Asian equity markets traded relatively flat this morning on an overall lack of directional drivers. Japan was down modestly after the $-¥ moved below the 100 mark overnight. Data showing FDI growth in China slowed in October from September failed to be a significant catalyst for greater Chinese markets, which traded mixed. Likewise, the release of the RBA minutes did not have a substantial effect on the Australian market.
Major US indices finished mostly lower on Monday; the exception of the Dow which finished up small. A very quiet and almost uneventful day until equities began to mover lower late in the trading session. Earlier in the session both the S&P and the Dow hit record highs; rising above the large round numbers of 1,800 and 16,000 in the process. There was no clear, logical catalyst for the move lower. Among the reasons given today – Dudley’s comments were earlier than the move, Plosser’s were in-line with prior statements and the move began before Icahn was "cautious" on the stock market. Fed speculation continues with each speech or comment by a Fed official quickly overanalyzed. Homebuilder confidence fell in November and was below expectations, but the reading remains above 50 for the sixth consecutive month. Optimism rose in China and was reflected in equities following reform announcements from the Third Plenum. Most sectors lower with biggest decliner consumer discretionary (0.72%) and exceptions telecom +0.61% and industrials +0.16%. UST prices were modestly higher. Crude and gold both lower.
Otherwise. Salesforces, Brocade & Urban Outfitters reported better revenues after the US bell, Carlyle see opportunities in Europe, Insurance sector downgraded to Neutral at Nomura, JPM prefer RWE over EON
Key levels: SPZ3 1790pts, EURUSD 1.3505, AUD 0.934, JPY 99.85, Gold $1272, Crude $92.78
Hot corporate newsflow:
– BMW mulls plan to build Mini Sports Utility Model : “Something in this direction makes sense for Mini,” Peter Schwarzenbauer, BMW Group board member for Mini and Rolls-Royce says, FT reports.
– Volvo CEO Olof Persson may make changes to truckmaker’s management team as board wants to quicken pace of efficiency program acc to Dagens Industri
– India is considering sharp new limits on investment in the country’s pharmaceutical industry that would bar foreign companies from taking control of makers of “rare and critical” medicines, a senior government official said Monday. New draft rules before the cabinet would bar foreigners from owning more than 49% of Indian manufacturers of such drugs, the official said. The official said the aim is to ensure adequate supplies of inexpensive, lifesaving medicines in India – WSJ
– DSM is preparing to spin off its pharmaceuticals division in a deal that will create a $2.6bn drug-making business. The Dutch cod-liver oil to petrochemical conglomerate will sell the division to JLL, a New York-based private equity group, which will merge it with Patheon, the drug-maker of which it is the majority shareholder. The deal is expected to close early next year.
– Exxon Mobil has agreed to sell its majority stakes in a Hong Kong utility and a power storage firm for a combined $3.4 billion, helping the U.S. oil major raise funds to plough back into its core operations
– Coastal Energy is selling itself to Spanish energy giant Cepsa for C$2.3bn ($2.2bn). The deal values Coastal at C$19 a share.
– Goldman said to draw potential buyers for Metro Warehousing unit
– Bharti likely to sell Africa Tower Business – CNBC
JPM favour RWE over EON and reiterate Buy on BKG. GS reiterate CL Buy on Subsea 7 and Aveva, reiterate Buy on Severstal. MS stay OW on First Quantum, EW on RDSA
Barcap increase PT on Casino but stay UW, remain UW on Scania and Petrofac
DB upgrade Severstal to Buy and rate Generali with Buy, KPN raised to Outperform Vs Neutral at Credit Suisse, SwissRe raised to Buy at Nomura while Outokumpu upgraded to Neutral
Stada Arzneimittel Cut to Hold Vs Buy at Berenberg, Bernstein rate Remy Cointreau UW
German utilities (Nathalie F Casali) RWE: balance sheet story continuing to unfold, maintain preference vs. E.ON
RWE’s 9M results reinforced our view that the company’s balance sheet is less of an issue than widely perceived. With management suggesting that 2014 would likely mark the trough for earnings, visibility about dividend sustainability has also improved significantly – investors are now more likely to focus on potential upside in our view. We maintain our preference for RWE over E.ON based on its cheaper valuation, more advanced strategy and better earnings risk-reward. We would pair a long in RWE against a short in E.ON to play near term upcoming positive nuclear tax news flow (although partly discounted already in our view).
Carlyle & Europe:
Carlyle Group CEO Bill Conway tells Le Figaro in an interview Europe is “strategic continent” and continues to offer numerous investment opportunities. Carlyle has invested EU9b ($12B) in Europe in past 10 yrs. European assets 20% cheaper than U.S. assets, discount was 28% yr ago
Europe remains penalized by concerns about euro region, speculation on exit of Greece or Germany, banks’ difficulty financing the economy.
Need to distinguish between economic environment and investment environment, Carlyle can make “very good” transactions in very difficult economic context.
Level of taxation in Europe “maybe not very effective” for growth
From GS : Selling 1m or 2m VIX futures into year-end has been profitable in each of the last 7 years. The average drop in the front-month VIX future from Nov to Dec has been 3.9 vol points. The decline in the Dec future has been about 1.3 vol points or 1.5x higher than the Jan contract and 2.2 vol points or 2.3x the roll down on a three-month
future. Over the last 23 years the S&P 500 has risen by an average of 3.3% and the VIX declinedby 10% from the last day of October through yearend. During the first 11 trading days of November the market is up 2.4% while VIX is down 11%. This analysis would tell us that the VIX may have already traded much of its typical seasonal decline, which leaves less room for error in 2013.
Emerging market debt investors will be spoilt for choice come next year.
According to analysts at Barclays, EM governments are expected to issue as much as $94bn in new hard currency bonds in 2014 – an increase of more than 20 per cent from what is expected this year and marginally higher than the record set in 2012.
Ever since the US Federal Reserve made the surprise decision in September to keep the QE punchbowl flowing, emerging market sovereigns and companies have wasted little time tapping the market again.
Aside from countries looking to take advantage of investors’ renewed appetite for risk, Barclays reckoned that the surge in issuance next year will be driven by the large refinancing needs of EM sovereigns. Some $64.7bn of EM sovereign bonds are due next year, it said.
What does this mean for EM bond investors? Given that countries will most likely try and meet their financing requirements early in the year, before the Fed begins its eventual taper, to take advantage of what are still record low rates (by historical standards), a glut of issuance could create some bargain buying opportunities for the sharp-eye investors out there.
Other interesting stuff:
– Nonvoting Philadelphia Fed President Plosser sees 6.25% unemployment rate by YE 2014; favors ending open-ended QE; Plosser votes next year.
– MS FX strategists see “increasing signs of disinflation, and in some cases, deflation, particularly in Europe.”
– Dropbox, now apparently worth some $8bn: “Online-storage service Dropbox Inc. is raising a funding round that could value it at more than $8 billion, according to people familiar with the situation, though new figures reveal its revenue growth is decelerating. The talks with investors to raise around $250 million are still early and no valuation has been agreed upon, said a person familiar with the discussions.”
– The US "secular stagnation", bubbles, negative rates & Larry Summers. http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/?_r=0
– The Coming Bust Of The Great Bakken Oil Field – interesting piece, courtesy of ZH : http://www.zerohedge.com/news/2013-11-17/guest-post-coming-bust-great-bakken-oil-field
– China and Japan are heading for a collision http://www.ft.com/intl/cms/s/0/be1c23b4-4f96-11e3-b06e-00144feabdc0.html
– Rajan offers radical vision of India’s future: on.ft.com/1jgpPma
– Only 19% of U.S. companies plan to expand staff in the next year. Now for that taper? http://blogs.wsj.com/economics/2013/11/18/vital-signs-the-worlds-glass-looks-half-empty/?mod=e2tw
LCM CrossAsset Strategy : For A Warm Winter
Financial trends are weak but we stick to our strategic positions.
– We discuss the opportunity to adjust our recommended portfolio. For rationale investors, the temptation may be high to take another look at commodities following their sell-off or to sell EUR bonds following their rally.
– Although we do not think we are irrational, we prefer to keep our strategy unchanged as the risk/reward of adjusting does not appeal. From a global portfolio perspective, we show that our current model portfolio is well balanced enough to survive any reversal.
Trade Recommendation Summary
– Overweight European Real Estate stocks (EEP FP) : Real Estate stocks are lagging in Europe due to the bond sell-off that took place during the summer. Calm is back on the bond market and this should support this trade.
– Buy Financial Bonds in the Eurozone (AFIN FP) : We want to take risk in the Euro Zone bond markets and would buy bonds of financial stocks.
– Sell Chinese Equities (YXI US) : The jump of Chinese stocks is a classic Noah effect. We take the opportunity to sell Chinese equities because the “reform’s news” should have an expected lifetime in investor mind of only a few days, at best.
MS European Equity Strategy: How extreme is sentiment, positioning and liquidity?
Liquidity appears to be the primary tailwind for equity markets in the short term. While sentiment and technicals are in elevated territory, most are not yet extreme and cash positions, flows and seasonality are all still supportive.
Extreme breadth – just 8% of stocks are >20% below recent highs – low since 2Q07 % of stocks >20% below 52Wk highs