Morning report

New stimulus from Bank of England

07-Oct-2011
Bank of England surprised financial markets yesterday by increasing the quantitative easing scheme by 75 billion pounds. Along with the news that work is being done to recapitalize euro zone banks helped to lift stock markets yesterday. Today the labour market report is published. Yesterday was marked by several important events, some surprises and subsequent large market reactions. First, the Bank of England surprised markets by increasing its purchases of government bonds by 75 billion pounds. The majority expected an increase, but not before the meeting in November. Furthermore, consensus expected an extension of 50 billion pounds. The result was a sharp weakening of pound sterling and lower interest rates. The decision was based upon a worsening of the global economic outlook, which makes it more likely that inflation will fall below the target of 2 per cent in the medium term. Bank of England expects to use 4 months to complete the purchases. This may, however, not be the end. Remember that the first bout of QE was extended three times form an original 75 to 200 billion pound. After the surprising BoE decision, it was time for the ECB interest rate announcement. The interest rate was, as expected, kept unchanged at 1.50 per cent. This time the interest rate was not "appropriate". The decision was also based on consensus in the interest rate committee, which means that some disagreed. At Trichets last press conference, new liquidity measures were presented. ECB announced a new covered bond purchase program at 40 billion euro. Details will be published after the monetary policy meeting in November. In addition, the Governing Council decided to conduct two longer-term refinancing operations (LTROs), one with a maturity of approximately 12 months in October and the other with a maturity of approximately 13 months in December. The operations will be conducted as fixed rate tender procedures with full allotment. According to Reuters some were expecting a rate cut this time. Hence, the euro strengthened after the decision to leave rates on hold. A survey conducted by Reuters after the monetary policy meeting showed that the consensus now is for a November or December cut of 25 basis points, followed by another early next year. For without yesterday's surprise, Wednesday's news that EU-leaders are working to recapitalize banks helped lift financial markets. Stock ended higher for a third day in a row, while interest rates increased. The 10-year yield is about 30 basis points above the 60-year low set two weeks ago. As a result of events internationally, the Norwegian krone has weakened against the euro and strengthened against pound sterling over the past day. Rising stock markets and a somewhat more optimistic tone has also resulted in a stronger krone against the dollar and the yen. The Norwegian National Budget for 2012 gave no significant market reactions, as Finance minister Johnsen delivered a budget more or less in line with expectations. The structural oil-corrected budget deficit is estimated to NOK 122.2 bn in 2012, a NOK 9,9 bn increase from 2011. The budget is estimated to have an expanding on Norwegian Mainland GDP by 0.3 percent. However, based on the composition of expenditure, the budget is seen as neutral. The spending of oil revenue is 2.4 bn less than implied by a mechanical interpretation of the fiscal rule (4% of the oil fund value). Real, underlying growth in government expenditure is projected to 2.1%, which is lower than the 2.8% estimated in 2011. The budget is as Norges Bank expected, and should not alter the interest rate decision going forward. Today's definite highlight is the employment report from the United States. After no growth last month consensus is now expecting a job growth around 60' in September. In August, the numbers were affected by a strike for 45 'workers at Verizon Telecom. The strike effect will contribute positively this month. This is still not sufficient to bring down the unemployment rate, which is expected to remain at 9.1 per cent. Any deviations from consensus often result in significant market reaction. Developments in the labor market are important for the US central bank and may affect expectations about new stimulus from the Fed. maren.romstad@dnbnor.no Yesterday's key economic events (GMT) 11:00 UK BoE MPC Meeting 11:45 EMU ESB MPC Meeting Todays key economic events (GMT) 10:00 Germany Industrial production 12:30 US Payrolls 12:30 US Unemployment rates As of Oct Oct As of Aug Sep Sep Unit % % Prior 0.5 1.50 Prior 4.0 0 9.1 Poll Actual 0.5 0.5 1.50 1.50 Poll DnB NOR -1.3 73 60 9.1 9.1

NOK & 3m NIBOR

8.00 7.80 7.60 7.40 29-Aug 16-Sep 3m ra. 3.20 3.10 3.00 2.90 6-Oct EURNOK

SEK & 3m STIBOR

9.5 9.3 9.1 8.9 8.7 29-Aug 16-Sep 2.50 2.45 6-Oct EURSEK 2.60 2.55

3m ra.
Headquarters 0021 Oslo Stranden 21 Offices Abroad New York London Shanghai Singapore Stockholm Sales Oslo (+47) Equity Fixed Income FX/IR Regional sales (+47) Bergen Bod Fredrikstad Hamar Haugesund Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund +47 03000

+1 212 681 3800 +44 207 6211111 +86 21 6132 2888 +65 6220 6144 +46 8 4734850 22 94 89 40 22 01 78 20 22 01 76 50 55 75 69 61 52 61 38 22 51 77 73 33 73 21 55 39 05 72 27 07 01 84 62 58 37 84 95 87 41 14 09 32 28 76 04 96 74 13 60 80 60 50 69 06 27 62 50 30 80 89 00 09

Research Regional Sales (+47) Eirik Larsen 22 01 76 55 Research FX/IR (+47) ystein Drum Kjersti Haugland Ole Andr Kjennerud Knut A. Magnussen Maren Romstad Camilla Viland Kyrre Aamdal Credit Research (+47) Ole Einar Stokstad Mikael L. Gjerding se Haagensen Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen 22 22 22 22 22 22 22 22 22 22 22 22 22 01 01 01 01 01 01 01 01 01 01 01 01 01 76 78 78 76 76 77 76 78 77 76 76 77 78 56 03 24 63 64 41 67 37 62 93 77 36 15

Unit m/m % 1000 %

07-Oct-2011

Morning report

Oil spot & NOK TWI

130 110 90 70 29-Aug 16-Sep NOK TWI ra. 100 98 96 94 6-Oct $/b

SPOT RATES AND FORECASTS (Source: Reuters and DnB NOR Markets)
FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK Prior 76.70 1.343 0.870 1.238 7.831 9.161 7.444 5.829 7.607 0.857 9.005 6.821 8.899 1.171 10.528 Last 76.65 1.343 0.870 1.236 7.836 9.144 7.444 5.833 7.615 0.858 9.010 6.813 8.889 1.168 10.519 % -0.1% 0.0% 0.0% -0.2% 0.1% -0.2% 0.0% 0.1% 0.1% 0.1% 0.1% -0.1% -0.1% -0.3% -0.1% In 1 m ...3 m 80 80 1.35 1.35 0.86 0.86 1.20 1.20 8.00 7.80 9.30 9.10 7.45 7.45 5.93 7.41 0.86 9.3 6.89 5.51 1.16 10.81 5.78 7.22 0.86 9.1 6.74 5.39 1.17 10.58 ...6 m ...12 m 80 90 1.30 1.25 0.84 0.82 1.20 1.25 7.70 7.70 9.00 9.00 7.45 7.45 5.92 6.16 7.40 6.84 0.86 0.86 9.2 9.4 6.92 7.20 5.54 6.48 1.17 1.17 10.71 10.98 FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB USD 0.9782 1.0391 0.9201 18.44 5.5428 1.5443 7.7833 118.06 0.2774 2.5713 0.5282 0.7733 3.2628 1.2946 32.2420 % 0.38% 0.09% -0.14% 0.03% 0.02% 0.01% 0.02% 0.00% -0.05% 0.01% -0.04% 0.29% 0.09% -0.35% -0.26%

EUR vs GBP & CHF

1.25 1.20 1.15 1.10 1.05 1.00 29-Aug 16-Sep GBP r.a 0.89 0.87 0.85 0.83 0.81 6-Oct CHF

Gov. Bonds, 10y

2.25 2.00 1.75 1.50 29-Aug 16-Sep NOK, ra. 3.00 2.50 2.00 1.50 6-Oct SEK

1m 3m 6m 12m 3y 5y 7y 10y

JPY and DowJones

14 12 10 8 29-Aug 16-Sep USDJPY ra. DowJones, 1000 78 77 76 75 6-Oct

SWAP AND MONE YM ARKET RATES (Source: Reuters) NIBOR STIBOR EURIBOR Prior Last Prior Last Prior Las t 2.77 2.80 2.32 2.32 1.30 1.30 2.97 3.01 2.51 2.51 1.50 1.50 3.20 3.25 2.52 2.52 1.71 1.71 3.28 3.36 2.57 2.57 1.87 1.87 2.90 2.86 2.08 2.08 1.72 1.67 3.20 3.19 2.31 2.27 2.09 2.04 3.42 3.41 2.43 2.43 2.34 2.35 3.63 3.61 2.55 2.52 2.61 2.62 GOVE RNMENT BONDS (Source: Reuters) NORWAY SWEDEN GERMANY Prior 115.25 2.42 0.51 Last 111.28 2.42 0.48 Prior Last Prior Las t 116.646 116.65 102.753 102.73 1.77 1.77 1.91 1.94 -0.14 -0.18 INTEREST RATE FORECASTS SWEDEN GERMANY 3m s tibor 10y swap 3m euribor 10y swap 2.50 3.00 1.50 3.00 2.75 3.25 1.50 3.25 2.90 3.25 1.50 3.25

USD LIBOR P rior 0.24 0.38 0.57 0.72 0.82 1.34 1.79 2.18 US P rior 101.1875 1.99 0.08

Last 0.24 0.39 0.58 0.73 0.84 1.37 1.79 2.18

10y 10y yield vs bund

Last 101.25 2.00 0.05

2000 1900 1800 1700 1600 1500 29-Aug 16-Sep EURUSD ra.

USD and gold

In 3m 6m 12m
1.49 1.44 1.39

NORWAY 3m nibor 10y swap 3.05 4.25 3.20 4.50 3.50 4.50

US 3m libor 10y swap 0.35 3.00 0.35 3.25 0.35 3.25

1.34 6-Oct Gold

EURSEK & OMXS

9.4 9.2 9.0 8.8 29-Aug 16-Sep OMXS ra. 450 430 410 390 370 350 6-Oct EURSEK

FRA NOK DEC MAR JUN SEP FRA SEK DEC MAR JUN SEP

3m 2.79 2.45 2.39 2.39 3m 2.22 1.92 1.85 1.86

Prior 2.78 2.45 2.38 2.37 Prior 2.21 1.92 1.86 1.87

chg 0.01 0.00 0.01 0.02 chg 0.01 0.00 -0.02 0.00

TWI NOK SEK EUR USD GBP Comm. Brent spot Brent 1m Spot gold

Today 97.97 120.60 105.82 78.60 78.80 Today 106.7 105.7 1635.0

% 0.07 0.23 0.04 0.04 0.00 Last 106.7 105.7 1635.0

Stock ex. Today Dow Jones 11,123.3 Nasdaq 2,506.8 FTSE100 5,291.3 Eurostoxx50 2,248.8 Dax 5,645.3 Nikkei225 8,601.4 Oslo 345.52 Stockholm 419.39 448.31 Copenhagen

% 1.7% 1.9% 3.7% 3.2% 3.1% 0.0% 2.5% 2.5% -0.1%

Morning report
07-Oct-2011
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