On Greece (Polls), Europe. MS piece on Grexit and contagion. UBS?

Bonjour,

Markets futures are slightly down this morning despite Mario Monti’s comments yesterday. We should hear about Spain changing its deficit targets and the Greek polls (see below) will be taken negatively…

CURRENT THEMES

The EURUSD is at 1.2528

On Greece
A new Greek poll shows that Syriza is stil in the lead with 30% of the vote vs 26% for the New Democracy party. PASOK is third with 15.5%. This is seen as negative as Syriza is gaining some share. Until these elections, the markets will just be directionless with a downwards tilt…

On Europe
Mr. Monti commented that Europe can have Euro Bonds soon and that European leaders need to make a brave leap towards fiscal union. He added that the LTRO brought time but Europe needs tighter integration. This could definitely help the markets today, although it’s impossible to see any kind of Euro bonds before a long time, as the process is slow, and our European leaders will need to discuss, negotiate, and so on…
On another subject given yesterday’s low PMIs we could get further liquidity measures announced as soon (next meeting is 6th of June).

OTHER STUFF

FT.com: Big European funds dump Euro assets: http://on.ft.com/JOFmgF
A short article highlighting that Amundi, Threadneedle, Hermes and others are just selling Euro assets into USD or other currencies.

NOMURA: Q2 Or Q3 ‘Will Be A Decisive Moment For The Crisis In Europe, And This Is How The ECB Will End The Panic – Business Insider http://read.bi/KfjWbj

STRATEGY

MS (Antonucci) European Economics & Strategy
Headed for a Euro Divorce? Scenarios and Trade Ideas
MS raises the probability of a Euro break up scenario and tries to anticpate what can happen if Greece leaves and what are the consequences of the unavoidable contagion. Contagion will happen through the sovereign, the banking sector and the politics. Italy, Spain, Ireland and Portugal are the most at risk.
What can they do:
1. More aggressive ECB policy action
2. Recapitalisation des banques périphériques via the EFSF/ESM
3. Creation of a deposit scheme (à la FDIC)
4. Fiscal Union
5. ECB become the official lender of last resort

At the end of the report, MS provides a grid of investment recommendations per asset class and per scenario. For instance, in case of Greece leaving and there is strong contagion but stron policy response for Equities:

Equities trough 20% lower, but policy breakthrough creates multi-year buying opportunity
For now strategy is to be positioned in defensives & safe havens; avoid financials
Financials and peripheral equities enjoy a large re-rating following policy shift and steps toward banking and fiscal union

EUROPEAN EQUITIES


MS (Lam) Investment Banks
Levers to improve returns

With weakening revenue outlook, MS explores what UBS & CS can do to lift i-bank ROEs by 3-4%. This would require average 2010-11 revenues or sizeable cost cuts – both challenging near term. Their base case is weak 2012, incremental cost cuts & slow ROE recovery, absent deep portfolio rationalization.

I believe this is worth reading, but I’m more optimistic on these names. Swiss banks and especially UBS can be seen as safe havens in the current crisis. Yes, they still suffer from lower trading revenues, lower IB fees and the global crisis, but relative to other European banks, they have started their restructuration earlier, they see huge private banking inflows from fleeing Greeks, Italians and French… And the stock is largely discounted (like the whole sector).

FINANCIALS
– Nordic banks downgraded by Moody’s in the latest release of reviews by the agency, Nordea and SHB cut one level to Aa3 whilst SEB and Swedbank levels were affirmed. All new rating carry stable outlooks
DEXIA downgraded by Moody’s to Baa1 from A3. Separately, Dexia Bank Belgium sold remaining Spanish govt bonds; reduces Greek, Portuguese holdings
Bankia will ask for €15B when it presents its restructuring plan to the government today according to Reuters. This is in contrast to the government implying €9B on Wednesday
BNP is taking tentative steps toward boosting its reach in Asia at a time when peers are pulling back – Dow Jones
AVIVA upgraded to OP vs UP at Exane
– GJENSIDIGE Upgraded to Buy from Hold at Berenberg
– JULIUS BAER Initiated at Buy at Berenberg; PT CHF35.9
– LOTTOMATICA PT Raised to EU19.1 vs EU16.6 at Mediobanca
– SAMPO PT Cut to EU20.5 vs EU22.1 at Morgan Stanley
– NORDEA, HANDELSBANKEN Downgraded by Moody’s on Funding Risks

INDUSTRIAL/MINERS/SERVICES
SIEMENS Upgraded to Buy from Hold at Deutsche Bank
– GLENCORE Said to Buy June-Loading Naphtha From Bharat Petroleum
BASF, LINDE, German chemical industry agrees to 4.5% pay hike
– Airlines : India has threatened to ban European carriers from its airspace if Brussels sanctions Indian carriers in the dispute over carbon charges – FT

UTILITIES/OIL/HEALTHCARE/CHEMICALS
– Oil futures up overnight as news from Baghdad emerges the six nation talks with Iran were inconclusive and will reconvene in Moscow on 18th Jun
– BG
aims to invest $30b on Brazil oil, gas by 2025 – Reuters
– GLAXO
will reveal detailed results today on an experimental treatment for diabetes that’s part of the reason for a $2.6 billion hostile takeover bid for Human Genome Sciences Inc., its partner on the drug
ROCHE files new drug application for Pertuzumab in Japan
Goldman says renewable energy is the new BRICs – Reuters
EON upgraded to N from UW at HSBC

TMT
MEDIASET PT Cut to EU1.78 at Mediobanca; Kept at Neutral
– C&W Communications PT Cut to 42p vs 50p at Morgan Stanley
– CAP GEMINI Cut to ‘Sell’ at Standard & Poor’s
SAP raised to B at Commerzbank
– ARM HOLDINGS Raised to ‘Buy’ at Standard & Poor’s, raised to B vs N at UBS

RETAIL/CONSUMER/LUXURY
– RICARD is in talks with HiteJinro to buy its 30% stake in Pernod Ricard Korea Imperial
– RICHEMONT
has recently turned down a €4B acquisition proposition of a jewellery company (The Financial Mail). The article notes that Richemont had €3bn to spend at the end of fiscal 2012 but Richemont CEO said that no acquisitions are planned at the moment

BON WEEK END!

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