LCM Dawn Patrol – 29.11.13 – LCM Volatility strat. GS’ where to invest now?. MS on Oil & Gas and on Capital goods. JPM on Semis… WEEK END.

Happy thanksgiving and happy Hanukkah!

European equity markets ended into positive territory, on a relatively quiet session as the US markets were closed for the Thanksgiving holiday. Most European indices ended near the session’s highs, with the main exception being the FTSE 100 which failed to sustain earlier momentum due to the BoE’s announcement on planned modifications to the Funding for Lending Scheme. On the corporate front investors assessed mixed earnings news; Thomas Cook (TCG.LN) +14.7% was amongst the leading movers having surprised the market with better than expected FY earnings and an upward revision of its FY15 sales and profitability targets. Macro data dominated the news flow with a raft of EU data beating expectations, including the Eurozone Nov Consumer Confidence and the German Nov preliminary CPI. The periphery has outperformed the rest of the region with Italy +0.9%, Spain +0.6%, and Portuga +0.5%l, and Ireland and Greece both at +0.4%.
Asian markets are largely flat this morning on low volumes. Data from Japan indicated that October production was weaker than expected, but the market remained confident given the trend was positive. A lead indicator suggested that November activity should improve, although this data can be volatile. Japanese inflation, employment and household spending data was all in line with expectations. South Korean industrial production data improved in October after falling in September. Making South Korean headlines was that Kepco had shut down another nuclear reactor, raising fears of electricity shortages. The government rejction of ADM’s bid for Graincorp and Rio suspending production in Gove made headlines in Australia.

Europe to open flat today as we wait for inflation data and that was the main catalyst for the last ECB rate cut (or at least that’s what they want us to believe).

Today, we”ll get the Spain GDP (Q3, rev), Spain CPI, Italy Business confidence, Euro Area Consumer Confidence and German CPI. We also get in the UK the Financial Stability Report followed by BoE governor Carney speech

WEEK END

FOOD. Get your Turkey here: http://www.thanksgivingparis.com/store.html
FILM. In the land of the Head Hunters. It’s now plkaying in Paris. http://bit.ly/1800sDs
KIDS. Saint Germain des Prés à la montagne. http://www.france-montagnes.com/saint-germain-des-neiges
EXPO. Les Halles en 68, une Américaine à Paris. http://quefaire.paris.fr/fiche/73488_les_halles_en_68_une_americaine_a_paris_

NEWS

• Basel Said to Target Bundled Debt in Hunt for Capital Holes
• U.K. Nov. GfK Consumer Confidence -12 vs Est. -10
• Japan’s Inflation Gauge Rises Most Since 1998 as Abenomics Makes Progress
• Carney’s Alarm Bell on Housing Nudges BOE Toward Stimulus Exit
• U.K.’s Labour Vows to Overhaul Energy Market in Push for Votes
• Merkel Rules Out Ukraine-EU Accord at Summit as Optimism Cooled
• Spain Said Near Rules on Deferred Tax Assets to Ease Bank Losses

Rubis Says EU85M Rights Offer Was 334% Subscribed

Monte Paschi Seeks Return to Profit in Restructuring Plan
Speedy Hire CEO Resigns Over Accounting Irregularities
Lloyds Said to Be Close to Naming Blackwell as Next Chairman
Apollo Close to Buying Aviva’s U.K. Property Assets: FT
Conwert Immobilien Invest Says Vice Chairman Pruckner to Quit
Barclays May Pay Top Execs Mainly in Shr-Based Allowances: FT
Morgan Stanley Leads Japan M&A Advice for First Time Since 1997
HSBC’s King Sees More Focus on Forward Guidance as Fed Tapers

CURRENT STUFF

Black Friday: Americans began their bargain shopping earlier than ever on Thursday evening as US retailers opened on Thanksgiving to kick off an intensely competitive holiday season. (Financial Times)

ECB warns on external risk to Eurozone financial system (FT). The ECB on Wednesday issued a warning on the looming reduction of monetary stimulus in the US, calling on eurozone policy makers to do more to prepare for the market shocks. In its latest financial stability report, the ECB said the risks to the eurozone’s financial system from outside the currency bloc had grown since May. “Starting in May, there was a significant re-pricing in global bond markets, which took place largely because of changing monetary policy expectations in the United States – with increased foreign exchange market volatility and stress borne largely by emerging market economies,” the ECB said.

USA: Chicago PMI and U Mich Sentiment Stronger than Expected. The Chicago PMI printed at 63.0 in November (vs. consensus 60.0), from 65.9 in October. Although a downtick from last month, the index remains in strongly expansionary territory. By component, declines were seen in new orders (-5.5pt to 68.8) and production (-6.8pt to 64.3), while employment rose (+3.2pt to 60.9). Manufacturing indicators for the month of November have been mixed, with weaker-than-expected Philly Fed, Empire manufacturing, and Dallas Fed surveys, set against stronger-than-expected Chicago PMI, Markit PMI, and Richmond Fed releases. (GS Research)

Wolfgang Münchau – Why Europe needs to try unconventional policy (FT). Last week’s data for the eurozone tells us that a long period of low economic growth and excessively low inflation lies ahead. France is falling back into recession; the signs of recovery in Italy have disappeared – again; even Germany has lost momentum. What should the ECB do now? It could, and probably should, cut interest rates again. The eurozone needs all the help it can get, but an additional cut will probably not be sufficient. But if Mario Draghi wants to make a real difference, he should contemplate quantitative easing.

“A preliminary commitment by banks to underwrite Monte dei Paschi’s 3-billion-euro ($4 billion) capital increase expires at the end of January, the Italian bank said in a document showing why it needs to press on with the cash call. If no capital increase is launched by that date, the pre-underwriting agreement with a pool of 10 banks would come to an end and Monte dei Paschi would have to restart negotiations to form a new consortium guaranteeing the rights issue, it said.” (Reuters)

China sent fighter jets into its new air defence zone on Thursday further escalating tensions in the East China Sea that have also drawn in the US. Col Shen Jinke said several fighter jets and an early-warning aircraft had been deployed as part of a routine patrol. (Financial Times) (WSJ)

Japan is winning its war on deflation with the latest consumer price inflation figures showing the highest reading since the country slipped into deflation 15 years ago. Core consumer price index inflation, which excludes fresh food but includes energy, hit 0.9 per cent in October, up from 0.7 per cent the previous month and in line with economists’ expectations. Excluding both fresh food and energy, it reached 0.3 per cent, the highest reading since 1998, indicating that rising energy costs alone were not the sole factor in inflationary pressure. (Financial Times)

STRATEGY

LCM (Abet) LCM Volatility Strategy. The Finger and the Moon #4.
Equities
– One month later, the message remains the same: short term implied volatility of most equity indices are anesthetized by a very low realised volatility which reflects the absence of marked themes on equity markets.
– Low realised volatility is due to this low dispersion of sectors’ returns and this low correlation among stocks. We consider this as an extreme event which should “normalise” within a reasonably short time frame.
– The short term ATM IV is extreme but it is interesting to note that the term structure and the skew are less extreme, implying the expectations of a return to “more normal” times in the period ahead.
– Directional trades are risky because the timing of this “return to normalcy” is really uncertain, but there are plenty of opportunities in terms of relative value trades.
Also, because the risk of being wrong in terms of market timing is low (LT IV is quite cheap) we reiterate the opportunity to enter several trades for 2014 as 2014 will be necessarily different from 2013.
– “Carry strategies” by selling the short term implied volatility of the FTSEMIB remains one of our preferred themes.

Currencies
– Contrary to the equity market, complacency has left the currency market. The relief rally of EM currencies is over and IV has failed to decline further.
– The currency market is really exciting because the implied volatility remains low enough to allow the implementation of low risk strategies for significant return via gamma and delta exposure.
– The low volatility context has not affected the potential performance of currencies and we think that Call Spread on RUB or Put Spread on AUD are very attractive trades. IV on INR and BRL is costly so we continue to favour the RUB as the best candidate to short.
– The CZK reacted strongly with the intervention of the central bank but there was no contagion to the PLN or HUF which is very impressive. For the same or other reasons, we think Eastern Europe currencies could depreciate and given their very low IV, we take this opportunity to buy Call Spread on PLN.
– We propose other trade ideas to play the depreciation of the CAD, the appreciation of the GBPSGD and pure derivatives strategies to play some mean-reversion of the relative IV of EURSEK against EURPLN.

GS (Kostin) Where to invest now?
Strategies for a market trading at fair value.

Target: S&P 500 will rise 6% and reach 1900 at year-end 2014

Our forecast return reflects 8% growth in EPS to $116 coupled with an essentially flat forward P/E multiple near 15x. Looking ahead, extended growth in sales, earnings, and the economy will lift P/E to 16x. S&P 500 will reach 2100 by end of 2015 and 2200 by end 2016.

Path: 67% probability of a 10% drawdown at some point during next 12 months

S&P 500 has soared 26% YTD. Median expected drawdown equals 6% inthe next three months and 11% during the next 12 months. Drawdowns of these magnitudes from the current level would equate to 1700 and 1600. 40% market rally in 18 months with no correction.

Fundamentals: Strengthening US economy and rising earnings

US GDP growth will accelerate to 3% in 2014. Fed taper will start in March. No hike in fed funds rate until 2016. Buybacks and dividends will grow by 25% to $960 billion and account for 45% of cash usage by S&P 500 firms in 2014, the highest share since 2007.

UPS&DOWNS

Oil & Gas (MS, Rats) Outlook 2014: Make, Break or Play for Time?
The imbalance in the finances of the majors will need to be resolved at some point. When that happens, the shares are likely to move sharply. Still, in 2014 we expect the industry to ‘play for time’ by accelerating asset sales. Without material FCF improvement, the sector is unlikely to outperform.

Capital Goods: Mining Equipment (MS, Uglow) Further downside in 2014; Atlas Copco moved to UW
We analyse mining capex and equipment orders in detail and conclude that a trough is nowhere in sight. On this basis, we see a substantial rerating ofmining equipment names as untenable, move ‘quality stock’ Atlas to Underweight, and remain Equal-weight on the other names under coverage.

Accor (MS, Lewis) Good Start, More To Come
Accor dropped its targets to sell assets, announcing an internal opco/propco instead. While details are limited now, we see increasing efficiency, record system growth, high cyclical recovery and scope for a re-rating: Overweight

European Semiconductors (JPM, Deshpande) 3Q13 inventory seasonal to below seasonal. Low inventory means current softness will likely be short.
Though 4Q13 guidance from many semi companies was below seasonal, this is because the semi cycle shows no clear direction and customers are cautious due to recent history of false starts. Thus, we expect that though 3Q13 inventory was below seasonal to seasonal, the weak 4Q13 guidance will mean it will beabove seasonal at end 4Q13. That said, with the starting point being below seasonal inventory, if the macro improvement in US and Europe continues, weshould see a seasonal bottoming in 1Q14 with semi company sales improving in 2Q14. Infineon is our top pick in an environment of improving industrial demand, with European autos recovering. With ASML having pulled back, that stock also warrants investor interest due to the strong 3-year case.

ANTOFAGASTA RATED NEW OUTPERFORM AT BERNSTEIN, PT 1,100P
ATLAS COPCO CUT TO UNDERWEIGHT VS EQUALWEIGHT AT MORGAN…
BNP RAISED TO BUY VS NEUTRAL AT UBS
BOLIDEN RATED NEW OUTPERFORM AT CREDIT SUISSE, PT SEK117
BSKYB RAISED TO OUTPERFORM VS NEUTRAL AT MACQUARIE
EXPERIAN CUT TO SELL VS NEUTRAL AT GOLDMAN
INTER RAO RAISED TO OVERWEIGHT VS NEUTRAL AT JPMORGAN
PUBLIC POWER CORP RAISED TO OVERWEIGHT VS NEUTRAL AT JPM…
RENTOKIL RAISED TO BUY VS NEUTRAL AT BOFAML
SERCO RAISED TO BUY VS NEUTRAL AT BOFAML
SOCIETE GENERALE RAISED TO NEUTRAL VS SELL AT UBS
TAISEI RAISED TO NEUTRAL VS SELL AT AT CITI
UPM CUT TO SELL VS NEUTRAL AT UBS

OVERNIGHT MARKETS

Asian markets
Nikkei 225 down -150.67 (-0.96%) at 15,576
Topix down -6.64 (-0.53%) at 1,254
Hang Seng up +74.99 (+0.32%) at 23,864

US markets
S&P 500 up +4.48 (+0.25%) at 1,807
DJIA up +24.53 (+0.15%) at 16,097
Nasdaq up +27.00 (+0.67%) at 4,045

European markets
Eurofirst 300 up +4.51 (+0.35%) at 1,305
FTSE100 up +5.00 (+0.08%) at 6,654
CAC 40 up +9.36 (+0.22%) at 4,302
Dax up +36.24 (+0.39%) at 9,387

Currencies
€/$ 1.36 (1.36)
$/¥ 102.35 (102.29)
£/$ 1.64 (1.63)
€/£ 0.8318 (0.8323)

Commodities ($)
Brent Crude (ICE) unchanged 0.00 at 110.86
Light Crude (Nymex) down -0.09 at 92.21
100 Oz Gold (Comex) up +4.60 at 1,242
Copper (Comex) up +0.03 at 3.23

10-year government bond yields (%)
US 2.75%
UK 2.74%
Germany 1.70%

CDS (closing levels)
Markit iTraxx SovX Western Europe +0.17bps at 63.09bp
Markit iTraxx Europe +0.4bps at 77.52bp
Markit iTraxx Xover -3.34bps at 311.91bp

Sources: FT, Bloomberg, Markit

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