Investment Research — General Market Conditions

5 August 2010

Monitor
Euro debt crisis watch
 The euro debt crisis has calmed down significantly over the summer. The stress
Watch list
tests of the European banks and successful bond auctions by Spain have dampened
fears that the debt crisis will spiral out of control. A strong earnings season – not least  Regulation of the financial system
for banks – has also contributed to a sharp recovery in risk appetite with strong remains at the forefront of things.
performances of equities, credit and commodities. The questions surrounding CDS
 The stress tests of 91 European banks on 23 July showed that only seven banks bans remain unanswered
failed. While this put into question the severity of the stress tests, the significant  ECB PIIGS purchases
amount of disclosure was a positive surprise (see Research – Euroland: Market
 Upcoming PIIGS bond auctions
implications of the European stress tests).
– Ireland, 17 August
 Spreads of PIIGS government bonds have narrowed considerably. The main
exception is Greece where spreads have stayed high. CDS spreads on PIIGS have – Spain, 19 August
also come down. Spanish bonds have performed particularly well as Spanish stress
– Italy, 30 August
tests surprised positively and bond auctions have been successful.
 Possible downgrades by rating
 IMF, EU and ECB have given their first review of Greek budget developments
agencies
today in relation to the emergency loans. They conclude that Greece has got off to a
good start but that important challenges and risks remain (see press release).  Finalisation of the Basel III
calibration and phase-in
 The ECB’s purchases of government bonds have come to a halt as markets have
arrangements in September
started functioning on their own (see chart below).
 Next review of Greece from ECB,
 Corporate credit spreads have fallen significantly and issuance of corporate debt
EU and IMF in October
has picked up. iTraxx Crossover now trades at 459, down from 628 at the peak in
June. Covered bonds have also performed but less so than other credit.

 The stress tests have contributed to more clarification over the state of the banks and
this has contributed to a decline in forward money market rates. The EUR 6x9
FRA-Eonia spread has declined from 50bp to just below 30bp. 3M EUR Libor-OIS
has come off slightly to 31.8bp but not as much as 3m US Libor-OIS which is trading
at 24.5bp.

ECB remains reluctant to purchase PIIGS sovereign debt

130 22.5
EUR bn ECB purchases, EUR bn
per week >>
110 17.5

90 << Asset purchases 12.5

(covered+govies)
70 7.5
Chief Analyst
Allan von Mehren
50 2.5 +45 45 12 80 55
alvo@danskebank.dk
30 -2.5 Senior Analyst
w9 w11 w13 w15 w17 w19 w21 w23 w25 w27 w29 Lars Tranberg Rasmussen
10 +45 45 12 85 34
laras@danskebank.dk
Source: Ecowin and Danske Markets

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Monitor

Contagion to other PIIGS

Greece vs. German sovereign yields (2-year yields) 2-year yields. Portugal, Ireland, Spain, Italy vs. Germany

% % % %
20 Germany Greece 20 7 Germany Spain Italy 6
18 18 6 Portugal Ireland
16 16 5
14 14 5
4
12 12 4
10 10 3
8 8 3
2
6 6 2
4 4 1 1
2 2
0 0 0 0
Jan Feb Mar Apr May Jun Jul Jan Feb Mar Apr May Jun Jul
2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010 2010

Source: Bloomberg and Danske Markets Source: Bloomberg and Danske Markets

Main equity indices Financial equity indices in selected Euroland countries

130 Index Index 130 Index Germany Spain Index

150 Italy Portugal 150
120 120 140 Greece Ireland 140
110 110 130 130
100 100 120 120
110 110
90 90 100 100
80 80 90 90
70 70 80 80
70 70
60 60
DAX (Germany) IBEX (Spain) 60 60
50 FTSEMIB (Italy) PSI (Portugal) 50 50 50
40 ISEQ (Ireland) FTASE (Greece) 40 Dec Feb Apr Jun
Jan 2010 Mar 2010 May 2010 Jul 2010 2009 2010 2010 2010

Source: Bloomberg and Danske Markets Source: Bloomberg, Ecowin and Danske Markets

Sovereign 5yr CDS selected Euroland countries Covered bond spreads selected Euroland countries

1400 bp Germany Spain bp 1400 400 iBoxx € Covered ASW 400

1200 Italy Portugal 1200 France spread, bp
350
Ireland Greece Germany
1000 1000 300 Portugal 300
800 800 250 Ireland
200 Spain 200
600 600
150
400 400
100 100
200 200
50
0 0 0 0
Jan 2010 Mar 2010 May 2010 Jul 2010 Dec-09 Feb-10 Apr-10 Jun-10

Source: Bloomberg and Danske Markets Source: Danske Markets

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Monitor

Broader contagion
Spreads outside PIIGS (5y spreads vs. Germany) 1y basis swap. 3m euribor vs. 3m USD libor
bp bp -15 -15
bp bp
160 Belgium France Holland 160 -20 -20
140 140
120 -25 -25
120
100 100 -30 -30
80 -35 -35
80
60
60 40 -40 -40
40 20 -45 -45
20 0 -50 -50
0 -20
-55 -55
Mar Apr May Jun Jul 2010
2010 2010 2010 2010 -60 -60
Dec 09 Feb 10 Apr 10 Jun 10

Source: Bloomberg and Danske Markets. Note: Change to new benchmark in Source: Ecowin & Danske Markets
French 5yr by

European money market spread US money market spread

60 bp 6x9 FRA EONIA Spread bp 60 80 bp bp 80

55 55 70 70
3M Euribor Eonia spread 6x9 USD FRA
50 50 60 60
OIS spread
45 45 50 50
40 40 3M USD Libor
40 OIS spread 40
35 35
30 30
30 30
25 25 20 20
20 20 10 10
15 15 0 0
Jan 2010 Mar 2010 May 2010 Jul 2010 Jan 2010 Mar 2010 May 2010 Jul 2010

Source: Bloomberg and Danske Markets Source: Ecowin & Danske Markets

European credit markets - Itraxx CDS 5yr indices US credit markets – CDX 5yr indices

200 bp bp 200 140 bp bp 750

CDX IGR 5yr CDX HY 5yr (right)
180 Itraxx main 180 130 700
160 160 120
Senior financial 650
140 140 110
Sovereign 600
120 120 100
550
100 100 90
80 80 80 500

60 60 70 450
40 40 60 400
Jan 2010 Mar 2010 May 2010 Jul 2010 Jan 2010 Mar 2010 May 2010 Jul 2010

Source: Bloomberg and Danske Markets Source: Danske Markets

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Monitor

Bank CDS aggregated – 5yr Senior CDS Selected banks – 5yr Senior CDS

Index 700 700

700 Index Itraxx 5yr SEN Financial CDS Banco Espirito Santo
SPAIN (4 banks) 600 BBVA
600 Italy (4 banks) 600
Unicredito
500 Portugal (3 banks) 500 500 Santander
Ireland (2 banks) Barcleys
400 400 400
BNP
300 300 300
200 200 200
100 100 100
0 0 0
Feb 2010 Apr 2010 Jun 2010 Aug 2010 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10

Source: Bloomberg and Danske Markets Source: Danske Markets

ASW spreads on the 1’st Schatz, Bobl and Bund futures 2 year and 10 year US swap spreads
90 90 70 70
bp 1st Bund ASW bp bp US 2yr swap spread bp
80 80 60 60
1st Schatz ASW US 10yr swap spread
70 1st Bobl ASW 70 50 50
60 60 40 40
50 50
30 30
40 40
20 20
30 30
10 10
20 20
0 0
10 10
0 0 -10 -10
Oct 2009 Dec 2009 Feb 2010 Apr 2010 Oct 2009 Dec 2009 Feb 2010 Apr 2010

Source: Bloomberg and Danske Markets Source: Bloomberg and Danske Markets

Global equities Implied equity vol

112 112 50 50
Index (02/02/10=100) % %
108 108 45 45
104 104 40 EURO STOXX 50 40
S&P Global 1200 vol index
100 100 35 35
96 96 30 30
92 92 25 25
88 S&P Global 1200 88 20 20
Financials Vix Vol index
84 84 15 15
Feb Mar Apr May Jun Jul Feb Mar Apr May Jun Jul
10 10
Source: Ecowin and Danske Markets Source: Ecowin & Danske Markets

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Monitor

EUR/USD and USD/JPY Implied 1m currency vol

1.55 98 19 19
EUR/USD USD/JPY (r.a.) EUR/USD USD/JPY
1.50 96 18 18
17 17
1.45 94 16 16
1.40 92 15 15
14 14
1.35 90 13 13
1.30 88 12 12
11 11
1.25 86
10 10
1.20 84 9 9
1.15 82 8 8
Nov Jan Mar May Nov Jan 2010 Mar May
2009 2010 2010 2010 2009 2010 2010

Source: Bloomberg & Danske Markets Source: Bloomberg & Danske Markets

Euro associated currencies EMBI spread

110.0 Index Index 110.0 400 bp bp 400

107.5 TRY 107.5 380 380
360 EMBI spread 360
105.0 105.0 340 340
102.5 102.5 320 320
PLN
100.0 100.0 300 300
280 280
97.5 97.5
260 260
95.0 95.0 240 240
92.5 HUF 92.5 220 220
Feb Mar Apr May Jun Jul 200 200
10 Dec Feb Apr Jun
2009 2010 2010 2010

Source: Bloomberg & Danske Markets Source: Bloomberg and Danske Markets

6M5Y EUR normalised Swaption volatility 5Y5Y EUR normalised Swaption volatility
95 bp 95 85 bp bp 85
83 83
90 90
81 81
85 85 79 79
80 80 77 77
75 75
75 75 73 73
70 70 71 71
69 69
65 65
bp 67 67
60 60 65 65
Dec Feb 2010 Apr 2010 Jun 2010 Aug Dec Feb 2010 Apr 2010 Jun 2010 Aug
2009 2010 2009 2010

Source: Bloomberg and Danske Markets Source: Bloomberg and Danske Markets

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Monitor

Disclosure
This research report has been prepared by Danske Research, which is part of Danske Markets, a division of
Danske Bank. Danske Bank is under supervision by the Danish Financial Supervisory Authority. The authors of
this research report are Allan von Mehren, Chief Analyst and Lars Tranberg Rasmussen, Senior Analyst.

Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high
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Financial models and/or methodology used in this research report

Calculations and presentations in this research report are based on standard econometric tools and methodology
as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be
obtained from the authors upon request.

Risk warning
Major risks connected with recommendations or opinions in this research report, including as sensitivity analysis
of relevant assumptions, are stated throughout the text.

First date of publication

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