Chinatown

GLOBAL EQUITIES RESEARCH

The new U.S.-China Strategic and Economic Dialogue that started yesterday is held in Washington till tonight, hosted by Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton. Closing Statements are released today (21.45 BST). The S&ED will focus on addressing the challenges and opportunities that both countries face on a wide range of bilateral, regional and global areas of immediate and long-term strategic and economic interests. This first meeting of the Dialogue will also set the stage for intensive, ongoing and future bilateral cooperative mechanisms. But, in the past, for two years, Henry Paulson focused on the twin phantoms of exchange-rate targets and trade imbalances. Congress embarked on a spree of protectionist rhetoric and China bashing. In return, Beijing did little to further liberalize its markets to foreign trade or address its corruption-ridden banking system. The main interest on the economic side will probably be whether the U.S. can coax China into an expression of support for the dollar. In broad terms, the two sides agree on a great deal, including the importance of reducing currency volatility, and the need to consolidate public finances while promoting a sustainable return to growth-diplomatic code for more wrangling over meaningless trade statistics. The two sides can also point to China’s continued purchases of dollars as evidence that it still supports the status quo, for now at least. This prompts the question of why Chinese officials have made a point of airing their concerns about the dollar. There may be three reasons. First, as a creditor, China has an interest in ensuring that the US is not tempted to inflate its way out of debt. By hinting that the dollar’s role is not inviolable, China is giving warning to the US that its concerns should be considered. Second, China’s officials see the issue as a useful way of pushing back against the criticism China is used to facing over its currency policy and other forms of export support. Third, and perhaps most importantly, the debate helps China’s government to recast debate over its foreign exchange reserves in terms of the dollar’s global role. In doing so, China’s government deflects attention from its responsibility in channelling a large share of China’s income into foreign assets and for any subsequent losses. Global markets may be listening closely, but Chinese criticism of the dollar is mainly directed towards audiences at home.
The 11% jump in U.S. new home sales to a seven-month high of 384k annualised in June, from 346k, is yet another sign that housing activity has bottomed out. New home sales have now been rising for three months in a row and the recent improvement in the NAHB homebuilders’ survey suggests that sales might even reach the 400k mark soon. To put that in perspective, however, even 400k would be less that a third of what sales were at the height of the boom in late 2005. Nevertheless, the rise in sales coupled with the continued decline in the number of homes on the market is now beginning to have a more pronounced impact on excess supply. The months supply of unsold homes fell to a 20-month low of 8.8 in June, from 10.2. Unfortunately, until that figure gets down to around 6 months worth of supply, the downward pressure on prices will remain. The median price of a new home fell by 12% over the year to June. In short, activity is stabilising, albeit at very low levels, but prices will continue to fall for the foreseeable future (watch for S&P / CS home price index released today at 14.00 BST).
June’s euro-zone money data showed that annual M3 growth continued its recent downward trend, slowing from 3.7% to 3.5%. The annual growth of private sector lending eased too, from 1.8% to 1.5% - a new record low. Lending to firms once again slowed particularly sharply. Admittedly, it is no surprise that bank lending is sluggish during a recession, as demand for loans will also have been weak. The slowdown in lending to firms will partly reflect the revival of alternative sources of finance as corporate paper markets get moving again. Finally, late June’s €442bn 12-month refinancing operation by the ECB will not have had time to feed through to the figures. Nonetheless, with the region’s banks likely to announce more write-downs on their toxic assets, loan defaults set to rise further and lending criteria still tightening in response to the economic slump, and surveys showing loan demand remaining weak, we still expect lending growth to continue to slow over the coming months.
Yesterday, the biggest jump in U.S. new-home sales in 8 years fostered the best DJIA’s 2-week rally since 2000. Homebuilders surged (Centex +9.1 %, Beazer Homes +13.9 %) pushing the S&P 500 homebuilders index (S5HOME) 40 % up since the rally began on July 10th. Targets are 1007 for the S&P 500 index and 2755 for the Eurostoxx 50.
Treasuries fell (10-year rate at 3.73 %, +5 bps) as the Treasury began selling a record $115bn in notes. $6bn in 20-year TIPS were auctioned at a rate of 2.387 %, higher than forecast. The Treasury will sell 2-, 5- and 7-year notes till Thursday (see yesterday’s daily mail for details).
Oil rose to $68.38 /bbl (+1.83$) while the dollar retreated to 1.4262 EUR/USD (vs. 1.4241 yesterday morning) and gold eased to $954.25 /oz (vs. 954.91).
Asian stocks were slightly up this morning (06.40 BST), with Japanese markets quite flat, and U.S. index futures were slightly down (DJIA -0.08 %, S&P 500 -0.143 %, Nasdaq 100 -0.141 %)..

ECONOMIC DATA WITH IMPACT

US S&P / CaseShiller home price index and the S&P / CaseShiller composite-20 for May (14.00 BST). The latter is expected at -17.90 % vs -18.12 % YoY, but the excess supply of unsold homes on the market is likely to continue putting downward pressure on prices for some time to come. /(major)
US consumer confidence index (15.00 BST) should show a small rebound in July, with gasoline prices now falling back, stock markets rallying and initial jobless claims beginning to ease (49.7 expected vs. 49.3). /(major)
The Richmond Fed Manufacturing Index (15.00 BST) is expected to rise from 6 to 8 in July. /(minor)
No major data released In the euro-zone.

POSITIVE IMPACTS

LVMH : H1 revenue €7.81bn, in line / Operating €1.36bn (1.34bn exp) / Indications of a slowdown in organic growth at the fashion & leather goods division over the period… However, approaches the H2 with confidence / Conf call 1400 UKT
BBVA : Q2 NII €3.59bn (3.32bn exp) / Net €1.56bn (1.3bn exp) / Bad loan ratio 3.2% end of June vs 2.8% end-March / Tier1 = 6.9%
BP : Q2 replacement cost profit $3.14bn (2.79bn exp) / Production 4.005m boep (3.948m exp) / Quarterly dividend, to be paid in September, is 14 cents per share ($0.84 per ADS) / Capex exp. to be less than $20 bn for the year / Refining outlook challenging
CONTINENTAL’s banks are pushing for a speedy capital increase of €1bn & want a separation from Schaeffler in the mid-term (FAZ)
VOLKSWAGEN plans to increase its capital mostly by issuing new preference shares, so as not to dilute the stakes of major shareholders (Handelsblatt)
SWEDBANK - ENSKILDA : The IMF & Latvia reached an agreement on policy measures which will help free up IMF funding alongside another €1.2 bn handout from the European Union / Both banks have the greatest exposure to the Baltics
SUBSEA : Q2 revenue $637m (562m exp) / Operating $118m (80m exp) / Order backlog $2.9bn (2.55bn exp)
SAGE : Trading in line with views / Robust balance sheet + strong FCF + net debt at June 30 fell to £491m (March 31: £558 m)
XSTRATA H1 production report : Thermal coal + 18% / Zinc in concentrate +30% / Ferrochrome -60% / Coal prod. volumes +11% / Total mined copper + 1% / Total mined nickel production +7%
PERNOD RICARD sold its Tia Maria coffee liqueur brand for €125 m in cash to Italy's Illva Saronno, bringing it closer to its €1bn disposal goal to help cut debt
GDF SUEZ : Russian PM Vladimir Putin will meet executives of GDF Suez Today to discuss joint projects…
REPSOL could be awarded E&P rights in Venezuela as it is part of a delegation accompanying Spain's foreign minister on an official visit
ACS's arm Cobra is part of a commercial delegation in Venezuela & could secure part of a €1.8 bn contract to develop Caracas metro

AMGEN : Q2 revenue $3.71bn (3.58bn exp) / EPS $1.29 (1.16 exp) / Sees FY EPS $4.80-4.95 (4.57 exp) + said FY revenue are trending toward the upper end of the current guidance of $14.4-14.8bn (14.33bn exp)

NEGATIVE IMPACTS

AHOLD : Q2 sales €6.4bn (6.56bn exp) / Stop&shop/Giant-landover sales $4.1 bn ($4.14 bn exp) / Giant-Carlisle sales $1.1 bn ($1.15bn e) / Albert Heijn sales €2.2 bn (€2.31bn e) / Continued to see changing customer with “inflation slowing considerably”
EADS : Q2 revenue €11.73 bn (10.74bn exp) / EBIT €656m (691.5m exp) on a new charge of €71 m on A400M / Sees Airbus’ goals challenging… but confirmed 2009 outlook + said revenue should be around previous year's level / Raised its FCF guidance
DBK : Q2 rev. €7.94bn (7.1bn e) / PTP €1.32bn (1.47bn e) / NII €2.76bn (3.35 bn e) / Com. 2.24bn, in line / Trading €2.6bn (1.76bn e) Risk provision €1bn (659m e) / Cost 5.62bn (4.90bn e) / Tier 1 = 11% / No outlook for 09 / Plans capital market issuance of €16bn

TRADING IDEAS

BUY ENI / ROYAL DUTCH / BP / TOTAL to play US energy names reporting this week
BUY NOKIA / GSZ / VIVENDI on reversal head & shoulder
BUY FTE / DTE to play economic recovery + gap above to be close soon

BUY PHILIPS / SELL SIEMENS // BUY PEUGEOT / SELL RENAULT // BUY SAINSBURY / SELL TESCO // BUY AEGON / SELL AXA
BUY RESEARCH IN MOTION / SELL APPLE // BUY DELL / SELL HEWLETT PACKARD

BROKER METEOROLOGY

TOTAL STARTED AT BUY BY UNICREDIT
SANOFI-AVENTIS RAISED TO OVERWEIGHT BY MORGAN STANLEY
PPR RAISED TO OVERWEIGHT FROM EQUAL BY MORGAN STANLEY
TOMTOM RAISED TO BUY FROM NEUTRAL BY UBS
DEUTSCHE POST RAISED TO BUY FROM NEUTRAL BY BANK OF AMERICA

ERICSSON CUT T SELL FROM BEUTRAL BY UBS
BANCO POPULAR CUT TO UNDERPERFORM BY BANK OF AMERICA
NORDEA CUT TO UNDERWEIGHT FROM NEUTRAL BY JP MORGAN
YARA CUT TO UNDERWEIGHT FROM EQUAL BY MORGAN STANLEY

DATA

WTI : 68,5 (-0,50 %)
Eur/$ : 1,4258 (0,18 %)
$ /Yen : 95,05 (-0,04 )
10 Yr US : 3,73 ( 1,2 bp)
10 Yr Euro : 3,49 ( 1 bp)

Indices : US close ; Europe close
SOX : 0,59 %;-0,41%
S&P :0,30 %; -0,09 %
DOW: 0,17%; -0,14 %
NAS :0,10%; -0,24%

DJ Stoxx US Sectoral Indices : US close ; Europe close
BASIC MATERIALS : 0,39 %; 0,68 %
ENERGY : 0,21 %; -0,15 %
FINANCIAL : 1,50 %; 1,31 %
HEALTHCARE : 0,07 %; -0,39 %
TECHNO : -0,30 %; -0,65 %
TELECOM : 0,22 %; -0,50 %
INDUSTRIAL : 0,50 %; 0,05 %
UTILITIES : -0,06 %; -0,41 %

TO BE COMING

Today
Results :Ahold (BMO) / Alleanza Assicurazioni / BBVA (BMO) / Banco Espirito Santo (BMO) / BP (BMO) / Bureau Veritas (AMC) / Deutesche Bank (BMO) / EADS / Endesa (BMO) / ST Micro (After US close) / Verbund /
Dividend :
Events :

Wednesday
Results : Sanofi Aventis / Arcelor Mittal / Gas Natural / France Telecom / Santander / ACS / Acerinox / Akzo Nobel / Acciona / Infineon / SAP / Atos / Saipem / Maroc Telecom / M6 Metropole TV / EDF Energies Nouvelles sales / Rhodia / Bayer / Daimler / Time Warner / ConocoPhillipsSymantec / General Dynamics / Nissan / Honda MotorNec Electronics / Nomura
Dividend : Stora Enso (€0.20)
Events: Unicredit EGM / Eletronic Arts AGM

Thursday
Results : Siemens / L'Oreal sales / Alcatel Lucent / Centrica / Grupo Ferrovia / Air France-KLM / Renault / Repsol / Enel / Royal Dutch Shell / ENI / Vinci sales / BASF / Maurel & Prom / Solvay / Clariant / Air Liquide / Mediaset / HeidelbergCement / Deutsche Postbank / Lufthansa / Dassault Systemes / Telefonica / Abertis / AstraZeneca / B Sky B (BMO) / Capgemini / CGGVeritas / Continental AG / Exxon Mobil / Neste Oil / Kellogg / Goodyear / Colgate Palmolive / Mastercard / Motorola / Walt Disney / Sony / NTT DoCoMo / Nec
Dividend :
Events :

Friday
Results : Total / Vallourec / Schneider Electric / Michelin / Eiffage sales / Ciments Français / Italcementi / Assicurazioni Generali / CNP sales / JC Decaux / PPR / Rexel / Belgacom / SAB Miller / Enel / British Airways / Anglo American / Anglo gold / Chevron / Sun Micro
Dividend :
Events: Singapore Airlines AGM

Monday
Results :US car sales / Linde / Anglo American / HSBC
Dividend : Banco Santander (€0,135234)
Events:

ECONOMIC DATA PREVIEW

Watch in the United-States the Conference Board consumer confidence for July due at 15.00 GMT. After dropping by 10% in June the Conference Board consumer confidence is expected to remained stable in July led by the drop of prices and by the effects of the Obama stimulus plan./JB

ECONOMY

United States: New home sales rise for a third consecutive month in June
New home sales rose for a third consecutive month from 346 000 in May to 384 000 (forecast 352 000) in June or 11%. Sales of new one-family house reached their highest level since November 2008 and rose the most in eight years. This increase was mainly led by falling prices and drop in mortgage rates add to the Obama stimulus plan effects. Following the recent improvement of the housing starts, building permits, NAHB index or existing home sales, the rise of new home sales is another concrete sign that housing activity has reach a ground floor. Nevertheless it is important to follow closely the employment market as a rise of unemployment could slow down the housing market positive trend.