Morning Report

14.11.2011

Can Mario Monti save Italy?

NOK & 3m NIBOR 8.00 7.80 7.60 7.40 4-Oct
3m ra.

3.20 3.10 3.00 2.90 24-Oc t 11-Nov

EURNOK

This weekend it became clear that Mario Monti is going to succeed Silvio Berlusconi as Italian Prime Minister. In addition a row of tightening measures passed the parliament. It remains to be seen if this is enough to save the country from the debt crisis. Markets were moderately positive on Friday. Stock markets rose, the euro gained vs the dollar and Italian long term government bond yield fell substantially after the acceptance of the Italian debt package. Asian markets also rose this morning. Italian authorities passed substantial tightening measures on Friday. At the same time it became clear that Berlusconi is no longer the prime minister of Italy. He will be succeeded by Mario Monti, the former EU commissioner from 1995-99. The measures accounts for cuts equal to 60 bill. EUR during the coming three years, ie 3.4% of GDP. The cuts involve pay freeze for public workers, higher retirement age (up to 67 years by 2020), increases VAT (up from 20 to 21%), and higher taxes ie. on capital gains. The question is to which extent the cuts will be implemented, and even more important if this is enough to restore market confidence. Italian GDP increased by almost 1% during H1 this year. The GDP-deflator rose by somewhat more than 1%, even if consumer prices rose a lot more. Taken together nominal growth was only 2%. That low growth puts a strong pressure on governmental finances.The recent pick up in government bond yields, combined with prospects of lower activity going forward, implies that the required surplus on the primary balance will increase further. Even if the new measures are implemented, the debt to GDP ratio will most likely increase further. To which extent Italy will be forced to seek finance from the EU and the IMF will depend crucially on the the market developments going forward. The change of leadership may help restoring market confidence and may also increase the probability that further tightening measure will be implemented. If Mario Monti is to become the new prime minister, the country will at least have a leaser with extensive experience and a close relationship with the other EU-leaders. Experience also shows that Italy has managed to tighten the primary balance with almost 4% of GDP over a ten year period earlier. Hence, there still seems to be hope. This week starts with new information on the present situation in the euros zone. Goods production in September is due today. Based on data for core countries production is expected to fall by 2% (m/m). Tomorrow the first estimates for Q3 will be released. For the entire euro zone, GDP is ecpected to grow by 0.2%, the same as in Q2. Elsewhere it is expected that the outlook for Germany, measured by the ZEW-index, will continue to fall. The week will end with a speech by the ECB governor Mr. Draghi at a banking seminar in Frankfurt. In the light of the rising market volatilty recently and the risks related to Italy and European banks, the focus on this speech will most likely be high. US consumer confidence picked up in November. The Michigan sentiment index rose from 60.9 in October to 64.2 in November. This was the third monthly gain after the trough in August. The improvement this month was probably releated to the somewhat better stock market development. The level is still very low and points at still weak coneumer demand going forward. The long term average for the series is 86. The sentiment will hardly improve much until the unemployment rate starts dropping. And that may be long into the future. Tomorrow US retail sales for October is due, inflation and industrial production will be relased on Wednesday, while housing starts are due on Thursday. Japanese GDP rose 6% annualized in Q3, as expected. GDP was lifted by consumer demand, net exports and housing investments. knut.magnussen@dnb.no
Yesterday's key economic events (GMT) 15:55 USA Michigan sentiment USA Bond markets closed Todays key economic events (GMT) 05:30 Japan Industrial production 11:00 EMU Industrial production 11:00 EMU Industrial production As of Nov Unit Index Prior 60.9 Poll Actual 64.2

SEK & 3m STIBOR 9.2 9.1 9.0 8.9 4-Oct 2.65 2.60 2.55 2.50 2.45 24-Oct 11-Nov
EURSEK

3m ra.

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

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

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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

As of Sep Sep Sep

Unit m/m % m/m % y/y %

Prior -4.0 1.2 5.3

Poll -2.0 3.6

DNB

Morning Report
14.11.2011

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 120 115 110 105 100 4-Oct 100 98 96 94 24-Oct 11-Nov
$/b

NOK TWI ra.

EUR vs GBP & CHF 0.89 0.88 1.20 0.87 1.15 0.86 1.10 0.85 4-Oct 24-Oc t 11-Nov 1.25
GBP r.a CHF

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

Prior 77.13 1.376 0.856 1.240 7.754 9.095 7.443 5.642 7.316 0.854 9.075 6.616 8.575 1.175 10.631

Last 77.12 1.375 0.857 1.236 7.741 9.086 7.443 5.629 7.304 0.852 9.039 6.609 8.572 1.174 10.611

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

In 1 m ...3 m 80 80 1.40 1.35 0.88 0.86 1.23 1.23 7.80 7.80 9.20 9.10 7.45 7.45 5.57 5.78 6.96 7.22 0.85 0.86 8.9 9.1 6.57 6.74 5.26 5.39 1.18 1.17 10.45 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 1.0282 1.0157 0.8989 18.67 5.4137 1.6053 7.7793 115.83 0.2755 2.5114 0.5107 0.7861 3.1930 1.2852 30.3690

% 0.03% 0.31% -0.23% -0.11% -0.03% -0.12% 0.01% 0.04% 0.02% 0.18% 0.04% -0.01% -0.16% 0.33% -0.02%

EURSEK & OMXS 9.2 9.1 9.0 8.9 8.8 4-Oct 500 450 400 24-Oct 350 11-Nov

OMXS ra. EURSEK

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

N IBOR Prior 2.90 3.15 3.22 3.33 3.01 3.33 3.57 3.78

SWAP AN D MON EYM ARKET RATES STIBOR EURIBOR Last Prior Last Prior 2.88 2.35 2.36 1.15 3.11 2.61 2.61 1.42 3.21 2.65 2.65 1.65 3.32 2.72 2.72 1.82 2.99 1.99 1.96 1.58 3.33 2.20 2.21 1.98 3.58 2.41 2.39 2.24 3.80 2.51 2.51 2.54

Last 1.15 1.42 1.65 1.82 1.52 1.89 2.21 2.51

USD LIBOR Prior 0.25 0.45 0.65 0.81 0.86 1.30 1.78 2.22

Last 0.25 0.46 0.66 0.81 0.83 1.34 1.83 2.28

Gov. Bonds, 10y 2.25 2.00 1.75 1.50 4-Oct

NOK, ra.

3.00 2.50 2.00 24-Oc t 11-Nov

SEK

10y 10y yield vs bund

N ORWAY Prior Last 115.45 111.20 2.43 2.42 0.60 0.55

GOVERNMENT BON DS SWEDEN GERM ANY US Prior Last Prior Last Prior 117.284 117.28 103.3 103.36 99.484375 1.69 1.70 1.83 1.87 2.06 -0.14 -0.18 0.22

Last 98.97 2.13 0.26

JPY and DowJones 13 12 11 10 4-Oct 24-Oct

USDJPY ra. DowJones, 1000

79 77 75 11-Nov

In 3m 6m 12m

INTEREST RATE FORECASTS N ORWAY SWEDEN GERM ANY 3m nibor 10y swap 3m stibor 10y swap 3m euribor 10y swap 3.00 4.25 2.25 3.00 1.10 3.00 2.70 4.50 2.00 3.25 1.05 3.25 3.10 4.50 2.00 3.25 1.05 3.25

US 3m libor 10y 0.45 0.35 0.35

swap 2.75 3.00 3.25

USD and gold 2000 1.47 1900 1.42 1800 1700 1.37 1600 1500 1.32 4-Oct 24-Oct 11-Nov
EURUSD ra. Gold

FRA NOK DEC MAR J UN SEP FRA SEK DEC MAR J UN SEP

3m 2.91 2.62 2.44 2.43 3m 2.55 2.06 1.78 1.68

Prior 2.90 2.62 2.44 2.43 Prior 2.53 2.06 1.77 1.70

chg 0.01 0.00 0.00 0.00 chg 0.02 0.00 0.01 -0.02

MISCELLANEOUS TWI Today % Stock ex. Today % NOK 96.79 - 0.18 Dow Jones 12,153.7 2.2% SEK 120.04 - 0.08 Nasdaq 2,678.8 2.0% EUR 106.63 - 0.03 FTSE100 5,545.4 1.8% USD 76.94 0.03 Eurostoxx50 2,324.8 3.1% GBP 81.00 Dax 6,057.0 3.2% Comm. Today Last Nikkei225 8,603.7 0.0% Brent spot 115.4 115.4 Oslo 387.65 2.6% Brent 1m 114.7 114.2 Stockholm 446.91 3.2% 483.64 2.0% Spot gold 1773.0 1773.0 Copenhagen Sourc es to all tables and graphic s: Reuters and DNB Markets

Morning Report
14.11.2011
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