Morning Report

06.12.2011

S&P turned market sentiment

3.50 3.30 3.10 2.90

The Italian austerity package and the outcome of the Mercozy-meeting lifted the market sentiment and sent government bond yield in Italy and Spain sharply lower. However, markets turned more negative after S&P put 15 euro zone countries on negative credit watch. The market reacted positively to the austerity measures proposed by the Italian government, and positive mood remained lifted after clarifications during yesterday's pre-assessment between Merkel and Sarkozy were known. According to Financial Times, the two agreed on new fiscal rules for the euro zone. The proposal involves that one should not force the private sector to take losses in possible new rescue packages. The plan is that the new rules, along with the Italian austerity measures launched on Sunday, will be sufficient for ECB to follow up with additional measures. Ten-year government bond yields in debt-threatened economies fell sharply yesterday. The Italian interest rates fell by 70-80 basis points and traded below 6.0% for the first time since the end of October. In addition the Spanish interest rates dropped significantly during yesterday, and fell towards 5.0%. Such drops eases the pressure and reduces the risk of an acute debt crisis, but can be quickly reversed if the mood turns. And some negative news emerged already yesterday evening. Last night S&P announced that it considers downgrading 15 countries in the euro zone, including France and Germany. (Cyprus is already under consideration, while Greece is taken to the CC on the basis of high default risk.) The reason is the increased systemic risk, as a result of tighter credit conditions, higher risk premiums, risk of recession, high debts and political disagreement about how the crisis should be tackled. Normally it takes three months from a country is put on such list to possibly being downgraded. Now, however, S&P say that they will conclude as soon as possible after the EU summit on Friday. Hence, S&P puts further pressure on the politicians ahead of the summit. The news came after European markets closed. The impact on the U.S. market was undoubtedly negative. The rise in the U.S. stock market was muted, but the leading indices ended the day positively. The euro immediately weakened by about 0.5 cents against the dollar and the EURUSD is currently traded right below 1.34. The rise in long U.S. Treasury interest rates was reversed after the news became known. Today US Finance Minister Timothy Geithner arrives in Europe, where he is to meet ECB chief Mario Draghi. A number of PMI indices for service industries were released yesterday. Although they are not as important as the industry indices, they provide important information about the activity in the economy. The figures are for November. For the euro zone the PMI index was slightly lower than the corresponding flash estimate, released earlier. It meant that the overall index rose slightly to 47.0. The indicator suggests that GDP will fall in the fourth quarter, and, thus, that this may be the start of a new recession in the euro zone. However, British PMI for the services sector surprised on the upside. The index rose from 51.3 to 52.1, while it was expected to fall. The current level is normally consistent with GDP growth of just below 2%. Across the Atlantic, ISM for services in the US fell somewhat back. But still the index remains well above 50 and is consistent with moderate GDP growth. Among other key figures it is worth noting that retail sales in the euro zone rose more than expected in October. The increase was 0.4%, while it was estimated an increase of only 0.1%. Nontheless, this was insufficient to reverse the fall from the preceding month, and the current level is still 0.4% lower than a year ago. High inflation, high and rising unemployment and fiscal tightening reduces consumption. A quarterly index for Norwegian consumer confidence fell to the lowest level since 2009 Q4. This was no major surprise as the monthly indicator (ForbrukerMeteret) has fallen sharply in October and November. The details show that Norwegian consumers once again are affected by the deteriorating outlook for among major trading partners. This will likely spur savings and dampen consumer demand in short term. The expectations survey from Norges Bank showed that inflation expectations have abated recently. Economists and business agents expect that inflation will remain below the Norges Bank's target of 2.5% at both one and two-year term. Five-year expectations are a little above the target. The business agents are expecting a salary increase of 4.0% this year and 3.7% next year. This may indicate that the crisis in the euro zone have some dampening effect on wages here at home, even if the labor market still appears to be strong. The survey is unlikely to affect the interest rate decision next week, where we think that Norges Bank will reduce the signal rate by 25 bp. knut.magnussen@dnb.no As of Unit Prior Poll Actual Yesterday's key economic events (GMT) 09:00 EMU Retail sales Oct %, m/m -0.7 0.1 0.4 12:00 Norway NBs expect. Survey 14:00 USA ISM, non-manuf. Nov Index 52.9 53.5 52.0 As of Unit Prior Poll DNB Todays key economic events (GMT) 10:00 EMU GDP, revised Q3 Q/q % 0.2 0.2 11:00 Germany Manufacturing orders Oct M/m % -4.3 1.0 14:00 Canada Monetary policy meeting n/a % 1.0 1.0

26-Oct 15-Nov 5-Dec

SEK & 3m STIBOR 9.5 9.3 9.1 8.9

2.70 2.60 2.50 2.40

26-Oct 15-Nov 5-Dec

Headquarters 0021 Oslo Stranden 21

+47 03000

Offices Abroad New York London Shanghai Singapore Stockholm

+1 212 681 3800 +44 207 6211111 +86 21 6132 2888 +65 6220 6144 +46 8 4734850

Sales Oslo (+47) Equity Fixed Income FX/IR

22 94 89 40 22 01 78 20 22 01 76 50

Regional sales (+47) Bergen Bod Fredrikstad Hamar Haugesund Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund

55 21 95 80 75 55 87 60 69 39 41 50 61 05 14 69 52 72 09 06 61 27 32 27 38 07 28 62 22 01 76 50 51 84 04 30 77 62 96 80 73 58 74 89 33 01 73 80 70 11 69 85

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

22 01 76 56 22 01 78 03 22 01 78 24 22 01 76 63 22 01 76 64 22 01 77 41 22 01 76 67

Credit Research (+47) Ole Einar Stokstad Mikael L. Gjerding se Haagensen Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen

22 01 78 37 22 01 77 62 22 01 76 93 22 01 76 77 22 01 77 36 22 01 78 15

Morning Report
06.12.2011

SPOT RATES AND FORECASTS

100 98 96 94 5-Dec
$/b

1.25 1.20 1.15

EUR vs GBP & CHF 0.89 0.87 0.85

0.83 1.10 26-Oct 15-Nov 5-Dec

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

Prior 77.73 1.340 0.857 1.233 7.736 9.067 7.436 5.773 7.424 0.854 9.036 6.767 8.700 1.172 10.589

Last 77.79 1.338 0.856 1.236 7.737 9.068 7.436 5.783 7.439 0.854 9.040 6.780 8.722 1.174 10.597

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

In 1 m ...3 m 80 80 1.35 1.35 0.86 0.86 1.23 1.23 7.80 7.80 9.20 9.10 7.45 7.45 5.78 5.78 7.22 7.22 0.85 0.86 9.1 9.1 6.81 6.74 5.45 5.39 1.18 1.17 10.70 10.58

...6 m ...12 m 80 90 1.30 1.25 0.84 0.82 1.23 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 1.0191 1.0190 0.9233 18.83 5.5590 1.5633 7.7749 119.19 0.2772 2.5809 0.5217 0.7769 3.3434 1.2855 31.0870

% -0.85% 0.17% 0.26% 0.18% 0.18% -0.13% 0.06% 0.12% 0.06% 0.16% 0.15% -0.44% 0.17% 0.30% 0.61%

EURSEK & OMXS 9.4 9.2 9.0 8.8 26-Oct 15-Nov 500 450 400 350 5-Dec

OMXS ra. EURSEK

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

N IBOR Prior 3.02 3.16 3.25 3.35 2.96 3.31 3.56 3.78

SWAP AN D MON EYM ARKET RATES STIBOR EURIBOR Last Prior Last Prior 2.95 2.39 2.40 1.13 3.13 2.68 2.68 1.40 3.24 2.70 2.71 1.65 3.35 2.77 2.77 1.83 2.96 1.90 1.89 1.58 3.30 2.10 2.09 2.05 3.56 2.32 2.31 2.43 3.78 2.44 2.43 2.75

Last 1.13 1.40 1.65 1.83 1.59 2.04 2.40 2.73

USD LIBOR Prior 0.27 0.53 0.75 0.90 0.82 1.31 1.75 2.17

Last 0.27 0.53 0.75 0.91 0.83 1.32 1.78 2.19

Gov. Bonds, 10y 2.25 2.00 3.00 2.50

1.75 2.00 1.50 1.50 26-Oct 15-Nov 5-Dec

10y 10y yield vs bund

N ORWAY Prior Last 115.3 110.60 2.46 2.48 0.27 0.29

GOVERNM ENT BON DS SWEDEN GERMANY US Prior Last Prior Last Prior 116.005 116.03 98.148 98.29 99.703125 1.80 1.81 2.19 2.19 2.03 -0.38 -0.38 -0.15

Last 99.53 2.06 -0.13

13 12 11 10

JPY and DowJones

79 78 77 76 75

In 3m 6m 12m

INTEREST RATE FORECASTS N ORWAY SWEDEN GERMANY 3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 3.00 4.25 2.20 3.00 1.30 3.00 2.80 4.50 2.10 3.25 1.10 3.25 3.10 4.50 2.00 3.25 1.05 3.25

US 3m libor 10y 0.55 0.55 0.50

swap 2.75 3.00 3.25

26-Oct

15-Nov

5-Dec

USDJPY ra. DowJones, 1000

USD and gold 1.46 1900 1.42 1800 1.38 1700 1.34 1600 1.30 1500 26-Oct 15-Nov 5-Dec
EURUSD ra. Gold

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

3m 3.07 2.67 2.38 2.35 3m 2.75 2.23 1.81 1.59

Prior 3.07 2.67 2.38 2.35 Prior 2.74 2.24 1.82 1.59

chg 0.00 0.00 0.00 0.00 chg 0.01 -0.01 0.00 -0.01

MISCELLANEOUS TWI Today % Stock ex. Today % NOK 96.73 - 0.01 Dow Jones 12,097.8 0.7% SEK 119.81 0.33 Nasdaq 2,655.8 1.1% EUR 105.31 - 0.06 FTSE100 5,568.0 0.3% USD 78.67 0.07 Eurostoxx50 2,369.4 1.1% GBP 80.20 Dax 6,106.1 0.4% Comm. Today Last Nikkei225 8,575.2 0.0% Brent spot 112.0 112.0 Oslo 382.29 0.9% Brent 1m 109.6 109.8 Stockholm 451.59 1.3% 0.6% Spot gold 1744.0 1744.0 Copenhagen 500.13 Sources to all tables and graphics: Reuters and DNB Markets

Morning Report
06.12.2011
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