LCM Dawn Patrol – 20.11.13 – GS on US investors in Europe, JPM dbl upgrade on WH Smith, MS likes Metro (so does Barclays), GS on Wirecard and more…

Bonjour,

US equities finished lower in another round of fairly uneventful trading on Tuesday. Macro seemed to be largely on the backburner as a directional driver. The Fed remained in focus, though today’s headlines did not have much impact on the price action ahead of tonight’s speech from Fed Chairman Bernanke and tomorrow’s release of the latest FOMC minutes. Once again, there seemed to be a need to fit an explanation to the pullback. This kept some of the focus on the more cautious headlines over the last few days surrounding issues such as multiple expansion, sentiment/positioning and corporate confidence. Consumer and tech continued to dominate the October quarter earnings calendar. Expectations for a highly promotional holiday season remained a key theme in the retail space. Industrials and utilities were the worst performers today, while financials beat the tape with some help from the big banks.
Asia-Pacific bourses were mixed, echoing a loss of momentum in the US market, with Japanese trade data failing to galvanise the Nikkei.
European shares are expected to extend the previous session’s declines today, as investors wait for fresh catalysts before placing strong bets.

Today, we’ll monitor the PPI in Germany, mortgage apps in the US as well as retail sales and the CPI. Then at 20:00 Paris time, we’ll get the minutes from the latest FOMC meeting.

They made it! I know nothing about football, but it seems incredible…

NEWS

Bernanke Sees Low Interest Rates Long After Bond Purchases End
Portugal Doesn’t Rule Out Selling Airline TAP to Efromovich
Portugal Expects Strong Investor Demand for CTT Ahead of IPO

Alcatel
: Private Placement of Up to 660m Pref. Subscription Rts.
BHP Buying Mosaic May Make Sense in Addition to Jansen: BofA
Deutsche Telekom Said to Near Scout24 Sale to Hellman & Friedman
Iberdrola Says Will Offer to Pay 2013 Dividend in Shares
Intesa Sanpaolo Places EU1b 5-Yr Eurobond
Nokia Investors Clear $7.4b Phone-Unit Sale to Microsoft
Peugeot Family Mandates Continuation of Dongfeng Talks: Echos
Roche’s Kadcyla Approved in EU for HER2-Positive Breast Cancer
SAP, China Telecom Expand Partnership in Cloud Computing
Serco, Partners Withdraw From U.K. Procurement Bidding, PA Says
Telecom Italia Aims to Exit Junk Status by 2016, Patuano Says
ThyssenKrupp Doesn’t Rule Out Capital Increase
ThyssenKrupp Said to Talk With 2 Steelmakers on U.S. Mill Sale
Vodafone May Be a Target for AT&T, SoftBank or AMX, Citi Says
Zodiac Predicts 2013-14 Organic Growth in ‘Buoyant’ Environment

CURRENT STUFF

Bernanke at the NEC: He did not drop any hint on when the Fed would start to slow its asset purchases from $85bn a month – referring only to “coming meetings” – but his remarks suggest a move is still possible at the Federal Open Market Committee’s December meeting. (Financial Times) (Alphaville)

US funds place big multibillion-dollar bets on euro bank recovery over the past four months in the belief that the region’s stuttering economic recovery will soon start to gather steam. (Financial Times)

Democrats eye tax on US groups’ overseas cash: The US would impose a one-time 20 per cent tax on an estimated $2tn of cash held overseas by American multinationals under a proposal from Democrats on the Senate finance committee that would reshape international tax policy. The proposal by Max Baucus, the veteran Montana lawmaker who chairs the panel, was unveiled on Tuesday as a way to stoke momentum for a much more sweeping rewrite of the US tax code, which is facing uncertain political prospects. (Financial Times)

China’s central bank has said it will “basically” end normal intervention in the currency markets, a more explicit commitment than it has previously made when outlining its plans to liberalise the renminbi. However, no details or timetable for reforms were given. (Financial Times)

STRATEGY

GS (Bell) Strategy Espresso: US investors continue to buy European equities
The latest TIC data from the US treasury shows continued net buying of European equities by US investors. The 12-month moving average of purchases has risen again to almost USD 90bn, comparable with the 2007-08 period (see chart). In September net purchases were USD 7.4bn – slightly below August at USD 9.4bn, but still high versus recent months.

There was large buying of European bonds by US investors in September as well; USD 22bn greater than for equities and a turnaround as US investors had been net sellers of European bonds in August. Buying of Japanese equities also rose sharply in September – with purchases of USD 6.4bn (the highest month of purchases since 2005). Essentially US investors swung into all foreign securities, bonds and equities, in September with net purchases of almost USD 40bn the highest since March 2011 (see chart below).
The latest data show that US investors are catching-up fast in terms of positioning with cumulative purchases since 2003 now moving above USD 300bn. Nonetheless there remains a gap between cumulative purchases in recent years and the trend rate of US buying based on data since the late 1970s. At this pace of purchases the gap would be closed in around a year (see second chart below).
We found that the main factors driving US investor purchases in recent years have been risk perception and to a lessor extent economic growth. We expect both to remain favourable for European equities as we go into 2014, although it seems unlikely that the pace of purchases will be maintained.

UPS&DOWNS

WH Smith (JPM, Webb) Double upgrade to Overweight
Following a change of analyst coverage we upgrade our recommendation on WH Smith (SMWH) from Underweight to Overweight. Between FY07 and FY13 SMWH delivered CAGRs of 9% for operating profit, 11% for PBT, 17% for EPS and 19% for DPS. This has been despite a 4% negative like for like sales CAGR, thus demonstrating the very limited relevance of this measure to SMWH’s performance and prospects. SMWH’s growth has been driven by a highly-incentivised management team focusing on what really matters, namely profits, returns on existing and incremental invested capital (ROCE was 20% in FY13 even after capitalising operating leases) and cash returns to shareholders (£536m returned since FY07).

Metro (MS, Aubin): Capital allocation / portfolio optimisation improves further
What’s new? Following press speculation, yesterday Metro issued a press release to confirm that it was actively studying a potential listing of its C&C operations in Russia. According to Metro, the stock listing of a minority share in Metro C&C Russia would be “part of the strategy to strengthen the balance sheet as well as secure further growth possibilities”. Metro also indicated that “no formal decisions have been passed”.

Wirecard (GS, Borra): 3Q reaffirms our positive structural view; Reiterate CL-Buy
We reiterate Wirecard as CL-Buy and believe the stock’s outperformance should continue as the company’s revenue growth accelerates over 2012-17, driven by mCommerce and Asia. Its multichannel platform, banking licenses makes it a strategic asset.

Afren Plc (GS, Morris) Buy: Ogo a material, world-scale Top 380 discovery; reiterate CL Buy
Afren announced today a significant upgrade to its resource estimates on Ogo to 774 mn boe (from 202 mn boe). This is the latest in a series of positive news from the company and Afren remains out top pick in the EU E&P sector. Reiterate CL Buy.

ABERDEEN ASSET RAISED TO NEUTRAL VS UNDERPERFORM AT BOFAML
BARRATT DEVELOPMENTS RATED NEW OVERWEIGHT AT BARCLAYS
BELLWAY RATED NEW UNDERWEIGHT AT BARCLAYS; PT 1498.1P
BERKELEY GRP RATED NEW EQUALWEIGHT AT BARCLAYS; PT 2454.7P
BOVIS HOMES RATED NEW UNDERWEIGHT AT BARCLAYS; PT 778.1P
DAISY CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
DEUTSCHE POST CUT TO NEUTRAL VS BUY AT BOFAML
EMPERIA RATED NEW BUY AT ING
GALLIFORD TRY RATED NEW EQUALWEIGHT AT BARCLAYS; PT 1200.1P
INDITEX CUT TO NEUTRAL VS BUY AT BOFAML
INTERTEK CUT TO UNDERPERFORM VS SECTOR PERFORM AT RB
KCOM RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
METRO RAISED TO OVERWEIGHT AT BARCLAYS
NORDEA CUT TO HOLD VS BUY AT SOCGEN
PERSIMMON RATED NEW EQUALWEIGHT AT BARCLAYS; PT 126
ROYAL MAIL RATED NEW SECTOR PERFORM AT RBC, PT 580P
ROYAL MAIL RATED NEW SELL AT UBS, PT 450P
TAYLOR WIMPEY RATED NEW OVERWEIGHT AT BARCLAYS; PT 146.8P
WH SMITH RAISED TO OVERWEIGHT VS UNDERWEIGHT AT JPMORGAN
WIRECARD CUT TO EQUALWEIGHT FROM OVERWEIGHT AT BARCLAYS

OVERNIGHT MARKETS

Asian markets
Nikkei 225 down -30.93 (-0.20%) at 15,096
Topix down -3.91 (-0.32%) at 1,233
Hang Seng up +76.66 (+0.32%) at 23,734

US markets
S&P 500 down -3.66 (-0.20%) at 1,788
DJIA down -8.99 (-0.06%) at 15,967
Nasdaq down -17.51 (-0.44%) at 3,932

European markets
Eurofirst 300 down -8.43 (-0.65%) at 1,296
FTSE100 down -25.45 (-0.38%) at 6,698
CAC 40 down -48.39 (-1.12%) at 4,272
Dax down -32.14 (-0.35%) at 9,193

Currencies
€/$ 1.36 (1.35)
$/¥ 100.02 (100.13)
£/$ 1.61 (1.61)
€/£ 0.841 (0.8397)

Commodities ($)
Brent Crude (ICE) up +0.26 at 107.18
Light Crude (Nymex) up +0.25 at 93.59
100 Oz Gold (Comex) at 1,273
Copper (Comex) at 3.16

10-year government bond yields (%)
US 2.72%
UK 2.73%
Germany 1.73%

CDS (closing levels)
Markit iTraxx SovX Western Europe at 64.4bp
Markit iTraxx Europe +2.93bps at 82.65bp
Markit iTraxx Xover +4.55bps at 337.02bp

Sources: FT, Bloomberg, Markit

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