LCM Dawn Patrol – 17.05.13 – European strategists cut defensive sectors… Ups&Downs…

Bonjour,

Asian markets traded flat to slightly higher this morning in low volumes. Japan rose only slightly as the weakening of the yen vs the US dollar abated, though real-estate shares and utilities were strong gainers. Large-cap miners and bankers drove Australia higher. Property majors advanced to give China a small gain; Aprilhome-price data is due out tomorrow.

Otherwise, Fiat downgraded, Japanese core machinery orders jumped, Europe bank stress tests delayed, GS downgrade Food&Bev while UBS upgrade financials to OW.

Watch today: Car registrations in Europe, construction output, Michigan and US Leading indicators

NEWS

Pickup truck demand – according to the WSJ, demand is increasing for pickup trucks, a positive sign for theauto industry given the higher profitability associated w/these types of vehicles – WSJ http://goo.gl/S70Mz
Sanofi announces positive results for Phase 3 Jakarta study
Glencore names Tony Hayward interim chairman after Bond ousted

US After-hours:
– Dell earnings miss: The third-largest PC maker by shipments on Thursday reported $14.1bn in first-quarter revenues, ahead of analyst expectations of $13.5bn, but down from $14.4bn a year ago. Net income, excluding extraordinary items, was $372m, or 21 cents per share, well below Wall Street’s estimates of 34 cents, and down 51 per cent on $761m, or 43 cents per share, recorded the same quarter a year ago.

CURRENT STUFF

FED Minutes :

Fed minutes Wed May 22 at 2pmET from the 4/30-5/1 meeting – these minutes may read a bit more dovish than the current market narrative around the Fed given the meeting took place prior to the most recent jobs report (which hit on 5/3). Investors will be watching closest for details around the following comment from the 5/1 statement: “the Committee is prepared to increase or reduce the pace of its purchases”. Under what conditions would the Fed raise the pace of QE? JPM

EU bank stress test:
Europe bank stress tests delayed, but will be tougher. The next round of stress tests will be delayed until next year, after the Single Supervisory Mechanism is set up. The EBA says the tests will include an “asset quality review” that will look more closely at risk-weighting and forebearance. FT

Japan :

Japanese continue to net buy foreign bonds and stocks – MoF weekly portfolio flows data for last week (May 5-11th) was released today. Japanese investors net bought ¥186.4bn of foreign bonds for the third consecutive week, following a net purchase of ¥301.2bn in the previous week. The last time that Japanese bought foreign bonds for three weeks straight was in November 2012. Additionally, Japanese investors were also marginal net buyers of foreign stocks last week to the tune of ¥19.2bn, following a net purchase of ¥28bn in the previous week as well.

Other (interesting) stuff :

– Bank stocks – Blankfein thinks bank stocks will continue to rally towards BV – Bank stocks will climb toward book values as “regulation will not turn up as bad as it’s judged to be, the economic certainties will clear up and people will decidethere’s growth” – Bloomberg
– New Blackstone vehicle will ask managers with whom firm already invests through its $48b fund of funds platform to submit innovative trading ideas for a fee. Third-party managers eager to propose trades to new fund, in part because constraints with their own firms prevent them from taking as much risk as they would like. FT

To read :

– California – these California cities could be next in bankruptcy – USA Today http://goo.gl/HLMIY

– Heroic Spain is damned if it does, and damned if it doesn’t – London Telegraph http://goo.gl/cKBlT

– Abenomics yet to convince Japanese business of long-term merits – FT http://goo.gl/VxJJb

– Easy Money: Too Much of a Good Thing? WSJ http://goo.gl/gIZdH

– Why Hedge Funds’ Criticism of the Fed May Be Right – NYT http://goo.gl/45gwR – China’s Growth Model Makes Sense http://www.project-syndicate.org/blog/china-s-growth-model-makes-sense-by-heleen-mees

UPS&DOWNS

JPM reiterate UW on RHK and OW on Whitbread. MS reiterate UW on PSON (fully valued), cut Eutelsat to EW vs OW and reiterate OW on Thomas Cook citing eliminated balance sheet risk. GS add AZ Electronic Materials onto CL Buy, Oriflame onto CL Sell, Johnson Matthey off CL Buy, reiterate Buy on RWE, reiterate CL Buy on Kabel Deutschland.
Petrofac raised to Buy vs Hold at Liberum, Fiat cut to Mkt Perform vs OW atBernstein, Aviva cut to UW at RBC

STRATEGY

ECB Cut getting some Attention – MS

They believe that the ECB is now aiming at meaningful further easing of monetary conditions. They think that there is a 70%+ chance of another rate cut in June. Yesterday’s weak GDP and inflation data reinforces the view. Refi cuts on their own will notdeliver material easing but are a pre-condition. They think incremental monetary easing will be accomplished via negative deposit rates. Absent a sharp turn in the data, they think negative deposit rates are more likely than not in the coming months.

GS Strategy Matters : Downgrading consumer staples; the premium is too high

We downgrade food & beverages to underweight and personal & household goods to neutral. These sectors have reached close to record premiums relative to the market. The scarcity of income and growth has led to outperformance of companies with high yields and predictable topline growth. While we remain focused on the yield theme (GSSTHIDY), we think the premium f

UBS Equity Strategy
UBS strategistsupgrade global financials to overweight: says global economy “is healing, capital has been rebuilt and the sector has moved from being a net issuer to net distributor of cash.”

The P/BV is ~40% discount to MSCI World at a time when the relative RoE is improving.

U.S. Banks raised to overweight, cites housing market recovery, strong balance sheets, attractive valuations

Upgrades Europebanks to neutral, prefers Nordic and UK banks

Cuts Japan, Canada banks to neutral

GS Commodity Watch : From macro to micro; now waiting for stronger growth – Divergence between DMequity and commodity returns US equity markets reached new all-time highs in May. However, unlike the last time in October 2007 when both equities and commodities hit all-time highs simultaneously, this equity milestone was met with declining commodity prices. This divergence in performance represents a significant departure from the past decade where correlations across assets were particularly high given the dominant force of macroeconomic drivers. – Return to normal We believe this lack of correlation, however, represents a return to a more normal state of the world as idiosyncratic microeconomic drivers are beginning to reassert themselves such as rising energy supplies and metal inventories. This is an important development in our view, given the heart of the strategic case for commodities as an independent asset class is its lack of correlation with the broader financial markets. Further, given where we are in the current business cycle with excess capacity and slow growth, the lack of commodity returns and volatility should be expected. – Neutral near-term outlook despite backwardation We believe that a more normal state of the world is consistent with backwardation in some of the key markets, not the contango that characterized much of the past decade, which is good news from a commodity return perspective. It is important to emphasize that while the oil backwardation receded during last month’s pull back in prices, more recently it has reappeared which is more consistent with the underlying fundamental picture that still remains tight on a historical basis. However, as our returns forecasts suggest, the backwardation is not sufficient to overcome our benign price forecasts. Accordingly, we maintain our neutral recommendation on commodities with a near-term return forecast of 0.1% and 12-month ahead forecast of 1.6%. That said, later this year and into 2014 we expect accelerating economic growth to tighten commodity markets more broadly, likely creating better opportunities for investors to benefit from higher roll yields.

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