Risk Appetite Improves Slightly With Equities Up In The US And Asia

• Risk appetite improved a bit yesterday with equities up in the US and Asia.
• EU diplomats are planning "project bonds" according to FT.
• Focus today will be on UK CPI and US existing home sales.

Market Overview

Risk appetite  improved a bit yesterday after the strong sell-off last week. The news flow overnight has been relatively quiet with focus turning to Wednesday's informal EU summit and the long list of activity indicators that will be released on Thursday.

FT reports that diplomats have approved the formation of so-called "project bonds." The amount is small so far and only EUR 230m in EU funds will be allocated through 2013 to back the bonds. The money should be spent on cross-border infrastructure investments and is highly symbolic. FT writes that the "growth compact" will also include increased funding for the European Investment Bank for infrastructure projects and speeding up the disbursement of EU development funds with focus on the poorer regions. These issues are likely to be discussed  at Wednesday's informal summit but we should not expect a fully-fledged plan until the summit on 28 June.

The improved sentiment from the European trade carried over to the  US equities. The S&P500 ended the trade up 1.6% after six days with decreases. The S&P future has decreased slightly in Asian trading. In Asia stock indices are trading in positive territory this morning. Nikkei is up by 1.0%, while Hang Seng is up by 0.9%.

US bond yields increased slightly on improved sentiment. In FX markets EUR/USD has climbed back above 1.28 overnight but this morning the cross is trading just below 1.28 again.

Greece remains the centre of attention and yesterday the German and French Finance Ministers repeated their call for Greece to stay in the euro. Based on the most recent polls it appears that it will be a very close call between Syriza and the New Democracy on who will become the biggest party (and win the 50 bonus mandates) in the second election round. While waiting for the Greek election on 17 June we are  likely to see continued high uncertainty and stress in the markets and things are likely to get worse before they get better in our view. Yesterday, we noted that Greek chaos continues but a solution can ultimately found in which we look at three different post-election scenarios. We are in for a long period of uncertainty but we believe that ultimately a deal will be struck between the EU/IMF and Greece that keeps Greece in the euro and austerity will continue. The alternative is too severe for both the EU and Greece.

Fixed income markets:  In our view the focal point this week is the EU summit tomorrow. There appears to be growing discontent with the German view on austerity. Southern European countries will try to push harder for a growth agenda but the truth is there is little they can do through fiscal policies that can boost demand. In our view the key to unleashing growth in Europe is monetary rather than fiscal. With the effects of the 3Y LTROs fading, there is a growing need for the ECB to increase support to the markets. This is however not that likely to happen in other forms than verbally in the near term.

US Treasurys and German Bunds should therefore be able to continue to perform, while Spanish and Italian  10-year yields are likely to continue to climb towards 7%. Overall market conditions are expected to worsen further ahead of the Greek election in four weeks' time. Today the Netherlands is coming to the market with a tap of up to EUR3.5bn of 0.75% 2015 bonds.

Market Overview2

Scandi

The most important economic data from Norway this week will be the GDP figures for Q1. The regular data releases have shown that economic growth has accelerated in the opening months of 2012. Strong private consumption has been the prime driver here, although leading indicators such as PMI and the Regional Network show that the upswing is broadly based, with oil-related businesses, service industries and the construction sector all performing strongly. This is supported by employment growth that also appears to have been solid in the early part of the year. We therefore expect that mainland GDP grew 1.2% q/q in the first quarter, which would be well above trend growth (roughly 0.75%). It would also be significantly higher than Norges Bank‟s (central bank) estimate in its Monetary Policy Report 1/12 from March, thus underlining the risk of allowing exchange rates to determine monetary policy.

Key Figures & Events

Market Data May 22, 2012

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