LCM Dawn Patrol – 23.05.13 – Nikkei dropping… poor Chinese PMIs, Exane on ARM, JPM on Kemira, MS on Merck… more!

Bonjour,

European shares were expected to retreat on Thursday, with a poor factory activity survey from China and concerns the U.S. Federal Reserve could decide to cut its bond purchases in the next few meetings hurting sentiment. The S&P dropped 0.83% to 1,655.35 and (at 7:45 Paris time) the Nikkei is dropping like a stone and approaching circuit breakers levels. Today’s European PMIs will be key and most expect some poor numbers. This, however, could lead to expectations of further ECB pro markets actions…

SX5E Index 2827.00y 17.00. Looks like opening around 2785 which would leave 2788 as short term gap resistance with 2794/99 just above…resistance above there still at the 2824 level…. Support is at 2751 then 2701

Watch today: PMIs in Europe, UK GDP breakdown, ECB’s Nowotny holds Austrian central bank press conference & Spain sells bonds. In the US, focus on Claims, PMI, House prices and new home sales

It’s raining and markets are falling… time to indulge yourself…

NEWS

Rajoy does not rule out prospect that Spanish banks will require more money

China Manufacturing Unexpectedly Shrinks in May From April (@49.6 vs 50.4e).

Telecom Italia is said to value fixed-line assets at $18b

Lloyds said to plan $8.7b auction of U.S. mortgage bonds

Nokia Siemens Plans Management Overhaul in Search for Cost Cuts

Deutsche Telekom is set to kick off sale of Scout24 Holding GmbH digital

Maersk CEO said he’ll be forced to prolong cost cuts at co

Carrefour agreed to sell its remaining 25-percent stake in a Middle East joint venture to local partner Majid Al Futtaim for 530 million euros. This may be dilutive on ST earnings, but the continued focus of Carrefour should be taken positively.

Vivendi Names Charlier SFR Chief in Split of CEO, Chairman Roles

Vivendi Seeks EU34M in Suit V FNAC, Ticketnet, Echos Says

UBS French Executives Held for Questioning on Tax, Parisien Says

Logitech plans to reiterate its FY14 financial outlook announced on April 25, and discuss its long-range financial performance goals for FY 2016: Sales of $2.25b, operating income of $150m and gross margin of ~35%

Earnings

Swiss Life 1Q Premium Income CHF6.97b; AM Inflows CHF1.6b

SBM Offshore 1Q Revenue $1b; Order Portfolio at Record $21b, repeat sales forecasts

CURRENT STUFF

On China
China’s manufacturing is contracting for the first time in seven months, adding to signs that economic growth is losing steam for a second quarter. The preliminary reading of 49.6 for a Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compares with a final 50.4 for April. The number also was below the 50.4 median estimate in a Bloomberg News survey of 13 analysts. A reading below 50 indicates contraction.

On the Fed
Ben Bernanke suggested the Federal Reserve could begin ending QE “in the next few meetings” if the jobs market continues to improve.
“If we do that, it would not mean that we are automatically aiming towards a complete wind-down,” he cautioned, in testimony to Congress (Financial Times). Minutes of April’s FOMC meeting showed some officials were ready to “adjust the flow of purchases downward as early as the June meeting” (Wall Street Journal).

On the IMF
he International Monetary Fund is considering the biggest changes to its policy on sovereign debt restructuring in over a decade.
The discussions include ways to ask bondholders to reschedule their debt early in an IMF bailout, and options for dealing with holdouts, who survived the Greek PSI intact and who have won recent legal victories against Argentina over its 2001 default. Set to be published later this week, the fund’s proposals are nevertheless unlikely to revive the idea of a full legal mechanism for processing sovereign defaults (Financial Times).

On the big mess
The European Commission plans to make investor “burden sharing” a bigger part of the conditions for EU banks to receive state aid.
The new rules would use Spain’s rescue of its banks as a template for bailing-in shareholders and junior bondholders before public funds are injected into banks, and could be enforced as early as late summer (Financial Times).

China Tilts Back to Big Capital Spending .A more detailed look at China’s economic performance in 2012 shows it tipped further off balance, relying more than ever on credit-fueled investment, a trend it had tried to rein in. (WSJ)

STRATEGY

The portfolio manager’s strategy cycle.

GS Portfolio Strategy Research: Growth Markets Perspective: Hedging EM Equity
They look at hedges for broad and single country EM equity exposure;considering both underlier behavior and practical characteristics, KOSPI 200 and Bovespa work well but KOSPI 200 puts are probably the better tactical hedge now.
While they are positive on EM longer term, without a pickup in global growth, EM may continue to underperform QE-fueled DM.

UPS&DOWNS

Merck KGaA (MS, Walker) Underappreciated turnaround around story, initiate at O/W
Initiate with OW, PT €142

The combination of a strong management team and a robust balance sheet gives Merck the means to deliver deep transformational change. But the share price doesn’t even reflect the value of today’s base business. We see attractive value, and initiate at Overweight, with ~20% PT upside.

Kemira Oyj (JPM, Scarlett) The restructuring story continues – margin accretion and structural growth may drive re-rating
We continue to favour Kemira as the restructuring story gathers pace and investors move towards stocks with structural growth and relatively defensive profiles. We upgrade 2013/2014E EPS by 4%/5% placing us 4%/6% above company consensus, respectively. Should management continue to deliver on targets post Q1, we calculate 12% potential upside to our numbers in 2014. We remain Overweight and increase our Dec-13 Price Target to €14.50 (from €13) reflecting 2013/14 upgrades and a stronger long-term growth profile.

ARM (Exane, Ramel) ARM vs INTEL the return of goliath
From OW to Neutral, PT: 1,000p.

Our analysis of Intel’s core vs ARM’s reaches a surprising conclusion Intel was left far behind in the mobile race. However, our in-depth analysis leads us to conclude that its existing processors are actually very competitive. Intel still lacks an integrated LTE modem/application processor platform and ARM’s ecosystem remains very strong. However,its arrival could mark the end of ARM’s monopoly on smartphones and especially on tablets.

Fidessa (JPM, Wellington) Recovery likely further off than first thought. Valuation remains demanding. Downgrade to Underweight.
We downgrade Fidessa to Underweight and reduce our Jun-14 PT by -12% to 1,757p. We view LT prospects as encouraging, but see 24x FY13E PER as too high given a 2yr EPS CAGR of just 2.4%. We do not see upside to near term estimates, as despite inflows in Q1, we are still seeing declines in traded equity market volumes on the LSE and NYSE. Customer restructuring is ongoing, and we see good news as unlikely in the ST. Therefore, given the rating, we view risk/reward as unfavourable.

Aberdeen Asset Management Rated New Buy at Berenberg
ANGLO AMERICAN CUT TO HOLD VS BUY AT JEFFERIES
ASHMORE GROUP RATED NEW BUY AT BERENBERG; PT 500P
BAYER AG RATED NEW EQUALWEIGHT AT MORGAN STANLEY, EU93.00
BRITVIC RAISED TO BUY VS NEUTRAL AT BOFAML
CELESIO CUT TO SELL VS BUY AT UBS
FIDESSA CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
GLENCORE XSTRATA REINITIATED AT REDUCE AT NOMURA; PT 290P
HENDERSON GROUP CUT TO NEUTRAL VS BUY AT BOFAML
HENDERSON GROUP RATED NEW SELL AT BERENBERG; PT 140P
Jupiter Fund Management Rated New Hold at Berenberg
KINGFISHER CUT TO REDUCE VS NEUTRAL AT NOMURA
MAN GROUP RATED NEW SELL AT BERENBERG; PT 105P
Metso Falls Most Since April 2 as Danske Says Sell
PETROPAVLOVSK CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
SAMPO RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN
SCHRODERS RATED NEW HOLD AT BERENBERG; PT 2,450P
THOMAS COOK RAISED TO NEUTRAL VS REDUCE AT NOMURA

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