On China and Spain. JPM’ View and MS’ European Strategy.

Bonjour,

Markets expected to open upwards this morning despite the pressure on the Spanish bonds and Bankia, as there is increased optimism for China to take growth oriented measures. Macro eyes on German regional CPIs, US S&P Case Shiller and Consumer confidence.

CURRENT THEMES

On China
There is a good summary of the evolution of recent Chinese data by JPM who expects easing to come soon as growth concerns increase. China’s April economic data for April was really disappointing and the data available for May suggests that economic condition did not improve (Markit PMI of 48.7). But more worrying are:
IP only rose 9.3% oya in April vs 11.9% in March. Electricity consumption up 3.6% in April vs 11.5% in 4Q11 and 6.8% in 1Q12. Corporate profitability declined by 2.2% in April (with sales up).
As inflation is not a concern yet, JPM expect the policy to shift towards macro easing.

On Spain
Rajoy reiterated that Spain doesn’t need a bailout for Spanish banks, but commitment from the European authorities to restore faith in the Euro which continues to stagnate under pressure. On Bankia, the government may use government debt or its bank rescue fund to save Bankia rather than capital injections from shareholders. This is not really helping Spain as the yield now hovers around 6.4%.

STRATEGY

JPM (Moeys) The J.P. Morgan View
An eerie quiet in Europe.
Asset Allocation –– Flat equities, credit, and bond duration, but combined with defensive positions through OW US across asset classes, long USD, and now UW Cyclicals. Remaining risk portfolios should be funded in euros.
Economics –– At 1.8% saar, Q2 is set to become the all-but-weakest quarter so far this recovery. Downside is coming from Europe and China, with the US cruising at a 2% handle.
Fixed Income –– Stay positioned for renewed EA periphery spread widening.
Equities –– This week’s flash PMIs point to underperformance of Cyclical vs. Defensive equity sectors into June.
Credit –– We underweight EM $ Corporates.
Foreign exchange –– Keep EMU hedges of long USD vs EUR and GBP, and short EUR vs CHF.
Commodities –– Platinum demand is overwhelmingly driven by W. Europe and further economic weakness there will likely exert further pressure on prices.

MS (Garman) European Strategy
Sticking to cautious view though time to screen for value ideas at the margin
MS’ Combined Makrt Timing Indicator is getting to close to the ‘Buy’ threshold (it’s at -0.46, buy level is -0.5) but still above the throughs of 2010 and 2011. MS remains underweight on European equities, waiting for a clearer catalyst to emerge.
Keep OW the defensives and UW cyclicals.
Quality growth should remain a core holding (see the nifty fifty + piece I mentioned twice in the dawn patrol) to which MS adds a few tactical opportunities in value oriented stocks.
26 stocks appear on 3 or more screens, including 7 rated Overweight by Morgan Stanley analysts. These are Anglo American, AP Moeller Maersk, African Barrick Gold, BHP Billiton, EDP Renovaveis, EDP and Valeo.

OTHER STUFF

In the FT, a 10% drop in the Euro could bring an additional 0.5% GDP growth. http://on.ft.com/JRuzga

The Eurozone Crisis For Dummies – Business Insider http://read.bi/JxSWVi

EUROPEAN EQUITIES

FINANCIALS
– BFA, the parent company of the Bankia group, says that its 2011 loss was €3.32 billion
– Dexia’s new public guarantee has been agreed by France and Belgium for slightly more than the first guarantee of €55 billion, reports Les Echos
– UNICREDIT’s hearing on the indictment request in a tax-evasion probe will be held by a Milan court
– HSBC’s capital raises prospect of higher dividend as has enough capital to cope with even tougher regulation, Barclays says
– LSE Rated Overweight as Morgan Stanley resumes coverage
– Gjensidige Forsikring PT Raised to NKr73.50 vs NKr72.00 at Morgan Stanley; Kept at Equalweight
– Danske Bank Rated New Hold At SocGen; PT Dk85
– DNB Rated New Sell at SocGen; PT Nk52.5
– Nordea Initiated New Buy At SocGen; PT Sk65
– SEB Rated New Hold at SocGen; PT Sk44
– Svenska Handelsbanken Rated New Buy At SocGen, PT Sk230
– Swedbank Initiated Hold At SocGen, PT Sk110

INDUSTRIAL/MINERS/SERVICES
– VEOLIA ES Solid Waste receives an offer from GS Energy
– ACS says it has agreed to sell seven power lines at enterprise value of €751.7 million in Brazil
– RIO TINTO’s RioZim wants to exercise its pre-emptive rights to acquire a majority interest in the Murowa diamond mine, reports the FT
– XSTRATA’s Peru unit protests spur a state of emergency after two die
Buy EADS as risks are more than priced in, Citi says
Buy IAG as shares look like they have been oversold, UBS says
– MAN SE Upgraded to Hold from Sell at Berenberg; PT unchanged at EU80
– Trelleborg AB Initiated at Hold at Berenberg; PT SEK75.00

UTILITIES/OIL/HEALTHCARE/CHEMICALS
– BP is being investigated by the US Justice Department concerning officials’ estimates on how much oil was flowing into the Gulf of Mexico, says the WSJ
– Shell has put its Orion oil sands project up for sale, after buying it six years ago in C$2.4 billion acquisition of Blackrock Ventures, according to Reuters
– Repsol names Nemesio Fernandez-Cuesta as COO and approves its 2012-2016 strategic plan
– Rhoen Klinikum’s management board said it is supporting the takeover offer from Fresenius, saying that the offer price is fair and that the proposal is strategically logical

TMT
– Rexel confirms 2012 outlook; adj. Ebita margin should reach at least 5.7%; sees FY free-cash- flow before interest and tax of around EU600m
– Aveva Raised to Equalweight vs Underweight Barclays; raises FY13 revenue estimate 7.5% (incl. acq impact of 3%) to GBP227.6m
– GN Store NordRaised to Overweight vs Equalweight at Morgan Stanley

RETAIL/CONSUMER/LUXURY
– Anheuser-Busch InBevPT Raised to EU65 vs EU60 at Morgan Stanley; Kept at Overweight
– AdidasInitiated at Neutral at JPMorgan; PT EU65
– Puma Initiated at Neutral at JPMorgan; PT EU257

SMALL/MIDCAPS
– Derby Cycle says that its business combination agreement has been amended to allow it to remain an independent stock-exchange-listed company for 18 months after takeover by Pon
– Lonmin says that platinum prices may endanger its plans to increase production and cut unit costs, reports Reuters
– President Petroleum Rated New Buy Jefferies; PT 70p
– Unipapel changes its company name to Adveo Group International SA
– Amer Sports Initiated at Overweight at JPMorgan; PT EU12
– CGG Veritas Raised to Buy vs Neutral at UBS
– Vossloh Raised To Neutral vs Sell at BofA

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