The Dawn Patrol – 01.10.12 – On Spain, the markets and China. JPM on Spanish banks. MS on Saipem.


Asian shares fell after poor data from Chinese and Japanese manufacturing surveys while most markets are closed for the golden week. . European futures down this morning. Can Rajoy wait until after the regional elections in Basque Country & Galicia Oct.21 for bailout? Spain has >Eu20B of debt due at end Oct…

Xstrata is set to recommend the latest offer from Glencore – FT

Alpha Bank will enter exclusive talks to purchase Credit Agricole’s unprofitable Greek unit Emporiki Bank.

Germany and France have agreed a common position on the tie-up of EADS and BAE Systems, insisting on controlling large equity stakes in the proposed €34bn aerospace and defence group but signalling a willingness to give up some of their current veto rights. The conditions signalled large obstacles still remain, and the Berlin-Paris deal will now have to be negotiated with the UK government and the companies themselves.

Lagardere wants EADS management to re-examine merger term.


Bernstein reiterate OW on ASML, JPM keep UW on HMB and OW on CPG, Nomura remain UW Spanish bank (BBVA preferred name), Aperam cut to Sell at Socgen, Citi sees compelling entry point into BG+ENI.

Barron’s like GS and say shares could rally 25% in the next year as capital markets improve.


On the Markets
The heat is still on… Investors continue to wait for Spain to ask for an ECCL and as the FT wrote on Friday, the mounting yields may put enough pressure for Madrid to move on. We also expect the Moody’s ratings to be announced. Greece should receive permission for the next tranche despite the lack of budget and reforms. The ECB should also be a big focus, although no rate cuts are expected. On the US side, we’ll monitor the payrolls on Friday and all the poor European data this week.

On Spain
The Oliver Wyman audit revealed a €54bn shortfall to reach a Tier1 ratio of 6% which is in line with market expectations. Valuations now appear more realistic and the stronger banks should sell more assets now before the bad bank structure is announced. There is a note by Jaime Becerril on the subject (please see below for details).

On China
China PMI’s over the weekend HSBC’s/Markit comes in at 47.9 from 47.6 in August in line with the flash we’ve already had. This morning the official Manufacturing PMI came in at 49.8, up from August’s 49.2 but below the consensus forecast of 50.1.

To read
Welcome back to the eurozone crisis by Munchau in the FT .. Munchau counsels his readers against falling into trap of thinking that next year’s German elections will clear hurdles to tranfer union. Welcome back to the eurozone crisis –
JPMorgan snaps up Europe mortgage bonds –
Blackrock pushing EM exposure “Why pay more for less exposure to growth? “


JPM ( Loeys) The J.P. Morgan View
Falling vol, falling risk premia
Asset allocation
–– Global growth is at record lows for a recovery, but also at record low volatility. Event risk has not been eliminated, but rolling volatility has crashed, and looks supportive for lower risk premia and for carry strategies.
Economics –– Plenty of evidence for a bottom formation in global growth, but not much yet to signal the rebound.
Fixed Income –– Today’s report on the reform of LIBOR will likely result in LIBOR rates converging with observable bank funding rates, i.e. a modest decline in the current USD rate.
Equities –– European equities face renewed headwinds.
Credit –– With the Fed at work in mortgage markets, stay long US CMBS.
Currencies –– A tricky environment for FX Carry.
Commodities –– The highest refinery margins since 07/08 are pushing up
crude demand. We stay long energy.


Oil & Gas (MS, Rats)
Saipem: OW, PT €57

On the road with Saipem: Management provided an upbeat outlook for offshore contract awards through the next 6-12 months as well as positive comments on LNG, FLNG & other prospects around the world. This provides encouragement over the likelihood of catalysts by year end and through 2013. However, the company is disappointed with the pace of contract awards YTD due to project delays and the knock on effect on earnings for 2013. Despite this, we continue to view Saipem as a

core Overweight within European Oil Services.

Spanish Banks (JPM, Becerril)
Oliver Wyman tests indicate real estate will get cheaper in Spain and banks will pay for it

Asset valuations are tougher but there is still no clearing price. OW introduced tough real estate price drops in its adverse scenario, similar to our own, but the timeframe and details could ultimately disappoint. We expect to see stronger banks selling assets more aggressively following the tests before the ‘Bad Bank’ is introduced, as described last week in our note Spanish Banks: Feedback from Spain: The sun also rises but not yet.
The Core Tier I of 6% in an adverse scenario still seems low to us. Given the OW maximum €54bn shortfall is estimated under 6% CT1 (below the regulatory minimum) and audits didn’t really change anything, we wouldn’t rule out further need for additional capital, largely dependent on whether debt markets will reopen for Spanish banks.
Large banks and Kutxabank fared best as M&A may be reviewed. The outcome of the stress tests shows enormous differences in credit losses and capital between Spanish banks, with little surprises as some mergers underway will probably review their terms or even be cancelled.
The potential full bailout of Spain is likely to keep dominating. The Spanish Government restated on Saturday the 2011 budget deficit from 8.6% to 9.44% as it said 2012 could slip to 7.4% from the current 6.3% target. Investors are still looking for a full “soft bailout” to be announced as

rating agencies’ decisions could unfortunately have an influence.

Max Kamir

Louis Capital Markets UK,LLP

Authorised and regulated by the FSA and Banque de France

39-41 rue Cambon

75001 Paris

T +33 (0)1 53 45 10 74

E mkamir


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