LCM (after) Dawn Patrol – 07.1.13 – The JPM View, JPM on European equities is cautious on EM…. More…

Bonjour,

European Markets should open lower as the situation in Washington over the US budget and debt ceiling is still jammed.
Lacking cues, lingering concerns about the US government shutdown continued to weigh on the markets. News flow was light this Monday morning, with China remained closed for the National Day holiday and businesses in Australia closed for Labour Day. The World Bank released its annual East Asia report this morning, cutting China’s growth 7.5% from 8.3%; growth outlook at other regions were also downgraded. Over the weekend, the Indian government approved simpler entry rules for foreign investments, which is expected to bring more foreign capital into the country. The stronger yen was the major concern in Japan, dragging exporters lower. Miners were weighing on the ASX. Rising construction orders has limited effect on the market, not even for builders.

This week could be quiet in terms of economic data because of the shutdown, but at the same time, the shutdown will be keep our eyes open on the newswires. Wednesday, we’ll get the Fed minutes and in Europe, we’ll have the BoE meeting, the German factory orders and UK retail sales. The Q3 earnings starts tomorrow and we’ll have JPMorgan on Friday.

NEWS

American Default Seen Unprecedented Catastrophe Dwarfing Lehman Demise.
U.K. Finance Industry Most Upbeat Since 1996 as Hiring Surges.
European Bank Profit Hampered by Loan Provisions, E&Y Reports.
Moscovici Says France to Drop Tax on Operating Profit for 2014.
Merkel’s Flirtation With Greens Raises Pressure on SPD.
Moody’s Changes Outlook on Malta to Stable From Negative.
Slovakia Outlook to Stable From Negative by Moody’s.
Syria Ready for for Peace Talks in Mid-Nov., Russia’s Lavrov Says.

Finmeccanica has agreed to sell its power-equipment business, Ansaldo Energia, to an Italian state-run fund, in a deal valued at more than €1 billion.
Airbus Said to Win First Japan Air Order.
Finmeccanica to Sell Ansaldo Stake to Fondo Strategico Italiano.
Airbus Says U.S. Shutdown Delays Planes to US Air, Jetblue.
Gecamines of Congo Studies Selling Stake in Glencore Copper Mine.
RWE Faces Costs, Delay After Plant Incident, Handelsblatt Says.
Repsol’s Stake in Gas Natural Attracts Temasek, Sinopec, FT Says.
Abengoa Files to Register Up to $621.2m of Class B Shares.
Burberry CEO Says China Slowdown More Than Temporary: Les Echos.
Lagardere May Sell Assets Including ‘Paris Match,’ Figaro Says.
Solvay to Buy Chemlogics for $1.35 Billion to Add Oil Chemicals.

CURRENT STUFF

House Speaker John Boehner said Sunday he wouldn’t bring up bills to fully reopen the government or increase the country’s borrowing limit unless Democrats agree to broader talks aimed at trimming the deficit. The speaker insisted he couldn’t muster enough votes to pass either one without the concessions. “The votes are not in the House to pass a clean debt limit, and the president is risking default by not having a conversation with us,” Mr. Boehner told ABC” (WSJ) (Financial Times)

Paulson and a clutch of bullish US hedge funds are leading a charge into Greek banks, confident that Greece, long seen as the weakest economy of the eurozone periphery, is on the turn. Alpha and Piraeus have generally been seen as the most attractive bets after recapitalisation exercises earlier this year – dominated by bail-out money – still left 16 per cent and nearly 20 per cent respectively in private hands. (Financial Times)

“The World Bank lowered its 2013 and 2014 economic growth forecasts for China and most of developing East Asia on Monday… The Washington-based development bank now expects developing East Asia to expand by 7.1 percent this year and by 7.2 percent in 2014, down from its April estimate of 7.8 percent and 7.6 percent, respectively [and] expects the Chinese economy to expand by 7.5 percent this year, down from its April forecast of 8.3 percent and below the International Monetary Fund’s most recent forecast of 7.75 percent.” (Reuters)

Shinzo Abe warned of delay in key labour reforms in Japan pointing to strong domestic opposition to the “sensitive” but potentially crucial plank in his structural reform programme. He conceded, in an interview with the FT, that a relaxing of Japan’s stringent job protections would not be part of an forthcoming policy package. (Financial Times)

Financial services companies are thought to have hired an extra 10,000 staff in the three months to September as optimism in the sector surged to its highest level for almost 17 years. (Financial Times)

Eight investment banks embrace Markit viral messaging revolution: Markit, the UK data provider, will operate an industry-wide central directory switchboard to connect the messaging systems of Thomson Reuters, Goldman Sachs, Deutsche, Citigroup, Credit Suisse, Barclays, JPMorgan Chase, Morgan Stanley, BofAML and GFI Group. Thw system will act as a central, vetted directory, allowing users to connect in rival banks without leaving their own secure, internal system. (Financial Times)

STRATEGY

JPM (Loeys) The J.P. Morgan View
Policy uncertainty and markets

Asset allocation –– The main impact of a longer-lasting US political stalemate is that money will move elsewhere, to countries with more effective and pro -growth policy making: Japan, China and now even Europe are attractive in comparison.
Economics –– Global PMIs are signaling Q3 growth near trend and on forecast, without any upside risk anymore .
Fixed Income –– We stay neutral duration.
Equities –– Favor EM, Europe and Cyclical sectors.
Credit –– Continued good economic news in Europe keeps us OW EU HY vs. HG and OW financials vs. non -financials.
FX –– We are short GBP and CHF.
Commodities –– Buy sugar as prices are close to production costs and supply is likely to be lower than expected.

JPM (Matejka) Equity Strategy October Chartbook – Messy politics, but fundamentals are tracking.
Stay bullish, on Banks and Periphery in particular. Markets hovering at ytd highs are making many nervous, US politics remains a concern and the worry is that recent “Low Quality” leadership can’t continue, especially as earnings are still missing. We believe the underlying picture continues to be bullish:
1) “Value” and “Low quality” leadership is not stretched by any means given still extreme valuation discount,
2) European activity continues to improve and to broaden, earnings will follow,
3) one should not become too bearish on the US given gasoline prices are back to Jan levels, mortgage rates have retreated and jobless claims are at cycle lows,
4) flows are favouring equities, M&A is picking up and seasonally Oct-Dec was not typically the time to cut risk.
We advise continued rotation, with OW positions in Value, Banks, Cyclicals, Europe vs. the US, and within Europe Spain, Italy and France vs. Germany, UK and Switzerland. EM remains the key source of downside risk, in our view.
We are cautious on both “cheap” EM plays – Commodities, as well as the expensive ones – Staples, Chemicals.

UPS&DOWNS

European Capital Goods (JPM, Willi) Q3 previews and survey: Will an improved outlook save the day?
Following cautious company comments into the results, we look for an in-line results season. From a tactical perspective, taking into account near and medium term earnings risks, valuation, recent performance and investor positioning, we are comfortable holding Assa Abloy, GEA, SKF and Prysmian during Q3 results while we are more cautious on Atlas Copco, Metso and Outotec. We see potentially high volatility at Electrolux and would side step Q3 while the expected near term bad news at Alstom is increasingly reflected in the valuation. Siemens should do well for now but we are concerned on performance around Nov 7th given cautious guidance expected and investor positioning. We could see a typical "travel and arrive" at Andritz ahead of the CMD (08/10). We upgrade ABB to N from UW (separate note)

AFRICA OIL CUT TO SELL VS HOLD AT SOCGEN
E.ON RAISED TO OUTPERFORM VS NEUTRAL AT EXANE
EDP CUT TO REDUCE VS BUY AT KEPLER CHEUVREUX
ENI RAISED TO NEUTRAL VS UNDERPERFORM AT EXANE
FINMECCANICA RAISED TO BUY VS HOLD AT KEPLER CHEUVREUX
FINMECCANICA RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN
FRESNILLO RAISED TO BUY VS NEUTRAL AT UBS
HOCHSCHILD MINING RAISED TO BUY VS NEUTRAL AT UBS
LADBROKES CUT TO NEUTRAL VS BUY AT BOFAML
MEYER BURGER CUT TO UNDERWEIGHT VS NEUTRAL AT HSBC
NORMA GROUP CUT TO UNDERWEIGHT VS NEUTRAL AT HSBC
PIRELLI RAISED TO OUTPERFORM VS NEUTRAL AT MEDIOBANCA
RANDSTAD RAISED TO OVERWEIGHT VS NEUTRAL AT HSBC
RED ELECTRICA RAISED TO BUY VS NEUTRAL AT UBS
RWE RAISED TO NEUTRAL VS UNDERPERFORM AT EXANE
SCANIA CUT TO NEUTRAL VS BUY AT BOFAML
TATE & LYLE RAISED TO BUY VS HOLD AT SOCGEN
TELEFONICA BRASIL CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUI…
THOMAS COOK RAISED TO NEUTRAL VS UNDERPERFORM AT BOFAML

OVERNIGHT MARKETS

Asian markets
Nikkei 225 down -138.86 (-0.99%) at 13,885
Topix down -13.49 (-1.16%) at 1,150
Hang Seng down -169.16 (-0.73%) at 22,969

US markets
S&P 500 up +11.84 (+0.71%) at 1,691
DJIA up +76.10 (+0.51%) at 15,073
Nasdaq up +33.41 (+0.89%) at 3,808

European markets
Eurofirst 300 up +1.56 (+0.13%) at 1,244
FTSE100 up +4.84 (+0.08%) at 6,454
CAC 40 up +36.27 (+0.88%) at 4,164
Dax up +25.06 (+0.29%) at 8,623

Currencies
€/$ 1.36 (1.36)
$/¥ 97.15 (97.46)
£/$ 1.60 (1.60)

Commodities ($)
Brent Crude (ICE) down -0.36 at 109.10
Light Crude (Nymex) down -0.53 at 103.31
100 Oz Gold (Comex) up +3.40 at 1,313
Copper (Comex) unchanged 0.00 at 3.29

10-year government bond yields (%)
US 2.63%
UK 2.74%
Germany 1.83%

CDS (closing levels)
Markit iTraxx SovX Western Europe -2.35bps at 82.72bp
Markit iTraxx Europe -1.62bps at 97.58bp
Markit iTraxx Xover -11.75bps at 388.22bp

Sources: FT, Bloomberg, Markit

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