Mirror

GLOBAL EQUITIES RESEARCH

Although the road is still long to a robust consumer recovery, the Retail Sales yesterday showed things are gradually going the right way. The headline 2.7% rise was mostly due to the Clash for Clunkers effect, but that is precisely the focus of such a stimulus to trigger some production boost that should spread to other peripheral sectors. Auto sales leapt by 10.6% m/m, gasoline sales increased by 5.1% and food sales rose by 0.3%. Without these, sales increased by just 0.6%. That was the first gain in six months, and admittedly the underlying trend remains weak. If sales values were flat in September, they would increase at an annualized rate of +7.6% in the third quarter compared with the 1.5% fall in the second. Real consumption is therefore set to make a decent contribution to the expected rebound in third quarter GDP growth. Some will tell you that once the stimulus effect is gone, then things will worsen back again, while others will tell you (us among others) that it is not bad for a start as the stimulus was not targeting this type of spending, and the equity prices rise, combined to the low yield environment is adding to the wealth effect, and the virtuous circle is increasing its speed.

The industrial production today will be another friendly data. Indeed,The rapid improvement in the ISM production index points to a second consecutive 1.0% m/m increase in manufacturing output in August. With the auto manufacturers already announcing big increases in vehicle production plans for the fourth quarter, expect the factory sector to have a strong finish to the year. Production of capital goods and goods for exports are expected to lead the way, with production of consumer goods remaining relatively slow.

The CPI today will not be too much of a focus, as the deflation fear has not been validated through that survey and should now vanish. Indeed, after tumbling to minus 2.1% in July, the annual rate of headline inflation should move back towards zero over the next couple of months, as the base effects linked to the surge in energy and food prices last year begin to unwind. By the end of this year the headline inflation rate will be firmly back in positive territory. Core index remains the concern as it strips out those volatile food and energy prices. At first glance there doesn't seem to be too much to be alarmed about. Yes, the core inflation rate slowed to a five year low of 1.5% in July. But 1.5% is only modestly below the Fed's implicit inflation target of about 2% and it is still well above zero. When looking at the detail, however, it is very noticeable how core services inflation has slowed sharply over the past six months and is now at a record low. In stark contrast to that slowdown, core goods inflation has accelerated sharply and is now running at its highest rate in more than a decade. Within another month or two, core goods inflation will be higher than core services inflation. Will inflation be the next problem ? It seems to us a possibility, but much too soon to worry about it now, the over capacity level is maintaining prices on decent levels for a while.

The NAHB tonight will be supportive as well. At least part of the improvement in activity in the housing market in recent months relates to the Government’s tax credit for first-time buyers and the Making Home Affordable Plan, which aims to reduce mortgage repayments and avoid unnecessary foreclosures. With these schemes not due to end for some time yet, most measures of housing activity will continue to improve gradually. Housing back on track, banks back in business, things start to look promising. Just need a bit of hiring (data out on Friday 2ed October)

The situation is a mirror from the one last year same period. The activity is poor, the market is creeping up supported by inflows and increasing news flow, while guys are finding jobs back again in the banking industry. Resistance on the cash eurostoxx 2924 & 2978 / first target 3080 and then 3200 area // resistance S&P cash 1100 and then 1134, target 1200 area / another little M&A news from the US with Adobe 1.8 bn$ bid on OMTR (up 25% after close)



ECONOMIC DATA WITH IMPACT


Mortgage Applications (12h UK) / previous was up 17% / the higher the better / minor though

CPI (13h30 UK) expected 0.3% from previous flat / ex food & energy +0.1% from 0.1% / never really showed the so fear deflation / minor as the focus became the sustainability of the recovery with consumers being part of it which the Retail Sales started to reflect

Industrial Production (14h15 UK) expected 0.6% from previous 0.5% / upside possibility / interesting although already played as manufacturing sector is known to be recovering since the latest strong ISM survey.

Oil Inventories (15h30 UK) / minor

NAHB (18h UK) expected 19 from previous 18 / whatever the speed, the housing recovery is on track / the higher the better / interesting

Oracle after US close


POSITIVE IMPACTS



INDITEX : H1 revenue €4.86bn (4.83bn exp) / Ebitda €799m (780m exp) / Sales in the first weeks of Q3 up 9% in local currencies

NEXT : H1 PTP £185.5m (178m exp) / Interim dividend 19p / Said that consumer recession has been less extreme than many forecasters were predicting… / Expects H2 profit to grow as it did in H1

MUNICH RE is well on track to reach its target of €2.5 bn in 2009 net profit (CEO) / Net profit in 2010 could be "significantly >€2 bn

KPN will likely post FY Ebitda of €5.15 bn to €5.25 bn (CEO) (FY Ebitda consensus = €5.17bn) / Reaffirmed FY10 Ebitda targets

FRANCE TEL.-BOUYGUES-VIVENDI (Yest.) :Sarkozy expressed reservations about the need for a 4th mobile phone licence in France

SANOFI-NOVARTIS : The U.S. FDA has cleared vaccines from Sanofi and Novartis against the H1N1 strain of influenza.

COMMERZBANK’s sale of Kleinwort Benson and Dresdner Bauspar has attracted strong interest (Handelsblatt)

ARCELORMITTAL will disclose Today at its investors day, new targets for gearing of between 25 and 40% and for net debt/average EBITDA ratio ranging between 0.5 and 1.8.

BHP expects global steel demand to double over the next 15 years + added that the world is set to be short on copper in the mid to LT / Similarly, BHP believes the world will be short on energy in the medium to LT, with demand being driven by emerging market growth.



ADOBE reported Q3 revenue $697.5m (687m exp) / EPS $0.35 (0.33 exp) / Sees Q4 revenue $690-740m (724m exp) and Q4 EPS $0.33-0.39 (0.37 exp) / Announced the purchase of Omniture for about $1.8bn



NEGATIVE IMPACTS



SAP : Co-founder Hasso Plattner plans to sell shares in SAP worth up to €240 m by the end of next year

ROCHE (yest.) : A federal court let stand a ban on the U.S. sale of Roche's Mircera, a rival to Amgen's blockbuster anemia drugs.

LLOYD’S could use a new capital instrument called a mandatory convertible note to raise capital (Telegraph) / It is also believed to be considering a £6 bn rights issue + a conversion of £6.79bn of pref. shares into common equity / Separately, The EC may force Lloyds to sell all or part of its key Halifax subsidiary in compensation for the billions of £ of state aid the group has received (Times)

SCHNEIDER, which is expected to make a joint bid with Alstom for T&D that nuclear Areva put on sale, said it now had more than €2.8bn of credit lines, including 2.5 bn maturing in June 2012 and beyond / T&D has been valued at between €3.5-5 bn

BARCLAYS : Lehman Brothers’ lawyers told a federal bankruptcy judge that Barclays got a $5bn discount when it bought Lehman’s NorthAm biz after Lehman’s bankruptcy filing a year ago, and wants assets back

DEUTSCHE TEL (Minor) : E-Plus (KPN) aims for a market share in Germany of 20% in 3 years, up from the current 16% (FAZ)



TRADING IDEAS


BUY BNP & SOC GEN to play upside trend resuming after 16% retracement previous month ready to go before nice Q3 coming on October for US names (Goldman, Oct 11th / Soc Gen & BNP early November) / JP’s CFO already saying last night would be ready to increase dividend as soon as early 2010 from 20cts to 0.75/1$ if things were still improving on the economic front, admitting though will probably add to reserves in H2 / Such evidence will include "unemployment peaking and coming down" and net charge-offs on loans falling, he added.

BUY TOTAL / SELL Eurostoxx to play recovery on track

BUY CARREFOUR / EON / RWE / UNILEVER / DIAGEO on double bottom possibility

BUY GLAXO / BASF on reversal Head & Shoulder



BUY CARREFOUR / SELL METRO // BUY ENEL / SELL IBERDROLA // BUY BASF / SELL BAYER // BUY AXA / SELL ALLIANZ // BUY ENI / SELL TOTAL // BUY RAYTHEON / SELL HONEYWELL


BROKER METEOROLOGY


KBC RATED NEW BUY // ADDED TO CONVICTION BUY LIST BY GOLDMAN SACHS

EUROPE BUILDING STOCKS RAISED TO NEUTRAL FROM CAUTIOUS BY GOLDMAN SACHS

DEXIA RAISED TO NEUTRAL BY HSBC

BANCO POPULAR RAISED TO NEUTRAL BY HSBC

XTRATA RAISED TO BUY FROM HOLD BY RBS

DSM RAISED TO BUY FROM SELL BY UNICREDIT

ASHMORE RAISED TO BUY FROM NEUTRAL BY UBS

PUMA INITIATED AT OVERWEIGHT BY MORGAN STANLEY

BILIFINGER RAISED TO BUY FROM SELL BY GOLDMAN SACHS

GEMALTO RAISED TO BUY FROM NEUTRAL BY GOLDMAN SACHS


SAINT GOBAIN CUT TO NEUTRAL FROM BUY BY GOLDMAN SACHS

ACS CUT TO SELL BY GOLDMAN SACHS

ABERTIS CUT TO HOLD FROM SELL BY CITIGROUP

LOGITECH CUT TO SELL FROM NEUTRAL BY GOLDMAN SACHS

STMICROELECTRONICS CUT TO NEUTRAL FROM BUY BY GOLDMAN SACHS

REPSOL CUT TO SELL FROM HOLD BY ING

SAFRAN CUT TO NEUTRAL FROM OUTPERFORM BY CREDIT SUISSE

SEB SA CUT TO NEUTRAL FROM BUY // REMOVED FROM EUROP BUY LIST BY GOLDMAN SACHS

MAPFRE CUT TO HOLD FROM BUY BY DEUTSCHE BANK


DATA


WTI : 70,6 (2,62 %)

Eur/$ : 1,4676 (0,13 %)

$ /Yen : 91,02 (-0,09 )

10 Yr US : 3,44 ( -1,86 bp)

10 Yr Euro : 3,29 ( 3,5 bp)


Indices : US close ; Europe close

SOX : 0,86 %;0,74%

S&P :0,31 %; -0,15 %

DOW: 0,59%; -0,04 %

NAS :0,52%; 0,15%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : 2,52 %; 1,06 %

ENERGY : 0,88 %; -0,17 %

FINANCIAL : 0,15 %; -0,37 %

HEALTHCARE : -0,75 %; -0,62 %

TECHNO : 0,59 %; 0,24 %

TELECOM : 0,40 %; -0,21 %

INDUSTRIAL : 1,10 %; 0,22 %

UTILITIES : 0,87 %; 0,02 %



TO BE COMING



Today

Results :Zodiac sales / Oracle (AMC)

Dividend :Antofagasta ($0.034) / Cadbury (GBp 6,333333) / Land Securities (GBp 7.00) / Logica ( GBp 1,111111) / Swedbank AB (SEK 1.00)

Events :Frankfurt Motor Show press day / Qualcomm at Deutsche Bank Technology Conference / Total mid-year review in London / Asian Technology Conference at Credit Suisse



Thursday

Results : FedEx (BMO) / Carnival / Palm

Dividend :

Events: Kingfisher analyst meeting



Friday

Results : Mediobanca

Dividend :

Events : Euler Hermes AGM



Monday

Results :

Dividend :ENI (€0.50)

Events: General Mills AGM / Nike AGM



Tuesday

Results :

Dividend :

Events:Power & Gas Leaders Conference at BoA - ML / Global Consumer & Retail Conference at BoA - ML / Commodities Conference at Credit Suisse / Swiss Equities Conference at Credit Suisse



ECONOMIC DATA PREVIEW



Inthe United-Stateswatch the Industrial production and the capacity utilization (14.15 GMT) for August. After rising by 0.5% in July, ending eight months of consecutive fall, US industrial production should confirm its rebound and post a 0.9% rise in August. Indeed, the production index in the last ISM manufacturing survey reached 61.9, a new high since October 2005.Moreover, after four consecutive quarters of capital spending decline, American industrial companies decided to reinvest massively, giving birth to the virtuous circle consumption-capital spending-employment. In those conditions, after increasing by 68.5% in July stopping eight consecutive months of decline, capacity utilization should rise again to reach 69.5% in August.



Inthe Euro areawatch the Consumer price index(10.00 GMT) for August. Consumer price index are expected to rise from +0.0% in July to +0.3% in August led by the slight rise of oil. From a year ago deflation should slow down passing from -2.1% in July to -1.7% in August. Meanwhile the core CPI (ex food and energy) will remain at +0.1% from a month ago and pass fro +1.5% YoY in July to +1.4% YoY in August.



ECONOMY



United-States: Retail sales jump the most in three years in August

After two consecutive months of rise, retail sales declined by 0.2% in July. However, lead by the automobile incentives retail sales rose by 2.7% in August (forecast +1.9%) the most in three years. Indeed consumers took advantage of the “cash for clunkers” program boosting motor and vehicle sales which rose by 10.6% in August. Auto sales increased by the most in almost eight years spurred by the Obama administration’s cash incentive to trade in older models for new, more fuel efficient vehicles. As a matter of fact excluding transportation, after decreasing by 0.5% in July, retail sales grew by 1.1% in August(forecast +0.4%). Meanwhile its important to notice that gasoline stations rose by 5.1%,clothing by 2.4% and sporting goods by 1.6%.Retail sales has been boosted as well by the 3% rise in wages and by the reduction in job destruction in the retail business (in fact a loss of only 10,000 in August, the lowest level since January 2008).

Meanwhile producer price index rose from -0.9% in July to 1.7% in August, bringing the annual rate from -6.8% in July to -4.3% in August. This rise is led by the recovery in the United-States and by the rise of energy cost ( as oil is on a rising trend) pushing prices up. Looking at the core PPI (excluding food and energy) we see that prices slipped from 2.6% to 2.3% and from a year ago inflation passed from 2.6% to 2.3%. We se that the deflation situation will remained in 2009 and inflation will return only in 2010.



United-States: Empire Manufacturing index increased to a 20 month high in September

The Empire Manufacturing rose from 12.1 in August to a 20 month high of 18.9 in September (forecast 15.0). This sharp rise confirmed the industrial recovery in the United-States, as showed by the recent ISM manufacturing survey reaching 52.9 in August above the level of 50 (the border between a contraction and an expand of the activity) for the first time since January 2008 and a highest since June 2007. Moreover the production index of the ISM rise by 4pts in August reaching 61.9 a highest since October 2005. Definitely the virtuous circle investment-employment-consumption is back in the United-States. This surge of the Empire Manufacturing index is consistent with a rise to around 55 of the ISM manufacturing in September.



Germany: ZEW economic sentiment index rose to the highest level in more than three years

After dropping at 39.5 in July, stopping eight consecutive months of progression, ZEW index reached the level of 56.1 in August, meaning a highest since April 2006.Following the German rebound and the stock market recovery, the index which reached 57.7 (forecast 60.0) in September the highest level in more than three years. Meanwhile the ZEW releasing the current situation improved from -77.2 to -74.0 in September (forecast -67.5) The rise of factory orders as well as the PMI manufacturing & services, exports and business confidence are suggesting an economic rebound and a growth acceleration. Nevertheless as showed by the drop of the industrial production in July the rebound of the activity at the second quarter is more technical after the sharp drop at the first quarter than a lasting growth and the recovery needs to be confirmed.



France: Deflation is slowing down in August

After rising for five consecutive months from February to June and felling by 0.4% in July, France’s consumer price index rose by 0.5% in August(forecast +0.3%). This rise was mainly led by the increase of energy cost (oil is climbing and electricity prices are rising) and by the global economic recovery. From a year ago deflation is on a decrease trend passing from -0.7% YoY in July to -0.2% YoY in August (forecast -0.4% YoY). Indeed the end of the recession in the United-States as well as the fragile rebound in the Euro area are boosting inflation through the rise of the global demand and the increase of energy cost. As a matter of fact we forecast that at the opposite of the United-States remaining in deflation, inflation will reach 0.5% in 2009.For 2010 we forecast that inflation will rise by 2.2%. Unfortunately it seems that the European Central Bank will not wait the return of inflation to react and increase its refi rate and will never give economic growth a real chance