LCM Dawn Patrol – 16.12.13 – JPM View, GS on Flows, Barron’s summary, that’s it…


Asian markets are weaker this morning, with data releases dominating headlines. Slightly weaker than expected Chinese PMI data didn’t immediately impact markets but dampened sentiment, with markets moving lower over the remainder of the morning. The Tankan, a Japanese manufacturers confidence index, came in at plus 16, slightly higher than the plus 15 forecast. M&A news dominated the Australia market with Wesfarmers selling its insurance arm to IAG and AWE rejecting an offer from Senex. IPO activity remains a focus in Hong Kong after China Everbright was priced late last week.

Today, we’ll have some European PMI data for December, the US Empire Manufacturing numbers, and US IP for November.


• China Manufacturing Index Unexpectedly Drops on Output
• Draghi Ally Asmussen to Leave ECB Board for German Government
• London Senior Bankers Expecting 44% Bonus Increase: Survey
• Merkel Begins Third Term Bolstered by SPD Backing for Coalition
• Ukrainian Demonstrations Surge Before Yanukovych Meets Putin
• Libya’s Eastern Oil Ports Will Stay Shut, Capping Oil Sales

AirAsia X Plans to Sign ‘Major’ Airbus Plane Order This Week
Areva in Talks With UK on EPR Financing Terms, Echos Says
Banca Etruria Seeks Merger Following Bank of Italy Review
Glaxosmithkline Seeks to Boost India Unit Stake to 75%
Grifols to hold extraordinary shareholders meeting in Barcelona at midday
NTT to Buy French Co. NextiraOne for Over 20b Yen: Nikkei
Orco Property’s Hungarian Units Start Insolvency Proceedings
Renault-Dongfeng Venture to Introduce Vehicles in 1H 2016
SoftBank Declines on Report Sprint Is Considering T-Mobile Bid
Telefonica CEO Quits Telecom Italia Board on Brazil Conflict


Chinese manufacturing sector slightly less busy this month, according to HSBC’s closely followed purchasing managers’ index. The bank’s preliminary survey of Chinese manufacturing activity for December saw the PMI fall to a three month low of 50.5, from 50.8 in November. (FastFT)

Republicans line up for new battle over the need to lift America’s borrowing limit early next year, raising concerns that the fiscal truce established in last week’s bipartisan budget deal may be shortlived. Paul Ryan, Republican chairman of the House budget committee, said his party planned to demand concessions from the White House in exchange for raising the country’s debt ceiling. Republicans would meet in January to discuss the options. (Financial Times)

The EU has halted efforts to revive a landmark integration deal with Ukraine, amid growing doubts any deal can be done with the country’s president Viktor Yanukovich and his current government. Brussels and protesters in Kiev fear Ukraine will now move closer to Russia on Tuesday, when senior officials from the two countries are expected to sign a “strategic agreement” to improve trade links – potentially inflaming demonstrators. (Financial Times)


Rules for failing banks raise prospect of eurozone red-tape burden: The latest proposals for the eurozone’s new banking regime could see up to 126 people being consulted on how to wind up a bank, even though agreement might need to be reached over the course of a weekend while financial markets are closed. Some senior officials are warning the proposals are too cumbersome. (Financial Times)


ECB official Asmussen quits to serve in German coalition as a junior mininster: His support for Mario Draghi, the ECB president, during the worst days of the eurozone crisis last year gave crucial German backing for the central bank’s aggressive measures. He is expected to be replaced by Sabine Lautenschläger, vice-president of the Bundesbank, which has opposed Mr Draghi’s efforts – including last year’s sovereign bond-buying scheme, which many analysts credit for ending the worst of the crisis. Her views on monetary policy are not clear. (Financial Times)

Barron’s consulted 10 top Wall Street strategists to develop an outlook for 2014. The group was decidedly bullish, with year-end targets for the S&P ranging from 1900 to 2100 (mean prediction 1977, roughly 11% higher than the current 1775). The group expects these gains to be made on the basis of a stronger economy and corporate fundamentals, with the market becoming less dependent on indications from the Fed. Tech and industrial stocks are expected to fare especially well. Not surprisingly, they expect the Fed to sharply cut its monthly bond-buying program, allowing interest rates to move moderately higher. They see a 2.7% GDP increase versus this year’s expected 1.7%. Piece includes a multitude of other predictions. Some picks from the experts: RIO, HD, JPM, 005930.KS, ORCL, NOC, GM, MCK, ULTI, LYB, XOM, CAT, CSCO (link).


JPM (Loeys) The J.P. Morgan View
Is growth bad for stocks?
Asset allocation –– Any sudden change in growth that brings rate hikes closer initially holds back stocks. But this effect wanes over time. US monetary normalization should not cause general asset price deflation as it should come with better growth.
Economics –– US Q4 growth upgraded from 1.5% to 2% on stronger consumption. US budget deal is likely worth 0.2% of 2014 GDP. 2014 Global GDP growth stays at 2.9% due to downgrades of Euro area Q2 2014 and lower Japan in Q2 and Q3 2013. We retain an upside risk bias.
 Fixed Income –– Short US and UK duration into 2014. Favor peripherals in the Euro area and UW EM local bonds.
Equities –– forecast S&P500 to rise 17% to 2075 by the end of 2014.
Credit –– Stay OW HY, financials vs. non-financials and BBS vs. As.
FX –– Stay long GBP vs. EUR and JPY.
Commodities –– Expect modestly higher metals prices in 2014.


JPM (Panigirtzoglou) Global Asset Allocation
Flows & Liquidity
Still waiting for corporate action
 This year’s equity market rally lacked corporate participation.
 In fact, corporates exhibited unusually contrarian behavior this year by reducing their M&A and share buyback volumes.
 This is surprising in a year when equities rallied strongly and uncertainty proxies appear to have declined sharply.
 On our models, one potential factor explaining this behavior is the decline in the relative cost between equities and debt, i.e. the Equity Risk Premium.
 Our S&P500 Equity Risk Premium proxy declined by more than 200bp since the summer of 2012, which by itself could make it less attractive for corporates to engage in debt-financed equity purchases.
 Callability in HY credit a secondary concern into 2014.
 Risk parity funds appear to be pretty long duration.

GS (Turner) European Flow Monitors: Strongest European Equity flows for 29 months.
Robust demand for European equities
The recent strong demand for European equities was evident again this week. We estimate the European investors made positive net flows of c.50 bp into European equity funds this week (7 days ended December 13, based on EPFR data), the largest such flow since July 2011. European flows into European equities have now been positive for 20 of the last 24 weeks; while Global flows into European equities have been positive for all 24 weeks. Encouragingly, demand also appears to be broadening, with no specific region/country bias obvious in the data.
Fixed income flows weaken Hitherto, the recovery in demand for equity products has not been at the expense of fixed income demand. This week however European investors made net redemptions of -€2.4 bn, the first material outflow since September. The moderation in demand was fairly broad-based across the range of fixed income funds, including both DM & EM and government & high yield.
EM equity demand deteriorates further In contrast to the robust demand for European equities, European demand for EM equity products deteriorated further this week – the fifth consecutive week in which flows have worsened. This negates a little of the strength in DM equity products, such that we estimate the aggregate net flow into equity products this week is €1.5 bn.


EADS (MS, Vig)  All About 2015
EADS’ investor forum provided investors with reassurance over the 2015 outlook. Further, mgmt outlined a number of initiatives being taken to improve margins beyond 2015. With earnings growth clear, valuation attractive and execution continuing to improve, we remain OW. PT to €64.

Imagination Technologies Group (MS, Meunier)  Royalties, alone, provide share support: Overweight
After meeting management (see Q&A inside), we think the share price fall was due to IMG misjudging consensus hopes for H1 vs H2, and to a higher market share loss than anticipated at MediaTek. But the business model is intact, with 40% market share in GPU, and shares have good support here.

Sage Group (GS, Mowalla): 2015 organic growth targets more achievable; Neutral
Following good FY13 results, we adjust our FY14-18 estimates to reflect an improved organic growth trajectory. We raise our valuation multiple to reflect this improvement which we believe will offer some scope to re-rate in the medium term.

Analyst Actions





Asian markets
Nikkei 225 down -164.00 (-1.06%) at 15,239
Topix down -11.78 (-0.95%) at 1,227
Hang Seng down -134.18 (-0.58%) at 23,112

US markets
S&P 500 down -0.18 (-0.01%) at 1,775
DJIA up +15.93 (+0.10%) at 15,755
Nasdaq up +2.57 (+0.06%) at 4,001

European markets
Eurofirst 300 down -1.98 (-0.16%) at 1,243
FTSE100 down -5.29 (-0.08%) at 6,440
CAC 40 down -9.41 (-0.23%) at 4,060
Dax down -10.54 (-0.12%) at 9,006

€/$ 1.38 (1.37)
$/¥ 102.81 (103.21)
£/$ 1.63 (1.63)
€/£ 0.8435 (0.8428)

Commodities ($)
Brent Crude (ICE) up +0.40 at 109.23
Light Crude (Nymex) down -0.27 at 96.33
100 Oz Gold (Comex) up +0.20 at 1,236
Copper (Comex) at 3.35

10-year government bond yields (%)
US 2.85%
UK 2.90%
Germany 1.83%

CDS (closing levels)
Markit iTraxx SovX Western Europe at 62.78bp
Markit iTraxx Europe -1.03bps at 79.01bp
Markit iTraxx Xover -5.15bps at 317.79bp
Markit CDX IG -0.26bps at 69.99bp

Sources: FT, Bloomberg, Markit


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