LCM Dawn PAtrol 21.10.13 – SAP light software sales, Philips OK, Akzo below,

Bonjour,

Sentiment was bright across Asian markets, which mostly extended relief rallies that began late last week on bets the US Federal Reserve would continue its monetary stimulus until December or beyond.
European markets up this morning following last week’s highs and expectations that the Fed will continue with its easy money strategy this week.

This week’s main events: flash PMIs in the US, China and Europe, the NFPs on Tuesday, US new home sales, German IFO. On the CBs side: MPC minutes on Wed, ECB to announce AQR (Asset Quality Review).

NEWS

• EU Races for Bank-Law Deal to Avert Post-Election Quagmire
• Draghi Challenges EU Bank-Aid Rules Requiring Forced Losses
• Banks Face Risk-Model Clampdown in Basel Trading-Book Review
• London Home Prices Rise ‘Unsustainable’ 10% on Foreign Demand
• Merkel Moves Closer to Grand Coalition as SPD Approves Talks
• Juncker’s Party Wins Luxembourg Elections While Losing Seats
• Cyprus Bailout Terms Create Space for New Lenders: Ancoria
• Broadbent Says BOE to Raise Rates Only After Recovery Is Secure
• Euro Calm Lures Investors Shaken by U.S. Disruptions
• ECB Men-Only Club Threatened as Draghi Sifts Bank Chief Resumes

EDF set to announce an agreement to build two reactors in U.K. with Chinese investors, Areva
Axa Hopes to Make More Acquisitions in Asia, CEO Says
Airbus Targets 25% Market Share in Japan in 2020, Bregier Says
Commerzbank Plans to Cut Management Posts: WirtschaftsWoche
• Yara Bribery Investigation Widened to Russia, DN Reports

Earnings

Akzo Nobel 3Q Net Income, Sales and Ebitda Beat Estimates 7:17
Akzo Nobel 3Q net income EU155m vs est. EU150m.
• 3Q sales EU3.78b vs est. EU3.76b
• 3Q Ebitda EU456m vs est. EU444m
• 3Q adj. EPS EU0.74 vs est. EU0.796
• Interim div. of EU0.33/shr
• Says performance improvement program on track
• Sees EU160m restructuring charges in 4Q
• Says 2013 operating income before incidental items “unlikely to exceed” EU908m in 2012

Philips 3Q Adj. Ebita Beats Estimates, Says Sales to Be Affected 7:06
Philips remains committed to reaching 2013 targets, say economy to continue to affect sales growth in coming quarters.
• 3Q rev. EU5.62b, est. EU5.76b
• Adj. Ebita EU634m, est. EU567m
• Net income EU282m, est. EU200m
• NOTE July 22: co. confirmed 2013 margin targets for reported Ebita of 10%-12% for group, healthcare 15%-17%, consumer lifestyle 8%-10%, lighting 8%-10%; ROIC 12%-14%
• Call 10am CET +31-20-7948485, +44-20-71901595

SAP 3Q Non-IFRS Operating Profit In Line; Software Sales Miss
SAP 3Q IFRS software rev. falls 5% to EU975m; est. EU988.3m y/y (6 analysts, may not compare).
• 3Q non-IFRS operating profit EU1.3b; est. EU1.32b (18 analysts)
• 3Q non-IFRS operating margin 32% vs 31.2% y/y
• 3Q non-IFRS software, cloud subscriptions rev. EU1.17b vs EU1.11b y/y
• 3Q non-IFRS software, related services rev. EU3.36b vs EU3.21b y/y
• 3Q non-IFRS total rev. EU4.06b; est. EU4.16b y/y (23 analysts)
• 3Q HANA rev. EU149m; est. EU131.5m (4 analysts)
• 3Q IFRS profit after tax EU762m; ests. EU772.8m (8 analysts)
• Annual cloud rev. run rate >EU1b; says gains market share, grow “significantly faster” than primary competitor
• Reiterates 2013 forecasts:
• 2013 non-IFRS operating profit in range of EU5.85b–EU5.95b (constant FX)
• 4Q, 2013 non-IFRS operating growth rate negatively impacted by ~7ppt from FX
• 2013 non-IFRS software, related services rev. to at least 10% y/y (constant FX)
• Sees 4Q, 2013 non-IFRS software, related services rev. growth rate negatively impacted by 5ppt from FX
• 2013 IFRS effective tax rate to 24% to 25%, non-IFRS tax rate 25.5% to 26.5%
• 2013 non-IFRS cloud subscriptions, support rev. of ~EU750m
• Conf. call Oct. 21 at 2pm CET; domestic: 855 272 3513, international: +44 (0) 203 059 5869

CURRENT STUFF

AQR (by JPM). The ECB stated it will present the details of its process of Asset Quality Review (AQR) and Balance Sheet Assessment (BSA) in the second half of October (a date has not been set as yet), but there is some expectation in the market we get some kind of methodology this week. While in neither case does it appear we are at a point where substantive and final decisions will be announced this early (i.e. the announcement shouldn’t be market moving) there is very little visibility or even expectations on what the ECB announces. And Eurozone bank share prices are |40%+ higher than the July 2013 lows.

Federal Housing Finance Agency seeks $6bn from BofA, compared with the $4bn to be paid by JPMorgan, according to people familiar with the matter. The FHFA has sued 17 institutions asserting that they broke securities laws when selling mortgage-backed securities to Fannie and Freddie. Bank of America has the biggest potential exposure, with a notional value of the securities of more than $57bn compared with $33bn at JPMorgan. Bank of America declined to comment on the case, which it is so far continuing to fight in court. (Financial Times)

Japan’s trade balance in deficit for 15th month: Japanese exports faltered, improving only 11.5 per cent from a year ago, versus forecasts of 15.6 per cent. The weakness signals that the weaker yen might not be helping firms as much as hoped. Imports were weaker than anticipated, too, rising 16.5 per cent from a year earlier, versus forecasts at 19.9 per cent. The figure suggests demand isn’t as robust as anticipated. (FastFT) (Bloomberg)

STRATEGY

JPM (Loeys) The J.P. Morgan View

Postponed US fiscal risk, a supportive Fed, and neutral growth signals push bonds onto a range and move investors into yield, carry and earning risk premia. Equities retain the best risk premia to us, followed by higher-yielding credit. Be long both. This week’s last minute deal on the US budget and debt pushed the next crisis points to next year and effectively pushed the main remaining event risk off the table for this year. With little event risk between here and year end, investors are now back to focusing on value and alpha … that brings us to risk premia as the main upside for asset prices… having a US fiscal deal behind us, seeing little apparent other event risk into year end, and having crossed the 4th anniversary of the global recovery each suggest to us that uncertainty and risk perceptions should continue to come down. Across markets, equity risk premia continue to stand out as the most elevated against history and remaining uncertainty.
Equities — Stay OW EM equities. We stay overweight Cyclical sectors and await for next week’s flash PMIs to review our stance. Momentum in equity markets is strengthening again with the MSCI AC World index 10% above its 200 day moving average. Cyclical stocks are doing better than Defensives in the reporting season but have underperformed in terms of returns month to date. We stay overweight Cyclical sectors and await for next week’s flash PMIs to review our stance. EM equities continue to outperform. Flow and credit indicators are positive for EM as discussed in today’s Flows & Liquidity. Stay long MSCI EM vs. MSCI World in common currency terms
Economics/Macro — . US fiscal debate and event risk are pushed into next year, and so is Fed tapering. Activity data support our view of global growth near trend, without a clear risk bias.
Fixed Income –– Bond yields are in a range at the moment and investor focus is all on carry. Neutral globally
Credit –– We expect further spread tightening and the 10s30s US HG spread curve to continue to flatten. .
Currencies –– The dollar is in a range, in our view. The US fiscal crisis does not threaten the dollar’s role as a reserve currency as it is not an existential crisis, as the Euro crisis was.
Commodities –– Stay long sugar, as Brazil production is set to disappoint

UPS&DOWNS

AEGON (MS, Andrich) Focus on FCF and Increasing Dividend, Remain OW
Aegon remains fundamentally under valued vs. both US and European peers. We believe investors should focus on Aegon’s strong FCF generation and the opportunity it gives to grow its dividend and de-risk its balance sheet.

Publicis Groupe (JP, Lo Franco) Attractive entry point although share price likely to remain volatile until merger is fully approved
PUB remains one of our top picks and we see the current share price as a very attractive entry point as: i) we feel the stock is pricing-in the potential risks of the Omnicom merger (covered by JPM analyst Alexia Quadrani) but not the potential benefits; ii) in our view, the improving EU outlook is likely to offset EM slowdown; iii) we believe the financial markets have not fully appreciated the scale of benefits from the digital revolution and the CMO/CIO opportunity (we agree with PUB’s CEO that agencies will not compete with consultancy firms); iv) PUB multiples are very attractive even on a stand-alone basis (i.e. ex the expected merger synergies): ‘14E EV/EBITDA of 8.9x (EU Media sector at 10x) and PE of 15x (vs. historical average of 16x-17x).

ANGLOGOLD ASHANTI RAISED TO NEUTRAL VS SELL AT UBS
AUTOGRILL RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
CREDIT: JPMORGAN DOWNGRADES LAFARGE TO NEUTRAL FROM OVERW…
CREDIT: JPMORGAN DOWNGRADES ST. GOBAIN TO UW FROM NEUTRAL
CREDIT: JPMORGAN UPGRADES BUZZI TO OVERWEIGHT FROM NEUTRAL
CREDIT: JPMORGAN UPGRADES HEIDELBERGCEMENT TO OW FROM NEU…
DEBENHAMS RAISED TO OVERWEIGHT VS EQUALWEIGHT AT MORGAN ST…
DNO INTERNATIONAL ASA RATED NEW ’NEUTRAL’ AT JPMORGAN
DNO INTERNATIONAL RATED NEW NEUTRAL AT JPMORGAN; PT NOK17.50
EDP CUT TO ’NEUTRAL’ AT JPMORGAN
HUGO BOSS CUT TO SELL VS NEUTRAL AT GOLDMAN
IBERDROLA CUT TO NEUTRAL VS OUTPERFORM AT CREDIT SUISSE
LUXOTTICA CUT TO SELL VS NEUTRAL AT GOLDMAN
LVMH CUT FROM CONVICTION BUY AT GOLDMAN, STILL A BUY
MAN GROUP RAISED TO NEUTRAL VS UNDERPERFORM AT EXANE
NOVATEK CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
OPAP CUT TO UNDERWEIGHT VS EQUALWEIGHT AT MORGAN STANLEY
TELIASONERA RAISED TO NEUTRAL VS SELL AT CITI
TNT EXPRESS CUT TO NEUTRAL VS BUY AT UBS
TOD’S CUT TO SELL VS NEUTRAL AT GOLDMAN
TURKCELL CUT TO NEUTRAL VS BUY AT UBS

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +73.03 (+0.50%) at 14,635
Topix down -0.73 (-0.06%) at 1,206
Hang Seng up +136.88 (+0.59%) at 23,477

US markets
S&P 500 up +11.35 (+0.65%) at 1,745
DJIA up +28.00 (+0.18%) at 15,400
Nasdaq up +51.13 (+1.32%) at 3,914

European markets
Eurofirst 300 up +9.61 (+0.76%) at 1,278
FTSE100 up +46.42 (+0.71%) at 6,623
CAC 40 up +46.39 (+1.09%) at 4,286
Dax up +53.12 (+0.60%) at 8,865

Currencies
€/$ 1.37 (1.37)
$/¥ 97.94 (97.70)
£/$ 1.62 (1.62)

Commodities ($)
Brent Crude (ICE) up +0.02 at 109.96
Light Crude (Nymex) down -0.01 at 100.80
100 Oz Gold (Comex) unchanged 0.00 at 1,314
Copper (Comex) unchanged 0.00 at 3.29

10-year government bond yields (%)
US 2.59%
UK 2.75%
Germany 1.84%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.31bps at 72.85bp
Markit iTraxx Europe -2.9bps at 85.06bp
Markit iTraxx Xover -10.83bps at 343.16bp

Sources: FT, Bloomberg, Markit

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