The Dawn Patrol – 13.07.12 – On China. JPM Quants on EM, Citi EU strat, GS’ top of Mind (great new product).

Buongiorno,

Markets to open up this morning according to European futures despite the Italian bonds downgrade by Moody’s (from A3 to Baa2). Moody’s downgrades coincides with Italian bonds auctions today around 11:15. Macro eyes on the Spanish and Italian CPIs, US PPI and U of Michigan. JPM and Wells Fargo Q2 out at 13:00 and 14:00.

Bon Week End.

ASML Cut to Neutral at Nomura; S/T Defensive with ARM. There will be a lot of ASML cuts as it rallied. It remains one of the best semis play in the world and Intel’s investment will help them accelerate the throughput of their EUV machines… But I agree that in the short term, there might be better stock plays…
STANDARD CHARTERED added to Citi’s focus list

AFTER HOURS

Equities ended in the red, rallying off their lows but also failing to hold a late sprint higher (the S&P nearly went green around 3:30pmET but couldn’t quite do it and closed dwn 6-7 pts). Some technically important areas have held (1330 and the 50day MA, which is now 1334.5). The S&P has now closed in the red for the last 6 consecutive sessions although has only pulled back less than 3% from the post-Summit highs (of ~1375 on 7/3).

Nothing really “happened” overnight to justify the S&P hitting ~1325 this morning (other than a steep decline in the euro although this in and of itself isn’t necessarily negative. The same debates are still occurring: earnings are bad so far, eco growth is cooling (although today’s #s were OK), central banks are acting but markets don’t care, and there remains speculation of more “policy” (whether it be Fed QE, Europe political resolution, China fiscal spending, etc). The earnings season is still very young but has produced a bunch of red flags (the highlights today include INFY and MAR) although there has been the occasional beat too (SAP).

CURRENT THEMES

On China
Well some data out this morning: Q2 GDP at +7.6% (vs 7.7% expected). Fixed Assets Investments +20.4% vs 20% expected in June. Retail sales +13.7% vs 13.4% expected. So basically in line data or at least no disastrous data… And given the recent monetary easing move (I guess it takes more than a few weeks to imact the real economy) markets are hoping for better data in H2… Next week’s PMIs are more important…

STRATEGY

JPM (Batra) Q-Strategy Help in EM
A guide to Stock Selection in Emerging Markets

JPM published yesterday this short report giving list of names selected using JPM’s Q score (quantitative screens indicating companies whose expected returns will be better than peers).
Top 5 stocks combining Q-scores and top down macro strategy: CP All, Tata Motors, Kbank, Huaneng Power, Woolworths holding
Top 5 stocks with highest overall Q-score: Ecopetrol, Advanced info, CP All , Aboitz equity and Tata Motors

Citi (Cattley) European Equity Strategy
Don’t Give Up.

Citi’s strategist summarises the situation by focusing on the macro trends : 1) de-leveraging, 2) lower growth, 3) divergence, and 4) low interest rates, ie the only certainties in this uncertain world. There are earnings risks and pressure on corporate profits are expected to rise. Earnings will have to come down, but margins don’t have to collapse now. In terms of valuations, European equities are cheap with a 12 month PE of 10x and he argues that UK corporates haven’t been that cheap on EV/EBITDA for the last 20 years. SO WHAT DO WE DO?
Citi reduces risk exposure in sector strategy, but the case for Europea equities remain compelling compared to cash, core rates and corporate bonds…
Downgrades Autos (Neutral) and Retail (Underweight), raises Telecoms (Neutral)

GS (Nathan) Top of Mind
Euro Area – What’s Next?
Top of Mind is a new GS product giving GS views on macro issues and key topics on the markets. This edition focuses on the Euro area with GS top economists, the current main challenges being: the European sovereign risk, the China growth and US growth… Not very groundbreaking, but really interesting to read. The part by Huw Pill (European Economis) explains the need for sharing of financial risks to be matched by greater fiscal control at the Euro area level.
There is a lot in the report… including the impact by asset class.:
ie for US Credit: (copy/pasted)
• We expect credit markets will remain equally focused on both events in Europe and continued deterioration of global macro data.
• With the EU summit in June having provided little in the way of concrete new measures – particularly that would have a near-term impact – we believe that the ECB’s commitment to the banking sector continues to provide the most important (if limited) cushion against pressures on the periphery.
• We think the ECB is willing to provide additional unconventional support, but only if market conditions were to deteriorate materially.
• The recent weakness of US macro data supports our belief that the Fed will announce some form of QE3, but we think such action is already priced in spreads; should the FOMC do little or nothing, we believe the market would be disappointed, likely leading to spread widening.

OTHER STUFF

Forget China’s Goal-Seeked GDP Tonight; This Is The Chart That Keeps The PBOC Up At Night | ZeroHedge http://bit.ly/MoHMkc

Terry Gilliam Talks About Being Frugal – Business Insider http://read.bi/OgYIqL

The Running of the Bulls, Day 6 | Events | OutsideOnline.com http://bit.ly/MpkuIB

EUROPEAN EQUITIES

FINANCIALS
– BaFin Says No Evidence Against German Banks on Euribor – Reuters
– HSBC Senior executives said to face questions from US Senate panel; removed from Citi’s focus list
– ING : KB Financial join main bid for ING’s Korean Life Business
– MUNIC RE, HANNOVER RE Cut to Neutral at BofA
– NEXITY stake isn’t strategic, BPCE’s Perol tells Les Echos
– STANDARD CHARTERED added to Citi’s focus list

INDUSTRIAL/MINERS/SERVICES
– ASML Cut to Neutral at Nomura; S/T Defensive with ARM
– DEUTSCHE POST rated new Hold at ING, PT €14.70
EADS‘s Europcopter CEO expects rev. growth above 10% – Die Welt
– FIAT INDUSTRIAL PT cut to €8.5 vs €9.5 aty Citi, kept at Buy
– G4S’s CEO Buckles was called to testify in U.K. on Olympic Security
KAZAKHMYS would rather swap ENRC minority stake for controlling stake in additional base metals assets in central Asia vs a cash exit, ING says
– SSAB cut to Neutral from OP at CS
– SMITHS GROUP cut to Sell Neutral at Citigroup
– Volkswagen China Jan-June vehicle sales rose by 17.5%

UTILITIES/OIL/HEALTHCARE/CHEMICALS
– Veolia’s U.S. waste unit may be valued at up to $2 bln, says Reuters
State Food and Drug Administration asks Roche to issue report on safety evaluations for drugs that may have caused adverse reactions
– BB Biotech reports first-half profit after tax SF354m
– CENTRICA rated new Buy at SocGen
– Enel PT Cut to Eu3 VS Eu3.7 at Barclays; Kept at Equalweight
– United Utilities Cut to Underweight at Barclays
– Snam PT Raised to EU3.85 vs EU3.8 at Barclays
– Terna PT Cut to EU3.05 vs EU3.15 at Barclays
– EXXON, BHP win time to assess Bass Strait gas
– DRAX, SNAM, SSE, VEOLIA top Utilities at Barclays
– NATIONAL GRID initiated Hold at SocGen

TMT
– NOKIA China is restructuring to cut jobs, Bloomberg reports
– Deutsche Post Rated New Hold At ING, PT Eu14.70
– Deutsche Telekom Raised to Neutral at Credit Suisse
– AEGIS Cut Neutral VS Buy at UBS

RETAIL/CONSUMER/LUXURY
– Carrefour Raised To Neutral VS Sell at Citi

SMALL/MIDCAPS
– Elisa 2Q Sales Beat, Ebitda Misses; 2Q sales EU389m vs est. EU384.2m, 2Q Ebitda EU122m vs est. EU124.2m, 2Q EPS EU0.32 vs est. EU0.31 retains FY guidance of stable sales, Ebitda and improved Ebit
– Kongsberg Automotive 2Q rev. EU262m vs est. EU259.3m ; 2Q Ebitda EU20m vs Est. EU22.5m ; Sees 3Q rev. ~EU230m, in line with est.
– Nyrstar considers the redevelopment of Australia Port Pirie Smelter
– Nexity’s stake ‘isn’t strategic’, says Les Echos
– SNS Reaal unable to repay state debt of €848m by end next year because of losses at real estate unit Property Finance
– Icade Cut To Neutral VS Outperform at Credit Suisse

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