Green Shoots

GLOBAL EQUITIES RESEARCH

“Green shoots” is the new catchphrase used by Ben Bernanke and others to refer to signs in financial markets and the U.S. and global economies that a recovery is in the offing. The appearance of “green shoots”, or at least the appearance of the term, has coincided with an increase in risk appetite in financial markets. Three events have helped to support a global increase in preference for risk assets, especially stocks, since March 9th. A slowing rate of contraction of some measures of economic activity in the U.S. has fuelled hopes for a H2 recovery despite the extraordinary collapse in Germany and Japan during Q1 at annualized rate of decline of around 15 %. The second source of support for the rising risk appetite has come from the transition of the financial crisis from an acute to a chronic phase. This occurred after the stress tests engineered by the Fed and the Treasury provided markets, hungry of reassurance, with some hope that the largest banks could stabilize their reserve positions with only modest capital increases totalling $75 bn. Finally signs of renewed growth in Asia (particularly in China), tied to massive credit and spending stimulus, have boosted hopes that an increase in Chinese domestic demand may ease global imbalances. Taken together, these three indications of slowing economic and financial deterioration have contributed to a rise in U.S. equity markets and a narrowing of risk spreads. One support of the “green shoots” scenario has been the proactive stance of the Obama administration toward the financial sector. This has included initiation and completion of stress tests to determine the viability of U.S. banks as operational (lending) entities. This step, coupled with the Fed’s commitment to quantitative easing, has helped to move what was an acute financial crisis with elements of panic to a contained chronic phase in which banks broadly have stabilised but have not yen begun to operate as lenders to U.S. households and corporations. If the hoped-for H2 return to positive growth of the U.S. economy is achieved, the “adverse feedback loop” running from the real economy back to the financial sector should be broken. If the financial sector crisis is restrained, the major question that remains is this: will the damage to the real economy begin to heal quickly enough to avoid another round of an adverse feedback loop that runs from the real economy and back to the financial sector?

Beige book = “green shoots”? For the first time in many months, the Beige Book was more optimistic and referred to “stabilization”. Reports from the 12 Federal Reserve Districts suggest that economic activity continued to be weak going into the summer, but most Districts indicated that the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level. Five Districts used the words "slow", "subdued", or "weak" to describe activity levels; Chicago and St. Louis reported that the pace of decline appeared to be moderating; and New York, Cleveland, Kansas City, and San Francisco pointed to signs of stabilization. Minneapolis said the District economy hadcontracted since the last report.

The 2.5% m/m decline in US durable goods orders in June was not nearly as bad as it looks because it was principally due to a 28.3% drop back in defence orders and a 38.5% drop back in orders for non-defence aircraft. In both cases, those categories are notoriously volatile and the declines in June reflect orders falling back to more normal levels after big surges in the preceding couple of months. Excluding transportation, orders increased by a solid 1.1% m/m. (If we exclude the 10.8% m/m drop in communications as well, most of which appears to have been a drop in military orders - the increase would have been nearer 1.5%.) The other encouraging news is that non-defence core capital goods orders increased by 1.4% m/m last month, following a 4.3% increase the month before. The three-month annualized rate of core capital goods orders turned positive. The actual shipments figures are not quite as strong – non-defence core capital goods shipments only increased by 0.1% m/m and the three-month annualized rate is still -16.2%. The upshot is that business investment probably fell quite sharply again in Q2, but it should stabilize or even record a modest rebound in Q3. Overall, this report adds to the evidence that the recession is over, or close to over.

There are currently many interesting moves in the markets. The dollar suddenly strengthened after U.S.-China Strategic & Economic Dialogue ended, with the EUR/USD plunging to a low of 1.4008 on July 29th from 1.4304 a day earlier (1.4051 this morning). The inverted correlation between oil prices and the dollar was confirmed again as oil prices slumped by nearly 6 % intraday (WTI at $63.35 /bbl from $67.23 /bbl) after commercial inventories rose by more than 5 million barrels to 347.8 million, near seasonally and historically records. Commodity prices followed the move with the CRB index falling from 250.2 to 243.5 intraday. Gold price sharply retreated as well: 929.55 /oz vs. 954.91 earlier this week. There were some fears of a credit bubble in China that weighed on the Shenzhen composite index that lost roughly 7.5 % in the last two sessions. Some investors start to fear that the surge in equities has outpaced the economy. But it seems to be a consolidation, more than the end of the rally as “green shoots” are consistent… This morning U.S. index futures were up: DJIA +0.30 %, S&P 500 +0.37 %, Nasdaq 100 +0.30 % (06.30 BST). The Nikkei was slightly up (+0.30 %) after industrial production was in line with expectations (+2.4 % MoM in June, -23.4 % YoY).



ECONOMIC DATA WITH IMPACT


US Initial Weekly Jobless Claims (7/25) that could be released below 600k (570k expected) for the fourth week in a row (13.30 BST), while Continuous Claims (7/18) may have decreased again after their peak of 6904 k on June 27th (6,200k expected). This may be good news for the July job report released on August 7th.

German unemployment figures for July(08.55 BST).

Euro-zone EC economic sentiment index (ESI) probably increased for a fourth month in a row in July (10.00 BST), mainly courtesy of a further improvement in industrial confidence. Services and consumer confidence probably improved too, but to a less extend, given the dire situation in the labour market. The index will probably point to a more moderate annual fall in GDP growth of around 2.5 %.


POSITIVE IMPACTS



FRANCE TEL : Q2 rev. €12.77bn (12.9bn e) / Ebitda €4.52bn (4.35bn e) / Interim div. €0.60 ex-date 28/08 paid Sept. 2 / Sees activity slightly lower in H2 but will try to limit EBITDA margin erosion / Confirmed FY FCF target of €8bn + debt target + pay-out ratio > 45%

AIR LIQUIDE : H1 sales €5.94 bn (5.73bn exp) / H1 recurring operating €889 m (868m exp) / Maintains objective for 2009 of revenue and net income to be close to 2008 levels

ALCATEL-LUCENT : Q2 revenue €3.91bn (3.86bn exp) / Adjusted EBIT loss €62 m (-89m exp) / Repeated guidance for FY breakeven at the adjusted operating income level / Reiterated view for market down between 8% and 12% at constant currency in 2009

BT : Q1 rev. £5.24bn (5.02bn e) / Ebitda £1.37bn (1.27bn e) / FCF £-122m (-475m e) / Pens. def -£5.8bn end June / FY outlook unch.

BAE SYSTEMS : H1 sales £9.94bn (9.72bn exp) / Adj. Ebitda £979m, in line / H1 div. 6.4p (6.27 exp) / Order book £45bn end June

TELEFONICA : Q2 rev 13.88bn (13.96bn exp) / Q2 OIBDA €5.59bn (5.45bn exp) / Reiterated guidance

IBERDROLA’s engineering unit won a $2bn contract in conjunction with Elecnor SA to build a power plant in Venezuela.

CLARIANT : Q2 sales SFR1.61Bn (1.68bn e) / Adj Ebit 69m (45.7m e) / Sees weak sales in local cur. / Sees 2010 ROIC > mkt avg

SANOFI announced the acquisition of Merck's interest in Merial for $4bn in cash / Acquisition seen accretive from the first year

ABERTIS : H1 net pft €332m (300m exp) / Spain highway traffic –9.8%

GAMESA : H1 sales €1.62bn (1.59bn exp) / Net €65m (66.5m exp)

ERSTE BK : Q2 NII €1.28bn (1.23bn e) / Com. €444m (439m e) / Trading €199m (134m e) / Risk prov. €522m (470 e) / Net better

SOLVAY : Q2 rev 2.07 bn (2 exp)/ REBIT €164M (139 exp) / Net pft €77M (64 exp) / FY operating lower than last year



NEGATIVE IMPACTS



CAP GEMINI : H1 revenue €4.38bn, in line / Ebit €287m (282m exp) / Cut H2 revenues guidance = Sees H2 sales down by 4% to 6% like-for-like (-0.5 to -3.5% previously) but said it is “comfortable with market consensus of FY op. margin at 7%)

RENAULT : H1 sales €15.99bn, in line / Operating loss €946m (-858m exp) / FCF +€848m / Confirms positive FCF and market share increase in 2009 / Like Peugeot yesterday, has revised 2009 world market forecasts to -12% on 2008, vs an original forecast of -15%

EDF : H1 sales €34.9 bn (36bn exp) but Ebitda €10.14bn (9.97bn exp) / Reiterated FY targets with moderate org. Ebitda grwth in 2009

ACS : H1 €8.12 bn (€8.22 bn exp) / Ebitda €736m (764m exp) / Net profit €1.54 bn (€1.50bn exp) boosted by its sale of more than 35% of Union Fenosa to Gas Natural

BASF : Q2 Sales €12.5Bn (in line) / EBIT €772m (960m exp) / Expects significant decline in sales & earnings in 2009 / Sees in CIBA integration synergies of at least €400M per year

WACKER CHEMIE : Q2 Sales €925.5M ( 914 exp) / EBITDA €170M (166.6 exp)/ FY sales & operating earnings well below those of 2008 / Expects the global recession to continue in H2

POSTBANK : Q2 NII €566M (602 exp) / Pretax loss €69M ( 59 exp) / Trading loss €103M (51 exp) / Loan loss provision €157M (154 exp) / Sees improvement in H2

MAN : Q2 rev €3.1 Bn (3.09 exp) / Q2 Op pft €144M (in line) / Net Income €22M (93.8 exp) / No sign of eco situation improving /

CENTRICA : H1 Sales £11.66Bn (11.5exp) / H1 Op pft £936 (1bn exp) / Interim Div 3.66 pence/shr

SIEMENS : Q3 sales €18.3Bn (18.7 exp) / Q3 sector pft €1.67Bn (1.52 exp) / Order intake €17.2bn (18.9 exp) / Net income €1.26Bn (939 exp) / Energy rev €6.44 bn (6.37exp) / Healtcare rev. €2.87Bn (2.84 exp) / Confirms 2009 guidance

LUFTHANSA (yest. Just before close) : H1 revenue €10.2bn (10.6bn exp) / Operating €8m (+73m exp) / Still targets FY op. profit but sees considerable risks to profit goals

FINMECCANICA : H1 revenue €8.52bn (8.24bn exp) / Ebit €559m (555m exp) / New orders €8.33bn / Confirmed FY guidance

GAS NATURAL (Minor) is planning to issue €3.5 bn in bonds over the next 2 years (News agency EFE) / Gas Nat. is looking to issue up to €6 bn in bonds before the end of 2011, including a €2.5 bn bond it recently placed

INFINEON : The share price has remained so high since the announcement of its rights issue that U.S. financial investor Apollo Global Management, which is effectively underwriting the transaction, may fall well short of its 29.9% stake goal (FT)

CGG VERITAS (GEOPHYSIQUE) : Q2 sales $779m (802m exp) / Net loss $32m (+8m exp) / Order book $1.3bn at end of June



TRADING IDEAS


BUY VALLOUREC (ahead of results friday) / 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


BUY SWISS RE / SELL MUNICH RE // BUY HEINEKEN / SELL PERNOD // BUY DTE / SELL TEF // BUY PHILIPS / SELL SIEMENS // BUY SAINSBURY / SELL TESCO // BUY AEGON / SELL AXA

BUY MARRIOTT / SELL LAS VEGAS SANDS / BUY RESEARCH IN MOTION / SELL APPLE // BUY DELL / SELL HEWLETT PACKARD


BROKER METEOROLOGY


M6 RAISED TO BUY FROM HOLD BY GOLDMAN SACHS

INFINEON RAISED TO BUY FORM HOLD BY RBS

PEUGEOT RAISED TO NEUTRAL FROM UNDERWEIGHT BY HSBC

LEGRAND RAISED TO NEUTRAL FROM UNDERWEIGHT BY JP MORGAN

LOMIN RAISED TO BUY FROM HOLD BY CITIGROUP

SYNTHES RAISED TO HOLD FROM SELL BY DEUTSCHE BANK

NEXANS RAISED TO BUY BY BANK OF AMERICA

TECHNIP RAISED TO BUY FROM HOLD BY RBS


ALLIANZ CUT TO NEUTRAL FROM OUTPERFORM BY CREDIT SUISSE

SANOFI-AVENTIS CUT TO NEUTRAL FROM BUY BY NOMURA

RANDSTAD CUT TO HOLD FROM BUY BY ING

SYNTHES CUT TO NEUTRAL FROM BUY BY UBS

GAS NATURAL CUT TO NEUTRAL FROM OUTPERFORM BY EXANE


DATA



WTI : 63,2 (-5,67 %)

Eur/$ : 1,4051 (0,01 %)

$ /Yen : 94,99 (0,00 )

10 Yr US : 3,68 ( 1,78 bp)

10 Yr Euro : 3,42 ( -0,3 bp)


Indices : US close ; Europe close

SOX : -0,86 %;-1,47%

S&P :-0,46 %; -0,81 %

DOW: -0,29%; -0,63 %

NAS :-0,39%; -0,79%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -2,59 %; -3,03 %

ENERGY : -2,13 %; -3,12 %

FINANCIAL : -0,33 %; -0,24 %

HEALTHCARE : 0,19 %; 0,28 %

TECHNO : -0,33 %; -1,05 %

TELECOM : 0,64 %; -0,02 %

INDUSTRIAL : -0,72 %; -1,02 %

UTILITIES : -0,42 %; -1,07 %



TO BE COMING



Today

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

Dividend :Bank of New York ($0,09)

Events :



Friday

Results : Total / 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 / Metro Group / Linde / Anglo American / HSBC / Arkema / Barlcays

Dividend : Banco Santander (€0,135234) / KPN (€ 0,23) / Xilinx ($0.14)

Events :



Tuesday

Results : BNP Paribas (BMO) / BMW / Beiersdorf / UBS / Givaudan / Statoil Hydro / Electronic Arts / Kraft Foods

Dividend :

Events:



Wednesday

Results :Adidas / Allied Irish Bank / Carlsberg / Activision Blizzard / Procter & Gamble

Dividend : Thomas Cook (GBp 4,166667) / Alcoa ($ 0,03) / Boeing ($0,42) / Intel ($ 0,14) / Pfizer($0,14) / Pfizer ($0,16) / Schering-Plough($0,065)

Events:



ECONOMIC DATA PREVIEW



Today in the United-States, watch the release of the weekly initial jobless claims for the week ended July 25 due at 13.30 GMT. The consensus expects that the claims will rose by 24 000 to 554 000.



In the Eurozone, have a look at the Economic Confidence (10.00 GMT) expected up at 75 in July from 73.3 in June.



In Germany, watch the unemployment change and the unemployment rate (8.55 GMT) that is expected to climb again at 8.4 % in July from +8.3 % in June. / LC



ECONOMY


United States: Durable goods orders fell in June

The US durable goods orders retreated 2.5 % in June due to the defence orders that dropped back 28.3 % and the non-defence orders that plunged 38.5 %. The consensus was expecting only a 0.6 % decline and the last month was revised from +1.8 % to +1.3 %. But ex-transportation, the orders climbed 1.1 % in June for the second consecutive month or the most in four months. Otherwise, the non-defence core capital goods orders increased by 1.4% m/m last month, following a 4.3% increase the month before. Note that the three-month annualised rate of core capital goods orders turned positive…



United States: Fed’s Beige Book

In it’s report, the Fed indicated that “the pace of decline has moderated since the last report or that activity has begun to stabilize, albeit at a low level”. Most Districts reported sluggish retail activity with decline in sales. Manufacturing activity showed some improvement but a low levels. Residential real estate markets stayed soft in most Districts, although many noted some signs of improvement. By contrast, commercial real estate markets weakened further in recent months in two-thirds of the Districts and remained slow in the others. Consumer spending in the early summer remained below previous-year levels in most Districts, as households continued to be price conscious. Auto sales were mixed across the country but sales of used vehicles continued to be strong or were strengthening.