LCM Dawn Patrol – 16.09.13 – JPM 5 years on flows, JPM View, Summers out. MS on mobile data.

Bonjour,

European stocks are set to rally on expectations the Federal Reserve would keep an easier monetary policy for longer after Lawrence Summers, widely regarded as the most hawkish candidate, withdrew from the race to head the central bank.
The dollar weakened against all its major peers while Asian stocks climbed with U.S. index and Treasury futures. Crude oil fell after the U.S. and Russia agreed on a plan to eliminate Syria’s chemical weapons. (Bloomberg) (Financial Times)

This week all eyes will be on the FOMC meeting (Wednesday evening) as the rest of the economic data is rather light exepct for the US IP, the German ZEW and EZ car sales. Syria is still key as we get the UN report today and in Italy, the vote on Berlusconi will be held on Wednesday as well.

Today: EU: CPI, US: Industrial Production; NY Fed Empire Manufacturing Survey for September

Larry Summers

NEWS

Summers Quits Race to Succeed Bernanke
Dollar Falls While Asian Stocks Jump on Summers
Merkel Gets Election Tailwind From Bavaria as FDP Concerns Grow
EU Bank-Failure Proposal Hits Rocky Road as Germany Leads Revolt
Three Losses to U.K. in a Week Limit EU Financial Reform Plans
Clegg Rejects House-Price Bubble Concerns Citing BOE Tools
Growing Banks Hold Onto Profit to Meet Targets, BIS Says
Hollande Says French Tax on Diesel Fuel Won’t Rise in 2014

Credit Suisse could sell its German private clients unit (independent on Sunday)
ViroPharma Said to Hire Goldman Amid Interest From Sanofi
Lufthansa’s Carsten Spohr Is Potential Successor to CEO: FAZ
Lufthansa $14b of Jets Said to Be Boeing-Airbus Split
Air France : Frederic Gagey, CEO will announce more restructuring measures on Sept. 18, he is likely to seek between 2,600 and 3,000 job cut. (Les Echos)
Imperial Tobacco. Positive Barrons piece this weekend citing valuation
Atos : said it would proceed with the early redemption of its convertible bonds issued in 2009 and authorise a share buyback worth e115mn. (Reuters)

CURRENT STUFF

House of Cards
Summers has taken himself out of the running to be the next Fed chair after a bloc of key Democratic senators indicated they would oppose his nomination. Janet Yellen, the Fed vice-chair, is now the frontrunner to replace Ben Bernanke in January, in an appointment that would make her the first woman to hold the post. (Financial Times) (Alphaville) (Wall Street Journal)

US bond investors expect the Fed to announce small ‘taper’ at Wednesday’s policy meeting: A bullish surprise for the Treasury market may loom in the form of a smaller taper, about $10bn or less, as the central bank tries to manage a reduction in QE3 against the backdrop of modest growth and low inflation. (Financial Times) And, is it ready? (Financial Times)

Obama stands firm on refusal to negotiate over US debt ceiling, increasing the chance of a crisis, with the US due to hit its legal borrowing limit some time after mid-October: “What never happened in the past was the notion that in exchange for fulfilling the full faith and credit of the United States, we are wiping away major legislation like the healthcare bill,” said Mr Obama in an interview with ABC’s This Week . (Financial Times)

Bank lending to emerging markets soars to record: Cross-border lending to emerging markets surged by $267bn, to an estimated $3.4tn, in the first quarter of 2013, the Bank for International Settlements said on Sunday. The BIS said the 8.4 per cent increase was by far the highest recorded, with the amount of interbank lending rising by almost $200bn, or 12 per cent. (Financial Times)

Cash held on balance sheets of largest companies at record high of £166bn, according to analysis by Capita Asset Services. (Financial Times)

STRATEGY

JPM (Panigirtzoglou) Flows & Liquidity
What has changed over the past five years?

Household saving rates rose sharply post Lehman but have reversed all of their decline. In contrast, corporate saving rates are still far from normal levels.
Household deleveraging appears to be continuing. While debt writedowns helped the US household debt to income ratio to retrace so far half of its previous increase between early 2000s and 2008, household debt to income ratios appear to be still very elevated outside the US.  Household credit growth has been rather weak since the Lehman crisis across the G4 with no signs of improvement yet.
Non-financial corporate sector credit growth has been improving somewhat due to share buyback related issuance.
These share buybacks have been improving since 2009 and are currently running at a $500bn per annum pace across G4 non-financial corporates, half of the $1tr peak pace seen at the end of 2007.
The G4 financial sector has stopped reducing its debt liabilities but has yet to turn expansionary.
TIC flows favoring foreign over US equities.
Western European equity ETFs have not seen any weekly outflow since the beginning of June.

The J.P. Morgan View
Can bonds derail the equity rally?

Asset allocation –– We note the long stocks and short bonds trade was the best position to have so far this year. We investigate what damage a further rout in bonds could inflict on equities but do not find enough to get us to cover our long equity positions. we stay long equities and short bonds
Economics –– US Q3 cut from 2.5% to 2.0%, and Euro area is tracking weak, but we still see upside risk on global growth over the coming year.
Fixed Income –– Cut bearish risk tactically ahead of FOMC .
Equities –– Our valuation model points to more upside for equities if m acro economic uncertainty continues to decline towards pre Lehm anlevels.
Credit –– The Verizon bond deal shows there is still strong dem and for HG bonds as well as some m arket challenges.
FX –– Dollar in a range. US gov’t shutdown would be dollar negative.
Commodities –– Energy rem ains our favorite commodity sector.

JPM Equity Strategy (Mislav Matejka, CFA) Potential peak in macro momentum in Q4? Steepening yield curve suggests otherwise
SXXP is at new high for the year, up 15% TR. Some are raising the concern that the best of the improvement in macro momentum is behind us, and that a potential rollover in Q4 could hurt stocks. True, some momentum indicators are elevated, but most we track are within normal ranges. Eurozone in particular does appear early in the cycle. We find ISM framework works better for Buy signals than for Sell signals => peaks in lead indicators have on most occasions not meant the overall cycle is ending. Crucially, yield curves are steepening – this was historically bullish for equities and for Cyclicals. From the slope of the yield curve such as current (“Recovery” phase) equities typically advanced by 10% next 12 months and Discretionary was the best performing sector.

UPS&DOWNS

Barcap European Pharmaceuticals: Losing defensive lustre
We are downgrading our view on the European Pharma industry to Negative from Neutral, as we believe the sector will underperform cyclical sectors as an economic recovery emerges in Europe and relative earnings momentum shifts into reverse. In our opinion a significant improvement in investor perception of European pharma pipeline prospects is likely to remain elusive over the next 12 months, with just a handful of significant but high-risk assets reporting pivotal data. We expect the drug pricing environment in emerging markets to remain challenging and for Europe to continue to deteriorate following a 10% rebate windfall in Germany at the turn of the year. The G-BA’s decision on the pricing of the DPPIV inhibitor class for diabetes mid-September represents a key event.
> Sanofi and NOVOB raised to Buy while NOVN cut to UW and GSK to EW

MS on Utilities: Key Takeaways from the Morgan Stanley Power & Utility Summit
We held our 10th annual Power & Utility Summit on 12 September. Inside we summarise our key takeaways from the company presentations. Self help is on the menu… A number of companies (RWE, E.ON, Veolia, Iberdrola) highlighted new cost cutting to come, and good progress to date. We view this as critical to the RWE and Veolia investment cases, and we feel both companies can surprise – Veolia on execution and RWE with a new cost cutting plan.

Mobile Data Wave Revisit (MS, Meunier)- Europe Wakes Up to 4G/LTE
We believe VOD’s decision to increase capex is a catalyst for European 4G/LTE upgrade. We have evidence that operators including TEF & Swisscom are on the same path. Ericsson is best exposed among equipment vendors and in EEMEA, Russia and MENA stand out We believe it is not a coincidence that both Vodafone and Telefonica announced a 30% increase in capex and a roll-out of 4G in Spain respectively – with 50% smartphone penetration in Europe, we believe that data networks are reaching a point where an upgrade to 4G.LTE is needed to increase the quality of service as detailed in our June 13, 2012, blue paper: “Mobile Data Wave”.

Related Stock Research:

ASTRAZENECA RAISED TO BUY VS SELL AT NORDEA
AVANGARD RAISED TO BUY VS NEUTRAL AT BOFAML
AXA RAISED TO NEUTRAL VS UNDERPERFORM AT BOFAML
BARCLAYS RAISED TO BUY VS REDUCE AT NOMURA
EUROPEAN PHARMA INDUSTRY CUT TO NEGATIVE AT BARCLAYS
GLAXO CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
HAYS RAISED TO NEUTRAL VS SELL AT CITI
HELLENIC TELECOM RAISED TO BUY VS NEUTRAL AT CITI
INTER RAO CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
NOVARTIS CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
NOVO NORDISK RAISED TO OVERWEIGHT VS UNDERWEIGHT AT BARCLAYS
REPSOL CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
SANOFI RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
SECURITAS, WS ATKINS CUT TO SELL AT CITI
SGS RAISED TO BUY VS NEUTRAL AT CITI
TELECOM ITALIA CUT TO SELL VS NEUTRAL AT CITI
WOLSELEY CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE

OVERNIGHT MARKETS: up

Asian markets
Nikkei 225 up +17.40 (+0.12%) at 14,405
Topix up +0.92 (+0.08%) at 1,185
Hang Seng up +266.75 (+1.16%) at 23,182

US markets
S&P 500 up +4.57 (+0.27%) at 1,688
DJIA up +75.42 (+0.49%) at 15,376
Nasdaq up +6.22 (+0.17%) at 3,722

European markets
Eurofirst 300 up +2.95 (+0.24%) at 1,250
FTSE100 down -5.18 (-0.08%) at 6,584
CAC 40 up +7.87 (+0.19%) at 4,115
Dax up +15.42 (+0.18%) at 8,509

Currencies
€/$ 1.34 (1.33)
$/¥ 98.87 (99.34)
£/$ 1.60 (1.59)

Commodities ($)
Brent Crude (ICE) down -0.84 at 110.86
Light Crude (Nymex) down -0.75 at 107.46
100 Oz Gold (Comex) up +19.90 at 1,328
Copper (Comex) up +0.07 at 3.28

10-year government bond yields (%)
US 2.89%
UK 2.94%
Germany 1.97%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.33bps at 91bp
Markit iTraxx Europe +0.68bps at 98.01bp
Markit iTraxx Xover +2.24bps at 391.8bp

Sources: FT, Bloomberg, Markit

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