LCM Dawn Patrol – 15.04.13 – JPM View, MS on global semis, China’s recovery is slow…

Hello

European stocks are seen mixed on Monday following the previous session’s sell-off, although the pause could be short-lived as weaker-than-expected macroeconomic data from China fuels worries over the pace of global growth. Data showed China’s economic recovery unexpectedly slowed in the first quarter, with the annual rate of growth easing back to 7.7 percent from the 7.9 percent pace set in the previous quarter, a weaker reading than a Reuters poll consensus forecast for an 8.0 percent expansion for the first three months of the year.

SX5E Futures: 2573.00y -44.00. Support at 2578 then 2556.Resistance 2593 then 2608/11

Today, discussions about the future of the Euro will re emerge as Germany seems to wish to slow down the process of the banking union. This week, we’ll watch the Italian elections, the German vote on Cyprus’ bailout and how far can North Korean missiles actually fly. We’ll get some important data such as the US IP, the German ZEW.

Data today: the EZ trade Balance, UK Rightmove House Prices, US Empire Manuf., NAHB Housing Mkt index.

Ha! The sun is back!
Time to really get active, no more excuses!
And to help you, I’ve selected two great apps.
Runkeeper: if you’re more of a runner and Strava if you’re more of a cyclist. But both work for both sports. I prefer Strava and use Garmin Connect too.

NEWS

China Economy Grows Less-Than-Est. 7.7% as Recovery Falters

Asian Stocks, Oil, Gold Drop as Chinese Growth Misses Est.

UK pensions – the aggregate shortfall of UK pensions is set to have jumped GBP100B over the last year due to falling rates – FT

Galp Raised Output in First Quarter, Processed More Crude
France Telecom 300M End-2015 Client Goal May Be Tough: Echos
Nokia’s Longer Term Outlook Remains Very Uncertain: Bernstein
Carlsberg Close to Signing $79m Euro 2016 Sponsorship, JP Says
Bayer CEO Says German Competitive Edge at Risk: Handelsblatt
Siemens. Positive write up in Barron’s citing a potential 17% boost to EPS in the next 12 to 18 months
Kuehne & Nagel 1Q KNIN (N): Q1 Net income CHF 132m. Below consensus and outlook unchanged.
ING. Reuters report this morning that ING bank may sell its TMB 31% $1.2bn TMB bank stake in May, post Thai elections.
M&S will open the first in a series of stores in the Netherlands. BBG
Bayer. Barron’s believes the company has the potential to surprise on the upside
Repsol’s YPF stake valued at more than USD 15bn, taking into account Repsol’s control premium and the potential value of the Vaca Muerta field assets. El Pais

CURRENT STUFF

European bank union – German officials have expressed concerns about the present banking union plan and insist EU treaties will need to be changed if Europe wants to move forward with the proposal as it is currently envisioned. Germany doesn’t think a bank resolution and restructuring mechanism can come into effect under the current treaty structure. Bloomberg

China’s Q1 GDP growth was 7.7%, missing estimates. The country reported 7.7% year-on-year growth while median economist forecasts were for 8% according to a Reuters poll. Industrial production grew 9.5%, compared to 10% for the same period in 2012 and retail sales rose 12.4% in the quarter, 1.9 percentage points lower than last year. (Financial Times)(Reuters)

Gold, silver prices tumble: Gold for immediate delivery dropped as much as 3.9% to $1,425.75 an ounce, the lowest level since April 2011, while silver fell 5% to its lowest level since November 2010. (Bloomberg)

U.K. Businesses Back EU Renegotiation (WSJ)
U.K. businesses support the government’s attempt to renegotiate the terms of EU membership, but have made it clear that complete withdrawal from the group would have a big negative impact.

UPS & DOWNS

Global Semiconductors (MS, Meunier) Blue Paper
Chipping Away at Returns

We are increasingly cautious on the semiconductor industry globally. Under our four scenarios for future industry development, we believe investors are primarily focused on the most optimistic outcome – demand for more complex devices continuing to evolve and Moore’s Law enabling that demand to be met. However, if demand does not evolve, or the new lithography technology EUV – which is needed to make smaller, cheaper chips – is not commercialized soon, we think consensus expectations for industry returns will not be met. EUV’s success thus forms one axis of our four-quadrant scenario matrix. Demand is the other axis, either continuing to evolve or becoming commoditized. The one combination that gets us to consensus is not the most likely scenario – in our view.

Sky Deutschland (JPM O’Donnell) De-risked with double digit growth; upgrade to Overweight with attractive entry point
We think the recent pullback (-14% in 3 months) provides a rare attractive entry point and upgrade from N to OW (Dec-13E PT €3.30 to €4.95). We think short-term factors are largely priced in – while subscriber net adds are likely to be up in 2013 (JPMe +366k vs. +351k 2012), Q1 and Q2 may be lower YoY (JPMe +41k in Q1 13 vs. +73k Q1 12) with these quarters more affected by ceasing outbound sales. We have always forecast a strong top-line (sub and ARPU growth); our change in view is driven by increasing comfort on the cost base – more visibility, high op leverage, and our analysis suggests the company is absorbing higher staff numbers, and reducing content costs and selling expenses as % of sales more than we had previously estimated.

Accor Cut To Underperform VS Neutral at Credit Suisse
Aveva Raised To Neutral VS Sell at UBS
Bureau Veritas Cut To Hold VS Buy at Berenberg
Citi Cuts Freeport-McMoran, Noranda on Metal Forecast Changes
Gold Fields Raised To Neutral VS Sell at Citi
Harmony Gold Cut To Sell VS Neutral at Citi
L’Occitane Raised to Buy From Neutral at Nomura, PT HK$25.40
Ocado Cut To Underweight VS Equalweight at Barclays
Petropavlovsk, Nordgold, Polymetal Cut To Sell at Citi
Saint-gobain Raised To Buy VS Underperform at BofAML
Sky Deutschland Raised To Overweight VS Neutral at JPMorgan

STRATEGY

MS (Parker) US Equity Strategy

JPM (Loeys) The J.P Morgan View
The long versus the short term of it

Asset allocation –– No change. We stay long US and Japanese equities.
Economics –– Weak US retail sales lower Q1 tracking to 3.0%.
Fixed Income –– Focus on the higher-yielders in EM local markets.
Equities –– With the exception of Japan, there is little evidence that the two –year long earnings outperformance of the S&P500 is changing.
The US reporting season has begun, but is giving little support to equity markets so far. From the 28 companies of the S&P500 that have reported first quarter earnings so far, 57% have beat expectations but the actual earnings surprise has been only 1% so far.
Credit –– We move to OW EMBIG, from neutral.
Currencies –– Yen weakness is pushing many currencies sharply higher.
Commodities –– We stay OW energy vs. base metals.

JPM (Matejka) EMEA Equity Strategy.

Huge ytd sector divergences – should one position for the reversal? We still think not
Although rotating into underperforming cyclicals such as Basic Material is tempting (the sector has underperformed Healthcare by ~28% YTD) we recommend investors do not succumb. M. Matejka, E. Cau. “…after all, the outperformance of defensives is big…all this is against the backdrop of strong index advance. Earnings season is starting and it could be a positive catalyst. The hurdle rate has been revised down sharply. For the S&P500 IBES is projecting outright negative qoq EPS growth for the first time in at least 10 years. This argues against negative surprises; however, corporate guidance’s remain cautious and we believe EPS revisions will remain negative… defensive growth did very well during past QEs, and this is more of the same. Bond yields remain low and macro momentum positive, but sub-trend. Japanese QE could support periphery and we see Italy vs. France as an interesting trade. We are short German exporters on worsening competitiveness. Mining remains our key UW sector, but given marked underperformance we think relative pair trade SXPP over SXNP could work. We believe the outperformance of Defensives over Cyclicals is not finished and keep our key OW sectors Staples and Pharma

OVERNIGHT MARKETS: DOWN

Asian markets
Nikkei 225 down -199.08 (-1.48%) at 13,286
Topix down -15.86 (-1.38%) at 1,133
Hang Seng down -336.00 (-1.52%) at 21,753

US markets
S&P 500 down -4.52 (-0.28%) at 1,589
DJIA down -0.08 (0.00%) at 14,865
Nasdaq down -5.21 (-0.16%) at 3,295

European markets
Eurofirst 300 down -10.77 (-0.90%) at 1,182
FTSE100 down -31.75 (-0.49%) at 6,384
CAC 40 unchanged 0.00 (0.00%) at 3,729
Dax down -126.86 (-1.61%) at 7,745

Currencies
€/$ 1.31 (1.31)
$/¥ 97.66 (97.70)
£/$ 1.53 (1.53)

Commodities ($)
Brent Crude (ICE) down -2.15 at 100.96
Light Crude (Nymex) down -2.52 at 88.77
100 Oz Gold (Comex) down -61.60 at 1,439
Copper (Comex) down -3.65 at 331.25

10-year government bond yields (%)
US 1.73%
UK 1.73%
Germany 1.26%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.69bps at 100.82bp
Markit iTraxx Europe +2.99bps at 110.96bp
Markit iTraxx Xover +8.42bps at 442.68bp
Markit CDX IG +0.47bps at 82.03bp

Sources: FT, Bloomberg, Markit

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