LCM Dawn Patrol – 18.09.13 – Fed doesn’t taper, Oracle weak, JPM on Roche, iOS7 is out.

Agur,

US equities finished higher on Wednesday with the S&P, Dow and Russell all up for a fourth straight session. The Fed was the key driver of today’s rally as the FOMC unexpectedly decided to leave the pace of its monthly asset purchases unchanged at $85B. The more dovish takeaways from today’s events drove the fairly broad-based gains in the market with utilities and materials leading the move higher. While monetary policy dominated the headlines and the price action, there were a few other items of interest. Today’s housing market data produced another round of mixed takeaways for the recovery sustainability debate. In addition, there were more concerns about an increasingly contentious fiscal battle shaping up in Washington.
Emerging markets that had been hardest hit by fears of the US central bank scaling back its stimulus programme climbed the most. Indonesian stocks soared 7 per cent in the first half hour of Jakarta trading, the Philippine stock market climbed 3.6 per cent in Manila, and Singapore’s Straits Times index moved up 1.8 per cent.

Today, Spain, France, U.K. sell bonds.

APPLE

iOS7 is now available to everybody. Feedback is very mixed and it took hours to download it. Apparently they were so many people downloading it at the same time that total internet traffic was 12% above average as iOS7 was launched. I guess you don’t really care…

NEWS

• Fed Unexpectedly Refrains From Taper, Keeps Bond Buying at $85b
• Yellen Chances Grow as Obama Aides Said to Test Senate Support
• Merkel Rejects Joint Euro Debt, Promises to Stay Hard Course
• Portugal’s Rating May Be Cut If Targets Are Missed, S&P Says
• U.K. Seen Fighting EU Benchmarks Plan in Next Financial Clash
• Berlusconi Ally’s Motion to Halt Expulsion Proceedings Fails

Oracle shares fell 3.2% in heavy volume on disappointing numbers after a short spike.
Oracle 1Q Adj. EPS 59c, Est. 56c; Shrs Rise 2.1%
JPMorgan Said to Pay $900m to Settle Whale Probes
Telefonica Said to Weigh Doubling Down in Italy as Board Meets
ThyssenKrupp Must Not Be Broken Up, Steinbrueck Tells WAZ
RWE Proposes 3-Year Wage Freeze, Westdeutsche Reports
Morphosys Offers New Shares to Fund Acquisitions
Gazprom Said to Reimburse RWE $1.5b Following Arbitration
Ageas Sees Wider Life Margins, Raises Goal for Combined Ratio
Intel may be looking at ARM (Daily Mail)
Marchionne Prepares for Final Hand in Chrysler Merger Game: Cars
JPMorgan Said to Underwrite Chrysler IPO: CNBC
Take-Two’s ‘Grand Theft Auto’ Sets $800 Million One-Day Record (short review next week, I haven’t had the opportunity to play behind my wife’s back).

CURRENT STUFF

Fed holds the line on bond buying: Just in case you didn’t notice… The Fed cut its growth forecast and confounded expectations that it would start to slow its third round of quantitative easing as the rate-setting Federal Open Market Committee said it would “await more ­evidence that progress will be sustained before adjusting the pace of its purchases”. (Financial Times)

BOTTOM LINE (by Jan Hatzius, GS): The FOMC unexpectedly decided not to taper the rate of its asset purchases at today’s meeting, preferring to wait for further confirmation of improvement in the outlook. There was no change to the forward guidance on the federal funds rate. The Summary of Economic Projections showed a decline in the central tendency expectation for the year-end 2015 fed funds rate, and the 2016 rate suggested a cautious pace of rate hikes once they begin.

More cautious fiscal headlines out of Washington. The fiscal battles in Washington continued to get more attention and were even mentioned as an overhang on sentiment before the FOMC statement proved to be a game-changer for the market. Despite the heightened concerns about a government shutdown, the debt ceiling still seems to be shaping up as the more contentious issue. In terms of the latest developments, House leadership revealed today that it will propose increasing the debt limit for one year, while delaying the Affordable Care Act for a similar amount of time. Their debt ceiling plan is also expected to include meaningful cuts to entitlement spending, a roadmap for tax reform and construction of the Keystone XL pipeline. For his part, President Obama reiterated that he will not negotiate over the debt ceiling.

JPMorgan braced for action over ‘whale’; $900m+ fine mentioned: People familiar with the situation said the actions of a London-based executive were likely to receive the most serious scrutiny, with an accusation from the UK’s FCA that he did not act in good faith in dealing with officials’ inquiries. (Financial Times) The fine will be “more than $900 million… according to a person familiar with the settlement talks.” (Wall Street Journal)

Indian’s rupee jumped 2.5 per cent in the first minutes of Mumbai trading, as part of a broader rally in emerging market currencies against the US dollar as the Fed failed to taper (FastFT)

STRATEGY

GS (Mueller-Glissman) Strategy Matters : From yield to growth; search for yield eases with higher rates
High dividend yield stocks have underperformed in the US and Europe since the trough in bond yields in May 2013. With rising rates the search for yield in equities is easing. As we move from the “Hope” to the “Growth” phase of the equity cycle we find that successful dividend yield strategies need to focus on growth opportunities and not just the level of yield. Dividend growth is likely come from both operational leverage and financial releveraging. The latter might weigh on credit and favours equity. We rebalance our GSSTHIDY-basket and highlight releveraging candidates.

UPS&DOWNS

SAP (GS, Moawalla): Read-across from ORCL results
We believe ORCL’s 1Q14 results suggest IT spending trends remain solid. While guidance for 2Q brackets consensus it likely veers to the conservative. We see a neutral read-across to SAP.

Roche (JPM, Vosser) 2014 growth likely to remain strong with pipeline to add to longer term visibility
We remain OW Roche given strong potential into 2014. Growth remains at the top of the sector with a 13-16e Core EPS CAGR of 8%, driven by further growth of the Breast Cancer and Rituxan/GA101 franchises. We increase LT EPS by 1-9% to reflect recent P2 data (Anti-Factor D and etroluzimab). We expect product momentum to continue, and see pipeline newsflow over the next 18 months that has the potential to increase visibility and confidence in assets worth SFr19 per share (we currently model SFr14). Given the pipeline and growth profile, we think Roche should continue to hold a premium rating. Our June-14 TP of SFr280 is based on a 16x 15e PE, and implies 18% upside.

AXEL SPRINGER RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
BBA AVIATION RATED NEW EQUALWEIGHT AT MORGAN STANLEY, PT 310P
GO-AHEAD RAISED TO OVERWEIGHT AT MORGAN STANLEY
E.ON CUT TO SELL VS HOLD AT SOCGEN
FENNER RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT SUISSE
HAVAS CUT TO EQUALWEIGHT VS OVERWEIGHT AT BARCLAYS
INTERCONTINENTAL HOTELS RATED NEW BUY AT SOCGEN, PT 2,200P
JOHNSON MATTHEY CUT TO NEUTRAL VS BUY AT UBS
M6 RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
MEDIASET CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
MOSCOW EXCHANGE RATED NEW NEUTRAL AT CITI, PT 67.40 RUBLES
SES CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
SIEMENS PT RAISED 5% TO EU97 AT MORGAN STANLEY, KEPT OVERWEI…
VOESTALPINE CUT TO SELL VS BUY AT UBS

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +245.26 (+1.69%) at 14,751
Topix up +16.26 (+1.36%) at 1,209
Hang Seng up +394.67 (+1.71%) at 23,512

US markets
S&P 500 up +20.76 (+1.22%) at 1,726
DJIA up +147.21 (+0.95%) at 15,677
Nasdaq up +37.94 (+1.01%) at 3,784

European markets
Eurofirst 300 up +5.80 (+0.46%) at 1,258
FTSE100 down -11.35 (-0.17%) at 6,559
CAC 40 up +24.89 (+0.60%) at 4,170
Dax up +39.11 (+0.45%) at 8,636

Currencies
€/$ 1.35 (1.35)
$/¥ 98.38 (97.90)
£/$ 1.61 (1.61)

Commodities ($)
Brent Crude (ICE) up +0.25 at 110.85
Light Crude (Nymex) up +0.47 at 108.54
100 Oz Gold (Comex) up +55.40 at 1,363
Copper (Comex) up +0.05 at 3.33

10-year government bond yields (%)
US 2.70%
UK 2.92%
Germany 2.00%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.41bps at 90.83bp
Markit iTraxx Europe -1.1bps at 92.93bp
Markit iTraxx Xover -2.09bps at 374.38bp

Sources: FT, Bloomberg, Markit

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