LCM Dawn Patrol – 23.09.13 – JPM View, EM Strategy, EU Strategy. MS Equity Strategy. More…

Bonjour,

European stocks were seen mixed on Monday, with German equities set to gain ground following the re-election of Chancellor Angela Merkel.
China’s stock market is rallying after a closely watched manufacturing index jumped beyond forecasts to a six-month high, offering further evidence that Beijing’s efforts to engineer a soft landing are having the intended effect. The Shanghai Composite opened half a per cent higher on Monday after an extended holiday weekend. Trading on Hong Kong markets was delayed due to a storm. (Financial Times) (Bloomberg)

Not much on the monetary policy agenda this week. We’ll have the flash PMIs today in Europe and in the US. We’ll check the durable goods orders, IFO, the US final Q2 GDP for important economic data. Most strategists are now tapering the effect of the tapering (see MS below) or guessing when it will happen… Have a great week.

NEWS

• Merkel Records Biggest Victory in Germany Since 1990
• Germany’s FDP Faces Parliamentary Exile After 64 Years
• China Manufacturing Index Rises to Six-Month High
• U.K. Homebuilding Approvals Rise 49% as Mortgage Market Revives
• Asian Stocks Advance on China Manufacturing
• Ireland’s Ba1 Credit Rating Outlook Revised to Stable by Moody’s
• France Won’t Tax EDF for Energy Shift, Minister Martin Says

ThyssenKrupp Denies Report It’s Inviting Automotive Unit Bids
Infineon Sees Start of Chip Market Recovery: Boersen-Zeitung
Versace Expects to Narrow List of Buyers for Stake Next Month
Holcim Turns Toxic Baby Dolls Into Cement as Waste Boosts Profit
BayernLB CEO Haeusler to Step Down Early, Handelsblatt Reports
Richemont Mandates Nomura to Sell Lancel, Le Figaro Says
Allianz Targets Record Profit in Asia as Sales Seen Growing 8%
NovartisRoche Merger Could Make Sense, Landolt Tells Basler

CURRENT STUFF

Merkel heading for big personal victory in German election: “Merkel’s Christian Democratic bloc took 41.5 percent to 25.7 percent for the Social Democrats of Peer Steinbrueck in yesterday’s election, according to results from all 299 districts. That leaves her short of a majority and needing a coalition partner to govern Europe’s biggest economy.” (Bloomberg) The outcome amounts to a powerful endorsement of the chancellor’s handling both of the eurozone crisis, and of the domestic economy, during the past four years. But the poor performance of the FDP, which slumped below the minimum 5 per cent needed to win any parliamentary seats, leaves considerable uncertainty over the composition of an alternative coalition. (Financial Times)

China Flash PMI climbs to six-month high of 51.2: The Markit/HSBC Flash Manufacturing PMI rose to 51.2, ahead of forecasts at 50.9 and better than August’s 50.1 score. Anything above 50 suggests growth. (FastFT)

BlackBerry executives spent several million dollars to buy a private jet for the company earlier this year, just months before announcing a near-$1bn loss and a massive redundancy programme. (Financial Times) It’s cool though: Blackberry is in “a risky, last-ditch bet that it can hang on to rapidly eroding ground in the market it pioneered. The plan appears to be to position the company as the go-to provider of systems to manage smartphone use for employers like the government and banks, where the need to ensure security is at a premium.” (WSJ)

STRATEGY

JPM (Loeys) The J.P. Morgan View
Policy risk up. Economic risk down.

Asset allocation –– We go back long credit and EM as the Fed refocuses on the economy and away from perceived unemployment rate targeting.
Economics –– The FOMC’s surprise non-taper raises policy uncertainty, but puts broad economic data back in charge of policy, reducing the risk of policy errors and economic uncertainty. We now see a Dec-to-June taper, but this all depends on better data. Manufacturing continues to gain.
Fixed Income –– Cut duration shorts, but do not go long as US rates will eventually still go higher than even the Fed forecasts . Bearish curve trades.
Equities –– Upgrade EM equities to overweight .
Credit –– Close UW US vs. EU HG and go long US HY and EMBIG .
FX –– Dollar heading down again, on taper push back .
Commodities –– Buy gold on higher inflation risk after Fed’s volte -face.

MS (Parker) US Equity Strategy
Don’t Fear the Taper

The initial equity market response to MBS purchases in QE3 was strong, but by spring 2013, the cumulative impact had saturated (Exhibit 1) at almost 7%. Equities responded positively on MBS settlement dates, rather than trade dates, although the average response has declined from 50bp to 15bp over the course of QE3. Based on this analysis, we see little incremental stimulus to equities from further asset purchases; consequently, investors should not be focused on the timing or pace of tapering. Instead, we see evidence that rate guidance – pushing out the timing and pace of conventional tightening – can stimulate equity markets.

JPM (Mowat) Key Trades and Risks
Emerging Markets Equity Strategy
The Fed is allowing investors to ‘temporarily’ relive the happy days of QE-driven EM bonds and equities. It is temporary as normalization in rates is still likely to be a 2016E event (JPM forecasts a first rate increase in 2Q15) and tapering is just postponed we think. The Fed’s dovish bias adds to our conviction that EM equities will rally for the balance of 2013. The switch to bullish EM equities was built on bearish positioning and improving cyclical data in EM

JPM Equity Strategy (Mislav Matejka, CFA) : Euro capex to rebound from record low – helping selected Cap Goods
Eurozone capex is at record low. We think the conditions are in place for its recovery. The two leading indicators of capex are profit dynamics and the changes in bank lending standards. We believe they are both at an inflection point – profits are likely to start growing again after 3 down years and banks are starting to ease the access to credit again. We found that low utilization rates are not a relevant pushback – after all they are always low at the trough in the cycle. We see this as a long term theme – the latest US capex upswing is 13 quarters and counting. We add to Capital Goods weight, but advise selective stock exposure as its valuations are not cheap and we remain structurally bearish on Chinese FAI outlook. We believe the following areas are attractive: 1) Capex plays – Siemens, Rexel, Prysmian, Assa Abloy, Legrand and IMI, 2) Trucks – Volvo, VW and Daimler, 3) Construction – Vinci, Saint Gobain, Wolesely, 4) Healthcare – Philips, and 5) IP/Auto related – GKN.

UPS&DOWNS

Metso (Almerud) Anaemic Services growth set to disappoint – Cut to EW
Although there may be some signs that bearish market sentiment on mining is troughing, the capex cycle will not rebound before 2015. We clearly overestimated the potential mining aftermaket growth earlier in the year & now reduce 2012-15 AM growth to 2% only, FY14e EPS by 15%. Move to EW.

Vivendi (Wellington) Cleave
The pace of change is accelerating at Vivendi. We look at our SoP derived valuations for Vivendi Media and SFR Vivendi and conclude that Media in particular has valuation upside.

CRODA RAISED TO OUTPERFORM VS NEUTRAL AT CREDIT SUISSE
MAIRE TECNIMONT RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS
MEGGITT RATED NEW EQUALWEIGHT AT MORGAN STANLEY, PT 600P
METSO CUT TO EQUALWEIGHT VS OVERWEIGHT AT MORGAN STANLEY
NATIONAL GRID CUT TO NEUTRAL VS BUY AT UBS
NORSK HYDRO RAISED TO HOLD VS SELL AT SOCGEN
PARTNERS GROUP RAISED TO NEUTRAL VS SELL AT GOLDMAN
TECHNIP CUT TO HOLD VS BUY AT SOCGEN
TELKOM SA RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN

Asian markets
Nikkei 225 down -23.76 (-0.16%) at 14,742
Topix up +3.50 (+0.29%) at 1,219
Hang Seng unchanged 0.00 (0.00%) at 23,503

US markets
S&P 500 down -12.43 (-0.72%) at 1,710
DJIA down -185.46 (-1.19%) at 15,451
Nasdaq down -14.66 (-0.39%) at 3,775

European markets
Eurofirst 300 down -3.34 (-0.26%) at 1,263
FTSE100 down -28.96 (-0.44%) at 6,596
CAC 40 down -2.38 (-0.06%) at 4,204
Dax down -18.45 (-0.21%) at 8,676

Currencies
€/$ 1.35 (1.35)
$/¥ 99.11 (99.31)
£/$ 1.60 (1.60)

Commodities ($)
Brent Crude (ICE) down -0.01 at 109.21
Light Crude (Nymex) up +0.02 at 104.77
100 Oz Gold (Comex) down -12.80 at 1,320
Copper (Comex) down -0.04 at 3.28

10-year government bond yields (%)
US 2.74%
UK 2.92%
Germany 1.95%

CDS (closing levels)
Markit iTraxx SovX Western Europe -0.62bps at 87.99bp
Markit iTraxx Europe n/abps at 99.16bp
Markit iTraxx Xover n/abps at 393.56bp

Sources: FT, Bloomberg, Markit

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