Morning Report

02.01.2012

Welcome to the Euro Zones lost year

NOK & 3m NIBOR 8.00 7.80 7.60 7.40
3m ra.

3.40 3.20 3.00 2.80 2.60

EURNOK

At the beginning of a new year it s usually easy to point to the prospects for continued growth and the opportunities it provides. Not so for the Euro Zone this year. In all likelihood, the growth in the region has now come to a halt. Since August, the purchasing manager index (PMI) for manufacturing and service sectors in the euro zone has remained below the 50 threshold, thus indicated declining activity in these sectors. Unemployment, which began to decline in the spring of 2010, has risen by 630,000 since April. Final PMI-indices for December, released today, will confirm this overall bleak picture. In her New Year speech Angela Merkel warned that 2012 "without doubt" will be more difficult than 2011. The Euro Zone slowdown will continue this year. The EZ nations have planned budget cuts equivalent to at least 1% of GDP. IMF-calculations suggest that this alone may pull down GDP by up to twice as much (when many countries tighten at the same time and interest rates can not be cut). Symptomatically, Spain's fresh government last Friday announced new spending cuts and tax increases amounting to nearly 9 billion euros (1% of GDP) in 2012, as a response to news that the budget deficit will end up around 8% of GDP in 2011, vs the previously expected 6.3%. Among other things, public salaries will be frozen for another year. The quick response is obvious: Lenders confidence in Spain has faltered. At the end of November Spanish government bond rates approached 7%. Although conditions improved in December, new mistrust and closed doors for new loans is not far off. Therefore, Spain and other countries may not have much choice, even though the budget cuts will weaken growth further in the short term. In addition, several years of lack of resolution of the public debt crisis has worsened banks' financial situation leading to tighter credit to enterprises. Together with more uncertainty and weaker growth prospects this lowers investments. Most important, households are affected through layoffs, wage freeze, higher unemployment and more uncertainty. We now expect a decline in private demand and a decline in GDP during the first half of this year, and an overall GDP decline of 0.4% this year. We are not alone: The latest consensus forecasts is for a decline of 0.1% in Euro Zone GDP this year, with a spread from -1.3% to 1.0%. In January last year, similar estimates were, respectively, 1.6%, 1.2% and 2.1%. The last year ended with few important new macro figures. HSBCs PMI-index for the Chinese industry, in December stood below the 50-line for the second consecutive month. China's increasingly open economy is naturally not insulated from the slowdown in Western Europe. The bright spot was that the index rose 1.0 points from November. Hence, the situation does not worsen. In addition, it is relatively certain that the government's loosening of its credit policy - banks' primary reserve requirements (RRR) was in November cut by half a percentage point - will be followed by more, probably soon. Analysts expect cut of a further 2 percentage points in the RRR this year. Most stock exchanges ended the year's last trading day in plus, but without changing much of what in sum was a lamentably years in the markets. According to figures from Bloomberg the global stock exchanges lost almost USD 6300 billion in value, equal to 9% of global GDP. At the start of 2012, maybe the most encouraging factor is that a lot of bad news and uncertainty already seem to be factored in. Symptomatically, the euro continues its downhill trip. On Friday, it traded below 100 against the Japanese yen for the first time in ten years, and ended the year around 1.2950 against the USD, almost 20 cents weaker than at the beginning of May. These developments were not fully unexpected. Eight months ago, we forecasted that the euro would fall to 1.25 against the USD by October, as the Euro Zone turmoil and an earlier US turnaround would favour the USD. Although the Euro decline has been less than envisaged then, there has been little doubt about the direction. The euro slide is hardly over. While the US economy is growing, although hesitantly, the Euro Zone economies are declining. Secondly, there is yet no permanent solution to the debt crisis, and investors are likely to continue to flee the Euro in favour of safe havens, among them the US. We register that the NOK (along with the Canadian "loonies") is again being launched as a safe haven. Our view is the same as before: The NOK is too small and illiquid to be attractive as a safe haven in uncertain times. oystein.dorum@dnb.no Yesterday's key economic events (GMT) 07:00 UK Nationwide home prices 09:00 Italiy PPI Todays key economic events (GMT) Markets closed in US, Japan and UK 08:53 Germany Manufacturing PMI 08:58 EZ Manufacturing PMI 10:00 Norway NEF/Econ home prices As of Dec Nov As of Dec Dec Dec Unit y/y % y/y % Unit index index m/m % Prior 1.6 4.5 Prior 48.1 46.9 0.5 Poll 1.6 4.6 Poll 48.1 46.9 0.5 Actual

22-Nov 12-Dec 30-Dec

SEK & 3m STIBOR 9.5 9.3 9.1 8.9

3m ra.

2.80 2.70 2.60 2.50 2.40

EURSEK

22-Nov 12-Dec 30-Dec

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DNB

Morning Report
02.01.2012

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 118 112 106 100
NOK TWI ra.

100 98 96 94
$/b

22-Nov 12-Dec 30-Dec

EUR vs GBP & CHF 0.87 0.86 0.85 1.15 0.84 1.10 0.83 22-Nov 12-Dec 30-Dec 1.25 1.20
GBP r.a CHF

FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK

Prior 76.98 1.295 0.833 1.215 7.744 8.927 7.434 6.007 7.812 0.869 9.311 6.908 8.974 1.152 10.699

Las t 76.99 1.293 0.834 1.217 7.743 8.911 7.433 5.989 7.782 0.870 9.293 6.894 8.968 1.153 10.692

% 0.0% -0.1% 0.1% 0.2% 0.0% -0.2% 0.0% -0.3% -0.4% 0.2% -0.2% -0.2% -0.1% 0.1% -0.1%

In 1 m ...3 m 80 80 1.30 1.30 0.84 0.84 1.23 1.23 7.80 7.80 9.20 9.10 7.45 7.45 6.00 6.00 7.50 7.50 0.85 0.86 9.3 9.3 7.08 7.00 5.66 5.60 1.18 1.17 10.95 10.83

...6 m ...12 m 80 90 1.25 1.25 0.82 0.82 1.23 1.30 7.70 7.70 9.00 9.00 7.45 7.45 6.16 6.16 7.70 6.84 0.86 0.86 9.4 9.4 7.20 7.20 5.76 6.48 1.17 1.17 10.98 10.98

FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB

USD 1.0221 1.0197 0.9413 19.73 5.7489 1.5515 7.7673 122.81 0.2793 2.6707 0.5418 0.7777 3.4613 1.2979 32.2290

% -0.09% -0.03% 0.31% -0.24% 0.07% -0.16% 0.00% -0.05% 0.19% 0.07% 0.07% -0.19% -0.03% 0.05% 0.05%

EURSEK & OMXS 9.4 9.2 9.0 500 450 400

350 8.8 22-Nov 12-Dec 30-Dec

OMXS ra. EURSEK

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

NIBOR Prior 2.55 2.86 3.11 3.27 2.84 3.16 3.39 3.59

SWAP AN D MONEYM AR KET RATES STIBOR EUR IBOR Las t Prior Last Prior 2.51 2.36 2.37 0.99 2.89 2.64 2.64 1.30 3.13 2.71 2.71 1.57 3.32 2.76 2.76 1.75 2.84 1.86 1.86 1.40 3.16 1.97 1.97 1.74 3.39 2.18 2.18 2.08 3.59 2.31 2.31 2.38

Last 0.96 1.29 1.57 1.75 1.37 1.73 2.08 2.41

USD LIBOR Prior 0.30 0.58 0.81 0.97 0.82 1.23 1.63 2.04

Last 0.30 0.58 0.81 0.97 0.85 1.23 1.64 2.04

Gov. Bonds, 10y 2.00 1.75 3.00 2.50

2.00 1.50 1.50 22-Nov 12-Dec 30-Dec

NOK, ra. SEK

10y 10y yield vs bund

NORW AY Prior Las t 114.85 110.90 2.44 2.44 0.61 0.61

GOVERNM ENT BONDS SW EDEN GERMANY US Prior Last Prior Last Prior 117.91 117.91 101.58 101.58 101.10938 1.63 1.62 1.83 1.83 -0.20 -0.21 #VALUE!

Last 101.11 1.89 0.06

13 12 11

JPY and DowJones

10 22-Nov

12-Dec

79 78 77 76 75 30-Dec

In 3m 6m 12m

INTEREST RATE FORECASTS NORW AY SW EDEN GERMANY 3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 2.60 3.50 2.25 2.25 1.05 2.50 2.40 3.75 1.95 2.50 0.90 2.75 2.30 4.25 1.75 3.00 0.90 3.25

US 3m libor 10y s wap 0.55 2.25 0.55 2.50 0.50 3.00

USDJPY ra. DowJones, 1000

USD and gold 1900 1.42 1800 1.38 1700 1.34 1600 1.30 1500 1.26 22-Nov 12-Dec 30-Dec
EURUSD ra. Gold

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

3m 2.62 2.33 2.28 2.30 3m 2.22 1.82 1.61 1.60

Prior 2.62 2.33 2.26 2.30 Prior 2.20 1.81 1.60 1.60

chg 0.00 0.00 0.02 0.00 chg 0.01 0.01 0.01 0.00

MISCELLANEOUS TWI Today % Stock ex. Today % NOK 96.83 Dow Jones 12,217.6 -0.6% SEK 118.05 - 0.13 Nasdaq 2,605.2 -0.3% EUR 102.17 - 0.05 FTSE100 5,572.3 0.1% USD 80.31 0.13 Eurostoxx50 2,316.6 1.1% GBP 80.90 Dax 5,898.4 0.8% Comm. Today Last Nikkei225 8,455.4 0.0% Brent spot 109.2 109.2 Oslo 384.95 0.4% Brent 1m 0.0 107.4 Stockholm 451.07 1.0% 1.0% Spot gold 1574.5 1574.5 Copenhagen 502.63 Sources to all tables and graphics: Reuters and DNB Markets

Morning Report
02.01.2012
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