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Nordea: New Financial Forecasts – Optimism partly reinvigorated

November 26, 2012
Recent confidence data have on balance offered positive surprises supporting hopes that better times lie ahead. Plenty of political risks remain though. In the Euro zone, these risks have been illustrated by numerous postponements regarding Greece and mixed election results in Catalonia, while in the US differing opinions on how to solve the fiscal cliff have continued to surface. We expect resolutions on these matters gradually, but cautiousness still likely to be seen in the short term.

•Monetary policy: We now expect the Fed to introduce more longer-term Treasury purchases (USD 40-50bn per month) to complement MBS purchases, as the so called Operation Twist expires at the end of the year. We expect the ECB to start intervening once Spain has asked for EFSF/ESM support. We do not see additional QE from the Bank of England.

•FX: The USD is to keep stronger broadly in the near term. EUR is in thin air due to the lack of positive data, 1.30 is still our 3M forecast as economic momentum is to improve going forward. Expect Emerging Market currencies to be under pressure vs. USD and EUR short term.

•Rates: The ECB’s announcement of possible bond purchases averted a catastrophe once again, but no quick solution to the Euro-zone debt crisis is in sight. In the US, the focus has quickly shifted to the uncertainty created by the fiscal cliff, which should keep the mood uncertain and support the demand for bonds. We adjust our US yield forecast slightly lower in response to the new QE call.

•Commodities: Brent oil prices have regained some strength on renewed Middle East tensions and a slight improvement in risk appetite following the first ”fiscal cliff” talks in the White House. Oil supply is on the rise short term, but risks are plentiful. Sluggish demand growth and rising inventory levels should receive more attention soon. Market sentiment remains fragile pending a temporary resolution of the US ”fiscal cliff”, leaving oil price risk skewed to the downside near term.

Please proceed to the research section of EU.Cbonds for a full note from Nordea.