LCM Dawn Patrol – 17.09.13 – LCM Cross Assets Strategy, Citi bullish, UBS and MS on EU banks, TuesGear and more!

Ciao,

European stocks are seen drifting lower on Tuesday as investors cash in a portion of recent gains ahead of a two-day U.S. Federal Reserve policy meeting.
US equities were mixed on Monday. The S&P 500 and Dow were higher; while the Nasdaq was modestly lower, note that AAPL was down (3.2%). The surprise withdrawal of Larry Summers as a candidate for Fed Chairman provided equities with a big early boost as the other leading candidate Yellen is seen as more dovish. An agreement between the US and Russia regarding Syria’s chemical weapons has also removed for now another market overhang. President Obama’s firm comments that he will not negotiate over the debt ceiling helped to keep gains modest. Attention remains focused on the 17-18 Sep Fed meeting and the anticipated tapering announcement; FOMC statement at 20:00 (Paris time) on 18-Sep followed by Bernanke press conference. Sectors were mostly higher; industrials +1.27% lead gainers and telecom (0.31%) the only loser. Treasuries were mixed with strength in the short end. Crude was lower. Gold was higher.
Asian markets were mostly lower, with key benchmarks the Nikkei, Topix and Hang Seng all falling slightly, ahead of the Fed’s two-day policy meeting beginning today. (Bloomberg)

Today: UK: Inflation data. EU: Current account, trade balance, ZEW economic sentiment survey. US: CPI.
Supply: 10:30 Spain to sell bills, Denmark in for I/L bonds, 11:00 Greece to sell €1bn bills, 11:30 Switzerland and Belgium rolling bills and the ESM as well at 12:30

TUESGEAR

This may not appeal to everyone… You may think it’s not sexy. You’re wrong. These Garmin watches will help you become a better person. It’s like having your own personal coach. It will monitor your heart rate, calculate your cadence see if your feet spend too much time on the ground as you run, it has a GPS, a VO2 max calculator. I can’t wait to see the new triathlon version.
https://buy.garmin.com/en-US/US/into-sports/running/forerunner-620/prod122785.html

NEWS

• China FDI for Aug: +0.6% vs +12.5% exp & +24.1% last
• Kerry Says U.S. Isn’t Wavering on Goal of Ending Assad’s Rule
• Paris Set to Outdo London Shard With Russian Skyscrapers Plan (don’t worry it’s in la Défense).

• L’Agefi reports that the French government prepares a new tax on banks. Hollande/France announce a new reform programme tomorrow
• U.K. Offers $5.3b Lloyds Stake Five Years After Bailout (75p/share).
Axa CEO Invites Taper as End of ‘Financial Repression’
Pernod, Remy Cointreau. The liquor space under pressure in China today on media reports that holiday sales have been extremely weak, Moutai trading off 3.2%.
UBS Wins Approval of $120m Lehman Investor Settlement
Danone Baby Formula Brand Probes Allegations on Payments to China Doctors
Air France Regional Bases Said to Face Cuts Amid Competition
Post to Buy Glencore U.S. Pasta-Making Unit for $370m
TCI Urges EADS to Transfer Dassault Stake to Shareholders: FT
Fortum Said to Start EU1.5b-EU2b Sale of Finland Grid: Reuters
• Qatar Holding Said to Suspend Versace Bid, Reuters Says
• Schaeffler Sells 4% of Continental Shares to Pay Down Debt
Novartis Unit Alcon Says Doesn’t Tolerate China Violations
Repsol will have as much as EU15b in liquidity at start of 2014 for potential purchases, El Economista reports

Twitter’s IPO Spurs Horse Race Among Exchanges Seeking Listing
Tencent Approaches Facebook Value Amid China Web Explosion

CURRENT STUFF

House of Cards
Janet Yellen has “emerged as the front-runner” to become the White House’s nominee to lead the Fed, but president Obama hasn’t yet made a final decision, an official said. The announcement would not be made this week but would occur during autumn, said spokesman Jay Carney, noting that season begins next week. (Wall Street Journal)

Shinzo Abe said today that Japan is clearly a “buy” at the moment. Abe made the comment during a meeting for investors hosted by a broker.. He said the government will draw out Japan’s maximum potential by taking advantage of deregulatory measures. He also played up the importance of the 2020 Summer Olympics in Tokyo, saying the next seven years will see the Japanese people achieve growth by bringing out the country’s true strengths. (Reuters)

China may have decelerated in August on slowing real estate activity: “The Conference Board’s leading economic index for China rose 0.7 per cent in August. That follows a 1.4 per cent jump in July and 0.8 per cent jump in June.” (FastFT)

Saudi Arabia is pumping the most crude oil since the 1970s to meet world demand. (Financial Times)

STRATEGY

LCM Cross Asset Strategy Report #12 : The Story of the Pain Threshold
The Fed will this week give us an indication on its tolerance towards market rates.
– The highly anticipated FOMC meeting should be bullish for bonds. The Fed will fight further interest rate hikes because beyond a certain threshold, higher rates will hurt the US economy. This pain threshold is unknown but we suspect that following the strong increase in mortgage rates, it does not stand too far away given the still weak households’ income growth.
– The European story is intact and works well on equity markets. We show how ‘Value’ investing is outperforming in Europe while it is the ‘Growth’ style that isleading in the US.
– The euro is declining against GBP but not against USD. We shed some light on this mystery and propose a model for EURUSD parity.
– The recent outperformance of cyclical equities looks like a trap. It is not broad based, so we advise to stay away from it.

Trade recommendation Summary– Buy Mortgage Bonds in the US (Re-pricing has gone too far. The Fed will fight further rates increases)
– Go Long MSCI Europe Value Short MSCI US Value (The economic lag accumulated by Europe during its double dip created opportunities in the domestic valuespace)
– Buy Implied Volatility on RUB Short Implied Volatility on JPY (RUB is defying statistics. IV on RUB is lower than IV on JPY. This is not anymore justified given the new economic risk in EM countries)
– Buy Implied Volatility on Metals Short Implied Volatility Gold (Metals prices are under structural pressure leading to a structural decline in volatility. It looks however overdone relative to Gold prices)

Citi (Esposito) European Equity Strategy
Bull Market: Raising 2014 Equity Targets – REV It Up

Handbrake off – We raise 3 things: 1) 2014 targets; FTSE 100 = 8000, Stoxx = 370, 2) mid-14 targets; 7500 & 350, 3) exposure to risk/earnings mo/value (REV) in our sector strategy; Autos to Overweight, Oil to Underweight. Keep buying dips

UPS&DOWNS

Banks & Equity Strategy (MS, Van Steenis) The top-down and bottom-up case for EU banks
We still think the market may underestimate the potential to unlock value at some EU financials, and be too pessimistic on the Asset Quality Review and leverage ratios, even though headwinds remain. Our strategists are overweight banks. Our most preferred stocks: UBS, Lloyds, ING, BNP, Baer, LSE.

UBS on Banks
Based on our estimates, most banks will reach a 3% fully loaded Basel 3 leverage ratio by 2013 and 4% by 2015. Leverage ratios calculated under various proposed regulatory frameworks differ by up to 100bp, we estimate (Basel 3, new Basel 3, CRD IV, PRA, Swiss, US leverage ratio). That said, an even larger relevant impact could come from different minimum requirements, ranging from 3% under the Basel proposals to 6% in the US. We have Buy ratings on Credit Suisse and Deutsche Bank, a Neutral on BNP and Barclays, and a Sell on Société Générale.

AGGREKO CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
ASOS CUT TO UNDERWEIGHT VS EQUALWEIGHT AT MORGAN STANLEY
AUTOS RAISED TO OVERWEIGHT, OIL CUT TO UNDERWEIGHT AT CITI
AVIVA CUT TO SELL VS HOLD AT BERENBERG
BRITISH LAND RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
DE LONGHI PT CUT TO EU13.3 VS EU14 AT BOFAML; KEPT AT BUY
EVRAZ CUT TO NEUTRAL VS BUY AT CITI
EVRAZ CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
GLENCORE XSTRATA CUT TO NEUTRAL VS BUY AT UBS
GO-AHEAD RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
HEIDELBERGCEMENT RAISED TO OUTPERFORM AT RAYMOND JAMES
ICON RATED NEW BUY AT UBS, PT $50
INDESIT RAISED TO OUTPERFORM VS NEUTRAL AT MEDIOBANCA
ING REINSTATED CONVICTION BUY AT GOLDMAN, PT EU11.80
NLMK CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
NLMK RAISED TO NEUTRAL VS SELL AT CITI
PHOENIX CUT TO HOLD VS BUY AT BERENBERG
POLYMETAL CUT TO UNDERWEIGHT VS OVERWEIGHT AT BARCLAYS
RBS CUT TO NEUTRAL VS BUY AT UBS
RESOLUTION CUT TO SELL VS HOLD AT BERENBERG
SEVERSTAL CUT TO NEUTRAL VS BUY AT CITI
ST JAMES’S PLACE RAISED TO BUY VS HOLD AT BERENBERG
STAGECOACH RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
STANDARD LIFE RAISED TO HOLD VS SELL AT BERENBERG
TURKEY RAISED TO OVERWEIGHT VS UNDERWEIGHT AT CREDIT SUISSE
VALEANT RATED NEW CONVICTION BUY AT GOLDMAN, PT $130

OVERNIGHT MARKETS: DOWN

Asian markets
Nikkei 225 down -36.05 (-0.25%) at 14,369
Topix down -1.93 (-0.16%) at 1,183
Hang Seng down -63.20 (-0.27%) at 23,189

US markets
S&P 500 up +9.61 (+0.57%) at 1,698
DJIA up +118.72 (+0.77%) at 15,495
Nasdaq down -4.34 (-0.12%) at 3,718

European markets
Eurofirst 300 up +8.16 (+0.65%) at 1,258
FTSE100 up +39.06 (+0.59%) at 6,623
CAC 40 up +37.72 (+0.92%) at 4,152
Dax up +103.58 (+1.22%) at 8,613

Currencies
€/$ 1.33 (1.33)
$/¥ 99.26 (99.05)
£/$ 1.59 (1.59)

Commodities ($)
Brent Crude (ICE) down -0.46 at 109.61
Light Crude (Nymex) down -0.85 at 105.74
100 Oz Gold (Comex) unchanged 0.00 at 1,318
Copper (Comex) unchanged 0.00 at 3.23

10-year government bond yields (%)
US 2.86%
UK 2.93%
Germany 1.95%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.26bps at 91.26bp
Markit iTraxx Europe -3.71bps at 94.3bp
Markit iTraxx Xover -14.13bps at 377.67bp

Sources: FT, Bloomberg, Markit

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