LCM Dawn Patrol – JPM UW on US, ML flows, JPM on EU earnings, MS on Oil & Gas, more…

Bonjour,

 

Asian markets were trading quiet this morning, with Hong Kong and Japan closed and US to be closed for the day.

European stocks are seen dipping on Monday as the United States edged closer to a debt default after Democrats and Republicans failed to reach an agreement over the weekend.

 

Watch this week the situation in Washington, European Bank AQR , US Earnings w/banks, tech, and industrials dominating the initial batch of reports (GE, GOOG, GS …), China eco data and US macro (Empire, NAHB housing, Beige Book, Claims/IP/Philly and leading indicators)

 

NEWS

 

ECB Bank Tests to Get 3 Sets of Eyes Next Year, Coeure Says

Asian Stocks to U.S. Futures Decline on U.S. Debt Impasse

Merkel Faces Struggle on Coalition Talks

U.K.’s Housing-Bubble Hysteria Is Misguided, EY Item Club Says

Osborne Pledges Stronger China Links at Start of Trade Trip

 

UniCredit has “no interest in remaining Alitalia’s shareholder in the future,” CEO in an interview
Netflix in talks with U.S. cable companies-WSJ
Unicredit may consider re-listing stake in German HVB – report
EDF Nears $22b Deal to Build U.K. Nuclear Power Plant
EADS CEO Tom Enders Says A380 Demand Will Recover
Porsche Aims to Enter 15 Countries, Mainly in Africa by 2020
Peugeot May Sell EU3b Stock to Dongfeng, France, Reuters Says
FDA Approves Sanofi’s Nasacort Allergy as OTC Treatment

 

CURRENT STUFF

 

With just four days left before the country faces the risk of default, senate leaders were locked in talks on Sunday in a desperate attempt to resolve the stalemate amid warnings of a global recession should the US run out of money to pay its bills. Harry Reid, the Democratic majority leader in the Senate, and Mitch McConnell, the chamber’s top Republican, have taken over the negotiations after talks broke down between the White House and conservatives in the House on Saturday. However, Senate talks also hit an impasse in a dispute over a Democratic push to unwind sequestration. Whatever emerges, the Republican-dominated House, which does not convene until Monday evening, would have to approve any Senate compromise. (Financial Times I) (Financial Times II) (WSJ) (NYT)

 

Twitter squeezes banks on IPO: “The fees banks are set to collect for selling the shares—at 3.25% of the money raised, said people familiar with the deal—would be the lowest percentage paid on a U.S.-listed IPO in more than a year, according to Ipreo… What’s more, the microblogging service is nearing completion of a $1 billion credit line from its bankers…” (WSJ)

 

Europe’s financial institutions are more exposed to their domestic government bonds than at any time since the eurozone crisis started. It has yet to be decided exactly how the European Banking Authority’s stress test of about 150 banks next summer will treat sovereign bond holdings. (Financial Times)

 

Gulf oil production hits record, defying expectations that the US shale revolution would break their 40-year grip on the global oil market and diminish their importance to the world’s consuming nations. (Financial Times)

 

 

STRATEGY

 

JPM (Loeys) The J.P. Morgan View
UW US
  Asset allocation
–– Washington stalemate makes risk assets outside the US look better
  Economics –– Fiscal stalemate pushes risk to further delayed and more drawn out taperingUS debt ceiling and budget resolution unlikely to require significant 2014 spending cuts, unlike the 2011 sequestration deal
  Fixed Income –– Neutral currently, despite bearish forecasts
  Equities –– We introduced this week a new systematic model for allocating between 16 major equity markets across both DM and EMThe new strategy recommends a long in India, Brazil and Sweden vsthe UK and South AfricaThe strategy thus currently favors EM over DM equities
  Credit –– Stay long credit
  FX –– FX can handle political uncertainty wellWe are long carry in AUD, 
NZD and CNY
  Commodities –– Production issues in metals markets and the ongoing improvement in global and especially Chinese IP keep us OW base metals

The US Q3 reporting season, which kicked off this week, is unlikely to give strong impetus to US equities.

 

JPM (Matejka) Western European Equity Strategy
Q3 reporting season and beyond

Earnings recovery still on track – Banks to show the greatest delta. Q3 reporting season is starting. The fear is that corporate results might fall short of expectations, especially given recent sharp P/E expansion. We find the hurdle rate to be rather low – consensus is looking for sequential EPS fall vs.. Q2 in both Europe and the US. Activity indicators which are typically well correlated to earnings point to a better outcome. Eurozone P/E multiple has rerated, but at 12.7x it is still not at a premium to LT median of 12.9x – we think it could rerate further. Our proxy for Euro profit margins has turned positive for the 1st time in two years and leading indicators point to double digit EPS growth in ’14. Banks’ earnings could show the greatest delta – their base is depressed, they are strongly correlated to economic rebound and could benefit from lower funding costs, improving asset quality and reduced provisioning. Is lack of credit growth a problem? Not in our view;

 

ML The Flow Show – Everyone loves Europe
Talking Points: 
The Q3 flow winners: floating-rate debt, HY bonds, Jap & EU equities…all reflation plays 
The Q3 flow losers: TIPS, EM debt, Munis and gold funds (Chart 1)…weak dollar/inflation plays (ex. Munis) 
Last week: investors cut exposure to assets…outflows from stocks and bonds (Table 1). But “Everyone loves Europe”: 15th straight week of inflows to European equity funds = longest streak in 11 years (Chart 2)

 

UPS&DOWNS

 

Oil & Gas (MS Pulleyn) 3Q Preview: Not Everyone Can Be Below Consensus, Plus Stay UW Seismic
CGG: UW, PT €16 to €14
Repsol: UW, PT €17.1 to €16.7
TGS: UW, PT NKr 190 to NKr 168

Stay Underweight CGG & TGS: We continue to see significant downside risk to consensus estimates across the seismic sector as both pricing and volumes come under pressure. We lower CGG earnings by 16% for 2013 and 23% for 2014, making us 22% and 30% below consensus. We lower price targets to €14 for CGG and to NKr 168 for TGS.

 

Barcap European Technology Hardware: Telecom infrastructure – where do we go from here? It’s not clear sailing
We expect a tepid recovery for the telecom infrastructure market. Yet shares are trading as though the end market is improving for all and M&A is a panacea. We think the picture less clear, with growth in certain regions and segments continuing to offset pressure elsewhere. We see the best value in Alcatel-Lucent as it not only has good exposure to the fastest growing segment but is also a likely beneficiary from M&A. Conversely, we view Ericsson negatively as it faces tough comps in key markets and would face increased competition in the face of most M&A scenarios. We upgrade Alcatel-Lucent to Overweight and raise our price target to EUR3.30; we downgrade Ericsson to Underweight with a target of SEK68. We also upgrade Nokia to Equal Weight and in the U.S. we continue to prefer Cisco (OW) to Juniper(EW).

 

JPM European autos ahead of Q3 Results (Jose M Asumendi) Looking for signs of European car market recovery
With some signs of improvement emerging in the EU car market, we set out our thoughts into Q3 results. We think Italy and Spain are turning a corner, the UK is in positive territory, and France and Germany are gradually rebounding from a low base but still with limited visibility into 2014. We are currently OW Daimler, VW and Renault and think they could deliver solid results. We are cautious on BMW, expecting margin contraction yoy. On the suppliers, we are OW Pirelli and Continental (both have CMDs on the same day as results). For Pirelli welook for commentary on a 3y financial plan. We are N on Michelin and Faurecia.

 

OVERNIGHT MARKETS

 

Asian markets
Nikkei 225 up +210.03 (+1.48%) at 14,405
Topix up +19.22 (+1.63%) at 1,197
Hang Seng up +267.02 (+1.16%) at 23,218

US markets
S&P 500 up +10.64 (+0.63%) at 1,703
DJIA up +111.04 (+0.73%) at 15,237
Nasdaq up +31.13 (+0.83%) at 3,792

European markets
Eurofirst 300 up +5.76 (+0.46%) at 1,251
FTSE100 up +56.70 (+0.88%) at 6,487
CAC 40 up +1.87 (+0.04%) at 4,220
Dax up +39.06 (+0.45%) at 8,725

Currencies
€/$ 1.36 (1.35)
$/¥ 98.30 (98.56)
£/$ 1.60 (1.60)

Commodities ($)
Brent Crude (ICE) down -0.08 at 111.20
Light Crude (Nymex) down -0.18 at 101.84
100 Oz Gold (Comex) up +5.90 at 1,274
Copper (Comex) unchanged 0.00 at 3.27

10-year government bond yields (%)
US 2.69%
UK 2.74%
Germany 1.87%

CDS (closing levels)
Markit iTraxx SovX Western Europe -2.8bps at 77.88bp
Markit iTraxx Europe -3.23bps at 93.02bp
Markit iTraxx Xover -13.23bps at 371.7bp

Sources: FT, Bloomberg, Markit

 

 

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