Live Cat Rebound

GLOBAL EQUITIES RESEARCH

Profit taking in the wake of slower-than-expected economic growth in Japan reawakened fear that stocks were trading ahead of the economy, and triggered a global sell-off that sent stocks below their recent trading ranges and handed the major U.S. indices their worst single-session percentage loss in six weeks. Consumer discretionary stocks (-3.2%) also suffered. Broader market weakness, along with an earnings miss and a disappointing forecast from Lowe's(-10%) weighed on the group. Health care stocks held up rather well, however. Health care providers (+2.7%) underpinned the sector's relative strength, thanks to news that President Obama is willing to accept insurance cooperatives instead of a government-run insurance plan. Participants were also largely unsurprised by news that the Fed and Treasury opted to extend the Term Asset-backed Securities Lending Facility (TALF) in order to help keep credit and liquidity conditions greased. The announcement, along with broader market weakness, did bolster buying among Treasuries, and helped the 10-year Note climb a robust 28 ticks, which pushed its yield below 3.5% for the first time since July.

Three of the six G7 economies which have published their Q2 data are now expanding again. But while the worst is clearly over, the upswing is likely to be fragile, which is the reason for some downside moves which should be seen as healthy consolidation in a very slow trading activity. Q2 data were better than the first in every G7 economy . The fact that Germany and France have returned to growth was seen by many as encouraging for their major trading partners, including the UK and Emerging Europe. The same point will presumably be made now about Japan. The common factor in all three G7 economies that grew again in Q2 was a large positive contribution from external trade. Where there are signs of a pick-up in domestic demand, these are still heavily dependent on fiscal stimulus. The hope of course is that governments will kick-start a sustained recovery. Business sentiment has improved in recent months, suggesting positive momentum is being sustained into Q3.

The 0.9% q/q (3.7% annualised) increase in Japanese GDP yesterday reflected a big boost from net exports. The contribution to quarterly growth from external trade swung from -0.9 percentage points (pp) in Q1 to +1.6pp in Q2. Meanwhile, both government (0.3pp) and consumer spending (0.5pp) made positive contributions, reflecting the government’s massive fiscal stimulus. The boost to real household incomes from falling prices will also have helped. The main negatives were acceleration in the pace of destocking and the continued weakness of private investment. The inventory cycle should turn positive in the third quarter and beyond.

The jump in the US Empire State manufacturing index yesterday supports other evidence that the recession ended around the middle of the year. The increase in the headline index from -0.6 in July to +12.1 takes it above zero for the first time since April last year. At current levels, the headline index is consistent with the ISM rising from 48.9 to around 52.0 in August. Bear guys will tell you that some of the improvement may be related to the temporary surge in demand linked to the "Cash for Clunkers" scheme, and that the consumer sector being still in the doldrums, the recovery will be subdued. A recovery has to start somewhere, and recovery is a fact for now. Same as the Great Depression avoided, and these facts have a price, they bring visibility. Yes everything is not clear, but we are still very far off the highest level ever seen on equity indices, and even 40% off the two years ago 's top.

As a matter of fact, the housing story started last night with the NAHB survey showing U.S. home builders were more confident in August than at any time in the past year. The home builders' index climbed to 18 in August from 17 in July. It's the highest since June 2008. The index has risen in five of the past seven months since hitting a record-low 8 in January, but remains far from its 75 highs.

We should get more today with the Housing starts. Home sales and construction are still at low levels, but evidence is growing that they are past their lows and beginning to rebound. Most influences on housing demand are still negative, but with the recession winding down it has become increasingly difficult to sustain the kind of weakness witnessed over the past couple of years. On the positive side : prices have fallen, mortgage rates are low, and first-time buyers are being subsidized. However, on the downside, jobs are still being lost, incomes are stagnant, and credit is still tight. But US officials are heavily working on the latter. The housing starts data are unreliable on a month-to-month basis, with standard errors of more than 10%. However, the data become more reliable on a four-month average. The single-family building permits data are fairly reliable even on a month-to-month basis (standard of error of less than 2%).

Builders are still deeply pessimistic as a group, but some are clearly finding it profitable to resume building, especially in areas that didn't overbuild during the boom. There are 281,000 new homes for sale, and it's taking nearly a year to sell a home built on speculation once it's been completed. Builders also have to worry about the inventory of condos and existing homes. "The excess inventory is gradually being absorbed," wrote specialists. "However, the adjustment process will take some time to play out. So we look for only a modest pick-up in homebuilding activity over the near term."

High intraday volatility yesterday should be seen as an exuberance of summer trading time more than an alarm about growth. The Shanghai index reached new low this morning and manage to trade above its close from yesterday which is very bullish (lost 20% the last 10 sessions), Japanese GDP in Q3 will be a lot stronger as the inventories which hurt Q2 will boost Q3, China’s growth is guaranteed by the government until 2011, things are clearly improving even as if they are not all clear, but the current levels are a long way off the highs reached on equity, and every latest advance were triggered by bear traps such as, maybe, the one of yesterday ...



ECONOMIC DATA WITH IMPACT


German Zew index (10h UK time) expected to rise in August as global demand is showing further tentative signs of recovery while the earlier slump in German exports is starting to ease. The index measuring current conditions might also pick up again / minor

Target (TGT), Home Depot (HD) earnings before opening (Retail)

Housing starts (13.30 UK) expected +598k from 582k in June / Housing starts are 22% above their trough, they are still 75% below their peak / Interesting as housing support is key to make the recovery a sustainable one, but very volatile data (see intro above)

PPI (13h30 UK time) expected -0.3% / Core prices expected +0.1% / The dip in the price of crude oil and gasoline last month suggests that energy prices will decline by about 2% m/m / minor as the CPI came out last week and was ok, no further deflation signal.


POSITIVE IMPACTS



MINING : India aims to cut permit delays & attract overseas capital through “simpler” resource investment laws to help double mining’s contribution to at least 4%.

RIO TINTO : Amcor (packaging company), offered to buy part of Rio Group’s Alcan packaging unit for $2.03bn

GDF SUEZ & Australia's Santos have set up a JV to develop a floating LNG project off northwest Australia in GDF's first foray into Asia.

GENERALI : Minority shareholder and board member Gaetano Caltagirone bought €4.2m worth of shares on Aug. 11 and Aug. 12, according to a regulatory filing distributed by the Italian exchange

BBVA is interested in the sale of US bank Guaranty Fin. Gp which is also being eyed by several Private Equity gp (El Economista)

3i Group has entered talks to sell £100m of European investments to a group led by Coller Capital and HarbourVest Partners (FT)

SCHINDLER : H1 Sales SFR5.97Bn (6.06 e) / H1 net pft SFR320M (287 e) / Reiterate guidance

METRO has set its sights on emerging mkts in Eastern Europe & Asia in its search for growth (CEO)

ROCHE: Phase III study shows breast cancer patients treated with Avastin & chemotherapies lived without the disease worsening

BTRIT. LAND : Q1 pretax loss £275M vs 572M last year / Q1 div 6.5P / Clear improvement in investor sentiment



NEGATIVE IMPACTS


RWE was picked for talks to buy a majority stake in Enea from the Polish govt (Stake worth~$2bn) / RWE has made indicative offer

REPSOL : SANTANDER has reduced its stake in REPSOL to 1.99% from 3%, according Spanish regulator.

THYSSENKRUPP Financial investor Triton is the only bidder remaining for Thyssen.'s indul services unit, (annual sales ~€1.7Bn) (FTD)

ACCIONA is seeking buyers for 7 ships as part of a downsizing of its 23-strong shipping fleet to meet falling demand (Cinco Dias)



TRADING IDEAS


BUY Cyclicals such as TOTAL / ST GOBAIN / ARCELORMITTAL / ALSTOM etc… as recovery is a fact for now, whatever the speed, which coming indicators should tell us even more

BUY CARREFOUR / AEGON / MUNICH RE / ALLIANZ / FRANCE TEL / TELEFONICA which consolidated seriously, should resume their upside trend

BUY the Dollar & (Dollar names) such as STM the biggest European dollar related stock


BUY DANONE / SELL UNILEVER // BUY K+S / SELL BAYER // BUY VINCI / SELL LAFARGE // BUY ENI / SELL ROYAL DUTCH // BUY GENERAL ELECTRIC / SELL 3M


BROKER METEOROLOGY


ARCELOR MITTAL RATED NEW BUY BY NOMURA

THYSSENKRUPP RATED NEW BUY BY NOMURA

CASINO RAISED TO OUPERFORM FROM NEUTRAL BY EXANE

SWEDBANK RAISED TO HOLD FROM SELL BY DEUTSCHE BANK

HSBC RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS

DANSKE BANK RAISED TO NEUTRAL FROM UNDERPERFORM BY BANK OF AMERICA - MERRILL LYNCH

SALZGITTER RATED NEW BUY BY NOMURA



SSAB RATED NEW REDUCE BY NOMURA

SAIPEM CUT TO EQUALWEIGHT FROM OVERWEIGHT BY MORGAN STANLEY


DATA


WTI : 66,9 (0,21 %)

Eur/$ : 1,4105 (0,16 %)

$ /Yen : 94,85 (-0,52 )

10 Yr US : 3,49 ( 2,4 bp)

10 Yr Euro : 3,28 ( -3,3 bp)


Indices : US close ; Europe close

SOX : -2,96 %;-2,65%

S&P :-2,43 %; -2,16 %

DOW: -2,00%; -1,89 %

NAS :-2,75%; -2,46%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -4,52 %; -4,42 %

ENERGY : -3,22 %; -3,40 %

FINANCIAL : -4,01 %; -3,03 %

HEALTHCARE : -0,15 %; 0,07 %

TECHNO : -2,66 %; -2,31 %

TELECOM : -2,19 %; -1,85 %

INDUSTRIAL : -2,83 %; -2,80 %

UTILITIES : -1,37 %; -1,28 %



TO BE COMING



Today

Results :British Land / Vestas Wind / Hewlett-Packard / Home Depot (BMO) / SBM Offshore / Cardinal Health / Petrobras

Dividend :Microsoft ($0.13)

Events :Sulzer EGM



Wednesday

Results : Telekom Austria

Dividend : HSBC Holdings (0,088889 GBp) / Informa (GBp 4.00) / Pearson (GBp 13,55556) / SABMiller ($ 0,466667) / BAT (GBp 31,00) / Scottish & Southern Energy (GBp 51,33333) / Scottish & Southern Energy (GBp 51,33333) / Thomson Reuters ($ 0,311111) / 3M ($ 0,51)

Events:



Thursday

Results : Ahold / Holcim / Heinz / Gap / Rio Tinto / Sears

Dividend :

Events :



Friday

Results :

Dividend : ArcelorMittal ($0,1875) / Goldman Sachs ($ 0.35) / Johnson & Johnson ($ 0,49)

Events:



Monday

Results :Corio / Dexia / Heineken / Antofagasta / Irish Life /

Dividend : Intercontinental Hotels (GBp 8,111111 ) / QUALCOMM ($ 0,17)

Events:




ECONOMIC DATA PREVIEW



In United States watch the Producer Prices Index (13.30 GMT) expected down 0.3 % in July versus a 1.8 % increase in June.

Look also the Housing Starts expected to climb to 582 000 for the first time in three month. The building permits (due at 13.30 GMT) are expected to climb to 575 000 in July from 570 000 in June.



In Germany, look at the Zew Survey for the economic sentiment (10.00 GMT) for July due to rose at 45 following 39.5 in the previous month.

In United Kingdom, have a look at the Consumer Prices (10.00 GMT) for July expected to decrease 0.3 % after a 0.3 % rise in June. From a year ago, prices are expected to increase by 1.5 %.




ECONOMY



United States: Empire Manufacturing better than expected in August

The Empire State Manufacturing survey of General Business Conditions in New York region increased more than expected in August at 12.08 versus 3 expected and following -0.55 in July. It is the first time since April 2008 that the index is above 0. A reading above 0 signal manufacturing is growing. This report is the first regional factory measure for the month, that indicates companies are restarting assembly lines after slashing inventories at a record rate.


United States: NAHB Housing Market Index rose as expected in August

The National Association of Home Builders confidence index rose to a one-year high at 18 following 17 in July. A reading below 50 means that most respondents view conditions as poor. But lower prices and government tax credits for first-time buyers have stabilized home sales, setting the stage for builders to gradually step up construction from record lows.


United Kingdom : Rightmove House Prices fell in August

The UK Rightmove House Prices declined in August by 2.2 % after a 0.6 % rise in July as sellers lowered asking prices by the most in eight months. The average cost of a home is worth 222 762 pounds. The house prices retreated by 3.1 % from a year ago.


Eurozone: trade surplus increased in June

The eurozone posted a trade surplus for the fourth consecutive month at €4.6 bn after +€2.1 bn in May as exports slump eased. Exports climbed 7.6 % in June after having decreased 3.9 % while imports rose 5.2 % after –3.5 % the previous month. But If we consider the seasonally adjusted data, the eurozone trade surplus slightly narrowed to +€1bn in June from €1.1bn in May. The exports slightly declined 0.1 % while imports were unchanged compared to the previous month.