Italian Interest Go Sky High: Morning Report

Morning report
Italian interest go sky high

10-Nov-2011
Interest on Italian debt increases to dangerous levels. The day when Berlusconi's resignation would give a lift to the markets, ended up with anything than positive for Italy. The interest the country pay for its debt increased from about 6.75 per cent yesterday morning to about 7.5 per cent in the afternoon, the highest one-day increase we have seen since Italy joined the euro. According to Financial Times, ECB was later an active buyer of Italian debt, which most likely explains why interest decreased to 7.23 per cent. In addition, we now see that the yield curve for Italian bonds is relatively flat, where interest in the short end is about to become higher than interest in the long run. This may indicate that investors regard immediate credit risk as high, and that they in the worst case fear an Italian default. In comparison both Ireland, Portugal and Greece had to ask for emergency aid from EU/IMF when their interest increased to similar levels. Such aid was dismissed by Berlusconi Friday last week. The market is most likely skeptical over whether Italy is capable in delivering sufficient austerity measures in a way that debt will be decreased to a more sustainable level. According to calculations by IMF Italy needs an annual real growth of 3.5 per cent, given 1 per cent surplus on the primary balance and an average inflation 2.5 per cent, if the debt level is to be stabilized at 120 per cent of GDP by 2030 under the current interest rate levels. Moreover, if debt is to be reduced to 100 per cent of GDP, the primary balance surplus must either be increased to 3 per cent, or real growth must increase to 4.5 per cent annually. Italy has on previous occasions managed to deliver similar surplus on the primary balance for an extended period. However, it seems unlikely that with the current level of growth, Italy will manage to bring down debt, as it has to implement levels of austerity measures unseen to the country in its newer history. A third factor which may cause a concern for investors, is that the European rescue fund, EFSF, which is to assist countries with problems lending money, also has problems lending money. A planned sale of bonds with 10 year maturity for a total value of 3 bn euro was, delayed last weeks as market conditions were unfavorable. The obvious question is not how, but who that is able to help Italy, if not even the rescue fund is able to do this. We believe that the only solution is the European central bank, as this is the only agent with sufficient resources to help the worlds third largest debtor and Europe's third largest economy. The activity in the Italian debt market soon gave spillovers to the currency and stock market. Compared to yesterday morning the euro has depreciated by 2 per cent versus dollar. According to Reuters, this is the largest fall in EURUSD in 15 months. Similar movements was also seen versus yen, which appreciated by 2 per cent versus euro. Yesterday's movements also confirmed that the krone is not regarded as a safe haven. The krone depreciated by 2 per cent against dollar, and 0.2 per cent against euro. The escape to safe havens most likely explains the movements in interest rate markets. Treasuries fell by 5 bp to 2.0 per cent, and the German bund fell by 10 bp to 1.72 per cent. Stock around the world also weakened, and American markets took the worst hit. Also in Norway we felt the turmoil, and Oslo Stock Exchange weakened by about 2 per cent. In Sweden the Riksbank published minutes from the interest rate meeting held last week. As is known, the repo rate was held constant at 2 per cent, and looking forward the Riksbank plans to increase the rate next year. However, the minutes revealed that both Svensson and Ekholm immediately wanted to lower the repo rate by 25 bp, and additional 25 bp in the first quarter of 2012. According to Svensson, the current interest rate path builds on assumptions of too high interest rates abroad, and that the bank may more quickly achieve price stability at 2 per cent inflation and unemployment at 6.5 per cent by lowering the interest rate path. As advertised earlier in the week, we now believe that the Riksbank will cut the repo rate twice by 25 bp until the first quarter of 2012. ole.kjennerud@dnbnor.no As o of Unit Prior Poll Actual Yesterday's key economic events (GMT) 00:00 China CPI Oct y/y % 6.1 5.5 5.5 01:00 China Retail sales Oct y/y % 17.7 17.4 17.2 08:30 Sweden Minutes from the Riksbank's meeting 26. October As of Unit Prior Poll DnB NOR Todays key economic events (GMT) 00:00 China Export Oct y/y % 17.1 16.5 15.9 08:00 Norway CPI, core Oct y/y % 1.2 1.1 12:30 US Trade balance Sep Bn -45.6 -46.0
NOK & 3m NIBOR

8.00 7.80 7.60 7.40 30-Sep 20-Oct 3m ra. 3.20 3.10 3.00 2.90 9-Nov EURNOK
SEK & 3m STIBOR

9.3 9.2 9.1 9.0 8.9 30-Sep 20-Oct 2.65 2.60 2.55 2.50 2.45 9-Nov EURSEK
3m ra.
Headquarters 0021 Oslo Stranden 21 Offices Abroad New York London Shanghai Singapore Stockholm Sales Oslo (+47) Equity Fixed Income FX/IR Regional sales (+47) Bergen Bod Fredrikstad Hamar Haugesund Lillehammer Kristiansand Oslo Stavanger Troms Trondheim Tnsberg lesund +47 03000
+1 212 681 3800 +44 207 6211111 +86 21 6132 2888 +65 6220 6144 +46 8 4734850 22 94 89 40 22 01 78 20 22 01 76 50 55 75 69 61 52 61 38 22 51 77 73 33 73 21 55 39 05 72 27 07 01 84 62 58 37 84 95 87 41 14 09 32 28 76 04 96 74 13 60 80 60 50 69 06 27 62 50 30 80 89 00 09
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 Credit Research (+47) Ole Einar Stokstad Mikael L. Gjerding se Haagensen Rolv Kristian Heitmann Thomas Larsen Knut Olav Rnningen 22 22 22 22 22 22 22 22 22 22 22 22 22 01 01 01 01 01 01 01 01 01 01 01 01 01 76 78 78 76 76 77 76 78 77 76 76 77 78 56 03 24 63 64 41 67 37 62 93 77 36 15
10-Nov-2011
Morning report
Oil spot & NOK TWI

120 115 110 105 100 30-Sep 20-Oct NOK TWI ra. 96 94 9-Nov $/b 100 98
SPOT RATES AND FORECASTS (Source: Reuters and DnB NOR Markets)
FX USDJPY EURUSD EURGBP EURCHF EURNOK EURSEK EURDKK USDNOK JPYNOK SEKNOK GBPNOK USDSEK JPYSEK NOKSEK GBPSEK Prior 77.83 1.355 0.851 1.232 7.767 9.064 7.444 5.734 7.372 0.858 9.129 6.691 8.604 1.168 10.654 Last 77.67 1.352 0.850 1.233 7.771 9.086 7.444 5.747 7.402 0.856 9.148 6.721 8.655 1.170 10.697 % -0.2% -0.2% -0.2% 0.1% 0.0% 0.2% 0.0% 0.2% 0.4% -0.2% 0.2% 0.4% 0.6% 0.1% 0.4% 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 6.96 0.85 8.9 6.57 5.26 1.18 10.45 5.78 7.22 0.86 9.1 6.74 5.39 1.17 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 7.40 0.86 9.2 6.92 5.54 1.17 10.71 6.16 6.84 0.86 9.4 7.20 6.48 1.17 10.98 FX AUD CAD CHF CZK DKK GBP HKD ISK KWD LTL LVL NZD PLN SGD RUB USD 1.0081 1.0255 0.9119 18.93 5.5053 1.5915 7.7800 117.16 0.2764 2.5538 0.5194 0.7745 3.2528 1.2943 30.8150 % -0.71% 0.26% 0.30% 0.60% 0.18% -0.06% 0.08% 0.15% 0.03% 0.22% 0.17% -1.02% 0.22% 0.41% 0.60%
EUR vs GBP & CHF

1.25 1.20 1.15 1.10 30-Sep 20-Oct GBP r.a 0.89 0.88 0.87 0.86 0.85 9-Nov CHF
Gov. Bonds, 10y

2.25 2.00 1.75 1.50 30-Sep 3.00 2.80 2.60 2.40 2.20 2.00 9-Nov SEK
20-Oct
NOK, ra.
1m 3m 6m 12m 3y 5y 7y 10y
JPY and DowJones

13 12 11 10 30-Sep 20-Oct USDJPY ra. DowJones, 1000 79 77 75 9-Nov
SWAP AN D MON EYMARKET RATES (Source: Reuters) N IBOR STIBOR EURIBOR Prior Last Prior Last Prior Last 2.83 2.78 2.36 2.36 1.16 1.16 3.12 3.05 2.59 2.60 1.43 1.43 3.28 3.20 2.64 2.64 1.65 1.65 3.39 3.33 2.71 2.71 1.83 1.83 2.96 2.95 2.07 2.06 1.51 1.50 3.25 3.27 2.21 2.21 1.84 1.83 3.50 3.51 2.39 2.38 2.11 2.12 3.71 3.72 2.47 2.46 2.38 2.39 GOVERNM ENT BON DS (Source: Reuters) N ORWAY SWEDEN GERMANY Prior 114.7 2.50 0.78 Last 110.90 2.45 0.74
USD LIBOR Prior 0.25 0.44 0.64 0.79 0.76 1.28 1.72 2.15 US
Last 0.25 0.45 0.65 0.80 0.77 1.25 1.71 2.14
10y 10y yield vs bund
N ORWAY In 3m 6m 12m
1.47 1.42 1.37 1.32
Prior Last Prior Last Prior 118.161 118.17 104.606 104.85 101.40625 1.61 1.61 1.73 1.71 1.97 -0.12 -0.10 0.24 INTEREST RATE FORECASTS SWEDEN GERMANY US
Last 100.17 1.99 0.28
USD and gold

2000 1900 1800 1700 1600 1500 30-Sep 20-Oct EURUSD ra.
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
3m libor 10y swap 0.45 2.75 0.35 3.00 0.35 3.25
9-Nov Gold
EU RSEK & OMXS

9.3 9.2 9.1 9.0 8.9 8.8 29-Sep 19-Oct OMXS ra. 500 450 400 350 8-Nov EURSEK
FRA NOK DEC MAR J UN SEP FRA SEK DEC MAR J UN SEP
3m 2.86 2.59 2.42 2.39 3m 2.56 2.12 1.90 1.81
Prior 2.86 2.58 2.42 2.39 Prior 2.56 2.14 1.90 1.80
chg 0.00 0.01 0.00 0.00 chg 0.00 -0.02 -0.01 0.01
TWI NOK SEK EUR USD GBP Comm. Brent spot Brent 1m Spot gold
Today 97.24 120.13 105.60 78.00 81.00 Today 115.9 111.6 1784.0
% 0.09 0.32 - 0.04 0.02 0.12 Last 115.8 112.3 1784.0
Stock ex. Today Dow Jones 11,780.9 Nasdaq 2,621.7 FTSE100 5,460.4 Eurostoxx50 2,249.4 Dax 5,829.5 Nikkei225 8,500.8 Oslo 381.08 Stockholm 434.13 Copenhagen 478.63
% -3.2% -3.9% -1.9% -2.3% -2.2% 0.0% -1.8% -2.3% -0.5%
Morning report
10-Nov-2011
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Italian Interest Go Sky High: Morning Report

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Italian Interest Go Sky High: Morning Report

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Morning report

Italian interest go sky high

NOK & 3m NIBOR

SEK & 3m STIBOR

Oil spot & NOK TWI

EUR vs GBP & CHF

Gov. Bonds, 10y

JPY and DowJones

Last 0.25 0.45 0.65 0.80 0.77 1.25 1.71 2.14

10y 10y yield vs bund

Last 100.17 1.99 0.28

USD and gold

3m libor 10y swap 0.45 2.75 0.35 3.00 0.35 3.25

EU RSEK & OMXS

3m 2.86 2.59 2.42 2.39 3m 2.56 2.12 1.90 1.81

% 0.09 0.32 - 0.04 0.02 0.12 Last 115.8 112.3 1784.0

% -3.2% -3.9% -1.9% -2.3% -2.2% 0.0% -1.8% -2.3% -0.5%

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