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Scandi trade: Pay 2y2y NOK and receive 2y2y SEK

Mon, Jul 28 2008, 14:25 GMT
by Arne Lohmann Rasmussen

Danske Bank A/S

Over the last two months we have witnessed a tightening in the swap spreads between Norway and Sweden. The main culprit has been the aggressive message from the Swedish Riksbank that further rate hikes are in the pipeline due to the elevated high headline inflation, whereas Norges Bank has been more pragmatic in its approach, stressing both the inflation risks but also the negative impact from the global economy.

Our base case is that the Riksbank is overestimating headline inflation over the medium-term. That said, it is worth noting that oil is the single most important price component that could shift Swedish inflation in either direction over the short-term. In that perspective, we are also worried that inflationary expectations may continue to be a major concern for the Riksbank. Hence, it seems quite likely that the Riksbank will deliver rate hike(s) according to the monetary policy report (MPR) this fall. However, we also believe that additional monetary tightening will only add to the weakness seen in the real economy in a slightly longer-term perspective. The Riksbank foresees 1.2% GDP growth in 2009. We believe it may turn out well to be below 1% if the Riksbank raises the repo rate in line with its main repo scenario. Hence, given the risk that the Riksbank might actually stick to its hawkish stance, we prefer to take our bet in the mid-segment of the curve and receive e.g. SEK swap 2y2y fwd.

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Published on  Mon, Jul 28 2008, 14:25 GMT

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Financial crisis update

Thu, May 22 2008, 10:37 GMT
by Danske Research Team

Danske Bank A/S

The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We update this publication regularly, the previous Financial crisis update being from 23 April.

• • The improvements have generally continued over the last month and risk appetite has increased. However, problems remain on some markets, not least in the money markets. Term liquidity (such as 3m EURIBOR) is still priced significantly wider than corresponding EONIA rates. Moreover, we continue to see a significant negative CDS-cash basis (the CDS spread is tighter than the corresponding cash bond spread) and as long as this continues to be the case we are not yet out of the woods.
  
• • That said, we think that the nature of the credit and liquidity crisis is changing. We are moving away from a situation where the large spread movements were first and foremost driven by technical issues such as forced selling and unwinding. Going forward we think the attention will be turning to how deeply the real economy will be affected by the crisis ie, if we look at the banks, we will be moving from a period where focus is directed at mark-tomarket losses, to a period where the focus is turning to real losses. We believe this could drive spreads wider.
  
• • Bloomberg currently reports USD 382.6 bn in losses from banks world-wide and USD 269.6 bn in capital raised. So banks have to a large extent been able to raise fresh capital. The IMF has estimated that losses stemming from the US mortgage crisis may approach USD 1 trillion. Falling US house prices and rising delinquencies may lead to USD 565 bn in mortgage-market losses according to the IMF in their latest Global Financial Stability report. Despite the great uncertainty regarding the size of future losses, it seems safe to state that much more is in the pipeline and that risks of negative surprises going forward remain.
  
• • Lending standards continue to be tightened in both Europe and the US, underlining the overall picture of tightening credit availability globally.

Key things to watch going forward:

• • 30 May – Results and possible actions from BBA on the way LIBOR rates are collected and calculated.
  
• • The next earnings results from the large banks are due in June, eg, Lehman Brothers is expected to report on 12 June, Goldman Sachs on 13 June and Morgan Stanley on 20 June. Focus will not only be on the banks’ possible losses going forward, but also on their ability to raise new capital.
  
• • The end of Q2 may be an important event on the money markets.
  
• • How will the already-implemented initiatives from the central banks work? And what new initiatives are in the pipeline from central banks? An expansion of TAF from one to three months is a possibility.
  
• • Default rates and economic news should become more important as the crisis changes towards being driven by economic factors and fewer technical issues and forced selling. However, the risk remains that the financial crisis will flare up again going forward.

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Published on  Thu, May 22 2008, 10:37 GMT

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Financial crisis update

Thu, Apr 24 2008, 08:39 GMT
by Danske Research Team

Danske Bank A/S

The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We update this publication regularly; the previous Financial crisis update was published on April 2.

• • The relief rally has continued with declining fear of systemic risks in the financial system and increased risk appetite. The escalation of the financial crisis in mid-March and the downfall of Bear Stearns was followed by a relief rally brought on by a series of Fed initiatives, JP Morgan’s offer to take over Bear Stearns, and better than feared results from some US investment banks.

• • Most markets have shown continued improvement in recent weeks, but the improvement is not universal. In fact tension on money markets continues to rise. On top of this credibility of Libor calculations have been questioned.
  

• • IMF has recently estimated that losses stemming from the US mortgage crisis may approach USD 1 trillion. Falling US house prices and rising delinquencies may lead to USD 565bn in mortgage-market losses according to the IMF in its latest Global Financial Stability report.

• • The financial crisis has abated recently, but it can flare up again with little or no warning. And the continued problems on money markets are a major concern. We doubt that we have seen the last bout of rising risk aversion and growing fear of systemic risks in the financial sector. However, what, when and how strong the next escalation of the financial crisis will be are questions tinged with much uncertainty.
  

Key things to watch going forward:

• • 24 April - Credit Suisse Q1 2008 result
  

• • 29 April - Deutsche Bank Q1 2008 result
  

• • 6 May - UBS Q1 2008 results
  

• • 13 May - MBIA Q1 2008 results

• • 14 May - Freddie Mac Q1 2008 results
  

• • 14 May - Fannie Mae Q1 2008 results
  

• • A large number of European banks will also be reporting results in the next couple of weeks
  

• • Earnings season in the US will continue in the coming days, but the large investment banks have all reported.
  

• • How will the already implemented initiatives from the central banks work? And what new initiatives are in the pipeline from central banks?
  

• • Early May - US Fed Senior Loan Officers Survey on Bank lending practices
  

• • 9 May - ECB Bank Lending Survey

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Published on  Thu, Apr 24 2008, 08:39 GMT

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Financial crisis update

Wed, Apr 2 2008, 12:43 GMT
by Danske Research Team

Danske Bank A/S

The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We update this publication regularly (the previous Financial crisis Update was released on 12 March).

• • The escalation of the financial crisis in mid-March and the downfall of Bear Stearns has been followed by a relief rally brought on by a series of Fed initiatives, JP Morgan’s offer to take over Bear Stearns and better than feared results from Goldman Sachs, Lehman Brothers and Morgan Stanley.
  

• • Most markets have showed improvement in recent weeks, but the improvement is not total. Eg, money markets and municipalities have shown little or no progress recently.

• • The financial crises have abated somewhat recently, but could flare up again with little or no warning. We doubt that we have seen the last bout of rising risk aversion and growing fear of systemic risks in the financial sector. However, what, when and how strong the next escalation of the financial crisis will be are questions tinged with much uncertainty.

Key things to watch going forward:

• • Late April/early May - Monoliners start reporting Q1 08 results

• • 17 April - Merrill Lynch Q1 2008 result

• • 24 April - Credit Suisse Q1 2008 result
  

• • 6 May - UBS Q1 2008 results
  

• • A large number of European banks will also report results in the next couple of months

• • How will the already implemented initiatives from the central banks work? And what new initiatives are in the pipeline? Especially BoE and ECB may announce changes shortly
  

• • Early May - US Fed Senior Loan Officers Survey on Bank lending practices
  

• • Early/mid April - ECB Bank Lending Survey

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Published on  Wed, Apr 2 2008, 12:43 GMT

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Financial crisis update

Wed, Mar 12 2008, 15:30 GMT
by Allan von Mehren

Danske Bank A/S

The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We update this regularly, the last time being on February 28. Key points in this issue are:

• • The financial crisis has flared up again, and fears of systemic risks in the financial sector are high. Credit spreads have soared and equities have dropped. Municipalities and intra-Euroland spreads were two of the markets much harder hit this time around. The renewed tension brought a swift response from central banks - principally the Fed, which is clearly deeply worried. Yesterday's newest initiative contained a new Term Securities Lending Facility (TSLF), by which the Fed will lend up to USD 200bn of Treasury securities to primary dealers for an extended term of 28 days against collateral in other securities such as agencies and MBS. This is clearly intended to promote liquidity and foster the functioning of financial markets. The knee-jerk reaction from markets has been positive, but the long-lasting effects are yet to be seen.
  

• • Despite avoiding downgrades from S&P and Moody’s for now, the monolines like Ambac and MBIA remain in serious trouble. Fitch seems somewhat more worried and still has MBIA on negative outlook. In a broader perspective there is little doubt in our view that the heat remains on the monolines.
  

• • A series of auctions of municipalities failed, as investor interest in the secured debt fell and the municipality market fell into disarray as hedge funds were squeezed to sell. The last few days have seen some buying and the new Fed initiative also helped bring the spread between municipalities and treasuries in from record highs.

• • Agency spreads have also surged, hitting fresh multi-year highs.

• • The renewed money market tensions brought a swift response from central banks mainly the Fed. However, a lot of the fundamental problems remain and there is risk of renewed tension going forward.
  

• • Leveraged loans to finance buy-outs, LBOs, have been a burden for many banks since last summer. The prices of these loans in secondary markets have declined since the turn of the year. The bottom line is that recent price falls on LBOs in secondary markets, combined with the warning from S&P on the future performance of these loans, is unlikely to provide any relief to banks’ balance sheets from the LBO front.

• • Is commercial real-estate going to be the next domino to topple as the crisis escalates? Recent spread widening does not look pretty.
  

• • The size of asset-backed commercial papers in the US has stabilised somewhat recently following large falls last year. However, new declines cannot be ruled out.
  

• • The initial source of the shock driving the current crisis was the decline in the value of US subprime mortgages. The high rated ABX indices have renewed their downward trend pointing to a worsening outlook for subprime mortgages. Rating agencies seem to be falling behind reality and downgrades are expected. This is likely to result in more losses for banks. Reported subprime-related losses so far amount to around USD 175bn. Estimates of total losses range between USD 200bn and USD 400bn, so further write-downs seem in the pipeline.
  

• • Each time the crisis flares up again new markets are affected. The intra-Euroland yield spreads have ballooned lately. For example, the 10 year government yield is now 61bp higher in Italy than in it is Germany.

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Published on  Wed, Mar 12 2008, 15:30 GMT

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Financial crisis update

Thu, Feb 28 2008, 13:19 GMT
by Allan von Mehren, Peter Lildholdt

Danske Bank A/S

The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We will update this regularly. Key points are:

• Since the previous Financial crisis update (19 February) fears of systemic risks in the financial sector have waned somewhat due to improved sentiment on the monoliner issue. As a reflection of this, credit spreads tight-ened and equity markets performed. However, crude oil futures for March delivery have broken the USD 100 barrier and EUR/USD went above 1.50.

• Some of the pressure has been taken off the monoliners. MBIA announced that it will separate the asset-backed securities business in an effort to stave off a credit rating downgrade. Ambac is working to raise USD 3bn in new capital in order to preserve its credit rating. So far, the efforts have been successful. S&P affirmed Ambac’s AAA and its negative credit rating watch with negative implications. MBIA was removed from credit watch with nega-tive implications and was instead assigned a negative outlook by S&P. However, Fitch also announced that a number of other monoliners will need to raise significant additional equity in the near future to prevent further downgrades. In a broader perspective, the heat remains on the monoliners.

• Leveraged loans to finance buyouts, LBOs, have been a burden for many banks since last summer. The prices of these loans in secondary markets have declined since the turn of the year, but recently the prices have recov-ered somewhat. Consistent with this development, credit spreads have tightened somewhat from the wide lev-els reached mid-February. The general picture is that any relief to banks’ balance sheets from the LBO front is unlikely in the near term.

• Reported subprime-related losses so far amount to around USD 175bn. Estimates of total losses range be-tween USD 200bn and USD 400bn, so there are probably further write-downs in the pipeline.

• The size of asset-backed commercial papers in the US keeps contracting as SIVs are being unwound.

• Recently, money market tensions, measured by Libor/OIS spreads, have been stable for EUR, SEK and GBP. However, tensions are rising slightly for USD. We see risks of further widening of money market spreads.

• The initial source of the shock driving the current crisis was the decline in the value of US subprime mortgages. Judged by ABX indices, the prices of US subprime mortgages have eased slightly recently and keep setting new lows.

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Published on  Thu, Feb 28 2008, 13:19 GMT

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Financial crisis update

Tue, Feb 19 2008, 14:17 GMT
by Allan von Mehren, Peter Lildholdt

Danske Bank A/S

The aim of this publication is to provide an overview of current stories/issues in relation to the financial market crisis. We will update this regularly going forward. Key points are:

• The troubles facing the bond insurers, also called monoliners keep mounting, and further downgrades are looming on the horizon. Warren Buffett’s offer last week to be paid for taking over responsibility for USD 800bn in municipal bonds did little to ease concerns. The primary source of the current stress among monoliners is their exposure to mortgage-backed securities – not their exposure to municipal bonds. Reports that investors have begun to shun Auction Rate Securities, ARS, which constitute around USD 330bn of the USD 2,200bn municipal bond market, is yet another indication that perceived risks of further downgrades among monoliners are on the rise.
  
  
• Leveraged loans to finance buyouts, LBOs, have been a burden for many banks since last summer. However, the prices of these loans in secondary markets have started to decline. Last week, S&P warned that a growing number of leveraged loans are in danger of breaching covenants or defaulting. Any relief to banks’ balance sheets from the LBO front are unlikely in the near term. Against this background of persistent concerns, credit spreads keep widening, and now stand at record wide levels during this crisis.
  
  
• The reports last week on `material weakness´ relating to the valuation of AIG’s CDS portfolio highlight that independent auditors will be particularly thorough in their auditing of the 2007 annual reports for financial institutions. In the coming weeks, similar news stories may therefore emerge as the auditing processes for the annual reports progress. In the short term, this may pull down sentiment on financials.
  
  
• The size of asset-backed commercial papers in the US keeps contracting as SIV’s are being unwound.
  
  
• Recently, money market tensions have picked up slightly after declining materially at the turn of the year. We see risks of further widening of money market spreads.
  
  
• The initial source of the shock driving the current crisis was the decline in the value of US subprime mortgages. Judged by ABX indices, the prices of US subprime mortgages have far from recovered.

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Published on  Tue, Feb 19 2008, 14:17 GMT