LCM Dawn Patrol – 01.07.13 – Chinese PMI, Tankan, Strat (MS, JPM), Nokia up, BBVA down, Amadeus down… and more…

Bonjour,

Markets to open flat to slightly higher as we get weak HSBC China PMIs (expected) and we wait for the Eurozone PMIs . The Nikkei is up 1.28% on positive Tankan data.

We’re entering an important week in terms of numbers, and please keep in mind that it’s a holiday week in the US (4th of July). Anything can happen… The ECB and the BoE (first Carney meeting) will meet on Thursday (no change expected). We’ll have the US ISM and PMI today. The EZ PMI today as well. More importantly (maybe) we’ll have the US jobs on Friday.

 

NEWS

China’s official NBS manufacturing PMI fell to 50.1 in June, which was in line with expectations but a 70bps fall from May’s 50.8.
Tankan for 2Q came in at the highest recorded levels for two years and a broad-based improvement of corp. sentiment as expected.
Greece. European conditions are set to worsen in 12-18 months, Soros tells Kathimerini
Irish govt is working on a plan to recoup some of the money it plowed into failing lenders from the euro area’s backstop fund, FM Michael Noonan said

Siemens sells its stake in the NSN JV to Nokia
Sabadell to sell 15.15% Banco Inversis stake for EU32.3m
RWE may need more measures after conclusion of restructuring plan called ’RWE 2015,’ CEO Peter Terium says in interview with Boersenzeitung.
Air France-KLM may eliminate thousands of jobs in new round of cost cutting, De Telegraaf reports, citing confidential documents.
ThyssenKrupp is currently discussing opt ions to sell parts of European steel business acc to Rheinische Post.

 

CURRENT STUFF

The official Chinese manufacturing PMI fell to 50.1 last month from 50.8 in May. It was the lowest reading in four months and just slightly above expectations. Meanwhile the final HSBC/Markit PMI for June was confirmed at 48.2, the lowest level since September 2012 and down from May’s final reading of 49.2. It was in line with a preliminary reading of 48.3 released on June 20. (Financial Times)(Reuters)

Optimism outweighed pessimism for Japan’s big manufacturers for the first time since September 2011, the country’s Tankan survey showed. The survey results for the June quarter were +4 compared to a median economists’ estimate of +3 in a Bloomberg survey. “Large companies from all industries plan to increase capital spending 5.5% in the year through March 2014.” (Bloomberg)

Samsung takes lion’s share of European smartphones; Android dominates: Almost half of all smartphones sold in major European markets in recent months have been made by Samsung, and Android-based smartphones accounted for more than 70% of sales in the top five European markets in the three months to the end of May, compared with 61% in the same period the year before. (Financial Times)

ECB’s upcoming Asset Quality Review, key in forming banking union, could force euro-area banks to contract theirbalance sheets by a further EU1.5t ($1.95t), Ernst & Young says in a report.  Expect bank assets to fall to 2008 levels in 2013, which should mark bottom of cycle. Non-performing loans to reach 7.5% in 2013, higher than previously estimated. Total loan growth forecast at 17% 2013-2017

(GS) “Our forecasts for the US dataset to be released this week will likely be mixed for rates… we think that payrolls will likely disappoint market expectations.” As a reminder, consensus expectations are for a 165K print, declining from May’s 175K, while Jan Hatzius now expects 150K.

To read:
– Bill Gross discusses why markets may have overcompensated to the downside. ow.ly/muIQS
– Depressing, and not wrong: The Best Hope for France’s Young? Get Out nyti.ms/10rGb5Y
– Britain must stay in EU – The Telegraph : http://www.telegraph.co.uk/finance/financialcrisis/10150729/CBI-boss-Sir-Mike-Rake-Britain-must-stay-in-EU.html
– Why China’s Economy May Be Heading for a Crash – CNBC http://www.cnbc.com/id/100849458

 

STRATEGY

JPM (Loeys) The J.P. Morgan View
The search-for-yield unwind is not over.

Asset  allocation –– Whatever the  intentions  of  tapering  talk,  the  cat  is  out of the bag on the coming end to the easy money regime. We UW search-for yield assets, gold, and bond-like stocks, and stay OW DM equities.
Economics  –– Japan  2013  growth  is  raised  from  1.8%  to  2.1%.  There rem ains downside risk on EM, especially China.
Fixed Income –– High-yielding sectors still vulnerable to outflows.
Equities  –– Close  OW  in  DJ  US  Home  Construction  index  vs.  S&P500. Focus US recovery theme on OW Banks, i.e. long in BKX vs. S&P500.
Credit –– Stay OW US over EM names.
Currencies –– We focus  on  two  defensive  trades  in  Asia,  short  CNH  and IDR.
Commodities –– Stay  UW  commodities  vs.  equities.  Within  commodities OW energy vs. base and precious metals.

MS (Draho)  Global Strategy Outlook Update
A Mid-Cycle Correction

Mid-cycle risk correction advanced but probably not over.The  prospect of an earlier than expected start to monetary policy normalization  by the Fed triggered a mid-cycle correction for developed markets that is  now advanced but probably not over. We would already add some risk in  high-conviction areas such as Japanese equities and securitized bonds, but  wait for additional volatility in Q3 before adding risk more broadly. If the  mid-cycle correction is already over, it would be one of the milder setbacks  of the last 10-20 years.
Strategic preference remains equities over bonds,based on our view  that equity valuations are still undemanding and the current cycle is not yet  over. In fact, our economics team is increasingly confident that global  growth will move from Twilight to Daylight during the second half, especially  in DM. This should ultimately support equities.
Fixed income markets will remain volatile due to both fundamental and  technical factors. An imbalance between buy-side and sell-side balance  sheets exacerbated the bond sell-off that we expected and led to a marked  underperformance of spread product that we did not anticipate. We expect  further bouts of volatility during the second half of the year, but a number of  countervailing factors suggest that valuations will not become completely  unhinged; we expect the US 10-year to reach 2.70% by year-end. We  would use additional weakness in spread product to add exposure.
Emerging markets will remain exposed to a combination of  challenges. EM weakness is rooted in the broken growth models that our  economics team flagged last year, combined with externally imposed policy  tightening and short-term technical imbalances. However, EM sovereign  bonds and currencies have cheapened materially and we upgrade tactically  from Reduce to Hold. EM equities are also now very cheap but we prefer  Japan, the US or Europe.
The new USD bull market remains intact. We turned bullish the dollar  earlier this year as rising real rates and recovering US asset prices favour  the greenback. Having turned tactically cautious on USDJPY back in May,  we are now bullish again. We expect the USD to outperform relative to  AUD, NZD, CAD, GBP and EUR. EM currencies will continue to face  medium-term headwinds but have already cheapened materially, and we  now prefer to differentiate within EM FX

JPM (Matejka) Europe Equity Strategy
Higher yields should lead, rather than be a hindrance, to further equity upside
We reiterate last week’s call that the current market correction should be used as an opportunity to increase equity exposure and to rotate sector tilt towards Cyclicals. US growth is resilient, in contrast to past 3 summers. Policy tightening has historically almost always led to higher equities, especially if inflation risk was minimal. We highlight that equities started to see inflows again, in contrast to bonds which are having continued huge outflows. The funds moving out of bonds need to go somewhere, and we believe equities are the natural choice, especially given that even a much bigger bond selloff won’t hurt the relative attractiveness of stocks. European activity is improving and spreads are well behaved. The EM/China/commodities angle is the challenging one, but we note that almost everybody agrees with this by now, and the bearish view and the positioning in that space has become extremely crowded. We reiterate last week’s upgrade of Discretionary names – Autos and Media in particular, at the expense of Staples. The only Defensive we would stick with into 2H is the OW Healthcare.

 

UPS&DOWNS

Nokia (JPM, Deshpande) End game is near. Options on handset not all negative thus value could be released.
Upgrade to OW.

We upgrade the stock to Overweight. Recent data-points that Nokia has actually considered selling the handset business, that based on industry data it has raised supply chain indications for FY13, and with growth in mid and low end smartphones strong, with Nokia having products in that range, indicate to us that the end game is potentially close for Nokia. The company could turn around smartphones on higher volumes or negotiate a sale if they opt to exit the business. NSN re-structuring should continue and it could potentially be ready to embark on the next stage by end ‘13. We apply a probability weighted SoTP methodology to assign some value to handsets which has not been valued in our SoTP in the past. This yields a €3.6 TP (from €2).

Iberian Banks (JPM,  Becerril) Still early to run the bulls as EM slows down
downgrading BBVA to UW from Neutral

Iberian banks’ profitability is showing some positive signs on margins but is still dragged by legacy problematic assets, as a cleanup is desirable. We updated our view on Iberian banks and downgrade our recommendation on BBVA from Neutral to Underweight following our downgrade on Santander on 13 June and on the back of a more cautious approach to emerging markets, in line with our economists. This is our relative view vs other EU banks, where we see a more attractive risk/reward in the near term, at the moment.

Subsea 7 S.A. (GS, Tarr) Buy: Sell-off provides entry opportunity; up to Buy, onto Conviction List
Subsea 7 shares fell c.13% following the profit warning on June 27, which we view as an overreaction. We expect a strong earnings rebound in 2014, driven by record backlog and margin improvement in Brazil and W. Africa. Up to Buy, onto Conviction List.

ALDAR SOROUH RAISED TO NEUTRAL VS UNDERPERFORM AT BOFAML
AMADEUS CUT TO NEUTRAL VS OUTPERFORM AT EXANE
AMADEUS IT CUT TO NEUTRAL VS BUY AT UBS
AUREUS MINING RAISED TO BUY VS NEUTRAL AT GOLDMAN
BANKINTER CUT TO HOLD VS BUY AT SOCGEN
BBVA CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
CSR RAISED TO BUY VS HOLD AT JEFFERIES
FIRSTGROUP REINSTATED BUY AT BOFAML
H&M RAISED TO BUY VS NEUTRAL AT BOFAML
HAYS RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT SUISSE
NOKIA RAISED TO OVERWEIGHT VS UNDERWEIGHT AT JPMORGAN
SABMILLER RAISED TO ACCUMULATE VS NEUTRAL AT MIRABAUD
SUBSEA 7 RAISED TO CONVICTION BUY VS NEUTRAL AT GOLDMAN
SWISSCOM RAISED TO BUY VS HOLD AT DEUTSCHE BANK
TULLOW OIL RAISED TO NEUTRAL VS REDUCE AT NOMURA
VEOLIA ENVIRONNEMENT RAISED FROM UNDERPERFORM AT CREDIT SUISSE
Volvo Removed From Conviction Buy List at Goldman
ZAIN RAISED TO NEUTRAL VS UNDERPERFORM AT BOFAML

 

ECONOMIC CALENDAR

Date Time Event Survey Actual Prior

01:50

JN Tankan Lge Manufacturers Index 2Q

3

4

-8

01:50

JN Tankan Large All Indust Capex 2Q

2.90%

5.50%

-2.00%

01:50

JN Tankan Lge Mfg Outlook 2Q

7

10

-1

01:50

JN Tankan Non-Mfg Outlook 2Q

14

12

9

01:50

JN Tankan Non-Manufacturing 2Q

11

12

6

07:00

JN Vehicle Sales (YoY) Jun

-15.80%

-7.30%

09:45

IT PMI Manufacturing Jun

47.8

47.3

09:50

FR PMI Manufacturing Jun F

48.3

48.3

09:55

GE PMI Manufacturing Jun F

48.7

48.7

10:00

EC PMI Manufacturing Jun F

48.7

48.7

10:30

UK Mortgage Approvals May 55.8K 53.7K

10:30

UK PMI Manufacturing Jun

51.4

51.3

10:30

UK M4 Money Supply (MoM) May

0.20%

0.30%

10:30

UK M4 Money Supply (YoY) May

0.00%

-0.10%

11:00

EC Euro-Zone CPI Estimate (YoY) Jun

1.60%

1.40%

11:00

EC Euro-Zone Unemployment Rate May

12.30%

12.20%

11:00

EC Euro-Zone CPI – Core (YoY) Jun A

1.20%

1.20%

16:00

US ISM Manufacturing Jun

50.5

49

16:00

US Construction Spending MoM May

0.60%

0.40%

16:00

US ISM Prices Paid Jun

50.5

49.5

OVERNIGHT MARKETS: MIXED

Asian markets
Nikkei 225 up +8.15 (+0.06%) at 13,685
Topix up +9.58 (+0.84%) at 1,143
Hang Seng up +363.21 (+1.78%) at 20,803

US markets
S&P 500 down -6.92 (-0.43%) at 1,606
DJIA down -114.89 (-0.76%) at 14,910
Nasdaq up +1.39 (+0.04%) at 3,403

European markets
Eurofirst 300 down -5.25 (-0.45%) at 1,152
FTSE100 down -27.93 (-0.45%) at 6,215
CAC 40 down -23.28 (-0.62%) at 3,739
Dax down -31.53 (-0.39%) at 7,959

Currencies
€/$ 1.30 (1.30)
$/¥ 99.32 (99.12)
£/$ 1.52 (1.52)

Commodities ($)
Brent Crude (ICE) down -0.21 at 101.95
Light Crude (Nymex) down -0.16 at 96.40
100 Oz Gold (Comex) up +10.90 at 1,235
Copper (Comex) up +0.01 at 3.06

10-year government bond yields (%)
US 2.51%
UK 2.44%
Germany 1.73%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.08bps at 96.4bp
Markit iTraxx Europe +2.53bps at 119.61bp
Markit iTraxx Xover +4.06bps at 476.85bp
Markit CDX IG +1.56bps at 87.5bp

Sources: FT, Bloomberg, Markit

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