LCM Dawn Patrol – 22.07.13 – JPM View, Markets update, GS downgrades Akzo, JPM upgrades African Barrick and more…

Bonjour,

 

European markets are set to open higher on Shinzo Abe election in Japan.

 

Today, there is isn’t much on the political front (if you’re French you can read how Mr. Hollande told his government to stay at work and how some replied that they needed a break).
This week is data-heavy  however , with Eurozone, US and Chinese flash PMIs, IFO, ECB bank lending survey, UK 2Q GDP, and US durable goods reports. This week’s flash PMI releases will provide useful guidance on where the global cycle stands. We look for a constructive signal with modest gains expected in the output index and a rise in the orders/inventory ratio in the US and China. Larger increases are expected in the Euro area.

 

The market’s mood is still the same. This week’s earnings didn’t really change much as they were largely in line except the disappointments in the tech sector. Investors finally get Bernanke’s speech and they seem OK with it. China is still an issue with its disappointing growth. For now, we stay focus on the fundamentals and on the earnings and then…
In Europe, industrials and banks led the market higher during the week on strong production numbers and on the ECB announcement of new collateral rules. This new collateral rule may be an important catalyst for the European market and for European banks, as it will deepen the ABS market and may also be the beginning of new rules and LTROs.  The Spanish and Portuguese political situations remain tricky…

Royal baby watch: Kate Middleton and Prince William could call tot Hyacinthe or Theophilus after ancestor
Read the Mirror

kandw

 

NEWS

 

SNB’s Jordan Reiterates Commitment to Defend Swiss Franc Ceiling
China – the next areas for reform include land policy, state-owned industries and taxation – Reuters

 

Deutsche Bank Said to Plan Cutting Balance Sheet 20%, FT Reports
UBS 2Q Net CHF690m; Wealth-Management Net Inflows CHF10.1b (positive)
Philips 2Q Ebita Beats Estimates, Confirms Forecast. Positive on healthcare orders, which was a key concern.
Invensys. Sunday Times says Schneider will table a GBP3.3bn f ormal bid for the company as early as this week.
BSkyB  may spend gbp500m on share buyback, Sunday Times reports
SAP  will end its dual chief executive officer structure next year, with Bill McDermott becoming sole leader
Mobistar Cuts 2013 Profit, Revenue Forecasts; Suspends 2013 Div.
Vivendi set to meet on Activision dividend & Maroc sale – WSJ Link http://on.wsj.com/1bCJhtU
Peugeot in preliminary talks with Banco Santander about selling auto consumer-credit unit Banque PSA Finance or merging bank with Santander assets – WSJ
Apple agrees to buy online transit-navigation service HopStop.com.

 

 

CURRENT STUFF

Europe growth poised to accelerate according to the Barron’s cover story; overall bullish on Europe – Europe’s economy is finally on track to exit recession (growth could turn positive in Q3 or Q4). The  region’s officials have shown an ability to contain recent banking and political headwinds. September  22 is probably the most important date on the European calendar for the remainder of 2013 (that is  when Germany will head to the polls). Barron’s

 

Fed reconsidering banks’ physical commodities activities: the Fed is reviewing a 2003 precedent 2003 precedent that let deposit-taking banks trade physical commodities. Sources told the FT the Fed’s discussions with bank executives in recent weeks included whether the banks should be barred from owning such assets. Meanwhile a Senate subcommittee will hold a hearing tomorrow to explore whether financial firms such as Goldman Sachs Group and Morgan Stanley should continue to be allowed to store metal, operate mines and ship oil. (Bloomberg)(Financial Times).

 

BoJ governor says more stimulus is an option; two-year inflation target not rigid: The Japanese central bank is prepared to inject more stimulus if the economy’s recovery is threatened, BoJ board member Takehiro Sato said in a speech today, as he pointed to risks such as the slowdown in Chinese growth. He also said the 2% inflation target was a flexible one that does not necessarily have to be achieved rigidly in two years. (Reuters)

 

Portugal’s prime minister ruled out calling a snap general election two years ahead of schedule. “President Aníbal Cavaco Silva said on Sunday night that he had been given “additional guarantees” from the two government parties that they would keep their coalition together to see through the country’s €78bn EU bailout programme.” (Financial Times)

 

More
China’s move to liberalise lending rates just reminds everyone that it’s deposit rates that matter most. (Bloomberg)

Bill Gross has some thoughts about QExit that he wants you to hear. (Bloomberg)
Japan – the WSJ has a long profile article detailing how Japanese firms remain reluctant to ramp up investment and are continuing to sit on massive cash hoards. The lack of spending is one factor holding back the success of Abenomics – WSJ

 

 

STRATEGY

 

 

JPM (Loeys) Global Asset Allocation ‘The J.P. Morgan View’.
No change to our main trade recommendations which are to be long equities versus fixed income; to overweight DM vs. EM across asset classes; to overweight  Value in the US; to buy into Japanese reflation; to own Euro-periphery bonds; to own natural gas; and to  overweight energy against metals. Within DM equities, we continue to overweight Value stocks and Japan.  Value stocks (low PE and PB) offer good long-term excess returns and have shown good momentum this  year. Given their still low multiples, Financials are the largest sector in Value, something we like as  Financials should also gain from the ongoing recovery in US housing.  We stay long-term bullish and  overweight Japanese equities, a position we have held through thick and thin since November. A rising  China and the risk of a reduced global reach of the US are major factors motivating Japan to rebuild its  economy. This weekend’s Upper House election should give the LDP three years of control to realize its  goals.
Equities — Our US sector trading rule based on momentum and short interest continues to perform  well. It currently favors US Healthcare and Financials against Utilities
Economics/Macro —   Growth projections cut for Russia and China. EM forecasts have been cut  0.5% for 2013 and 2014 since the start of the year.
Fixed Income ––   Select money market over-weights the best way to play EM rate retracement,  but we remain short in the long end. Wait for capitulation in EM FI which hasn’t happened yet
Credit ––   Over half the tapering talk spread widening has been recovered. We continue to prefer  US names in the USD credit market.
Currencies ––  Remain bearish EM FX near term.    .
Commodities ––   Gold should stabilize from here on higher physical demand, lower scrap supply,  and mine closings. Buy Brent vs. WTI

 

GS (Kaiser) GOAL – Global Strategy Paper N°10.
Micro Equity Factors are a better tool for cyclical equity allocation than sectors

We study the “types” of stocks that outperform during different phases of investment cycles as  defined by the ISM index, S&P 500 P/E, S&P 500 EPS growth, US Treasury yields, and the US dollar  since 1980;
Collectively those micro investment cycles comprise the macro business cycle but individually they  are unique and effective equity signals that can be forecast and applied to equity portfolio allocation;
Goldman Sachs Micro Equity Factors (MEF) are particularly levered to these micro investment cycles.  MEFs are long/short, sector-neutral baskets that pair stocks based on fundamental metrics like  balance sheet strength, earnings and sales growth, return on capital, and realized volatility;
MEFs have less exposure to macroeconomic cycles and lower market beta than sectors or macro  equity tools such as Goldman Sachs Wavefront baskets due to their sector-neutral and long/short  basket construction;
Stock pickers should focus on S&P 500 EPS growth cycles, which are the best indicator of MEF  performance. The phase of the earnings cycle gives both high hit rate and large return potential;
Equity portfolio managers should use return-on-capital and volatility when evaluating their cyclical  risk. Our Returns and Volatility Micro Equity Factors (MEF) have the best combination of hit rate and  return potential in different investment cycles;
Sector allocators should react more to broad macro cycles like the ISM cycle, Global Leading  Indicator (GLI) or shape of the US Treasury yield curve.

 
 

UPS&DOWNS

 

Akzo Nobel (GS, Rae) Sell: Premium valuation remains following earnings downgrades; Sell
We downgrade Akzo Nobel to Sell following its weak 2Q results which described sustained weakness in the European deco market, triggering higher restructuring charges for the group.

 

AFRICAN BARRICK GOLD RAISED TO NEUTRAL AT JPMORGAN
ALMA MEDIA RAISED TO STRONG BUY VS BUY AT NORDEA
ANADOLU EFES CUT TO SELL VS NEUTRAL AT UBS
ESSAR ENERGY RAISED TO BUY VS NEUTRAL AT CITI
GRIFOLS A RATED NEW BUY AT BOFAML, PT EU37
HALDEX CUT TO HOLD VS BUY AT SEB
HOCHSCHILD CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
ILIAD CUT TO MARKET-PERFORM VS OUTPERFORM AT BERNSTEIN
LINDT & SPRUNGLI CUT TO NEUTRAL VS BUY AT CITI
MERCIALYS CUT TO NEUTRAL VS BUY AT GOLDMAN
MOBILY CUT TO NEUTRAL VS BUY AT BOFAML
NYRSTAR CUT TO UNDERPERFORM VS NEUTRAL AT EXANE
PETROPAVLOVSK CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
PHARMSTANDARD CUT TO UNDERPERFORM VS BUY AT JEFFERIES
PKN ORLEN RATED NEW HOLD AT ING
POLYUS GOLD INTL CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
SAIPEM RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
SCANIA CUT TO SELL VS NEUTRAL AT UBS
SHANKS GROUP RATED NEW OUTPERFORM AT CREDIT SUISSE; PT 1…
ZIGGO CUT TO NEUTRAL VS BUY AT UBS

OVERNIGHT MARKETS: UP

 

Asian markets
Nikkei 225 down -47.67 (-0.33%) at 14,542
Topix down -2.72 (-0.22%) at 1,209
Hang Seng down -49.21 (-0.23%) at 21,313

US markets
S&P 500 up +2.72 (+0.16%) at 1,692
DJIA down -4.80 (-0.03%) at 15,544
Nasdaq down -23.67 (-0.66%) at 3,588

European markets
Eurofirst 300 down -0.12 (-0.01%) at 1,209
FTSE100 down -3.69 (-0.06%) at 6,631
CAC 40 down -2.47 (-0.06%) at 3,925
Dax down -5.52 (-0.07%) at 8,332

Currencies
€/$ 1.32 (1.31)
$/¥ 99.98 (100.64)
£/$ 1.53 (1.53)

Commodities ($)
Brent Crude (ICE) up +0.13 at 108.20
Light Crude (Nymex) up +0.18 at 108.23
100 Oz Gold (Comex) unchanged 0.00 at 1,293
Copper (Comex) unchanged 0.00 at 3.15

10-year government bond yields (%)
US 2.48%
UK 2.29%
Germany 1.53%

Sources: FT, Bloomberg, Markit

 

 

 

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