Sunday, April 26, 2009

Weekly Focus: Stressed by the Stress Tests

Global update

  • No quantitative easing from Sweden's Riksbank this time around, but drawing closer
  • Euro-zone industrial indicators surprised on the upside and continued to move upward in April. Both the German Ifo and euro-zone PMI are pointing towards improvement
  • Data out of Asia in the past week added to the recovery story as South Korean exports continued to grow
  • US housing prices are showing signs of improvement, and housing sales are beginning to stabilise
  • Q1 financial earnings reports surprise on the upside

Market movers ahead

  • Results of financial system stress tests
  • US FOMC meeting, ISM and Q1 GDP data
  • Euro-zone CPI and UK manufacturing PMI
  • Monetary policy meeting at the Bank of Japan
  • More Q1 earnings reports

Market Movers Ahead


  • In the US the key focus will be on the FOMC meeting and Q1 GDP data on Wednesday, and ISM on Friday. Furthermore, banks will receive their stress test results this weekend. Although the results will not be made public before May 4, rumours are likely to emerge as early as next week. In terms of the FOMC meeting, we do not expect a scale up on quantitative easing or announcement of new measures. The statement is nevertheless likely to say that such steps could be taken if deemed necessary. Q1 GDP is set to post another sharp decline but could surprise positively compared to consensus expectations. Another positive surprise is likely to come from the ISM index Friday. We expect an above consensus rise to 40. The week will also see the release of the S&P/Case-Shiller house price index. So far three of the four home price indexes that we track have shown an improvement and the one missing is the Case-Shiller. Moreover, the flow of Q1 earnings reports will continue next week.
  • In Euroland there are no major movers, but M3 data, German länder CPI and Euro Flash CPI will be of interest. UK releases PMI manufacturing where we see scope for a further increase and an upward surprise.
  • In Asia the most interesting event will be the monetary policy meeting in Japan. BoJ will likely revise growth markedly lower but we don't expect new quantitative measures as the new stimulus package from the government has eased the pressure on BoJ.


  • In Sweden the upcoming week will only have 3½ working days on the financial markets as banks will close early the day before May 1. As far as macro data is concerned, there are no big movers and shakers, but we will keep an eye on confidence data. Retail sales will also be worth watching.
  • In Norway we are keeping a close eye on retail sales, as private consumption is important with regards to our divergent view on the Norwegian economy relative to Norges Bank. Norges Bank is not expected to purchase any foreign currency in May, which should lend support to the NOK.
  • We expect unemployment in Denmark to rise from 2.5% in February to 2.7% in March. Unemployment is still very low, but should rise quite sharply over the next six months on the back of the strong decline in production.

Global Update

More signs of recovery as restocking is under way …

The past week offered further evidence of a turnaround in the global economy. Euroland PMI data offered yet another positive surprise as the manufacturing new orders index rose from 30.9 to 37.4. Furthermore, since the inventory index continued lower the balance between orders and inventories rose to the highest level since 2006. The order-inventory balance is a good leading indicator of overall PMI as illustrated in the first chart. It is striking that Euroland is already showing signs of improvement as it is generally expected to be lagging in the cycle, but it probably mirrors that the global economy has been hit by a simultaneous huge shock from the financial crisis leading to extremely sharp cut backs in production. It now seems that inventory reduction globally has come very far and that the headwinds from this side will fade in the coming quarters. Euroland will also gain from this, but the recovery is likely to be slower than in the US and Asia.

The drawdown in inventories is also evident when comparing US industrial production with actual demand. Until November 2008 the two were moving lower in tandem, but since then demand has stabilised while production has continued to decline markedly. Inventories are therefore at extremely low levels at a time when monetary and fiscal stimuli are likely to kick in and lift demand. This might lead to a continued rise in ISM, which tends to be quite important for financial markets as a gauge of the business cycle. Data out of Asia this week also added to the recovery story. South Korea released exports for the first 20 days of April which showed another month of gains giving more credence to the case that the improvement seen in previous months is not just noise but actually taking place.

… while IMF is cutting growth forecasts further

These data make it all the more puzzling why IMF chose to revise down its growth forecast sharply during the past week (see table). Since its previous forecast in January, financial markets as well as economic indicators have improved. Our own projections are now more upbeat and we see little reason to revise them down. If anything, we start to see upside risk to H2 09 based on the data mentioned above. This is likely to put further upward pressure on bond yields during the coming quarters.

Banks and the US auto sector continue to be in focus

Earnings for Q1 have taken centre stage in the past week as well and especially banks are in focus. The picture has been a bit mixed but overall Q1 has been the first quarter in a long time where banks have been able to deliver positive surprises. Losses are still big, but revenues from trading activity are increasingly working as a buffer to absorb the losses. There is still great uncertainty over the need for further capital, which could dilute existing shareholders. Banks will receive the results of their stress tests today and the results will be made public on May 4. However, at least some information on the outcome of the tests is likely to be leaked to the press already this weekend and would be an important driver for markets in the short term.

The US auto sector has also come back into focus as the deadlines for restructuring plans are drawing closer. Chrysler faces a deadline of 1 May to conclude a partnership with Fiat and cut its debt and labour costs, or face bankruptcy. At the same time General Motors has said it is working on a debt-for-equity exchange ahead of its 1 June deadline. The latest story has been that Fiat is pursuing a stake in the European arm of General Motors. A lot of uncertainty surrounds the auto sector, which is likely to continue in coming weeks. This is keeping markets a bit sidelined - despite the more encouraging economic signs.

Financial views


  • We reiterate our positive market view and anticipate a further 10-15% upside in US and global stocks at year-end.
  • Still, a test of sustainability should be expected during the coming weeks as market focus will move from economic healing signals to Q1 reporting season and the stress tests of 19 banks in the US. We anticipate that the stock market will pass this test, although a 5-10% correction might be on the cards due to the likely very weak Q1 EPS results.

Fixed Income

  • Global: Bond yields are expected to range trade short term, but to rise on a 3-6m horizon based on improving macro conditions. US expected to underperform Euroland in sell-off.
  • Intra-Euro: We are overweight peripherals (Italy, Greece, Spain) versus Germany in 2-5y maturity. On longer maturities we prefer France and Finland versus Germany.
  • Scandi: We are underweight long Danish government bonds versus Finland in the 10Y area, but overweight in the 2Y area and overweight Swedish government bonds versus Germany in the 5Y area. We recommend overweight of Norwegian govies versus Germany in 10y segment. We are underweight Danish mortgages versus government bonds in all segments (callable, Capped Floaters and non-callable) except for 1-2 year noncallable mortgage bonds.


  • We remain overweight credit as an asset class as we believe that the market in general is pricing a too severe default scenario. That said, the fundamental outlook is grim with defaults going to rise sharply and the ride is likely to be rough as uncertainty over the timing of an economic recovery persists. In our view, the most prudent way to build up an overweight position is via the primary market.

FX Outlook

  • EUR/USD is expected to drift lower on the back of relative interest developments and the relationship between US and Euroland in the business cycle. EUR/GBP remains overvalued, but is set to continue lower. Carry can keep on performing while defensive currencies will face additional headwind. High correlation to equities is expected to fade.
  • SEK and NOK have good potential against EUR, but the risk of quantitative easing and general risk aversion represent obstacles. Medium-term horizon appears bright. DKK is attractive (e.g. against CHF) due to sound carry.


  • Commodities have performed relatively strongly the last month fuelled by heavy Chinese buying of metals, high OPEC compliance and optimism in the market that we have passed the cyclical through.
  • Even though sentiment is very strong, we are a bit cautious calling for higher prices after this rally. Underlying demand outside China is still relatively weak and the risk of stocks continuing to rise is still evident. However, looking 3-6 months ahead we expect a new leg up in commodity prices.

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Danske Bank


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