Saturday, May 2, 2009

Weekly Focus: Asian Sensation

Global update

  • The Asian recovery is proving very strong with Japan now joining the party. South Korean exports and production are rising steeply.
  • US GDP was mixed, but forward looking indicators continue to rise. Risks to global growth are increasingly on the upside in coming quarters, which could lead to a positive feed back loop. We look for further rises in bond yields and equity prices.
  • Credit tightening is slowing in Euroland and the steep decline in housing demand is levelling off. In UK, PMI data point to turnaround in exports, retail sales are improving and house prices are stabilising.
  • Unemployment is rising sharply in Denmark and we have revised our estimate for unemployment higher.

Market movers ahead

  • Another weak US payrolls report is expected. Results of the stress tests in the US will also take centre stage.
  • In Euroland the ECB meeting on Thursday will be in focus. We look for a rate cut of 25bp and implementation of non-standard measures. The Bank of England is expected to keep rates unchanged.
  • Data for the Danish currency reserve should show a further increase. We look for a 10bp narrowing of the rate spread to Euroland on Thursday.
  • Norges Bank is expected to disappoint and only deliver a 25bp cut.
  • Minutes from the Swedish Riksbank and the speech by governor Ingves should give more info on thoughts about quantitative easing. PMI data are expected to rise.

Market Movers Ahead


  • In the US non-farm payrolls have been released and they will likely continue to paint a bleak picture of the labour market as it mainly reflects the very weak growth we have seen in the past quarters. We expect a decline of 660,000 - slightly worse than the consensus of a 620,000 drop. Otherwise the bank stress tests will be in focus again. The results should be out on May 4, but there are rumours this could be delayed. ISM service will give more information on how fast the economy is recovering at the moment. Also keep an eye on jobless claims.
  • In Euroland the ECB meeting Thursday will be the key event. We expect the ECB to cut rates by 25 basis points to 1% in line with consensus and we expect them to signal that this will be the bottom. ECB will also announce plans on non-standard measures. We expect them to introduce a 12-month auction and see some probability that it is combined with buying of corporate paper. In the UK the Bank of England announced rates on Thursday and we expect the BoE to keep rates on hold and not change the quantitative easing.
  • In Asia Chinese PMI from CLSA has been released. It is at a lower level than the other PMI index from NBS but we expect it to catch up a little and rise to 50 from 44.8.


  • In Denmark focus will be on data for the currency reserve and the rate decision from the “Danmarks Nationalbanken” (DN). The currency reserve has risen further during the past month and we expect the DN to see scope for narrowing the spread to ECB. We believe they move cautiously though, and only narrow by 10bp from 75bp to 65bp.
  • The central bank in Norway will also announce rates. The consensus expects a rate cut of 50bp but we only expect a cut of 25bp due to the more positive news we have seen lately. In Sweden focus will be on the minutes from the last Riksbank meeting and a speech held by Stefan Inves, the Riksbank governor. Talk on quantitative easing will be key.
  • PMI and industrial production is released in both Norway and Sweden. A further rise in PMI as seen in most other countries seems very likely.

Global Update

Asia showing strong recovery - upside risk to forecasts

The data flow out of Asia continues to be very positive and importantly it is now “hard data“ showing considerable improvement - not only surveys. The biggest surprise probably came in Japan where production rose 1.6% in March and production plans point to a further rise of more than 10% over the next two months. This indicates a considerably more favourable scenario than seen just a few months ago. We now expect Japanese GDP in Q2 to be around flat and to rise to around 3.5% (q/q annualised) in Q3. This is in sharp contrast with IMF and OECD forecasts that expect negative growth in Japan until mid-2010. In South Korea exports rose further in April and are now up 30% from the low point in January. To finish the positive news flow, Chinese PMI rose further to 53.5 in April adding evidence to the recovery story in Asia.

So why is Asia recovering so fast? A combination of 1) sharp inventory reduction, 2) improving markets for trade finance that broke down in late 2008 and 3) strong economic stimulus are probably the main factors. Rising demand is for example evident in car sales, which have rebounded lately.

The development will have positive spill-over effects on the rest of the world. Asia represents one quarter of the global economy and export weights to Asia (including Japan) in both US and Euroland are around 20%. In Japan about half of all exports go to the rest of Asia.

We now see upside risks to global growth in Q3. This should not only support the equity markets in coming quarters, but also put upward pressure on bond yields globally. This will especially be the case in the long end as short yields are anchored by continued low central bank rates.

US Q1 GDP weak but forward-looking indicators are higher

In the US GDP disappointed in Q1 as it fell 6.1% (see Flash Comment - Another Steep contraction in Q1). The decline was partly due to a sharp inventory reduction but a negative surprise from investments was also pulling down.

However, more forward-looking indicators continue to point to improvement. Regional surveys from Richmond, Dallas and Chicago rose further and US jobless claims, which is normally a good leading indicator, have also levelled off recently.

From negative to positive feedback loop?

In Euroland there was also some evidence of improvement in the housing market - as seen in the US and the UK as well. ECB's lending survey for Q1 revealed that housing demand is no longer falling sharply. The report also provided evidence that credit standards are still being tightened, but at a much slower pace than in previous quarters (see Flash Comment - Credit tightening is slowing). On top of that, credit spreads have come down and money market spreads are narrowing as money is starting to flow better in the money market. Overall financial conditions are still tight but the worse seems to be behind us.

We believe that more positive economic news in the coming quarter will support credit markets and thus we could see a more positive feedback loop in which improving economic prospects fuel confidence that the financial crisis is easing, which in turn leads to higher asset prices. This in itself will reinforce the belief in an economic recovery, and the negative feedback loop experienced over the last nine months would be replaced by a positive one in which a turn in sentiment could become self-reinforcing.

Financial views


  • We reiterate our positive market view and anticipate a further 10% upside in the US and global stocks at year-end.
  • Nevertheless, a test of sustainability should be expected during the coming weeks as the market needs the long-term investors to add exposure and play the economic healing theme. Short-term investors have dominated the market scene so far in the market recovery since mid-March. Our expectation is that the latter group will seek profit taking opportunities and that the stress tests of 19 banks in the US could open such a window. We anticipate that the stock market will pass this ‘test', although a 5-10% correction might be on the cards driven by cyclicals.

Fixed Income

  • Global: Bond yields are expected to rise on a three- to six-month horizon based on improving macro conditions, rise in risk appetite and heavy supply. US to underperform Euroland in sell-off.
  • Intra-Euro: We are overweight in peripherals (Italy, Greece and 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 one- to two-year non-callable mortgage bonds.


  • We remain overweight credit as an asset class as we believe that the market in general is pricing in a too severe default scenario. That said, the fundamental outlook is grim with defaults likely 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 where new issuance continues to be bid.

FX Outlook

  • EUR/USD is set to drift lower on the back of expected movements in relative interest and the relationship between US and Euroland in the business cycle. EUR/GBP is heading down as sterling is supported by positive economic data. USD/JPY will probably break above 100 in the near term. Carry can keep on performing while defensive currencies will face additional headwind. High correlation to equities is expected to fade.
  • The Swedish krona and Norwegian krone have good potential against the euro, but the risk of quantitative easing and general risk aversion represents obstacles. The medium-term horizon appears bright. The Danish krone is attractive (e.g. against Swiss franc) due to sound carry.


  • Base metals like copper and zinc have performed relatively strongly the last month fuelled by heavy Chinese buying. Oil prices have stabilised at about USD50/barrel.
  • Even though sentiment is relative strong, we are a little cautious about calling for higher prices after the general rally in April. Underlying demand outside China is still relatively weak and the risk of stocks continuing to rise is still evident. However, looking three to six months ahead we expect a new leg up in commodity prices.

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Danske Bank


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