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GLOBAL EQUITIES RESEARCH

Nice and healthy consolidation yesterday for the last August trading day with the UK closed, big crossroad from the US flows into Europe. Despite a rather brief attempt to pare its losses, the stock market remains under the control of sellers. Their presence has been felt since the early morning, when participants moved against stocks after witnessing a near 7% drop by Shanghai's Composite Index, which fell amid concerns that tighter lending practices in China could ultimately undercut the mainland's stock market. Weakness hasn't been limited to equities. Rather, commodities are also under pressure as sellers move in broad fashion. As such, oil prices are down a sharp 4.2% to $69.71 per barrel, while gold prices are down 0.8% to $949.90 per ounce

Bullish should be September month. Not only the current sentiment remains bearish while the macro and the micro are both improving, but there is a lot of cash ready to jump in. Since March, end-investor flows have moved out of cash into riskier assets, but thus far the scale of the move has been limited relative to the earlier dash for cash. Thus ICI mutual fund data from the US shows a $165bn flow out of money market funds from April to June (last data point), with $42bn inflows to equity funds and $89bn inflows to corporate bond funds. To put these flows into context, money market fund assets rose by a remarkable $1.53trn over the course of the credit crisis, with equity mutual funds experiencing a cumulative net outflow of $281bn from January 2008 through to March 2009 . On this basis, only 10-15% of the bear market asset re-allocations have so far been reversed . Similarly, if you observe liquidity ratios at US mutual funds, cash has certainly been put to work, but equity fund cash ratios remain above the 2004-08 levels. Meanwhile, liquidity ratios at corporate bond funds have spiked, presumably due to managers not being able to deploy inflows fast enough. Admittedly these readings only run through to the end of June and it is reasonable to believe that market participation rose further in July and perhaps August, but there is still a long way to go.

A strategist noted that a similar point can be made of equity market valuations. According to IBES data, the MSCI World Index trades at a consensus 12-month forward PE ratio of 14.3, predicated on a 14.8% increase in earnings per share. Given the extreme collapse in corporate profits during 2008 and 2009, the consensus earnings growth expectations look tame. Forward multiples are almost back to fair value, but earnings growth estimates do have plenty of room to increase from prevailing levels and offer a nearby further 10-15% upside for the main equity markets. Not even adding the possible premium that should occur thanks to virtuous circle taking place which will profit to equity business.

Bear guys are just looking at the very few risks, which soon will no longer be. The same strategist, who we fully agree with, is forecasting a rebound in employment as soon as October and November. This hiring increase will support spending, while the possible required tightening from Chinese authorities to prevent an overheat (currently a 16.4% annualised pace of real GDP growth ) would be welcome and supported by a boost of their exports thanks to the worldwide inventories rebuilt. Bearing in mind that over this decade, world growth above 2.2% has been sufficient to generate commodity price inflation, a continuation of 16% Chinese GDP growth would have exerted a significant negative influence on real incomes in the rest of the world, while probably forcing a premature tightening of policy and an equally premature termination of the recovery. China's stimulus to be implemented until 2011 would have been very useful to support its domestic economy at a very crucial time, and was the first one to reach the real economy. Now the US and European pick up will now do the rest and push the Chinese economy to switch in an exporting one back again.

The ISM manufacturing today will be very supportive. Indeed already yesterday the Chicago Purchasing Managers Index stood at 50.0 in August compared with 43.4 in July and above the 43.4 economists expected. Readings over 50 indicate overall business expansion. The consensus of 50.1 should be seen as shy, with further improvements likely in the months ahead. There are several reasons for optimism, but above all the regional manufacturing surveys have improved. Indeed, the forward-looking balances in these surveys suggest that the ISM index could reach the high 50s soon. Also, corporate bond yields have continued to plummet, with the Moody's BAA 10-year industrial yield now at 6.7% compared with 9.5% last November. The durables inventory-to-sales ratio fell to 1.81 in June, from 1.87.

New day of a new month, new cash in place and most players back from school holidays, which should make today a very steady session.



ECONOMIC DATA WITH IMPACT


Bank of England's household borrowing figures (9h30 UK) for July should reveal a rise from 48,000 to 51,000 in mortgage approvals. Since the end of last year, approvals have risen at an average rate of around 3,000 per month. And a similar rise looks likely in July, given the increases seen in the two alternative measures of mortgage approvals – the British Bankers’ Association measure rose by 2,500 in July, while the Lending Panel measure rose by 3,000.

The UK CIPS/Markit report on manufacturing (9h30 UK) now points to a very robust recovery in the sector over the coming months. The positive message should be maintained in August’s survey, with the PMI index perhaps edging up a bit further to 51.5, from 50.8 in July with some upside possibility

ISM non manufacturing (15h UK) expected above the 50 level, which is seen as crucial since above 50 the industrial sector is growing and no longer contracting / important , even if very much expected, a good data on this first day of a new month will rmeind investors that the equity markets rally is not empty in term of fundamentals, and just front running the economic activity.

Pending Home sales (15h UK) expected up 1.6% from previous +3.6% / should reflect once more the bottoming of the housing sector / minor , but the higher the better

Construction spending (15h UK) expected flat from prior 0.3% / should show signs of stabilisation / the apparent rebound in housing activity suggests that we should see a rise in residential construction spending in July, while the stimulus-related boost to public works may generate a gain in non-residential construction spending too. Nonetheless, while a stabilisation in activity is apparently underway, there is little reason to believe that it will develop into a robust recovery. Builders aren't going to be in a rush to start new residential projects when the excess supply of unsold homes on the market is still at elevated levels. Similarly, high commercial real estate vacancies mean that developers won't be hurrying to increase capacity / interesting though


POSITIVE IMPACTS



VINCI : H1 rev €15.39Bn (15.31bn e) / Operating €1.36Bn (1.35bn exp) / Interim div 52c (in line) / Sees higher FY concession revenue Will acquire electric engineering company Cegelec from a Qatari state-owned investment company in an all-share €1.18bn deal designed to create a major European player in the energy services sector / In exchange, Qatari Diar Real Estate Investment, a unit of Qatar Investment Authority, will receive 31.5 m of Vinci's shares, making Qatar the largest shareholder after Vinci's employee savings fund

COMMERZBANK’s CEO said the Q109 had "marked the bottom" for CBK / Expects 2010 to be better / “The question is by when we are profitable again, we have said that this will be in 2011 but it could be earlier" (FT)

VIVENDI : Q2 revenue €6.65bn (6.69bn exp) / Operating 1.51bn (1.41bn exp) / Kept 2009 goal for strong rise in adj. Operating + will continue to distribute high dividend

HAVAS : H1 revenue €700m (704m exp) / Operating €71m (59m exp) / No guidance provided for the end of the year

LLOYDS agreed to a £1bn deal with the U.K. govt to guarantee half the risk on a portfolio of its existing short-term loans to companies in return for Lloyds agreeing to more business lending (FT)

BARCLAYS is considering a plan to split the assets of Barclays Capital’s mid-market private equity division and the management company that runs the unit (Daily Telegraph)

UBIBANCA said that at least 2 companies are interested in buying a stake in its UBI Assicurazioni unit and forming an insurance JV

RWE will be added to the DJ STOXX 50 Index, STOXX Ltd. announced yesterday / The changes will become effective on Sept. 21.

AB INBEV and CRH will be added to the Dow Jones EURO STOXX 50 Index (STOXX Ltd.) / Changes effective on September 21

EUROPEAN EQUITIES : Libya's $65 bn sovereign wealth fund aims to buy into European utilities, drugmakers and other companies with

technology that may be useful for the country (Head of the Libyan Investment Authority)



NEGATIVE IMPACTS


EIFFAGE : H1 operating €423m (450m exp) weighed by a decline in activity in construction and public works / Now targets FY revenue at €13.4 bn from €13.7 bn previously

NOKIA delayed to next year the launch of its music service in the US (Forbes)

RSA insurance is considering a rights offer to raise $1bn (Sunday Telegraph)

PHILIPS will leave the DJ Stoxx 50 / STOXX Ltd. announced yesterday / The changes will become effective on Sept. 21

FORTIS and RENAULT will leave the Dow Jones EURO STOXX 50 Index (STOXX Ltd.) / Changes effective on September 21

AREVA : H1 operating €566m before additional provision for Finish OL3 project (€590m e) / Net income €161m (€402m e) / Backlog €48.88bn / Says strong growth in the 2009 sales & Backlog / Sees 2009 operating income close to that of the financial year 2008

UNICREDIT is the target of 3 U.S. class action lawsuits stemming from the Bernard Madoff swindle (La Stampa and la Repubblica)


TRADING IDEAS


BUY PERNOD & VINCI ahead of results this week

BUY EDF / ENEL / ROYAL DUTCH / BP / TOTAL / ENI on eco recovery

BUY ERICSSON on double bottom possibility & BUY PEUGEOT on reversal Head & Shoulder possibility


BUY BAYER / SELL BASF // BUY UNILEVER / SELL DANONE // BUY NOVARTIS / SELL ROCHE // BUY EDF / SELL EON // BUY CONOCOPHILLIPS / SELL CHEVRON


BROKER METEOROLOGY


LAND SECURITIES RAISED TO OVERWEIGHT BY MORGAN STANLEY

GEMALTO RAISED TO BUY FROM NEUTRAL BY UBS

BHP BILLITON RAISED TO BUY FROM NEUTRAL BY UBS

LAGARDERE RAISED TO BUY FROM HOLD BY CITIGROUP

WENDEL RAISED TO BUY FROM HOLD BY JEFFERIES

VOESTALPINE RAITED NEW BUY BY BANK OF AMERICA - ML


GAS NATURAL CUT TO UNDERPERFORM BY BANK OF AMERICA – ML

UNIBAIL RODAMCO CUT TO EQUALWEIGHT BY MORGAN STANLEY

KLEPIERRE CUT TO UNDERWEIGHT BY MORGAN STANLEY

NOKIA CUT TO UNDERPERFORM FROM OUTPERFORM BY CREDIT SUISSE


DATA


WTI : 70,3 (-2,98 %)

Eur/$ : 1,4352 (0,13 %)

$ /Yen : 93,07 (-0,08 )

10 Yr US : 3,40 ( 0,73 bp)

10 Yr Euro : 3,26 ( 0,7 bp)


Indices : US close ; Europe close

SOX : -1,61 %;-1,96%

S&P :-0,81 %; -1,18 %

DOW: -0,50%; -0,94 %

NAS :-0,97%; -1,29%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -2,10 %; -2,28 %

ENERGY : -1,93 %; -2,13 %

FINANCIAL : -0,42 %; -0,86 %

HEALTHCARE : -0,26 %; -0,82 %

TECHNO : -0,94 %; -1,27 %

TELECOM : -0,61 %; -0,81 %

INDUSTRIAL : -1,32 %; -1,66 %

UTILITIES : -1,21 %; -1,15 %



TO BE COMING



Today

Results :Vivendi (BMO) / US car sales

Dividend :Banco de Sabadell (€ 0,07)

Events :Global Industrials Conference at Morgan Stanley / Logitech AGM



Wednesday

Results : Bombardier

Dividend : BHP Billiton ( $ 0,455556) / Legal & General (GBp 1,233333) / CRH (€0.185) / Friends Provident ( GBp 1,444444)

Events:



Thursday

Results : Pernod Ricard

Dividend : Bank of America -ML ($0.01) / Merck & Co ($0.38)

Events : HMV AGM



Friday

Results :

Dividend :Nike ($0.25) / Sara Lee ($0.11)

Events:



Monday

Results :

Dividend :

Events:Tenaris investor presentation



ECONOMIC DATA PREVIEW



In the United States, watch the ISM manufacturing (14.00 GMT) for August expected to reach 50.2 As the level of 50 represent the borderline between a contraction and an expand of the activity this data should confirm the rebound of the activity in the manufacturing sector boosting companies investment.



In the Euro area, watch the final release of the PMI manufacturing for August expected to confirm the preliminary release at 47.9 showing the progressive rebound in the industrial sector, keep an eye on the unemployment rate for July expected to slightly increase to reach 9.5%.


ECONOMY



United States: Chicago purchasers managers index rose more than forecast

After reaching a low point at 31.4 in March and Chicago purchase manager index rose for the fourth time in five months and for a third consecutive month in August. August rise at the level of 50 was higher than expected (forecast 48.0)and represent the highest level since September 2008. Its important to bear in mind that the level of 50 is the dividing line between contraction and expansion. If we add the jump of the NAPM Milwaukee index from 43.4 in July to 56.0 in August this is confirming the manufacturing recovery in the United-States. In addition these data are a very encouraging signs for the ISM manufacturing released tomorrow which is expected to over cross the level of 50



Euro area: Prices decline less than forecast

After reaching a low point at -0.7% in July consumer price index in the Euro area decline less than forecast in August at -0.2% YoY

( forecast -0.3% YoY). This decline of deflation can be explained by the fact that in July the “base effect” was at his maximum as consumer prices were at 4.1% a year ago in July 2008( when the barrel was at 147$) and start to drop since then (3.8% in August 2008). In the coming months inflation may increase as the global economy is progressively steeping out of recession. Nevertheless if negative inflation should decrease in the coming months there will be no risk of inflation pressure.