The Dawn Patrol – 10.01.13 – China Trade, Soros’ solution for Europe, GS on FTE and Iliad, MS ups GDF, GS on the debt limit…

Hello

European markets to open up today on better Chinese trade data as imports surged more than expected (and exports to Europe fell 1.9%).

TODAY, we’ll watch the French, Italian, Spanish IP numbers, the US FOMC minutes, the MBA applications. Italy will sell bills and Germany will sell bonds.

NEWS

BHP Sees China Growth Trending Down Toward 6% After 2 Years
China’s Mar. Exports Rise 10% Y/y; Est. 11.7% Rise
North Korea May Launch Missile as Soon as April 10: Sankei
Spain’s Deoleo Says 22 Mln of New Shares to Be Listed April 10
National Bank of Greece’s board to resume meeting today seeking shareholders approval of a share capital increase
Repsol spilled 6,600 gallons at Colville River in Alaska
KPN rights issue: KPN expected to hold shareholders meeting
IAG wins Vueling backing for takeover bid. BBG
Telefonica, Telecom Italia. Telefonica is said to be willing to exit its six-year investment in Telecom Italia as Italy’s largest phone company considers a combination with Hutchinson Whampoa. BBG
France Telecom. Conseil d’Etat, France’s highest court, on April 9 rejected a complaint from France Telecom’s CFE-CGC Unsa union claiming Free Mobile isn’t respecting its network coverage obligations. La Tribune (and read GS note below on FTE and ILIAD).

SAP: I sent a preview yesterday. The key take away is that, usually SAP drops after Q1 numbers and this time analysts expectations are rather low on licenses. So we may get the opposite, but it’s the Q1 and no one really cares unless you’re top down and then SAP looks nice as largest, most resilient tech name in Europe at a reasonable price…

Climber Records 300ft fall!
After reading the article on the FBI investigating guy who leaked insider info on Herbalife at on a golf course, I was going to recommend to stop playing golf… But this is worse…

 

CURRENT STUFF

On China
Chinese exports grew less than expected for the first time in four months. First-quarter trade with the US rose by 10.8 per cent from a year earlier, but China’s trading with the EU fell 1.9 per cent to $124.4bn. Overall shipments abroad rose 10 per cent, below the 11.7 per cent median estimate of forecasters (Bloomberg, Financial Times).

On North Korea
Korea’s Boy Who Cried Wolf Is Now Screaming “Thermonuclear War”
The boy who cried wolf is now openly screaming “global thermonuclear war.” No, really. AFP reports that North Korea said Tuesday the Korean peninsula was headed for “thermo-nuclear” war and advised foreigners to consider leaving South Korea, as the UN chief warned of a potentially “uncontrollable” situation. “Tuesday’s advisory — greeted largely with indifference — followed a similar one last week to foreign embassies in Pyongyang, to consider evacuating by April 10 on the grounds war may break out. “The situation on the Korean Peninsula is inching close to a thermo-nuclear war,” the Asia-Pacific Peace Committee said in a statement carried by the North’s official Korean Central News Agency.” The result – a big yawn, which sadly for Kim Junior is the worst reaction. After all what is a dictator with an inferiority complex and a laughable military to do to get some respect around here and score some “nuisance value” cash from the superpowers (which has been his entire plan all along).

On Europe
EU policymakers discussed including short-term interbank debts on the list of liabilities that can be bailed-in during a bank rescue. The move is among potential amendments to the EU’s bail-in directive following haircuts for uninsured depositors in the Cyprus crisis. Northern eurozone governments also proposed accelerating the bail-in tools’ entry into force from 2018 to 2015 (Wall Street Journal). European Parliament lawmakers also plan to enshrine a preference for depositors over senior bondholders in the pecking order of creditors under the new rules, including haircuts for uninsured depositors “as a last resort” (Bloomberg).

On Golf
The FBI is investigating insider trading allegations tied to leaks from KPMG’s Los Angeles office. KPMG resigned as the auditor of Herbalife and Skechers following its disclosure of the leaks (Reuters). Scott London, the 30-year KPMG veteran at the heart of the case, admitted tipping “someone I’d known from the golf club” (Wall Street Journal). “I regret my actions in leaking nonpublic data to a third party,” London said.

A European Solution to the Eurozone’s Problem.
The following is an extended version of George Soros’s article, “Germany’s Choice.” http://www.project-syndicate.org/blog/a-european-solution-to-the-eurozone-s-problem

UPS&DOWNS

France: Telecom Services (GS, Lee) More pressure, less relief in French telecoms. FT to CL Sell
Meetings with senior management of operators and the regulator on our GS French telecoms trip in Paris highlighted intense competition continues in French mobile and that the hopes of opex and capex help to offset this are overplayed. We put France Telecom on the Conviction List Sell.
Iliad reiterate Buy, 12-month price target €187 (from €174) Strong mobile share take execution and greater than expected cost synergies between fixed and mobile strengthen our view that the market underestimates Iliad’s opportunity for profitable mobile growth.

European Utilities (MS, Turpin) 2013 – FCF inflection offers key turning point
RWE: OW, PT €33 to €36 | MS Best Idea
E.ON: UW to EW, PT €11 to €15
GDF Suez: UW to EW, PT €15 to €16

2013 marks an inflection point for FCF generation and ROE for the sector, thanks to self-help measures, and we feel encouraged to add more risk to our Top Picks. We look at what all this may mean for dividend cover and valuation, and draw on the experience of Telcos, which offers valuable lessons.

European Food/HPC (JPM, Pannuti, CFA) Q113 Previews: weak start for both Food and HPC, Reckitt the strongest and Danone/Henkel weakest
Q1 earnings season should be weak for European Food and HPC. Amid tough comparatives, weakening pricing and one less trading day, we expect Q113 LFL of c4-5%, below FY13e sales growth estimates, with Reckitt Benckiser the best performer (JPMe 7% LFL), while DEMB, Henkel and Danone should post the weakest growth. Amid share prices up 10-20% YTD and rating expansion, Q1 should not provide further impetus to share performance. While Reckitt should be supported by a strong Q1, high valuations are vulnerable ahead of a weak delivery. Our 2013 top picks are Nestlé and Unilever in Food and L’Oréal and SCA in HPC.

AFRICAN BARRICK GOLD RAISED TO NEUTRAL VS SELL AT WESTHOUSE
ASSA ABLOY RAISED TO NEUTRAL VS UNDERPERFORM AT EXANE
AZ ELECTRONIC RAISED TO BUY VS NEUTRAL AT UBS
AZIMUT RAISED TO BUY VS NEUTRAL AT BOFAML
BERKELEY GROUP CUT TO ’NEUTRAL’ AT HSBC
BHP, RIO TINTO RAISED TO OUTPERFORM VS NEUTRAL AT MACQUARIE
COFINIMMO RATED NEW HOLD AT BERENBERG; PT EU91.6
CREST NICHOLSON RATED NEW OVERWEIGHT AT HSBC, PT 360P
DSM UPGRADED TO BUY VS HOLD AT RABOBANK; PT EU55 VS EU46
E.ON RAISED TO EQUALWEIGHT VS UNDERWEIGHT AT MORGAN STANLEY
EASYJET RAISED TO BUY VS NEUTRAL AT CITI
ELECTROLUX CUT TO UNDERPERFORM VS NEUTRAL AT EXANE
FIRST QUANTUM MINERALS REINSTATED AT NEUTRAL AT GOLDMAN
FLSMIDTH CUT TO UNDERPERFORM VS NEUTRAL AT EXANE
FRANCE TELECOM ADDED TO CONVICTION SELL LIST AT GOLDMAN
GDF SUEZ RAISED TO EQUALWEIGHT VS UNDERWEIGHT: MORGAN STANLEY
Michelin, Continental Cut to Neutral at Credit Suisse
MOBISTAR RATED NEW HOLD AT JEFFERIES; PT EU17.6
Morgan Advanced Materials Cut to Underperform at BofAML
MOSCOW EXCHANGE RATED NEW BUY AT UBS; PT RUB62
PRADA CUT TO UNDERPERFORM AT MACQUARIE; PT DOWN 11% TO HK$63
SIEMENS RAISED TO NEUTRAL VS UNDERPERFORM AT EXANE
SKF RAISED TO NEUTRAL VS UNDERPERFORM AT BOFAML
SOLVAY CUT TO HOLD AT RABOBANK; PT LOWERED TO EU100 VS EU110
SOPRA CUT TO ’NEUTRAL’ AT HSBC
STADA GROUP CUT TO UNDERPERFORM VS NEUTRAL AT BOFAML
Sterling Resources Cut to Speculative Buy at FirstEnergy

STRATEGY

GS on the US Debt limit. (Phillips)
The debt limit will need to be raised again this year, probably by August. The deadline is still a few months away, but over the next few weeks the direction the debate takes may become clearer. At this point it appears likely that the next debt limit increase will need to be accompanied by more significant policy concessions than the increase enacted in February. That said, we don’t expect the upcoming debate to be as disruptive as the debt limit increase in 2011 was.
The White House has indicated that the budget the President submits to Congress on April 10 will include deficit reduction measures in line with the offer he made to House Republicans in late 2012. The main difference between those proposals and prior budgets is a proposal to index benefit programs, including Social Security, and aspects of the tax code to a slower-growing inflation measure known as “chained CPI.”
Congressional Republicans may begin to formulate a strategy for the upcoming debt limit increase over the next few weeks. Initial comments from Republican leaders imply they will seek major spending reductions, making the next increase difficult. However, we suspect that Republicans will eventually allow the debt limit to increase with more incremental policy changes in return. This could include more targeted entitlement changes (like the chained CPI proposal in the President’s budget), some type of commitment on tax reform, or other budget process reforms.

OVERNIGHT MARKETS: UP

Asian markets
Nikkei 225 up +80.54 (+0.61%) at 13,272.89
Topix up +17.03 (+1.55%) at 1,119.07
Hang Seng up +21.66 (+0.10%) at 21,892

US markets
S&P 500 up 5.54 (+0.35%) at 1,568
DJIA up +59.98 (+0.41%) at 14,673
Nasdaq down +15.61 (+0.48%) at 3,237

European markets
Eurofirst 300 up +0.56 (+0.05%) at 1,165
FTSE100 up +36.27 (+0.58%) at 6,313
CAC 40 up +3.94 (+0.11%) at 3,670
Dax down -25.13 (-0.33%) at 7,637

Currencies
€/$ 1.30 (1.30)
$/¥ 98.96 (99.26)
£/$ 1.53 (1.53)

Commodities ($)
Brent Crude (ICE) up +0.14 at 106.37
Light Crude (Nymex) down -0.30 at 93.90
100 Oz Gold (Comex) down -0.20 at 1,586
Copper (Comex) unchanged 0.00 at 343.80

10-year government bond yields (%)
US 1.75%
UK 1.74%
Germany 1.26%

Sources: FT, Bloomberg

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