LCM Dawn Patrol – 24.06.13 – Strat from JPM, GS. Vodafone, Siemens in the news. GS less positive on CAP, MS likes ACCOR, lots of great stuff for your breakfast reading.

Bonjour,

European stock index futures point to a lower open, adding to last week’s sharp losses, as investors fretted about the prospect of reduced U.S. monetary stimulus and worries over China’s banking sector.

Key levels : SPU3 1577, NKY -1,50%, SHCOMP -3.20%, UST 10y Yields 2.5911, AUD 0.9217, JPY 98.52, Gold $1285, Crude $93.44

What we learnt from last week:
With the Fed no longer focused on pushing asset prices higher, gains in stock and bond prices will be harder to come by. Better economic growth will likely be needed to drive stocks significantly higher from here. If that occurs, bonds are likely to sell off. This means that the ups and downs in economic data will play a bigger role in moving markets, and that the trend of rising asset prices across the board –which has generally characterized the past four years – is ending.
Many strategists & economists believe the OMT is practically dead and the next big theme for the ECB will be broad-based QE (unpopular in Germany butdoesn’t require a vote in the Bundestag)
In China, recent spikes in short-term interest rate markets stem from a combination of specific events. The PBoC’s unusual response reflects the new government’s goal to lead the country toward a more market-based economy, but if short-term rates remain high for longer, it could bring collateral damage to some dependents and risk market distress

This week’s most important events will be the EU summit on Thursday and Friday as our heads of states will discuss the banking union, Greece and competitiveness and growth. I’m not sure anything will really come out of the latter themes, but who knows…  In terms of data, will have the IFO today, the durable goods orders tomorrow, the M3 on Thursday and the Chicago PMI on Friday.

Watch today German IFO business survey (economists see risk that the recent flooding may have a stronger negative effect, especially on the business assessment of the current situation). Otherwise, Fed’s Fisher speaks in London and Germany, Belgium sell bonds, France sells bills.

Wimbledon starts with Federer, Nadal, Sharapova playing today: http://www.wimbledon.com/en_GB/scores/schedule/index.html

wib

NEWS

Italy – a scheduled 100bp increase in the VAT will be delayed 3 months and could be scrapped altogether – Reuters
The BIS over the weekend urged central banks to begin withdrawing their accommodative stances
US. The FT writes that rising bond yields have pushed the cost of homebuyers financing up
Germany trims deficit plan in Merkel’s pursuit of budget balance
Peyrelevade Sees More Restructuring in France, Les Echos Says

Cyclicals Raised to Overweight vs Neutral at JPMorgan
Goldman Lowers China GDP Estimate to 7.4% in 2013, 7.7% in 2014
Western European carmakers will lose around EU312b from 2010 to 2020 in sales because of the financial crisis, Focus reports, citing a study by the University of Duisburg-Essen, in Germany.
Telecoms : France Telecom, Telecom Italia, Deutsche Telekom, Spain’s Telefonica chiefs seek easing of rules blocking mergers, removal of fixed broadband network access at wholesale level to competitors in letter to European Commissioner Jose Manuel Barroso – FT.

Siemens needs to spin off Osram despite a likely tough stock-market debut to show investors it is committed to streamlining. (WSJ)
Vodafone Offers to Buy Kabel Deutschland for €87 a share
Rio Tinto Say It’s Opting to Retain Diamonds Businesses
Fiat said able to triple payout from Chrysler after refinancing
ENRC founders preparing offer valuing co. at $4.7b

CURRENT STUFF

On China
PBoC says liquidity is reasonable; rates remain high and volatile
: China’s central bank said liquidity was at a “reasonable level” and urged banks to control risks from credit expansion, signaling no relief for a cash squeeze that risks exacerbating an economic slowdown. The country’s money market rates remained high and volatile. Overnight bond repo rates fell to a low of 6.1% earlier in the day but briefly crawled back up again to 9.1%, slightly above Friday’s close at 8.89%. (Bloomberg)(Reuters)

BIS tells central banks to stop trying to spur a recovery and re-focus on inflation. In its annual report, the “central bankers’ bank” said the global economy was “past the height of the crisis” and central banks “cannot do more without compounding the risks they have already created”. It said central banks couldn’t repair balance sheets of households or financial institutions, and railed against critics of eurozone austerity, saying there were “reasons to be sceptical” about arguments that the fiscal multiplier had been underestimated. (Financial Times)(BIS report)

Top bankers’ pay falls 10%: “Average pay of top bankers in the US and Europe including JPMorgan’s Jamie Dimon and Royal Bank of Scotland’s Stephen Hester dropped by a 10th last year after banks bowed to investor and regulatory pressure, Financial Times research shows.” (Financial Times)

Japan’s biggest pension fund doubts 2% inflation target: “History is against the Bank of Japan as it undertakes unprecedented asset purchases in pursuit of a pledge to overcome 15 years of deflation, Mitani, the 64-year-old head of the 112 trillion yen ($1.14 trillion) Government Pension Investment Fund, said in a Tokyo interview June 21.” (Bloomberg)

Other Stuff:

Martin Wolf on how austerity has failed in the UK and the euro zone.
The Japanese public weighs structural reform.
A big roundup of charts from Matthew Boesler.

STRATEGY

JPM ( Loeys) The J.P. Morgan View
Negative momentum in EM

Asset allocation –– Stay long equity to bonds in DM as the recent sell off will ultimately undermine the hawkish FOMC/Bernanke comments that produced it. Stay UW EM across asset classes, as the sell off weakens EM fundamentals and reinforces EM underperform ance.
Economics –– Market sell off worsens an economic outlook in EM that was already becoming shakier. We lower Latam growth by ½% for 2013 and 2014. EM 2013 is cut by 0.1%, and is now 0.5% below the start of the year.
Fixed Income –– Fed shift signals more bearish steep ening.
Equities –– This week’s flash PMIs added further fundamental support to our long in MSCI EMU vs . MSCI EM.
Credit –– US credit spreads to come in again in H2 .
Currencies –– Further, modest dollar strength expected .
Commodities –– The impending start to tapering is a big negative for precious metals and we stay u nderweight.

JPM (Matejka) EMEA Equity Strategy
We think the most relevant part of the Fed’s stance is still the one where it is  looking to reduce accommodation only if growth continues to improve; i.e. we don’t think we can be in a bad  equilibrium of disappointing growth and rising rates for an extended period.  Move OW in Cyclicals from N.  We upgrade Discretionary from N to OW, funded from Staples which we move to N from OW. We reiterate  our closing of our short in commodities last week, noting selected metal prices have seen some  stabilisation. We stay OW Pharma as it looks cheap and is a USD play.

GS (Hatzius) US Economics Analyst
A More Graceful Exit from QE

In a long note, Goldman chief economist Jan Hatzius talks about a A More Graceful Exit from QE.
Hatzius’ argument is that the taper is overblown as the big story.
Instead he points to this chart, of Fed futures, which indicate that market expectations for the timing of the first Fed interest rate hike have moved from May 2015 to December 2014.

Says Hatzius:
In our view, the most compelling explanation for the reaction to Chairman Bernanke’s appearances is that market participants have shifted their monetary policy expectations more broadly than suggested by the small change in QE forecasts. A broader shock to expected monetary policy is consistent with the combination of higher TIPS yields lower breakeven inflation rates, and weaker equities over the past few weeks. More specifically, we believe that the bond market views QE tapering as a broader signal that the monetary policy exit is getting underway, and hikes in the funds rate will not be far behind. Exhibit 3 shows the change in the market’s pricing of short-term interest rates since Bernanke’s testimony to the Joint Economic Committee of Congress on May 22. The first hike in the funds rate has moved forward from May 2015 to December 2014, which is probably at least twice as much as expectations about the first tapering of QE.
Read more: http://www.businessinsider.com/goldman-on-how-the-fed-can-improve-the-exit-2013-6#ixzz2X6qkJ36P

UPS&DOWNS

Europe: Chemicals (GS, Patel) 2020 Vision conference highlights an increased focus on specialty
Twelve companies attended our 2020 Vision conference in London on June 18. Companies described a subdued operating environment, but remain optimistic about a 2H recovery as well as the longer-term opportunities. We are CL Buy on CRDA and AZEM.

 

Capgemini (GS, Borra)): Off Conviction List following outperformance; remains Buy
Following recent outperformance, we remove Capgemini from the Conviction List., but maintain our Buy rating. We expect revenue growth to recover in 2Q and 2H and believe balance sheet optimisation and FCF focus will enhance shareholder returns.

Technology – Software & Services (MS, Wood) CIO Poll: 2013 outlook improves slightly
We see an overall improvement in IT spending, with US better and Europe a little worse. Software showed slight deceleration, while services increased slightly. Despite this, given the weakness in Europe and better underlying data, we continue to prefer Software (SAP, Temenos) to Services.

Accor (MS, Lewis) Positive RTI
We believe the share price will rise relative to the industry over the next 60 days. This is because of an earnings release. Accor will announce its Q2 sales update on July 16. RevPAR trends in Europe have improved in Q2, and we expect Accor LfL growth in hotels to improve from -0.1% in Q1 to around 2% in Q2. With easier comps in H2 2013 and significant cost cutting, we expect the company to make some positive comments about LfL profits. Accor is undertaking a significant restructuring, with plans to change the ownership of 800 hotels over 4 years. It

restructured 22 hotels in Q1, and we expect it to report continued progress here in Q2. Trading at 7.5x EBITDA, the stock is at the lower end of its valuation range. We estimate that there is about a 70% to 80% or “very likely” probability for the scenario.

AB INBEV CUT TO HOLD VS BUY AT SOCGEN
AKBANK CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
CAP GEMINI REMOVED FROM CONVICTION BUY AT GOLDMAN; KEPT AT BUY
CASINO CUT TO SELL VS NEUTRAL AT CITI
DELHAIZE CUT TO NEUTRAL VS BUY AT CITI
DIAGEO CUT TO HOLD VS BUY AT LIBERUM
DRAX RAISED TO BUY VS HOLD AT SOCGEN
GARANTI CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
ISBANK CUT TO UNDERWEIGHT VS OVERWEIGHT AT BARCLAYS
KOMERCNI RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
METRO CUT TO SELL VS NEUTRAL AT CITI
MORRISON CUT TO NEUTRAL VS BUY AT CITI
RYANAIR RAISED TO BUY VS HOLD AT CANTOR
SAINSBURY CUT TO SELL VS NEUTRAL AT CITI
YAPI KREDI CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
YAPI KREDI RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN

OVERNIGHT MARKETS

Asian markets
Nikkei 225 down -51.01 (-0.39%) at 13,179
Topix down -1.27 (-0.12%) at 1,098
Hang Seng down -316.81 (-1.56%) at 19,947

US markets
S&P 500 up +4.24 (+0.27%) at 1,592
DJIA up +41.08 (+0.28%) at 14,799
Nasdaq down -7.39 (-0.22%) at 3,357

European markets
Eurofirst 300 down -11.31 (-0.99%) at 1,133
FTSE100 down -43.34 (-0.70%) at 6,116
CAC 40 down -40.89 (-1.11%) at 3,658
Dax down -139.24 (-1.76%) at 7,789

Currencies
€/$ 1.31 (1.31)
$/¥ 98.49 (97.89)
£/$ 1.54 (1.54)

Commodities ($)
Brent Crude (ICE) down -0.26 at 100.65
Light Crude (Nymex) down -0.03 at 93.66
100 Oz Gold (Comex) down -2.20 at 1,289
Copper (Comex) unchanged 0.00 at 3.10

10-year government bond yields (%)
US 2.56%
UK 2.41%
Germany 1.73%

CDS (closing levels)
Markit iTraxx SovX Western Europe +1.43bps at 92.48bp
Markit iTraxx Europe +4.19bps at 123.81bp
Markit iTraxx Xover +11.26bps at 500.31bp
Markit CDX IG +0.64bps at 93.79bp

Sources: FT, Bloomberg, Markit

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