LCM Dawn Patrol – 21.11.13 – GS European Strategy for 2014, GS dgrades K goods, MS on Telco from the Barcelona conf, more…

Bonjour,

US equities finished lower on Wednesday with the S&P, Nasdaq and Russell all down for a third straight session. There were a number of macro-related dynamics in focus, though the broader price action still seemed to be more reflective of some consolidation following the six-week run-up in the market. While the 14 ET release of the October FOMC minutes sent stocks lower and medium-to-longer-term Treasury yields higher (the front end fared better), they did not provide much additional insight into the timing of an initial tapering move (that said, they also did not close the door on a December move). In addition, despite the lack of consensus on the appropriate adjustments, they largely fit with expectations for some kind of strengthening of forward guidance. The corporate calendar remained fairly busy with the latest batch of October quarter reporters out of retail, investor days and sell-side conferences. However, takeaways were largely company-specific in nature. Healthcare was the only sector to finish in positive territory today with support from hospitals and managed care. Other defensive sectors such as utilities and telecom fared the worst.
After minutes from the US Federal Reserve suggested a scaling back of its stimulus programme was likely in the “coming months”, most Asian indices fell back, although Japanese stocks rose to a six-month high.

Today, the weather is horrible in Paris. We get European PMIs, US jobless claims, PPIs, Philly’s Fed…

NEWS

ECB Nominates Nouy for Supervisor Job After Spat Over Gender
EU Risks Violating Global Bank-Capital Pact, Basel Member Says
Greek Fund Won’t Accept ‘Excessive Discount’ on Eurobank: Reuters
Greek budget plan to be tabled today, ANA reports

Peugeot
Talks Said to Stumble After Dongfeng Cuts Size of Planned Stake
Vodafone Chief Is Open to His ‘Beautiful Assets’ Being Circled
Bumi Delays $501m Bakrie Exit After Tan Financing Hold Up
Morgan Stanley Said in Discussions to Sell Oil Unit to Rosneft
Tele2 to Weigh Sale of Dutch Fixed Lines as Decline Accelerates
Oi CEO Open to More Consolidation After Portugal Telecom Merger
Atos Seeks Takeovers to Make Worldline Europe’s Payment Leader
Commerzbank to Invest EU220m in Online Banking by 2016: FAZ
Chrysler Adds 4 Banks to Help With IPO, Eyes Early Dec.: Reuters
Generali Sells Fata Danni to Cattolica for EU179m
Gimv Group Proposes EU47.2m Investment in Electrawinds
Sareb, Santander Sell EU540m Realia Debt, Expansion Reports

CURRENT STUFF

HSBC China Nov. Flash PMI 50.4; Est. 50.8

‘Blunt’ head of China’s biggest bank has warned that bad loans will inevitably rise and weaker lenders will be wiped out as the government relaxes its grip on the economy. But Jiang Jianqing, chairman of Industrial and Commercial Bank of China, the country’s largest lender by assets, also hit back at those foreign critics who have raised questions about the resilience of China’s banks after the lending spree that powered the country through the 2008 global financial crisis. (Financial Times)

Fed minutes:The central bank offered no new hints on when it could “taper”, reiterating that it was still expecting such a move “in coming months”, but the discussion of alternatives at the rate-setting Federal Open Market Committee suggests it is keen to slow its buying. Cutting the extra interest on reserves banks hold with the Fed would drive down already low overnight interest rates even further, probably to just a few basis points, hurting bank profits but adding extra stimulus to the economy. Most officials on the FOMC thought such a move “could be worth considering at some stage”(Financial Times) (Alphaville)

US budget talks generate cautious optimism: A 29-member budget conference committee including both Democrats and Republicans has been in negotiations since late October, and appears to have experienced a breakthrough in recent days. According to people close to the talks, the contours of a deal are coming together to replace some sequestration cuts with a mix of spending cuts and new revenues derived from higher government fees. The deal would set spending levels for one or two years, but ensure that the US government would not be shut down on January 15. (Financial Times)

The White House came out against a proposal by a group of hedge funds to take over and recapitalise the core operations of Fannie Mae and Freddie Mac, the US mortgage finance giants, saying it risked creating two new “too big to fail” institutions. (Financial Times)

STRATEGY

GS (Oppenheimer) European Strategy Outlook 2014
Slower but longer

2013 has been a year of sharp equity market appreciation led by multiple expansion. We think we are in transition from a ‘Hope’ or valuation-driven phase of the cycle, typical of recoveries from recessions, into a slower but longer ‘Growth’ phase driven by earnings growth.
Growing – up
After three years of virtual stagnation we expect European profits to grow 14% in 2014 driven by an improvement in global growth and some rise in margins. This pace of growth would be slow by the standards of typical recovery phases, but it would be enough to generate a total return through 2014 of about 15%. More importantly, we believe a steady secular upswing in the equity market can continue for a long time. The relative return on our forecast compared to bunds would be in the 72nd percentile of historical distribution. The case for equities as a ‘Long Good Buy’ continues in our view.
Themes: Income (total return) & Growth (DM)
Scarcity is likely to be rewarded. We continue to like a core strategy of total return opportunities: dividend yield plus dividend growth (GSSTHIDY). We supplement this with a preference for DM economic recovery exposure (GSSTDMGR).
Sectors: Upgrade banks, downgrade industrials
In our overweights we are looking to gain exposure to: 1) domestic European growth (banks, staffing and UK homebuilders), 2) gradually rising bond yields (insurance), 3) global growth (technology, autos and luxury goods), and 4) under-valued potential (healthcare). We continue to avoid expensive ‘defensives’ (food & beverages) and EM/commodity exposure (resources, industrial goods & services and chemicals)

UPS&DOWNS

Europe: Capital Goods (GS, Ibbotson) Downgrading Capital Goods coverage view to Cautious
We downgrade our sector view to Cautious alongside our Strategists move to Underweight. We see lower long-term growth going forward and as such struggle to justify the current valuation premium to the market.

Telecommunications Services (MS, Prota) Barcelona TMT – Day 1 Wrap
A more positive sector mood?: Vodafone’s CEO mentioned higher demand, improved consumption patterns, hopes of a more supportive economy, and more pro-investment and consolidation regulation. Project Spring should lead the sector into investment driven competition too. 4G is generally perceived as a new leg of growth with higher smartphone penetration and customers trading up to higher value data packages eventually driving blended ARPU growth even without charging for a 4G premium. We think that BT was more upbeat than previously and the company remains confident that it can absorb sports costs without impacting guidance or dividend.

ALLIANZ CUT TO NEUTRAL VS BUY AT CITI
ANTOFAGASTA CUT TO NEUTRAL VS BUY AT UBS
CHEMICALS, OIL SERVICES CUT TO UNDERWEIGHT AT GOLDMAN
DERWENT LONDON RAISED TO BUY VS NEUTRAL AT GOLDMAN
ERSTE RAISED TO BUY VS HOLD AT DEUTSCHE BANK
EUROPE BANKS, UK HOMEBUILDERS RAISED TO OVERWEIGHT AT GOLDMAN
EUROPE CAPITAL GOODS CUT TO CAUTIOUS VS NEUTRAL AT GOLDMAN
EUROPEAN MEDIA CUT TO NEUTRAL AT GOLDMAN
EUROPEAN TELECOMS RAISED TO NEUTRAL AT GOLDMAN
INDUSTRIAL GOODS CUT TO UNDERWEIGHT AT GOLDMAN
LABORATORIOS ROVI CUT TO NEUTRAL VS BUY AT UBS
LEGAL & GENERAL RAISED TO BUY VS NEUTRAL AT BOFAML
METRO RAISED TO BUY VS HOLD AT KEPLER CHEUVREUX
MUNICH RE RATED NEW BUY AT UBS, PT EU177
RAIFFEISEN RAISED TO BUY VS HOLD AT DEUTSCHE BANK
RESOLUTION CUT TO NEUTRAL VS BUY AT BOFAML
SARAS CUT TO HOLD AT SOCGEN ON LACK OF FCF GENERATION VISIBILITY
SEGRO CUT FROM CONVICTION BUY AT GOLDMAN, STILL A BUY
SIXT CUT TO NEUTRAL FROM OVERWEIGHT AT HSBC
SODEXO CUT TO NEUTRAL VS BUY AT CITI
SWISS RE RATED NEW NEUTRAL AT UBS, PT SF83
TATA STEEL CUT TO UNDERWEIGHT FROM NEUTRAL AT HSBC; PT INCREASED

OVERNIGHT MARKETS

Asian markets
Nikkei 225 up +259.49 (+1.72%) at 15,336
Topix up +10.39 (+0.84%) at 1,244
Hang Seng down -169.41 (-0.71%) at 23,531

US markets
S&P 500 down -6.50 (-0.36%) at 1,781
DJIA down -66.21 (-0.41%) at 15,901
Nasdaq down -10.28 (-0.26%) at 3,921

European markets
Eurofirst 300 up +1.56 (+0.12%) at 1,297
FTSE100 down -16.93 (-0.25%) at 6,681
CAC 40 down -3.92 (-0.09%) at 4,268
Dax up +8.78 (+0.10%) at 9,202

Currencies
€/$ 1.34 (1.34)
$/¥ 100.45 (100.02)
£/$ 1.61 (1.61)
€/£ 0.8343 (0.8343)

Commodities ($)
Brent Crude (ICE) down -0.31 at 107.75
Light Crude (Nymex) down -0.25 at 93.60
100 Oz Gold (Comex) down -11.20 at 1,247
Copper (Comex) at 3.16

10-year government bond yields (%)
US 2.80%
UK 2.75%
Germany 1.72%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.26bps at 64.66bp
Markit iTraxx Europe -1.11bps at 81.54bp
Markit iTraxx Xover -6.04bps at 330.98bp

Sources: FT, Bloomberg, Markit

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