Danske Daily : 14 December 2011

No surprises from Fed - slightly more upbeat on the economy and no hints of imminent QE3.

Merkel reluctant to increase firepower of ESM.

EUR continues to slide and the stock market is lower.

Not a done deal that Norges Bank will lower rates today.

Focus today will be on Italy‟s government bond auction and eurozone industrial production.

Markets Overnight

As expected there were few changes in the Fed statement released in connection with the meeting yesterday. Fed was slightly more upbeat on the economy in light of the recent economic data, but still sees considerable downside risk particularly due to the European debt crisis. On the policy front it was status quo. Fed maintained its commitment to keep interest rates “exceptionally low” at least until mid-2013 and it will carry on extending the maturity of its treasury bond portfolio in the so called Operation Twist. There was no hint that we are moving closer to QE3 in the statement but all options remain open for 2012.

Uncertainty about the EU countries’ ability to implement the agreement from last week’s EU summit continues to weigh on the market. According to media reports German Chancellor Angela Merkel at an internal CDU meeting yesterday rejected increasing the firepower of the European Stability Mechanism (ESM) beyond EUR500bn. ESM is the permanent bail-out fund that is poised to replace EFSF at some stage next year. Comments from Japan and Bundesbank have also dimmed hopes of a significant increase in IMF‟s resources.

Uncertainty about the development in Europe continues to weigh on sentiment. The US stock market yesterday closed lower despite Fed‟s slightly more upbeat view of the economy with S&P 500 closing down 0.9%. Asian stock markets are also mostly lower this morning, but US stock futures have improved slightly in Asian trade.

In the US bond market 10-year treasury yields have declined by 6bp since market close in Europe yesterday on the back of negative sentiment in the stock market and a very successful auction of 10-year treasury bonds. In the European bond market Spain‟s and EFSF‟s bills auction yesterday went relatively well, but sentiment in the bond market was mixed with Italian 10-year yields increasing slightly to 6.69% and Spanish 10-year yields declining slightly to 5.71%.

In the FX market EUR continues to slide and this morning EUR/USD is trading 1.303. In the Scandinavian currencies SEK has weakened further overnight, while EUR/NOK is trading largely unchanged ahead of today‟s Norges Bank meeting.

Global Daily

Focus today: The market is still waiting for Standard & Poor‟s judgment of the outcome of the EU summit and a possible downgrade of a least one eurozone country including France. Today Italy‟s auction of 2016 government bonds will give us an idea of to what degree the country still has access to funding in the market, which could prove to be the most important event today. The data calendar is relatively thin with industrial production for the euro area the most interesting release. We expect another decline in industrial production in October following a sharp decline in September, underscoring that GDP is poised to contract in Q4.

Fixed income markets: We have a substantial pipeline for today with names such as Italy, Sweden and Germany coming to the market. Failure is not an option for the Italian auction given the current tense market situation. Besides the auctions, focus is still on the rating cycle and whether S&P will follow through on its credit watch and downgrade one or more eurozone sovereigns.

FX markets: The euro came under renewed pressure yesterday as debt concerns and German reluctance to raise the limit on the bail-out fund continued to weigh on sentiment. Furthermore, the dollar got some support from the FOMC meeting, as it gave no new hints of a new round of quantitative easing. We could see further downside for EUR/USD today and a test of 1.30 is likely. Next strong support is seen at 1.2961 – the 12 January low. EUR/CHF also dropped somewhat yesterday, but the market is reluctant to push the cross significantly lower ahead of tomorrow‟s SNB meeting, where a new higher minimum target for EUR/CHF could be in the pipeline. This morning we will publish our FX Top Trades for 2012. Being long EUR/CHF is in fact one of our proposed top trades.

Scandi Daily

Norway: The main event today is the policy meeting where a 25bp cut is fully priced, but in our opinion a rate cut is not a done deal. In its latest monetary policy report Norges Bank made full allowance for a global economic downturn. Furthermore, there have been no dramatic changes in the market‟s interest-rate expectations for Norway‟s trading partners since October and the import-weighted NOK exchange rate is close to where it was projected to be in the monetary policy report.

The impact of the crisis on the Norwegian economy is evident, especially in surveys of business and household confidence, but „hard‟ data show that private consumption is holding up, house prices are still climbing and homebuilding activity remains strong, and the outlook for oil investment has even been revised up.

Finally, the Norges Bank governor said on 21 November: “Should the outlook deteriorate significantly, the key policy rate may be lowered as a counterbalance to higher funding costs in the bank system.” Hence, the question is whether the situation has deteriorated enough to warrant a rate cut today. That said, concerns that NOK could become too strong and NIBOR fixings rising further may trigger a rate cut today. Even a 50bp cut cannot be ruled out. If we see a spike in EUR/NOK we would use it to buy NOK.