LCM Dawn Patrol – 01.10.13 – LCM Cross Assets Strategy, JPM on DIA, Barclays on UNI, SG cuts Real estate.

Hello,

European shares to open higher despite the US government shutdown that shouldn’t last.
US equities were lower on Monday. Dysfunction in DC was the dominant factor in today’s news flow. Continued political turmoil in Italy was also headwind. Economic news was mixed; the final September HSBC PMI for China dropped substantially from the preliminary reading, but the US provided modestly positive economic news from Chicago PMI and Dallas Fed. Notably, equities partially recovered from their lows of the day, which occurred at the open, and managed gains for the month of September despite the slump in the second half of the month. All sectors were lower; as were crude and gold.
Asian shares rose after tumbling the most in six weeks yesterday while Treasuries fell as sentiment among Japanese manufacturers increased to the highest since 2007.

Key levels: SPZ3 1678pts, UST 10y 2.63%, EURUSD 1.3546, AUD 0.9385, Gold $1328 WTI $102

 

TUESGEAR

Sorry, no gadget, but a trailer… Winter is coming…

 

NEWS

• U.S. Govt Shut Down as Deadlocked Congress Flails Over Spending
• Italy in Disarray as Draghi Pledge Keeps Nation From Brink
• Bank Secrets Exposed in EU Credit Derivatives Antitrust Probe

Activision May Seek Shareholder Vote on Vivendi Buyout
Amazon to Hire 70,000 Seasonal Workers to Meet Holiday Demand
Axa Sells Majority Stake in Private Equity Fund-Management Uni
BNP Paribas Hires Six to Bring Tokyo Equity Desk to About 100
Dish Reaches Extension With Disney Avoiding ESPN, ABC Blackout
Eurex Plans Penalties for Some High-Speed Trading Practices
Fortum preparing to sell Swedish Electricity Network acc to SvD
French Oil Refining Margins Are Falling, Le Figaro Says
Google Said to Avoid U.S. Antitrust Challenge Over Waze Deal
Macquarie Group Is Said to Make an Offer for Lloyds’s Assets in Australia
Neopost 1H14 results and FY14 guidance in line with consensus.
Osram Says SLS Restructuring in North America to Affect 900 Jobs
Roche’s Perjeta Wins Approval as Early Breast Cancer Option
TF1 Threatens to Close LCI If It Can’t Offer Channel Free: Echos
Unilever Sales Slowed in Third Quarter on Emerging Markets
Vodafone Italy Said Set to Name Bisio CEO to Replace Bertoluzzo

 

CURRENT STUFF

Shut down: The US government will start to shut down numerous agencies on Tuesday and send tens of thousands of workers home after Republicans and Democrats failed to bridge their differences over the budget. A series of votes in the Republican-controlled House of Representatives and the Democratic Senate left the two sides stuck at the same position at midnight on Monday where they had started the day, with conservatives refusing to pass a short-term budget without a delay in Barack Obama’s health law. (Financial Times) (NYT).

Silvio Berlusconi faces party revolt over coalition collapse: The possibility of an internal revolt against Mr Berlusconi was cited on markets as a factor that limited the backlash for Italian stocks and government bonds on Monday, with hopes rising that the eurozone’s third-largest economy would avoid another destabilising election campaign. (Financial Times) (WSJ)

“Japanese Prime Minister Shinzo Abe said Tuesday that he has decided to go ahead with a plan to increase the national sales tax next year. “I have decided to raise the consumption tax rate to 8% to 5% from April 1,” Mr. Abe said at the beginning of a meeting of ruling party officials.” (WSJ)

Japanese companies’ confidence at six-year high: Tuesday’s quarterly “Tankan” survey from the Bank of Japan, which takes the pulse of about 10,600 companies of all sizes across the country, showed that the headline measure of confidence among large enterprises was at its highest level since the final quarter of 2007, boosted by exporters cheered by a weaker yen and by non-manufacturers enjoying a revival in consumer spending. (Financial Times)

Japan’s real borrowing rate turns negative: “Japan’s real cost of long-term borrowing has dropped below zero, bringing an end to years of high real rates and marking a milestone for “Abenomics”. Negative real interest rates are a key feature of Shinzo Abe’s war on deflation, which aims to encourage bond-heavy investors to seek higher returns through domestic stocks, loans or property, or by buying assets abroad.” (Financial Times)

Hedge funds’ bets on falling share prices have dropped to $144bn, the lowest level since the data provider began monitoring in 2006, as traders predict an extended bull run for equities over the coming months. (Financial Times)

 

STRATEGY

LCM Cross Asset Strategy – All Eyes on Earnings Now
We take a deeper look at Europe and try to identify the challenges in the pursuit of the equity recovery.
– In theory, the recovery of PMIs should support earnings. However, we notethat this recovery is mainly a normalisation of the excessive pessimistic sentiment built up last year during the double dip recession.
– The recovery of earnings is however necessary to push equity indices higher in Europe. We demonstrate that within the equity universe, realised profitshave been a more discriminatory factor than valuation or growth metrics.
– The EZ banking sector or Southern European countries present the same pattern: they are lagging their peers in terms of profits. Investors do notseem ready to “buy further” into the potential recovery. So profits have to increase now to sustain equity prices.
– We fail to find much enthusiasm on the economic side. We remain positive on domestic assets for cyclical reasons but we do not expect an important dispersion on equity markets because profits’ dispersion will remain limited. The leadership of domestic assets can be seen as a leadership “by default” as global equities underperform.
– There is a scope for a further decline in the relative equity risk premium of European countries but we suspect markets need a trigger. The ECB has the potential to be that trigger.
– This European call is not a beta trade but an alpha trade. It is a chance for investors who should focus on it rather than wasting time with the fake drama played by US or Italian politicians.

Trade recommendation summary
1) We provide a list of lagging stocks for optimistic investors : Next necessary step is the recovery of profits. We filter the SXXE universe to find lagging stocks with positive EPS revisions.
2) We published our Derivatives Report last week and proposed several strategies : We continue to like GBP and to dislike EM currencies like TRY or RUB. On equities, a disciplined investor should buy V2X via Call Spread, and play a decrease of IV on NKY, FTSEMIB against an increase of IV on UKX and SX5E.
3) Buy Euro-BTP and Buy FTSEMIB against Stoxx Europe 600 : The current increase in the Italian Debt risk is a buying opportunity.

 

UPS&DOWNS

JPM on DIA (DIA SM, N – €6.42, PT €6.50) (Jaime Vazquez) Downgrade to Neutral
We downgrade Dia from OW to N and leave our TP unchanged at €6.50 (Sep-2014). We continue to like the company, its formats and management. However, the stock has done well at a time when LFLs have deteriorated in Iberia, in contrast with the improving trend seen at Carrefour. Separately, we are confident that the company will soon find buyers for its Northern France operation (or potentially the entire country) but we believe this is widelyexpected by the market.

Barcap on Unilever NV: What matters: Emerging (market) risk
What to do – Remain OW on a 12m view, but shares could struggle until year end: With Unilever signalling a broad-based EM slowdown other HPC names may also come under pressure near term. Henkel (OW PT EUR83) looks to have among the least exposure to consumption in troubled regions. Longer term we remain positive on Unilever, expecting the recent focus on GM expansion, cost savings and mix to result in accelerated EBIT margin expansion. However the market is likely to remain in “show me” mode near term, looking for firm evidence of EM stabilization and a step change in rate of margin delivery. We trim our DCF-driven PT to EUR35 from EUR36 and remain OW.

Real Estate cut to Underweight at SocGen on Rising Bond Yields
SocGen’s cuts sector from neutral; says as a late cyclical industry, real estate should lag recovery in equity markets.
Valuations now above long-term historical median, and the higher rates SG expects in 12 months – at 3.3% for Eurozone and 3.2% for the UK – have reduced target prices 10%: SG
Prefer ECB easing to UK growth – New sector pick is Hammerson, new least preferred is Immofinanz, (cut to sell vs hold).
Cuts UL, LI, BLND, GFC, DLN, SGRO, COF, WHA, BEF, DES and BNS to hold vs buy;, INTU and IMMO from Hold to Sell and FDM from Buy to Sell

AFRICAN MINERALS CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUI…
ARYZTA RAISED TO BUY VS HOLD AT SOCGEN
BEFIMMO CUT TO HOLD VS BUY AT SOCGEN
BENI STABILI CUT TO HOLD VS BUY AT SOCGEN
BRITISH LAND CUT TO HOLD VS BUY AT SOCGEN
DERWENT CUT TO HOLD VS BUY AT SOCGEN
DIA CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
FONCIERE DES MURS CUT TO SELL VS BUY AT SOCGEN
GECINA CUT TO HOLD VS BUY AT SOCGEN
IMMOFINANZ CUT TO SELL VS HOLD AT SOCGEN
INTU PROPERTIES CUT TO SELL VS HOLD AT SOCGEN
INVESTEC PT CUT TO 465P VS 520P AT UBS
KLEPIERRE CUT TO HOLD VS BUY AT SOCGEN
LIBERTY GLOBAL RATED NEW BUY AT JEFFERIES, PT $92
PEGASUS AIRLINES RATED NEW OVERWEIGHT AT MORGAN STANLEY
SCOR RAISED TO BUY VS NEUTRAL AT ODDO
SEGRO CUT TO HOLD VS BUY AT SOCGEN
SIBANYE GOLD RATED NEW SELL AT UBS
SONOVA CUT TO NEUTRAL VS BUY AT CITI AFTER CEO MEETING
TELECOM ITALIA REINSTATED BUY AT GOLDMAN
TURKISH AIRLINES CUT FROM OVERWEIGHT AT MORGAN STANLEY
TURKISH AIRLINES CUT TO EQUALWEIGHT AT MORGAN STANLEY
WERELDHAVE CUT TO HOLD VS BUY AT SOCGEN

 

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +66.16 (+0.46%) at 14,522
Topix up +6.78 (+0.57%) at 1,201
Hang Seng down -347.18 (-1.50%) at 22,860

US markets
S&P 500 down -10.20 (-0.60%) at 1,682
DJIA down -128.57 (-0.84%) at 15,130
Nasdaq down -10.12 (-0.27%) at 3,771

European markets
Eurofirst 300 down -7.45 (-0.59%) at 1,247
FTSE100 down -50.44 (-0.77%) at 6,462
CAC 40 down -43.33 (-1.03%) at 4,143
Dax down -67.11 (-0.77%) at 8,594

Currencies
€/$ 1.35 (1.35)
$/¥ 98.21 (98.21)
£/$ 1.62 (1.62)

Commodities ($)
Brent Crude (ICE) down -0.63 at 107.74
Light Crude (Nymex) down -0.35 at 101.98
100 Oz Gold (Comex) up +0.90 at 1,327
Copper (Comex) down -0.01 at 3.32

10-year government bond yields (%)
US 2.64%
UK 2.76%
Germany 1.78%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.9bps at 88.14bp
Markit iTraxx Europe +1.94bps at 104.38bp
Markit iTraxx Xover +7.53bps at 408.03bp

Sources: FT, Bloomberg, Markit

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