Morning Report

20.12.2011

Expect rate cut from Riksbanken

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

3.50 3.30 3.10 2.90

EURNOK

Yesterday the European Central Bank published its report on financial stability. Today we expect that the Riksbank will cut the repo rate by 25 basis points. Yesterday the European Central Bank published its semi-annual report on financial stability in the euro zone. The report says the risk to financial stability has increased significantly in the second half of 2011, and several of the factors that were highlighted in the last report in June has materialized, first and foremost by the debt crisis in Greece, Portugal and Ireland having spread to Italy, and through increased fear which in turn has affected the other countries on the continent. In addition, banks' funding situation has deteriorated since the last report. Yesterday's report also points to four key risks that could worsen the financial stability going forward. These are, in short, that the debt crisis could spread further on to the continent and that this has a potential negative effect on the financial sector and on economic growth. Furthermore, the report stress that the deterioration of the financial stability that has taken place since the last report requires "bold and decisive actions" both outside and within the euro zone. It is pointed out that the measures which are proposed and undertaken among euro zone politicians so far, is a step in the right direction, and that the most important step in the months to come is to maintain financial discipline, and a rapid implementation of structural reforms in order to initiate growth and bring unemployment down. With 16.3 million unemployed, unemployment in the euro zone at its highest level ever. And it appears that politicians now have taken a step closer to a solution, or more precisely: measures that could contribute to increased confidence in the euro zone. European finance ministers yesterday agreed to lend 150 billion euros to IMF, which in turn will be able to lend to heavily indebted euroeconomies. At the same time, it became clear that four countries outside the currency union will also contribute. The four are Denmark, Sweden, Poland and the Czech Republic. Britain, who last week declined to sign the new agreement on requirements for budget deficits, has again proved reluctant to participate in the joint rescue mission. According to Reuters the British said that they need more time, while one can only act through a G20 cooperation. One of the countries which is in desperate need for political reforms is Spain, and yesterday the newly elected prime minister, Mariano Rajoy, said that he will cut in public spending and provide tax relief for the corporate sector. In his speech to the Spanish parliament Rajoy said that his first three reforms will be aimed at budget policy, continuation of the reforms in the banking sector, as well as structural reforms in the public sector. Yesterday's markets were characterized by only minor movements. While the U.S. stock markets have weakened somewhat since yesterday morning, the European stock markets rose. This morning Asian stock markets have opened up, probably as a response to the decline from the preceding day when the news of King Jong-Il's death was known. In FX movements were also relatively small. The euro was steady against the dollar, while the krone strengthened on a broad basis, and among other things, it rose by 0.6% against both the euro and dollar. Today the Riksbank's last monetary policy meeting of the year will be held. At the previous meeting the repo rate was kept unchanged at 2.0%. However, the interest rate path was lowered and indicated that the rate would remain unchanged until autumn 2012. Internally there were disagreements in the comitee: Both Svensson and Ekholm wanted to lower interest rates immediately to 1.75%, followed by an additional cut of 25bp. There is disagreement among analysts about whether one will cut interest rates on today's meeting, such as Svensson and Ekholm wanted in October. According to Reuters, 7 of 16 of those surveyed, including us, expects a cut equivalent to 25bp. Furthermore, we expect two more cuts in the first half of 2012 so that the repo rate is 1.25%, which we believe it will be until we enter 2013. The reason why we now expect cuts from the central bank is the deteriorating conditions in the global economy which is likely to reduce the growth in activity in the Swedish economy. Among other things we have seen that the PMI index has fallen markedly in recent months, an index that has traditionally comoved well with GDP growth. Export outlook has deteriorated in line with the escalation of the crisis in the euro zone. Meanwhile, consumer confidence fell to levels that we saw during the financial crisis in 2008-09. This indicates a weak consumption growth in 2012. ole.kjennerud@dnb.no Yesterday's key economic events (GMT) 15:00 US NAHB Housing mrk. indx Todays key economic events (GMT) 08:30 Sweden Riksbank meeting 09:00 Germany IFO index 13:30 USA Housing starts number As of Dec As of Dec Nov Unit m/m % Unit % Index Mil. Prior 20 Prior 2.0 106.6 0.628 Poll 20 Poll 2.0 106.1 0.635 Actual

9-Nov 29-Nov 19-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

9-Nov 29-Nov 19-Dec

Headquarters 0021 Oslo Stranden 21

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+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

DNB 1.75

Morning Report
20.12.2011

SPOT RATES AND FORECASTS

Oil spot & NOK TWI 118 112 106 100 9-Nov 100 98 96 94 29-Nov 19-Dec
$/b

NOK TWI ra.

EUR vs GBP & CHF 0.87 0.86 1.20 0.85 1.15 0.84 1.10 0.83 9-Nov 29-Nov 19-Dec 1.25
GBP r.a CHF

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

Prior 78.05 1.300 0.839 1.219 7.731 9.008 7.434 5.949 7.623 0.859 9.220 6.935 8.885 1.167 10.743

Last 77.92 1.301 0.840 1.220 7.780 9.030 7.431 5.979 7.673 0.862 9.262 6.942 8.905 1.162 10.752

% -0.2% 0.1% 0.1% 0.1% 0.6% 0.2% 0.0% 0.5% 0.7% 0.4% 0.5% 0.1% 0.2% -0.4% 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 0.9930 1.0399 0.9374 19.49 5.7136 1.5496 7.7852 122.70 0.2787 2.6549 0.5364 0.7602 3.4565 1.3068 32.0380

% 0.40% 0.18% -0.04% -0.38% -0.13% -0.03% 0.00% -0.20% 0.10% -0.13% -0.13% 0.73% -0.07% -0.02% -0.29%

EURSEK & OMXS 9.4 9.2 9.0 8.8 9-Nov 500 450 400 350 29-Nov 19-Dec
OMXS ra. EURSEK

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

N IBOR Prior 2.81 2.97 3.08 3.23 2.79 3.10 3.32 3.52

SWAP AN D MON EYM ARKET RATES STIBOR EURIBOR Last Prior Last Prior 2.81 2.43 2.43 1.06 2.97 2.74 2.73 1.35 3.08 2.77 2.76 1.61 3.23 2.81 2.80 1.80 2.78 1.80 1.83 1.45 3.06 1.92 1.93 1.83 3.27 2.14 2.12 2.15 3.47 2.27 2.22 2.45

Last 1.06 1.35 1.61 1.80 1.41 1.80 2.13 2.43

USD LIBOR Prior 0.28 0.56 0.79 0.95 0.85 1.25 1.62 1.98

Last 0.28 0.56 0.79 0.95 0.82 1.23 1.63 2.02

Gov. Bonds, 10y 2.00 1.75 1.50

NOK, ra.

3.00 2.50 2.00 1.50

SEK

9-Nov 29-Nov 19-Dec

10y 10y yield vs bund

N ORWAY Prior Last 117.15 113.50 2.18 2.15 0.29 0.29

GOVERNM ENT BON DS SWEDEN GERMANY US Prior Last Prior Last Prior 118.078 118.21 101.023 101.25 101.71875 1.61 1.59 1.89 1.86 1.81 -0.28 -0.27 -0.08

Last 101.47 1.85 -0.02

13 12 11

JPY and DowJones

10 9-Nov

29-Nov

79 78 77 76 75 19-Dec

In 3m 6m 12m

INTEREST RATE FORECASTS N ORWAY SWEDEN 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 0.55 0.55 0.50

swap 2.25 2.50 3.00

USDJPY ra. DowJones, 1000

USD and gold 1900 1.42 1800 1.38 1700 1.34 1600 1.30 1500 1.26 9-Nov 29-Nov 19-Dec
EURUSD ra. Gold

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

3m 2.62 2.31 2.21 2.23 3m 2.75 1.75 1.54 1.54

Prior 2.65 2.33 2.23 2.25 Prior 2.11 1.71 1.50 1.50

chg -0.03 -0.02 -0.02 -0.02 chg 0.65 0.04 0.04 0.04

MISCELLANEOUS TWI Today % Stock ex. Today % NOK 96.64 - 0.04 Dow Jones 11,766.3 -0.8% SEK 119.22 0.25 Nasdaq 2,523.1 -1.3% EUR 102.96 - 0.06 FTSE100 5,365.0 -0.4% USD 80.27 - 0.08 Eurostoxx50 2,203.0 0.0% GBP 81.10 - 0.0 Dax 5,670.7 -0.5% Comm. Today Last Nikkei225 8,296.1 0.0% Brent spot 105.0 105.5 Oslo 363.73 -0.9% Brent 1m 102.7 103.6 Stockholm 426.68 -0.3% 0.5% Spot gold 1594.0 1598.0 Copenhagen 483.58 Sources to all tables and graphics: Reuters and DNB Markets

Morning Report
20.12.2011
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