The Dawn Patrol – 28.01.13 – JPM View, JPM EU neg on Cyclicals, GS on Stock Picking.

Bonjour,

European stocks are seen rising on Monday, set to gain ground for the fourth straight session and tracking a rally on Wall Street where a surprisingly good start of the earnings season has propelled the S&P 500 above 1,500 points for the first time in more than five years.

Today, We’ll monitor Germ Import prices, M3 growth, US Durables goods, Homes sales and Dallas Fed Man. Italy sells bonds. Germany, France sell bills.

Hope you had a good Week End and were more reasonable than me in terms of food and exercise.

To Watch?:
Translated into “Happiness Therapy” in French… Why do we translate English titles into other English titles (like “Hangover” into “Very Bed Trip”)??

Anyway, it’s not great, but there are some good scenes in this movie.

HOT STUFF

RYANAIR beats on profit & sales for fiscal 3Q…strong preXmas bookings helped push up av. fares (+8%), offset higher costs with fuel +24%

VOLVO has agreed to pay Rmb5.6bn ($1bn) for a minority stake in the commercial vehicle unit of China’s Dongfeng Motor (GS reiterate Conv. BUY)

EADS. France’s Hollande wants Lauvergeon to chair EADS. And ALCATELLUCENT’S Camus ready to be EADS Chairman – LeFigaro

DEUTSCHE TELEKOM, Axel Springer discuss Scout24 sale

NOVARTIS’S Gleevec wins FDA approval for new use in children

HELLENIC PETROLEUM gets $1.1b in loans to refinance debt

TELEFONICA said to seek $1.7b loan to extend debt early

JAPAN AIRLINE cancel all B787 flights through Feb17.

RWE plans to counter “challenging” year by cutting investments by as much as 50% to offset losses from phasing out of nuclear power in the country, CEO Peter Terium said yday at co. event in Davos.

CURRENT STUFF

US sequestration budget shock looks more likely: Although economists have long assumed that the socalled sequester would not be allowed to occur, and saw a recent move by Republicans on Capitol Hill to extend the US borrowing authority as a sign of greater cooperation with the White House, conservative lawmakers have recently made it clear that they were simply gearing up for another fight and are prepared to take a hard line on the $1.2tn in cuts even amid objections from military hawks. “I think the sequester is going to happen,” said Paul Ryan, the influential Republican congressman on NBC’s “Meet the Press”. (Financial Times)

Banks experiment with new CLOs: “Barclays and Credit Suisse are both preparing collateralised loan obligations – which bundle corporate loans primarily for leveraged buyouts into a single vehicle – for investment groups Pramerica and Cairn Capital, said sources close to the deals.” The deals could be the first under new rules requiring CLO managers keep some ‘skin in the game’. (Financial Times)

Chinese industrial companies’ profits surge in Q4: “Total profits earned by major Chinese industrial enterprises rose 17.3% from a year earlier in December to Rmb895.2bn ($144bn), according to figures released by the Chinese government on Sunday.” (Financial Times)

To Read

Jon Hilsenrath: A trust deficit is holding back the economy. (Wall Street Journal)

Fed focus shifts to when to slow asset purchases. (New York Times)

Equities bears are on the defensive. (Wall Street Journal)

STRATEGY

Europe: Multi-Sector Holdings (GS, Iwar) NAV discounts have tightened but further to go; Kinnevik and Christian Dior our top picks
We increase our price targets by an average of 12% and now see average upside of 23% across the sector. The average NAV discount has tightened to c.30%, but it is still wide vs. history. Top picks are Kinnevik and Christian Dior, both CL Buy.

Strategy Matters 5GS, Glissmann) From macro to micro; ‘revival’ of stock picking or seasonal relief?
Correlations across equities are very low currently. A drop in correlations at the turn of the year is quite usual but with a lower ERP correlations should start to reverse the upward trend since the tech bubble at least in part. This helps stock pickers.

JPM ( Matejka) European Equity Strategy
CESI below zero calls for risk reduction – move European Cyclicals to UW The degree of optimism and the nature of the bullish arguments used are eerily similar to the backdrop seen last March. We advise taking some risk off the table for the following reasons: 1) US CESI has moved negative. On the past 7 occasions when this happened the near term equity upside was capped (markets down 6 times), with asymmetric risk-reward.
2) Q4 results are beating lowered hurdle rate, but are not leading to earnings upgrades.
3) Stocks had a strong run – equal weighted market P/E multiple just moved above 10 year average, at 13.2x 4) Many technical and sentiment indicators are flashing warning signs. AAII Bull index is in the top 5% of historical range, Vix at record lows and Equity Skew at 10 year lows. Note that Euro CESI is still accelerating – keep preference for the region and keep top OW Banks – likely to decouple from Cyclicals. Move Cyclicals to UW. Screen of stocks with largest downside when CESI goes negative in the report.

JPM ( Loeys) The J.P. Morgan View
Asset allocation –– Upside risk on Q1 GDP keeps us overweight in equities, corporates and EM, but this is not significant enough to push us into shorting bond duration. The search for better yield and return continues, but investors remain averse to high short-term vol and mark-to-market risk. This we believe creates a preference for illiquid assets, with little MTM risk, over better priced liquid assets, such as equities.
Economics –– A significant rise in global flash PMIs keep us with upside risk on global growth. The flash Euro area PMI is now within a point of the level needed to confirm stable GDP and thus an end to recession. We are raising German Q1, but lowering France, for no change in our forecast of a flat Euro Area Q1.
Fixed Income –– Favour Treasuries over Bunds.
Equities –– Increase exposure to the Cyclical vs. Defensive equity sector overweight.
Credit –– Credit continues to underperform equities.
Currencies –– Short JPY vs. NOK, USD and EUR.
Commodities –– Stronger global activity data are starting to push growth expectations higher. Stay long base metals.

UPS & DOWNS

Carphone warehouse cut to UW and Home Retail+Debenhams to EW at MS, Munich Re Cut to Neutral from Outperform at Exane, GS remove John Wood from Conviction Buy list (still Buy), reiterate buy on NZYMB and Conviction Buy on Volvi. Randgold raised to Buy at ML, DB see more re-rating catalysts on William Hill and expect British land to benefit from a resumption of capital growth. Telekom Austria resumed UW at MS and ASML raised to BUY at Citi and like D.E Master

 

OVERNIGHT MARKETS: MIXED

Asian markets
Nikkei 225 down 57.54 (0.53%) at 10,869
Topix down 0.80 (0.09%) at 916.29
Hang Seng up +108.22 (+0.46%) at 23,689

US markets
S&P 500 up +8.14 (+0.54%) at 1,503
DJIA up +70.65 (+0.51%) at 13,896
Nasdaq up +19.33 (+0.62%) at 3,150

European markets
Eurofirst 300 up +3.75 (+0.32%) at 1,175
FTSE100 up +19.54 (+0.31%) at 6,284
CAC 40 up +25.99 (+0.69%) at 3,778
Dax up +109.84 (+1.42%) at 7,858

Currencies
€/$ 1.35 (1.35)
$/¥ 91.00 (90.89)
£/$ 1.58 (1.58)

Commodities ($)
Brent Crude (ICE) down 0.06 at 113.22
Light Crude (Nymex) up +0.07 at 95.95
100 Oz Gold (Comex) unchanged 0.00 at 1,656
Copper (Comex) unchanged 0.00 at 363.95

10year government bond yields (%)
US 1.95%
UK 2.07%
Germany 1.64%

CDS (closing levels)
Markit iTraxx SovX Western Europe 1bps at 99.22bp
Markit iTraxx Europe 0.3bps at 104.98bp
Markit iTraxx Xover 1.61bps at 420.19bp
Markit CDX IG 1.72bps at 84.88bp

Sources: FT, Bloomberg, Markit

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