LCM Dawn Patrol – 03.02.14 – Lots on Strategy, JPM on EU Banks, an overview of things to come…

Bonjour,

Economic data released this morning and over the weekend provided a dimmed sentiment in Asia this morning. China’s official PMI data came out over the weekend and weighed on the whole region; the data came in at 50.5, weaker than last month’s and fueling concerns of an economic slowdown in China. China, Hong Kong, and Taiwan remained closed for Chinese New Year.

On the FX side, the USD finished higher vs major currencies on EM worries and the Fed tapering, the EURUSD traded lower on the Bundesbank comments. Commoditiess were lower with silver leading the pack (down 3%). Gold -2%, NatGas down 2.25%. Crude up 1.5%.

Markets don’t seem to care about the current earnings season and the FOMC’s meeting was a non event. The press and strategists only focus on EM… I’ve put some summaries below, but as capital economics wrote last week, we shouldn’t put them all in the same basket. And it doesn’t seem like it’s a systemic crisis about to happen but more localised events (even if the funds outflows don’t help).
Investors are still on the cautious side globally. This week, we’ll monitor the US (today), EU (today) and China PMIs (some came out in line over the WE, more coming tomorrow), some CPI data (EU PPI and Italy tomorrow), the ECB meeting on Thursday and the NFPs on Friday.

We also have a batch of earnings coming even if the largest companies already published. This week: Mon (SYY in the morning and APC, GGP, HIG, and YUM after the close), Tues (ADM, Arm, BP, CLX, CME, EMR, ETN, HCA, KORS, and UBS before the open and AFL, GILD, and UNM after the close), Wed (ADP, CTSH, EL, IACI, MRK, and TWX in the morning and AKAM, DIS, KIM, PRU, and XL after the close), Thurs (AER, CMI, Daimler, DO, FOX, GM, K, KKR, PRGO, TEVA, and VOD in the mornig and G, LNKD, NCR, and VRSN after the close), and Fri (Arcelor, CBOE, and CI in the morning).

SPORTS

Who's laughing now?

Who’s laughing now?

NFL: The Seattle Seahawks beat the Denver Broncos 43 to 8.
Rugby: The French beat the English 26 to 24.
Ski: 1st Ligety, 2nd Hirscher, 3rd Pinturault.

NEWS

S&P 500 Has Longest Weekly Drop Since 2012 as Fed Cuts Stimulus
Euro-Area Inflation at 0.7% Builds Rate Pressure on ECB: Economy
London Leads U.K. House Price Increases as Item Club Sees Bubble
Danish Premier Builds Cabinet as Goldman Deal Splits Coalition
Ukraine Sovereign Rating Cut to Caa2 from Caa1 by Moody’s

Etihad Airways Sets Deadline to Decide on Alitalia Investment
Porsche, Piech Sued in Frankfurt by Hedge Funds Over VW Deal
Vestas Forecast to Return to Profit After Two Years of Cost Cuts
RWE Seeks AGM Approval for Option to Raise Capital: DLF
Axel Springer in Talks to Buy Immowelt: Focus
Mapfre to Buy Bankia Units for EU151.7m
U.K. Retailer DFS Plans GBP1b IPO This Yr: Sky
Total, Renault Among French Companies Visiting Iran, Figaro Says
HSBC Said to Plan Sale of Swiss Private Banking Assets in Geneva
European Banks Face 5.5% Capital Hurdle in EBA Stress Test

CURRENT STUFF

China’s services sector cools further: China’s official non-manufacturing index slipped from from 54.6 in December to a multi-year low of 53.4 last month. Any score above 50 indicates growth. The data is in line with other data showing the economy cooled leading up to Chinese New Year. On Saturday, the official manufacturing index slipped to 50.5. (FastFT)

KKR “is set to open its first office in Spain on Monday, as the buyout specialist seeks to build on its billion-euro stake in a country that is attracting a growing volume of investment from abroad.” (WSJ)

STRATEGY

Emerging Markets and flows
Emerging Markets Equity Funds posted their biggest outflow since mid-3Q11 heading into the final days of January as institutional redemptions hit their highest level in nearly three years. Investors also pulled significant sums out of Emerging Markets Bond and US Equity Funds during the week ending Jan. 29. But they continued to pump money into Japan, Global and Europe Equity Funds and boosted their commitments to Balanced and Real Estate Sector Funds.
Overall, Equity Funds collectively posted net outflows of $10.4 billion versus $1.88 billion for Bond Funds and $11.53 billion for Money Market Funds. The performance gap between developed and emerging markets fund groups since the start of last year narrowed slightly for equity funds – although it remained above 29% — but increased for bond funds.EPFR Flows

EPFR Flows

JPM (Loeys) The J.P. Morgan View
Is this correction tradable?
Asset allocation
–– We do not think so. The main downside comes from Chinese delevering, but this market is quite closed, has a lot of government ownership, and has little foreign participation. Contagion into DM should be limited, but economic contagion could be severe into EM. We stay broadly underweight EM, but remain long DM risk assets.
Economics –– Activity data are still tracking significantly above our forecasts for DM, but EM turmoil and Chinese efforts to delever its financial system are increasing downside risk on EM, pushing global growth bias to almost balanced.
Fixed Income –– Stay long German Bunds vs. US Treasuries and UK gilts on expectations of continued policy divergence.
Equities –– A down January does not imply a decline over the remaining 11 months. The opposite is actually more likely from a historical point of view.
Credit –– The spread of EM over US HG has now surpassed the wides seen during last year’s taper talk selloff.
FX –– Add to dollar longs.
Commodities –– Risks skewed to the downside for energy markets.

JPM (Matejka) Equity Strategy
February Chartbook – We see the dip as an opportunity to add, not as a start of sustained weakness

At the turn of the year many struggled to identify an obvious negative. This is clearly not the case anymore, a whole range of factors are being questioned again. We think this is a healthy development. Complacency is receding as a number of technical indicators have moved away from the stretched territory (Vix, Bull-Bear, RSI…). Investors raise the following concerns: 1) Rollover in global activity momentum. The acceleration is behind us, but there is enough breath for growth to remain resilient. 2) Mixed Q4 earnings. European results are lagging, but we attribute the bulk of this to ongoing disinflationary pressures in 2H ’13 and weakening EM FX. IFO at 3 year high points to better trends ahead. 3) EM stress feeding back into DM? We remain UW EM exposure in our portfolios, but don’t believe that EM stress will dominate the DM recovery theme. Last summer’s dip was a buying opportunity, and we think this one is too. We stay OW periphery with spreads behaving well and PMIs outpacing the core. Banks and Consumer Cyclicals remain our top picks.

UPS&DOWNS

European Banks (JPM,  Abouhossein) EM sell-off: Analysing exposure at risk
Following recent movements in bond yields and currencies for some EM countries (e.g. Argentina, India and Turkey), we retain our view that EM exposure related risk is a cause of concern for Eurobanks. As an example, the increase in Turkish ON lending rate to 12.0% from 7.75% did not seem to have the desired effect on its currency. Hence, we remain concerned and analyze the spillover impact on European Banks and Global IBs from the EM volatility across key product classes. We assess two factors: i) potential contagion risk into EM related FICC revenues, and ii) traditional credit exposure risk of Eurobanks in EM. We conclude, ongoing Fed tapering remains a concern and hence we would continue to avoid EM exposed banks such as i) CSG within IBs, ii) UK-Asians (HSBC and STAN), and iii) EM exposed large-cap Spanish banks (SAN and BBVA). We would also avoid Turkish Banks.

 

Casino(MS, Aubin) Premium to SOTP not warranted, move to UW
Deteriorating prospects ahead for Casino’s EM subsidiaries – as reflected by declining market value – combined with likely further margin erosion in France translate into a marked-to-market SOTP of €71, which we set as our new price target.

Prudential plc (MS, Hocking) Assessing the Currency Risk: Watch for an Entry Point
Renewed volatility in EM has once again raised questions about Pru’s exposure to weaker currencies in Asia. In our view, the key currency risk is translational – Pru’s US unit and exposure to USD-linked territories in Asia (e.g. HK and SG) limits the downside risk. We would buy on weakness.

Global Autos(MS, Lebke) Beyond the Yen: Exploring the Risks of EM Slowdown
Whilst Japanese OEMs’ product offensive on the back of >100 USD/JPY is yet to start, the turmoil unfolding in EM markets poses a further, albeit more short-term risk to sector profits. We take a deep dive into global Auto OEMs’ sensitivity to changes in volume and FX for 5 key individual EMs.

Europe: Media (GS, Padiachi) Estimate changes to reflect FX/investments, structural thesis
We update estimates across our coverage to adjust for FX moves. We upgrade DMGT to Buy from Sell and downgrade RTL to Neutral and Informa to Sell. We maintain our CL-Buys on Publicis, UBM and Mediaset.

SCOR (GS, Malhotra) Buy: Sell-off implies overplayed concerns on earnings power; up to Buy
We upgrade to Buy as we think the recent sell-off offers an attractive opportunity. Current valuation implies market concerns around earnings power but we believe volume growth (6% to 2017E) will offset margin pressure (net income growth 3% 2014-17E).

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