LCM Dawn Patrol – 02.07.13 – JPM on reinsurers and Europe strat, DB on PMIs and Equity perf, MS on RWE, JPM on Conti and lots more.

Bonjour,

Europe to open lower despite the US (S&P +0.54%) and Japan (Nikkei +0.85%) following the encouraging US ISM data and European PMIs published yesterday. Volumes were quite low in the US and if these numbers look good, confidence is still fragile as we get closer to Q2 earnings. This Friday’s NFP number will be key to the Q2 trend. The Tech sector performed in line thanks to AAPL upgrade at Raymond James (target: $600) while semis were down. Emerging markets were a bit weak yesterday with most in the red except Mexico.

Today, we’ll watch the UK construction PMI, the US Factory orders and the Fed comments on rulemaking for Basel III, also Fed’s Dudley and Powell speak tonight.

Le Tour
Today, we’ll follow the TTT (Team Time Trial) on a 25km boucle.
tour

NEWS

Portugal’s Albuquerque to Replace Gaspar as Finance Minister

Greece Making Progress on Overhaul, Economic Minister Tells Welt

Australia’s central bank met expectations and held its key interest rate at a record-low 2.75 per cent.

World Bank cuts its 2013 growth forecast for Indonesia to 5.9 per cent from a previous 6.2 per cent.

Gold continues rebound from 3-year low of $1,180.71

Air France Has Made EU990M of Targeted EU1.5B Savings: Echos
Ardagh Purchase of Saint-Gobain Containers Challenged by FTC (2)
BASF: Brudermueller doesn’t see dramatic decline in Chinese economy
Best Buy shares jumped more than 9 per cent after positive comments by Credit Suisse Analyst
Danone. China investigates Danone, Mead Johnson on milk powder pricing
Dior’s head says European demand for luxury goods is proving resilient
Dongfeng Peugeot Citroen Auto Jan-June Sales Up 33%, Co. Says
Erste Shares Offered at EU18.5-EU19.15 in Placement: Terms
Essilor Sells $300M in Notes in U.S. Private Placement
Nielsen is poised to join the S&P 500
Ocado 1h Pretax Loss 3.8m Pnds VS Est 2.4m Pnd-loss
Pfizer, Novartis Said Interested in Buying Onyx: Reuters
RBS. Sky News report the bank plans a GBP500m IPO of ‘Arrow Global’
Roche Buys Constitution Medical for $220m Plus Milestones
Rothschild to Advise on Split of RBS, FT Reports
Tesla jumped 7 per cent after analysts at Jefferies raised their price target
UBS, Credit Suisse Pressure Tax Evaders, Handelsblatt Says
Zynga shot up 10% after markets as it replaced company founder Pincus with Xbox boss Mattrick

CURRENT STUFF

Australia’s central bank left rates on hold, as widely expected: The RBA board held the cash rate at 2.75%, with the governor noting the economy was growing “a bit below trend”, but the Australian dollar may continue to fall, which would help rebalance the economy. (Statement)

China’s credit freeze deliberate, and just badly executed? “The People’s Bank of China instigated the cash shortages that catapulted Chinese interest rates to nosebleed highs during the past two weeks because the central bank felt it had no alternative amid what it saw as out-of-control credit growth,” says the WSJ, citing an internal PBOC document. However it adds the message was poorly communicated, underlined by the propaganda authorities’ efforts to ‘tone down’ reporting of the cash crunch. (Wall Street Journal)(Financial Times)

Japanese pension fund buys into US electricity: “One of Japan’s biggest pension funds has joined a Canadian partner to buy a $2bn electricity plant in Michigan, said people familiar with the deal. The investment, which is the first infrastructure acquisition by a Japanese public pension fund, is a sign that the country’s massive pension-fund industry is diversifying outside traditional assets such as government bonds.” (Financial Times)

To read:
Immobilier : à Paris, les prix recommencent déjà à monter (Les Echos)
Kohlberg (No, Not KKR) Will Buy Piano Giant Steinway Musical In $438M Deal (Forbes)
A Revitalized Car Industry Cranks Up U.S. Exports (WSJ)
Wall Street’s Brightest Minds Reveal THE MOST IMPORTANT CHARTS IN THE WORLD (Business Insider)

STRATEGY

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.

Deutsche Bank Global PMIs vs Equity Prices.

UPS&DOWNS

RWE AG (MS, Chada) Why We Were Wrong – Downgrade to EW
OW to EW, PT €36 to €28 | **Removed from Best Ideas**

We cut our RWE forecasts, and expect consensus to do so also. The operating environment is tough, albeit with limited downside. FCF is attractive, but leverage is higher than we expected. There is clear value in any power price recovery, but less so in the absence of this – we downgrade to EW.

BT Group plc (MS, Delfas) Possible Regulatory Issues Ahead, at 17x FY14 Earnings
EW, PT 310p

Ofcom could cut ULL prices. In addition, there could be greater regulatory scrutiny of BT’s Sport + Fibre pricing. The pension deficit should be lower, but with reported P/Es at 17x FY14e, 12x FY15e, we see risks and remain EW.

Continental AG (JPM,  Asumendi)
Another upgrade and keep on buying

We believe Continental will report a sequential improvement in 2Q13 margins. We continue to believe Continental is the best of both worlds with a unique combination of a stable and high margin tire business and an automotive business that is expected to grow faster than production. We reiterate our Overweight rating on the stock with a rolled-forward Dec-14 price target of €118 (prev. Dec-13 PT of €105).

European insurance (JPM,  Huttner, CFA) Cutting forecasts on reinsurers
Our forecast -10% rate cut in nat cat means we cut 14e EPS for all 4 reinsurers we follow, d/g Munich, SwissRe, Hannover

We apply the negative impact of our forecast -10% step decline in natural catastrophe reinsurance and assume on average flat rates in the other reinsurance lines, which is the assumption our colleague, Andreas van Emden, has applied to the Lloyds insurers. We also assume no capital management from any of the reinsurers as we believe the timing of a buyback for Munich or a special dividend for Swiss is uncertain. We cut 2014e EPS by -4% for Swiss, -5% for SCOR, -7% for Munich and -8% for Hannover; to reflect the limited risk reward we cut our recommendations from OW to N for Munich and Swiss, from N to UW for Hannover, and we leave SCOR OW unchanged.

OVERNIGHT MARKETS: UP

Asian markets
Nikkei 225 up +125.28 (+0.90%) at 13,978
Topix up +12.63 (+1.10%) at 1,163
Hang Seng down -81.78 (-0.39%) at 20,722

US markets
S&P 500 up +8.68 (+0.54%) at 1,615
DJIA up +65.36 (+0.44%) at 14,975
Nasdaq up +31.24 (+0.92%) at 3,434

European markets
Eurofirst 300 up +11.41 (+0.99%) at 1,164
FTSE100 up +92.31 (+1.49%) at 6,308
CAC 40 up +28.57 (+0.76%) at 3,767
Dax up +24.70 (+0.31%) at 7,984

Currencies
€/$ 1.31 (1.31)
$/¥ 99.53 (99.65)
£/$ 1.52 (1.52)

Commodities ($)
Brent Crude (ICE) down -0.07 at 102.93
Light Crude (Nymex) down -0.16 at 97.83
100 Oz Gold (Comex) up +0.90 at 1,257
Copper (Comex) unchanged 0.00 at 3.15

10-year government bond yields (%)
US 2.49%
UK 2.44%
Germany 1.72%

CDS (closing levels)
Markit iTraxx SovX Western Europe -1.3bps at 95.1bp
Markit iTraxx Europe -4.79bps at 114.82bp
Markit iTraxx Xover -16.87bps at 459.98bp
Markit CDX IG -3.01bps at 84.49bp

Sources: FT, Bloomberg, Markit

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