally default rates are
0
moving lower. Second, (short and medium term) visibility for the banking sector has Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10 Jul/10

significantly improved following the stress test. Third, the changes to the Basel III Source: Markit
proposal materially reduces the pressure on banks to issue longer dated bonds as the net
stable funding ratio is postponed. Fourth, credit investors are generally cash rich and
ready to invest and we do not see a significant risk of outflow in the coming months. All
in all, we think that demand for credit is well underpinned and we do not anticipate
spreads to widen dramatically unless economic numbers suggest that a double dip is set to iTraxx Crossover (5Y CDS)
become a reality. Overall, we therefore consider a further widening of spreads a buying 1,400
bp

opportunity and most likely some attractive opportunities may arise in the primary market 1,200

when we approach the end of August. 1,000

800

The primary market 600

Summer time around Europe as well as a weaker sentiment in the financial market are not 400

exactly catalysts for primary market activity. Societe Generale issued a 5Y EUR 0.5bn 200

bond at 70bp above swaps and Statoil issued both a 7Y (USD 1.25bn) and a 30Y (USD 0
Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10 Jul/10

0.75bn) bond at a price of Gov +90bp and 115bp respectively. Source: Markit

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

17 | 13 August 2010
www.danskeresearch.com
Weekly Focus

Financial views
Equities
 Despite a rally in risky assets, the gap between the stock market’s implied earnings
expectations and analysts’ expectations has yet to be closed. Although we are now Equities and US 10Y yield
halfway through the Q2 earnings season with companies surprising on the positive 1275 Index
4.00
%
side, the double-dip fear among investors is still present. Both investors and 1225 3.75
1175 3.50
companies fear 2011, especially if a slowdown in ISM is not offset by expected job 1125 3.25
creation and private consumption. Along with worsening signs in the US housing 1075
3.00
1025 << S&P500
market, this dampens the positive signals and guidance upgrades from the companies. 975
US 10-year gov bond >> 2.75
As we believe the stock market to discount too low growth expectations, we see room 925 2.50
Feb Mar Apr May Jun Jul Aug
for performance of global equities. We reiterate our global market forecast of 10-15% 10
end-year 2010.
Source: Reuters Ecowin

Fixed Income
 Global: Focus in bond markets is on the fear of a hard landing in the global economy,
as both US and Chinese data have been consistently weak. With the outlook for EUR/USD and USD/JPY
continued weakening global leading indicators, low inflation and dovish central banks
165 97
– possibly more QE – yields could decline a bit further in the near term. On a 3-6 155 95
<< EUR/USD
month horizon we recommend a moderate overweight on duration in the 5-7 year 145 93

sector. We are neutral on the US German spread. 135 91

125 89
Credit 115 87
USD/JPY >>
 Some weakness has materialised lately but we remain of the opinion that credit is a good 105 85
Aug Oct Dec Feb Apr Jun Aug
place to be invested in the coming months. Companies are still acting conservatively 09 10
with modest investments and focus on cost cutting. Visibility for the banking sector
Source: Reuters Ecowin
has improved following the stress test and the changes to the Basel III proposal.
Finally, credit investors are generally cash rich and ready to invest and we do not see
a significant risk of outflow in the coming months.
Credit spreads
 As such we are positive on credit for the moment. In the longer term, however, it is
27.5 % points % points 6.5
inevitable that companies will feel the negative effect from the austerity measures
22.5 5.5
currently being undertaken around Europe.
17.5 4.5
FX outlook 12.5 3.5
 A lot of bad news is already priced into USD but this isn’t the case for EUR. Lower 7.5 2.5
US credit spread (Baa) >>
levels are expected during autumn as risks for European debt markets remain. Chinese 2.5 << Eur high yield spread 1.5
yen buying has sent USD/JPY lower, but downside is limited as BoJ is starting to 07 08 09 10

wake up. GBP is overbought against EUR and is a sell. CHF has a decent chance of a
Source: Reuters Ecowin
comeback if risk aversion rises.
 SEK is vulnerable if global upswing cools and investors re-price central banks as the
Riksbank is priced hard. Support from good Swedish data though. NOK is soft but is
less hard priced – potential for positive surprise by year-end if NB delivers hike. Commodity prices

Commodities 87.5 USD/barrel Index

3700
<< Oil (WTI)
 Wheat has retreated somewhat after surging on weather-related supply concerns and 82.5
3500

oil has moved below USD80 per barrel again. In our view, current market pricing 77.5
3300

continues to look a bit stretched given a large stock overhang of both commodities 72.5 3100
LME metal prices >>
globally. Base metals could also be in for a further correction as focus turns to a likely 67.5 2900

bubble in the Chinese property sector. 62.5 2700

Aug Oct Dec Feb Apr Jun Aug
09 10

Source: Reuters Ecowin

18 | 13 August 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 -4.7 -4.6 3.4 -13.0 -1.7 -10.2 -13.2 1.3 3.6 -3.0 38.0 3.9
2010 1.5 2.8 1.6 -6.9 0.8 2.6 1.4 2.2 4.1 -5.6 42.1 4.1
2011 1.8 2.3 0.5 1.2 0.2 3.9 3.9 1.8 4.0 -4.5 46.5 4.1
Sweden 2009 -5.1 -0.8 1.7 -16.0 -1.5 -12.4 -13.2 -0.3 8.4 -2.1 38.9 7.2
2010 2.7 2.2 1.5 2.3 1.1 9.1 11.3 1.3 9.3 -3.5 43.6 6.3
2011 1.5 1.4 1.3 1.8 0.0 3.3 3.2 2.1 10.1 -4.1 47.2 6.6
Norway 2009 -1.6 0.2 4.8 -7.9 -2.1 -3.9 -10.3 2.1 3.1 8.0 26.0 19.0
2010 1.8 3.9 2.7 -7.2 0.8 1.1 1.9 2.5 3.3 12.0 26.0 24.9
2011 3.1 4.2 2.3 3.8 0.1 0.3 5.5 1.7 3.2 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 -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 1.8 1.0 0.5 -3.0 0.0 4.0 3.5 1.4 9.0 -3.9 49.5 1.4
2011 2.5 1.5 0.0 4.0 0.0 8.0 5.0 2.0 8.6 -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 3.0 2.7 0.3 2.9 1.2 12.1 11.3 1.6 9.4 -10.2 91.6 -3.9
2011 3.0 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.

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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 13-Aug 0.13 0.38 0.73 2.74 128.5 - 579.7
+3m 0.13 0.35 0.65 2.60 125 - 595
+6m 0.13 0.35 0.75 2.75 120 - 620
+12m 0.13 0.40 1.05 3.00 127 - 587
EUR 13-Aug 1.00 0.90 1.30 2.69 - 128.5 745.1
+3m 1.00 0.80 1.30 2.55 - 125 744.0
+6m 1.00 0.85 1.35 2.60 - 120 744.0
+12m 1.00 1.00 1.75 3.05 - 127 745.0
JPY 13-Aug 0.10 0.24 0.44 1.05 110.5 86.0 6.74
+3m 0.10 0.24 0.40 1.00 120 96 6.20
+6m 0.10 0.24 0.40 1.00 120 100 6.20
+12m 0.10 0.30 0.70 1.40 130 102 5.73
GBP 13-Aug 0.50 0.74 1.29 3.19 82.1 156.5 906.9
+3m 0.50 0.70 1.15 2.80 84.0 149 886
+6m 0.50 0.70 1.10 2.80 85.0 141 875
+12m 0.50 0.75 1.50 3.10 82.0 155 909
CHF 13-Aug 0.25 0.17 0.52 1.73 135.3 105.3 550.6
+3m 0.25 0.25 0.55 1.60 130 104 572
+6m 0.25 0.25 0.65 1.60 128 107 581
+12m 0.75 0.75 1.35 2.10 135 106 552
DKK 13-Aug 1.05 1.15 1.62 2.85 745.1 579.7 -
+3m 1.05 1.05 1.65 2.75 744 595 -
+6m 1.05 1.10 1.65 2.75 744 620 -
+12m 1.05 1.25 2.05 3.20 745 587 -
SEK 13-Aug 0.50 0.96 1.69 2.83 947.2 737.1 78.7
+3m 1.00 0.80 1.85 2.80 940 752 79.1
+6m 1.25 1.30 2.15 2.85 920 767 80.9
+12m 1.75 1.90 2.60 3.30 920 724 81.0
NOK 13-Aug 2.00 2.62 3.05 3.89 791.1 615.6 94.2
+3m 2.00 2.65 3.05 3.75 765 612 97.3
+6m 2.25 2.90 3.30 3.80 760 633 97.9
+12m 2.50 3.15 3.55 4.25 760 598 98.0

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
13-Aug Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2010 2011
NYMEX WTI 76 81 81 80 85 87 89 92 94 82 91
ICE Brent 76 79 81 79 84 86 88 91 93 81 90
Copper 7,255 7,274 7,072 7,200 7,500 8,000 8,400 8,600 8,700 7,261 8,425
Zinc 2,056 2,307 2,067 1,900 2,000 2,100 2,150 2,200 2,250 2,069 2,175
Nickel/1000 21 20 23 21 22 22 23 23 24 21 23
Steel 495 464 491 460 475 500 510 530 550 473 523
Aluminium 2,164 2,199 2,131 2,100 2,100 2,150 2,200 2,300 2,400 2,132 2,263
Gold 1,217 1,110 1,194 1,200 1,150 1,100 1,050 1,000 1,000 1,164 1,038
Matif Mill Wheat 213 126 131 174 189 180 182 185 185 155 183
CBOT Wheat 753 518 490 650 675 680 690 700 700 583 693
CBOT Corn 410 389 379 375 410 420 430 440 450 388 435
CBOT Soybeans 1,057 969 932 975 990 1,000 1,010 1,020 1,030 967 1,015

*Interest rate forecasts will be revised mid August. Source: Danske Markets

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Calendar
Key Data and Events in Week 33

Monday, August 16, 2010 Period Danske Bank Consensus Previous

- USD Senior loan officers survey
- DKK Wage growth (DA) y/y 2nd quarter 2.6%
1:01 GBP Rightmove House Prices m/m|y/y Aug -0.6%|3.7%
1:50 JPY Tertiary Industry Index m/m Jun -0.1% -0.9%
1:50 JPY GDP,preliminary q/q|ann. 2nd quarter 0.6%|2.3% 1.2%|5.0%
10:00 NOK Trade balance NOK bn Jul 25.4
11:00 EUR CPI, final m/m|y/y Jul -0.4%|1.7% 0.0%|
14:30 USD Empire Manufacturing m/m Aug 7.5 8.25 5.08
19:00 USD NAHB Housing Market Index Index Aug 13 15 14

Tuesday, August 17, 2010 Period Danske Bank Consensus Previous

- OTH Earnings: Carlsberg, Abercrombie & Fitch, Wal-Mart, Home Depot
3:30 AUD RBA August Minutes
10:00 EUR Current Account, s.a. EUR bn Jun -16.7
10:30 GBP CPI m/m|y/y Jul -0.1%|3.2% -0.2%|3.1% 0.1%|3.2%
10:30 GBP CPI Core m/m|y/y Jul …|3.1%
11:00 EUR ZEW economic sentiment Index Aug 10.7
11:00 DEM ZEW economic sentiment Index Aug 20.3 20.6 21.2
11:00 DEM ZEW current situation Index Aug 24.0 14.6
14:30 USD PPI m/m|y/y Jul 0.5%|4.5% 0.2%|4.2% -0.5%|2.8%
14:30 USD Housing starts 1000 (m/m) Jul 540 (-1.6%) 560 (2.0%) 549 (-5.0%)
14:30 USD Building Permits 1000 (m/m) Jul 568 (-2.5%) 576 (-1.2%) 583 (2.1%)
14:30 USD PPI core m/m|y/y Jul 0.1%|1.3% 0.2%|1.3% 0.1%|1.1%
15:15 USD Industrial production m/m Jul 0.4% 0.5% 0.1%
15:15 USD Capacity utilization Index Jul 74.5% 74.1%
18:30 USD Fed's Kocherlakota (non-voter, neutral) speaks

Wednesday, August 18, 2010 Period Danske Bank Consensus Previous

- OTH Earnings: Deere & Co, AP Moller - Maersk
- DKK New car sales, july Jul
7:00 JPY Leading Economic Index, final Index Jun 101.3 98.9
9:30 SEK Industry Capacity q/q|y/y 2nd quarter 84.9%|…
10:30 GBP BoE Minutes
13:00 USD MBA mortgage applications 0.6%

Thursday, August 19, 2010 Period Danske Bank Consensus Previous

6:30 JPY All Industry Index m/m Jun -0.3% 0.2%
8:15 CHF Trade balance bn CHF Jul 1.82 1.77
10:00 NOK GDP (mainland) s.a. q/q|y/y 2nd quarter 0.1%|…
10:00 NOK GDP (total) s.a. q/q|y/y 2nd quarter -0.1%|…
10:30 GBP Retail Sales incl. Auto fuel m/m|y/y Jul 0.5%|1.2% 0.4%|1.1% 0.7%|1.3%
10:30 GBP Retail Sales ex. Auto Fuel m/m|y/y Jul 1.0%|3.1%
10:30 GBP Public Finances (PSNCR) bn. GBP Jul 20.9
10:30 GBP Broad money M4 m/m|y/y Jul 0.0%|3.0%
10:30 GBP Mortgage Approvals 1000 Jul 48
11:00 CHF ZEW indicator Aug 2.2
14:30 USD Initial jobless claims 1000 480 484
15:00 USD Leading indicator Index Jul 0.1% -0.2%
16:00 USD Philadelphia Fed. Index Aug 6.0 7.5 5.1
18:30 USD Fed's Bullard (voter, neutral) speaks
19:00 USD Fed's Evans (non-voter, neutral) speaks

Friday, August 20, 2010 Period Danske Bank Consensus Previous

13:00 CAD CPI m/m|y/y Jul -0.1%|1.0%
13:00 CAD CPI - BoC core rate m/m|y/y Jul -0.1%|1.7%

During the week Period Danske Bank Consensus Previous

Fri 13 - 16 CNY Actual FDI y/y Jul 47.5 39.6%

Source: Danske Markets

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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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