The Dawn Patrol – 14.01.13 – JPM’s View, GS on Tobacco, EU Tech. MS on US semis. Much more…

Bonjour,

European markets to open flat to slightly up. Asia strong this morning as China can increase QFII and RQFII quotas by 10x (http://reut.rs/V8gbsZ). Markets also boosted in part by comments from a Federal Reserve official about the outlook for the U.S. economy.

Everything you need to know on the Golden Globes: (http://www.imdb.com/)

OVERNIGHT MARKETS: UP

Asian markets
Nikkei 225 up +148.93 (+1.40%) at 10,802
Topix up +9.67 (+1.09%) at 898.69
Hang Seng up +156.48 (+0.67%) at 23,421

US markets
S&P 500 down -0.07 (0.00%) at 1,472
DJIA up +17.21 (+0.13%) at 13,488
Nasdaq up +3.88 (+0.12%) at 3,126

European markets
Eurofirst 300 down -1.25 (-0.11%) at 1,163
FTSE100 up +20.07 (+0.33%) at 6,122
CAC 40 up +2.90 (+0.08%) at 3,706
Dax up +7.06 (+0.09%) at 7,716

Currencies
€/$ 1.34 (1.33)
$/¥ 89.55 (89.26)
£/$ 1.61 (1.61)

Commodities ($)
Brent Crude (ICE) up +0.43 at 111.07
Light Crude (Nymex) up +0.60 at 94.16
100 Oz Gold (Comex) up +5.40 at 1,665
Copper (Comex) up +2.30 at 366.25

10-year government bond yields (%)
US 1.87%
UK 2.08%
Germany 1.58%

CDS (closing levels)
Markit iTraxx SovX Western Europe -1.66bps at 96.95bp
Markit iTraxx Europe -0.6bps at 101.98bp
Markit iTraxx Xover -0.33bps at 422.5bp
Markit CDX IG +0.8bps at 87.08bp

HOT STUFF

Top Fed official Charles Evans said on Monday the U.S. economy is expected to grow by 2.5 percent in 2013, improving to 3.5 percent growth in 2014, and U.S. unemployment rate would be 7.4 percent this year, easing to about 7 percent in 2014.

Goldman Sachs. The London Telegraph says Goldman’s bonus pot is expected to be $13.3B for all of ’12, up from $12.2B in ’11. GS reports earnings this Wed. The total comp ratio (comp as a percent of revs) is expected to fall Y/Y

UPS/TNT Express the WSJ discusses the intense work occurring behind the scenes as both firms look to complete their proposed merger. France is lobbying to have its state-controlled DBD parcel company be recognized as a credible new competitor and to buy assets from the combined UPS/TNT as a way to alleviate anti-trust worries. Eurozone officials continue to make disapproving remarks in public about the deal although this wouldn’t be the first time tough talk was followed by eventual approval. WSJ

M&S is starting to turn a corner after an extend period of weakness and Barron’s believes that the company could rise more than 20% over the next year. That being said, the article also goes on to say that any further signs of weakness could entice a bid from a competitor. Barron’s

SWATCH GROUP buys Harry Winston brand for $1bn including debt. BBG

PEUGEOT may take over General Motors’ Opel unit. La Tribune

VOLKSWAGEN sees tougher competition after record 2012 sales, deliveries in 2012 rose 11% to 9.07 million vehicles. BBG.

MAN: starts short-work hours at Salzgitter, Munich plants (BG)

EDF : France agreed to compensate EDF at a rate of 1.7% a year for a deficit accumulated through the financing of renewable energy (Les Echos).

APPLE Cuts Orders for iPhone Parts: Apple has cut its orders for components for the iPhone 5 due to weaker-than-expected demand, according to people familiar with the situation. (http://dthin.gs/UYd99F)

CURRENT STUFF

On telcos
EU to pursue telco market integration: “Europe’s telecommunications commissioner will lay down a series of far-reaching reforms this year to support the formation of a pan-European telecoms market, in order to foster greater competition and investment in a sector hard hit by the financial downturn.” (Financial Times)

On Portugal
On Friday, after European markets closed, the Portuguese debt agency announced they will explore “possible primary bond issuance of existing bonds”. They also launched a 2013 finance programme which is further positive news that the country is normalizing and returning to markets after losing market access in 2010.

On European Banks
ESM bank rescue rules may put bigger burden on sovereign: Despite EU leaders’ vows last year to ‘break the vicious cycle’ linking governments and their own failing banking systems, a proposal seen by the FT suggests sovereigns in this situation will continue to shoulder a large part of the burden. “The plan, circulated late last year among eurozone finance ministry officials, would force struggling countries to either invest in failing banks alongside the rescue fund, the European Stability Mechanism, or guarantee the ESM against any losses.” (Financial Times)

On Greece
The IMF’s Lagarde says Greece is beginning to turn around but needs to continue with efforts on revenue/tax collection. BBC. Samaras says no longer in danger of a euro exit

On Spanish Banks
The sale auction of Catalunya Banc will start this week, with the distribution of the sale book of the lender among potential candidates. FROB intends to complete the sale process within the 1Q13. Sale book includes the already executed transfer of assets into SAREB for €6.71Bn as well as the recapitalization of the lender with European funds for €9.08Bn. SAN, BBVA, SAB and Kutxabank are reported as to be interested in the process (Expansion)

UPS & DOWNS

Global: Tobacco (GS, Cazzol) Not packing it in; Buy BAT, KT&G, JT, PMI, SWMA and ITC
Our analysis on the impact of tobacco packaging regulation across 52 major markets suggest investor concerns may prove overdone. We believe the recent sector de-rating provides attractive entry opportunities in structural tobacco industry leaders.

CTC Media (GS, Balakhnin) Buy: The worst is already priced in; upgrading to Buy
CTC Media is the worst performing CEEMEA Media stock over 12 months. We believe that concerns are overdone. Our price target reflects full DTT rollout costs and corporate governance risks but we still see strong potential upside (38%). Up to Buy.

Europe: Technology: (GS) Reflecting pro-cyclical bias and shifting to 2014 valuations
We are increasingly pro cyclical and favour exposure to the semis sub segment. We expect a positive cyclical inflection in semis as per our industrial trend-line analysis. We also shift to 2014 valuations.

Semiconductors (MS, Moore) 2013 Outlook: Many Parallels from a year ago; Inline.
The backdrop for semis should be favorable, as we thought a year ago, but we note a number of parallels with early 2012 that give us pause, particularly after the recent run-up. With little improvement in key lead indicators, we remain dependent on macro acceleration vs. micro.

AXA Cut to Underweight From Equalweight at Barclays
Cap Gemini Added To Conviction Buy at Goldman Sachs
Cap Gemini Raised To Overweight From Equalweight at Barclays
CNP Assurances Cut to Equalweight From Overweight at Barclays
Daimler Cut to Neutral from Buy at BofAML
Dassault Systemes Cut to Underweight at Barclays
EDF Rated New Buy at SocGen, PT Eu20
Fresenius Medical Care Raised to Buy From Hold at Berenberg
Fresenius Medical Care Raised to Buy From Hold, PT Eu61
G4S Raised to Outperform From Neutral at Credit Suisse
Intertek Removed From Focus List At Credit Suisse
Intesa Cut To Sell VS Buy at Centrobanca
Intesa PT Cut to Eu1.27 VS Eu1.73 at Centrobanca
Kazakhmys Cut To Underweight From Equalweight at Barclays
Munich RE Raised to Overweight From Equalweight at Barclays
Russian, Chinese Markets Offer Value, HSBC Global’s Poole Says
SAGE Group Cut to Underweight From Equalweight at Barclays
Sandvik Raised To Buy From Neutral at Nomura
SocGen, Credit Agricole Raised to Outperform at Credit Suisse
Vedanta Resources Reinstated at Outperform at Credit Suisse
Verbund Cut to Sell from Neutral at Citigroup
Vienna Insurance Cut to Equalweight at Barclays

STRATEGY

JPM (Matejka) European Strategy
Cyclicals getting stretched, but OW Financials trade has legs; Q4 hurdle rate is low.
We think that Banks offer a better risk-reward than Cyclicals as they are less crowded and are cheaper. We also believe that the movement in peripheral spreads, which is important for Banks, will not trade in lockstep with global activity momentum, a key driver for Cyclicals. Eurozone credit backdrop might end up being less volatile this year than global activity momentum.

JPM (Loeys) The J.P. Morgan View
The J.P. Morgan View: Go East
Jan Loeys Another good week for risk markets with equities and credit rallying further, but this week without a selloff in bonds. We have also seen a sudden surge in equity fund inflows, which seem incongruous with lukewarm incoming data and thus may well come from investors who missed last year’s stock market rally. In 2012, fund investors poured $680bn into bond mutual funds and ETFs, while taking some $23bn out of equity funds. Given that flows are unlikely to reverse soon, as there is not a lot of profit on them yet, we believe near term momentum remains good for stocks.
– Equities –– Strong retail buying is adding fuel to equity markets. Our recommended equity portfolio focuses on regional and sectoral exposures. Underweighting US equities remains our main regional theme. This trade also protects our portfolio against looming debt ceiling risks. US equities had been the consensus overweight by equity investors for two years and their outperformance started reversing over the summer. US equities have so far erased their 2012 outperformance but are far from erasing their 2011 outperformance. We focus the US equity underweight against EM Asia and Japan. In GMOS this week, we took profit on our overweight in MSCI EMU versus S&P500 given looming Italian election risks into February, and still disappointing European economic activity data. We stay overweight in Topix vs. S&P500 currency hedged. Fiscal easing, financed via debt monetization, and coupled with structural reforms has the potential to sustain this trade beyond a 3-6 month horizon, in our view. This week’s fiscal stimulus announced by the Japanese government appears supportive of the Japanese trade. Across sectors we favor Cyclical vs. Defensive sectors but have taken part profit as the pace of the improvement in the global manufacturing PMI slowed in December. We stay overweight the DJ US Home Construction Index and large mortgage banks (BKX Index) vs. the S&P500 to position for a continued recovery in US housing.

Asset allocation –– The growth gap between East and West is widening, and has allowed us to join the Obama Pivot towards Asia. We stay long Japan and EM Asia in equities on stronger signs of an economic rebound in the East, while we again cut growth numbers for the US and Europe.

Economics –– Weaker activity data force us to lower Q4 for the US from 1.5% to 0.8% and the Euro area from -1.5% to -1.8%. But strong trade and industrial data in Asia, as well as more fiscal easing in Japan, have induced us to raise Japanese growth for the 3rd time in a row, and to signal upside risk on China.

Fixed Income –– Go long duration in the US as we see yields mean reverting and we are not quite high in the 6-month range.

Credit –– Idiosyncrasies driving relative performance signals a welcome move-away from the one-factor-drives-all world of late.

Currencies –– Staying short JPY. Be also short USD but against AUD, RUB and KRW.

Commodities –– Our main trades are long industrial metals, US natural gas, and Brent time spreads vs. short agriculture.

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