The Dawn Patrol – 04.03.13 – JPM & GS on EU Equities. JPM Asset Allocation. MS ups France Tel! China property killed. and More…

Bonjour,

European markets expected to open slightly lower. with traders citing concerns over U.S. budget cuts, Italy’s political deadlock and Chinese plans for tighter controls on its property sector as reasons for the likely fall.

Today, we’ll read the FTE upgrade by MS, the somewhat positive call by JPM’s Matejka. On the macro front, the EcoFin ministers meet today and should generate news on Cyprus and Italy. We’ll have the Spanish unemployment data and the Eurozon PPI. In the US, we’ll look for the ISM in NY. The week’s most important data well be the service PMIs tomorrow and the NFP on Friday.

SX5E Futures: VG1 Index 2617.00y -18.00. Support at 2608 then 2578. Resistance 2633 then 2669. Looks like opening around 2606 which would leave intra-day gap resistance at 2621

Kuehne & Nagel net income CHF485m vs. est. CHF523m. CEO Reinhard Lange to step down at May 7 AGM, to be consultant until contract ends Dec. 31. BBG

LVMH, Burberry lux stocks -2% in HK today after property sector plunges on new rules to curb the market

Danone. The company, in part due to Trian Fund’s suggestion, is changing its cost structure in an effort to squeeze out more profit. Depressed by profit warnings, the stock trades for 15x. 2014 earnings, well below its 10-year average price/earnings multiple of 18.7x. Trian Fund Management sees an implied year-end 2014 value of EUR 78 a share. Barron’s. http://on.barrons.com/12nFSvP

Air France CEO Says European Mergers Are ‘Almost Over’: Echos

Tesco Plans to Open Online Entertainment Stores: Daily Telegraph

Rio Says Expectations for Strong 1H in China, Moderation in 2H

Statoil Says Europe Uncertainty Hits Gas-Supply Investment: FT

Credit Agricole outlook revised to stable from negative by Moody’s. BBG

Hope you had a great week end. Some enjoyed the ski and the sun. Hope it stays that way…

CURRENT STUFF

On China
China’s official NBS Non-Manufacturing PMI for February comes in at 54.5 from 56.2 in January. There will be some lunar new year effect but exports were lower.

Alos, Beijing hit property developers with more tightening measures to contain housing costs that were harsher than expected. The State Council had demanded late on Friday an increase in required down payments and loan rates for buyers of second homes in cities where prices are rising too quickly. The announcement came ahead of the start of China’s annual parliamentary meetings.

On Japan
Kuroda says will do “whatever we can do”: Haruhiko Kuroda, the government’s nominee for BoJ governor, said open-ended asset purchases could begin this year in attempts to reflate the economy. “I would like to make my stance clear that we will do whatever we can do,” Kuroda, the president of the Asian Development Bank, said at a confirmation hearing in the parliament in Tokyo today. He reiterated his belief the BoJ should buy longer-term bonds. (Bloomberg)

On Bernanke
Fed Chairman Ben Bernanke gave a speech on Friday evening in which he warned that raising interest rates too early could jeopardise growth and cause the very financial problems it was intended to prevent.

To read
· U.S budget wrangles. Washington declares cease fire on budget wars; despite failing to reach a deal on the sequester, both sides of the aisle signal they won’t pursue brinksmanship with continuing resolutions. NYT http://goo.gl/cvzyh

· Black Swan Fever – “Since the housing market imploded six years ago, we’ve been suffering from black swan fever…Instead of complacency about rare, destabilizing events, the markets, the media and the politicians developed a fixation: Find the next black swan. That has led to a belief that any sign of stability, any indication that the worst may have passed is simply a false dawn. Luckily, that skittishness has passed” – The Atlantic http://goo.gl/5urGl

· No end in sight to Italian gridlock. FT http://on.ft.com/XDmtRP

· Central banks to set tone for currencies. WSJ http://on.wsj.com/VsFE2r

UPS & DOWNS

France Telecom (MS, Delfas) 20%-50% Upside Potential
Estimates look reasonable and valuation is low: EE alone is now >25% of market cap. Add in better cost control and possible state fibre subsidies worth €6.5bn, and this could become a recovery story. We move FT to OW and see 20% upside potential in the near term but a possible 50% in our bull case.

Anglo American Cut To Reduce VS Neutral at Nomura
Arcelormittal Rated New Sell At Liberum, PT Eu10
ASML Cut to Underperform VS Sector Perform at RBC
Bunzl Raised To Neutral VS Sell at UBS
Capita PT Raised to 955p VS 870p at Berenberg; Kept at Buy
European General Retailers Cut To Neutral VS Overweight at UBS
GKN Raised to Neutral VS Sell at Goldman
K+S Cut to Underperform VS Neutral at BofAML
Legrand PT Raised to EU37.1 vs EU36.1 at Berenberg
Luxottica PT Raised to Eu35 VS Eu31 at Nomura; Kept at Reduce
Next Cut To Neutral VS Buy at UBS
Old Mutual Cut To Neutral VS Buy at UBS
Portugal Telecom Rated New Hold At Jefferies, PT Eu3.5
Taylor Wimpey Cut To Sell VS Neutral at Citi
Telefonica Raised To Overweight VS Neutral at JPMorgan
UBM PT Raised to 835p VS 670p at Berenberg; Kept at Buy
William Hill PT Raised to 460p VS 410p at Morgan Stanley

STRATEGY

JPM (Matejka) European Equity Strategy
Consolidation modde, but we note a few positives are emerging.

• Considers that as consolidation rather than start of longer term weakness
• Says entry point getting better as various mkts have retraced YTD gains
• Says Italian elections (source of risk for mkts) behind us
• Suggests overweight Staples (remain preferred Defensive); stays underweight Mining
• Says high FCF yield names continue to be more attractively valued compared to both high Quality and high Growth stocks
• Screens for high and sustainable FCF yield stocks
• Consistent positive FCF yield delivery in each of last 4 yrs, 2013 FCF yield >3%, positive 2013 EPS growth among criteria
• Basket of 25 names: Adidas, Ahold, AB InBev, AtoS, Axel Springer, Bayer, BT Group, Bunzl, Continental, Deutsche Telekom, DSV ‘B’, Experian, Gemalto, Imperial Tobacco, Kerry Group, Pearson, Randstad Holding, Reed Elsevier, Sage Group, SAP, Smith & Nephew, Smiths Group, United Internet, WPP, Wolters Kluwer

GS (Oppenheimer) Strategy Matters: Sectors: Not cyclical, not defensive, but in search of growth
We expect a modest recovery in global growth this year accelerating into 2014. However, near-term risks are high and domestic growth is sluggish. We search for structural growth growth stories which are not already heavily priced.
Attractive growth: Tech, healthcare, personal/HH goods and autos Upgrade: technology, personal & HH goods, and healthcare to overweight. Remain overweight autos; strong growth and inexpensive valuation.
Value traps: Telecoms, oil & gas
Remain underweight telecoms and oil & gas.
Expensive growth: Food & beverages
Remain neutral food & beverages, despite strong growth and low volatility, relative valuation close to all time high.
Financials: Continue to prefer insurance over banks
Remain overweight insurance and neutral Banks. Insurance benefits from reduced risk, higher bond yields and inexpensive valuation.
Utilities: Downgrade to neutral still positive on unregulated
We downgrade the sector to neutral but maintain our recommendation on the unregulated utilities which benefits from higher carbon prices.

GS (Turner) European Asset Managers, Equity Flows.
Equity flows soften but remain positive
The appetite of European investors for equity products slowed a little this week (7 days ended February 28). Although equity flows remained positive, we estimate that they totaled only onequarter of the flows seen the previous week. Based on EPFR and EFAMA data, we estimate that European investors added a net +€1.3 bn into equity funds.
We ascribe this sequential slowdown to the return of market concerns arising from the recent Italian election, and the subsequent market volatility.

JPM (Loeys) The J.P. Morgan View
Worse is needed to reverse the risk rally.

Asset allocation –– Rising risk factors in last year’s trio of the US, China and Euro Area stopped the risk rally in its tracks last month but did not reverse it. Worse than we currently forecast is needed to reverse the rally, in our view. We stay long equities and credit on a medium-term value view.
Economics –– Hard activity data for January are confirming the world economy has started to lift from the lows of Q4. But the drop in the Global PMI and extra US fiscal tightening appear to be limiting upside to forecasts. We again raise Japanese 2013 growth, from 0.5% to 1.0%.
Fixed Income
–– Impact of Italian election to remain relatively localized.
Equities
–– We prefer to express our EM equity OW against Euro rather than US equities. Open a short in MSCI EMU$ vs. MSCI EM$.
Credit
–– Spread moves suggest Italian risks are contained within Europe.
Currencies
–– Sell GBP/USD and GBP/SEK, buy USD/THB (sequester hedge), and stay long EUR/GBP, USD/JPY and EUR/JPY in options.
Commodities
–– Stay short Brent.

OVERNIGHT MARKETS: MOSTLY DOWN

Asian markets
Nikkei 225 up +41.86 (+0.36%) at 11,648
Topix up +8.12 (+0.82%) at 992.45
Hang Seng down -297.35 (-1.30%) at 22,583

US markets
S&P 500 up +3.52 (+0.23%) at 1,518
DJIA up +35.17 (+0.25%) at 14,090
Nasdaq up +9.55 (+0.30%) at 3,170

European markets
Eurofirst 300 down -2.83 (-0.24%) at 1,169
FTSE100 up +17.79 (+0.28%) at 6,379
CAC 40 down -23.09 (-0.62%) at 3,700
Dax down -33.54 (-0.43%) at 7,708

Currencies
€/$ 1.30 (1.30)
$/¥ 93.35 (93.56)
£/$ 1.50 (1.50)

Commodities ($)
Brent Crude (ICE) down -0.19 at 110.21
Light Crude (Nymex) down -0.15 at 90.53
100 Oz Gold (Comex) up +7.50 at 1,579
Copper (Comex) down -0.25 at 347.90

10-year government bond yields (%)
US 1.84%
UK 1.87%
Germany 1.41%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.43bps at 104.15bp
Markit iTraxx Europe +1.22bps at 117.9bp
Markit iTraxx Xover +6.45bps at 454.04bp
Markit CDX IG -1.56bps at 86.32bp

Sources: FT, Bloomberg, Markit

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