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Friday January 4 2008

Rabobank issues ISK Eurobonds worth 30bn
This morning, the Dutch Rabobank announced an ISK Eurobond issue of ISK30 bn. The duration of the bonds is one year and the coupon rate 14%. It seems certain that the issue is a rollover of the lion's share on the bank's 45bn issue in January 2007 which will mature this month. The settlement day of the new issue is 28 January, the same day the previous issue matures, and the same lead manager, TD Securities, manages both issues. The ISK has appreciated by 0.5% so far today, on top of some appreciation yesterday. The issue now is the first since 21 November last year and it will be interesting to see whether all ISK Eurobonds maturing in January, a total of 65bn plus interest, will be met with new issues, or whether new issues will even exceed that amount. (JBB)

A slump on OMX Iceland during first day of trading 2008
The year's first trading day, yesterday, on OMX Iceland was not particularly optimistic as the price of both shares and bonds declined. Total turnover in the market was just under ISK 31bn; almost ISK 16bn thereof was in bonds and just over ISK 14bn in shares. Trading today also set off on a pessimistic note as the price of major companies in the OMXI15 share index has fallen by about 2.4% so far today (11.45 GMT). The index just fell below 6,000 points this morning and has not been lower since 30 August 2006.

OMXI15 fell by 2.75%
The OMXI15 share index fell by 2.75% yesterday, mainly due to a fall in the price of investment and financial companies. The price of Exista and FL Group plunged the deepest, or by 6.1% and 5.7% respectively. The banks' share prices also fell with shares in Kaupthing falling the furthest at 3.75%. Both domestic and foreign financial companies have been subject to great uncertainty due to the current credit crunch and investors worldwide impatiently await the annual financial statements of companies. The annual results of Icelandic financial companies will be published near the end of the month.       

HFF-bond yields rise
The yield on Housing Financing Fund (HFF) bonds rose by 1-18bp in trading yesterday, apart from series HFF34 which fell by 1bp. There was substantial trading in HFF bonds on the year's first trading day, the turnover totalling ISK 11bn. The yield fluctuated considerably within the day and for a while it rose by much more. As an example, the yield on HFF44 rose to 5.00% but ended at 4.90%. The rise in the yield is in line with our expectations as we expect it to rise again in the first weeks of 2008, both due to low inflation in Q1 and also because return in the money market is somewhat higher than linkers, attracting investors into that market. 

The outlook now brighter for the ISK
The ISK had a good start to the year as it appreciated by 1.12% in the first day of trading. The appreciation has continued today. A high interest differential to foreign interest rates supports the ISK and means that difficulties in global financial markets do not seem to be weakening it significantly. A similar tale can be told of other high-yield currencies as many investors see them as a kind of an escape route from difficult conditions in major financial markets. We expect the ISK to remain relatively strong in the first months of the year. (HDV)

Extensive aluminium exports in November
Unusually high aluminium exports are the main reason why the trade deficit proved low last November. This may also be the explanation for a high trade deficit in December as the inventory position of aluminium plants was probably unusually low at the end of November which in turn means that aluminium exports were low last month. Newly released figures from Statistics Iceland on foreign trade up to and including November indicate that exports amounted to ISK 30.9bn in the month whereas goods worth ISK 33.4bn were imported, leading to a trade deficit of  ISK 2.5bn, a 100bn lower deficit than preliminary figures had indicated.

A substantial increase ahead
Aluminium exports increased considerably last year even though power generation at the Kárahnjúkar power plant was up and running somewhat later than anticipated. The outlook is for aluminium exports of close to 415,000 tonnes in 2007, equalling almost a 40% volume increase between years. However, the increase will be even greater this year as Alcoa's smelter can be expected to have reached full capacity in February, and, in addition, the last phase of the expansion of the smelter in Grundartangi was recently completed. We assume that around 750,000 tonnes of aluminium will be produced in Iceland this year, representing about 80% increase between years based on our abovementioned projection for 2007. The price of aluminium has slid to a degree since its peak in spring, although it is still quite high, and it is deemed more likely to rise again rather than fall further.

The trade deficit to shrink this year
The autumn trade deficit figures can be said to have indicated a more rapid improvement in the trade deficit than was justifiable. Thus, aircraft exports diminished the trade deficit in October and the November figures were affected by enormous aluminium exports, as stated above. The underlying deficit was therefore wider than indicated by the figures, but, even so, it is clear that the trade deficit is now narrowing. That trend will continue this year, as aluminium exports rise significnatly and the import of investment goods contracts. Moreover, the import of private cars and consumer durables can be expected to slow down. (JBB)  

A turnaround in the housing market
The development in the housing market in recent years has been marked by changes in credit terms and high demand stemming from an increase in purchasing power and rising population. Since the beginning of the year 2004, the price of housing in the country has risen by 86% according to surveys by Statistics Iceland. In the same period, the price of apartments in the capital area surged by 87% and that of single family housing by 113%. Housing investment has also been high in the same period, amounting to 4.9% of GDP in 2004, 5.1% in 2005, 5.8% in 2006 and, according to available figures for 2007, housing investment was 6% of GDP in the first three quarters of the year. As a comparison, the average housing investment to GDP ratio in 1990-2006 was 4.6%.

A substantial price surge in 2007
At the beginning of last year, the housing market was calmer than in the previous years, both regarding turnover and price development, but the market was at its most active in the second and third quarters of the year. The average annual rise in Q1 of the year was around 5.8%, but was 14.2% in Q4. This occurred simultaneously to a significant increase in turnover which however waned as the year drew to a close.

A slowdown in 2008
We expect the housing market to slow down significantly this year. The reason lies in high interest rates and more difficult financing which especially weakens the buying capacity of new buyers in the market. We expect prices to remain almost unchanged from the beginning of the year until its end and believe that a robust economy and households' strong good purchasing power will stave off a significant price reduction. (HG)  

Extensive aluminium exports in November
A turnaround in the housing market
A slump on OMX Iceland during first day of trading 2008
Rabobank issues ISK Eurobonds worth 30bn
Oil prices: Iceland's unique position
Icelandic sells production facility in Maryland
Straumur funded for over 270 days
Economic development in 2008
A wide foreign trade deficit in December
Date: 1/4/2008
Category Volume
Benchmark Bonds 1,285,356
Equities 47,771
Other Bonds 279,373
Total 1,612,501
Date: 1/3/2008
Largest turnover  
ID Vol. Price Price ch.
GLB 7,821 21.50 -2.05%
LAIS 3,727 34.85 -1.83%
KAUP 1,481 847.00 -3.75%
STRB 305 15.00 -0.66%
EXISTA 207 18.55 -6.08%
Date: 1/3/2008
ICEX-15 6,144 -2.75%
Date: 1/3/2008
Benchmark Bond Issues  
ID Vol. Yield
HFF150224 187,120 6.28% 0.00
HFF150434 257,166 5.24% 0.00
HFF150644 530,218 4.90% 0.00
HFF150914 142,624 7.55% 0.00
RIKB 08 0613 53,930 14.04% 0.00
RIKB 08 1212 111,788 14.05% 0.00
RIKB 09 0612 111,880 14.00% 0.00
RIKB 10 0317 62,882 12.75% 0.00
RIKB 13 0517 105,345 10.35% 0.00
RIKS 15 1001 0 %
Date: 1/3/2008
REIBOR Market  
O/N 13.76% 14.01%
SW 13.79% 14.04%
1M 13.91% 14.16%
3M 14.03% 14.28%
6M 14.20% 14.45%
12M 14.25% 14.50%
Date: 1/3/2008
Exchange Rates  
  pr. ISK 3m.Libor 3m.fwd.
USD 61.38 4.62% 1.4
GBP 121.58 5.79% 2.5
JPY 0.57 0.91% 0.0
EUR 90.92 4.63% 2.1
Vt. ISK 119.40 4.71% 2.8
Date: 1/4/2008 14:21 GMT
Volume in ISK m. 

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