The Days Before GDP

GLOBAL EQUITIES RESEARCH

U.S. equities eased on Friday, with the DJIA (-1.08 %) retreating back under 10,000 pts. This correction was due to a drop in the oil sector after oil price retreated roughly 1 % (U.S. commercial crude oil inventories appear to be at very high levels by historical standards) and in the semiconductor sector after Broadcom (-7.26 %) released disappointing earnings. This overshadowed the good results of Microsoft (+5.38 %, highest rise in the DJIA) and its good prospects for Windows 7. Anyway, this slight pull back of the market is far from the double dip some investors expected. What happened to the October crash? As the summer ended, investors heard many voices warning that the market’s gains weren’t sustainable and that we could be headed for another October crash. Instead, the Dow hit 10,000 pts on October 14th. Of course, the month isn’t over yet and another selloff is always a possibility, but if the gains hold, they’ll debunk a lot of naysayers. One reason is a surprisingly rosy start to the third-quarter earnings season. Historically, October is a month for losses, but many companies are reporting better-than-expected results, lifting broad market sentiment. As of October 23rd, 196 companies out of 500 in the S&P index released their Q3 quarterly earnings, with a record 80.1 % well above analysts’ estimates. Momentum is another factor. Many investors are scrambling to get in the rally and giving the market an added boost.

The key event this week is the release of the U.S. Q3 GDP data on Thursday, with a consensus of 3.0 % QoQ annualized for the real GDP. Data may have topped analysts’ estimates and reached 4.0 %. Most of the rebound can be traced back to the now over “Cash for Clunkers” scheme which boosted consumption in the first couple of months in the quarter. Consumption may have boosted by as much as 3.5 % (with a contribution of 2.4 % in the GDP data), which would be the strongest growth in two-and-a-half year. Anyway, apart of durable goods, the latest Beige Book warned that consumer spending remained weak. The spike in Q3 vehicle sales was met primarily from existing stocks, but a slower pace of inventory liquidation in other sectors probably added almost 1.0 % to GDP growth. The news on Q3 investment should be mixed, with a rebound in spending on equipment and software (that may have rebounded at an annual pace of about 8.0 %) and residential investment (but only 2.5 % of GDP today) being partially offset by a sharp decline in spending on commercial real estate. This was confirmed by the latest Beige Book. The monthly construction data suggest that investment in residential real estate recorded its first quarterly increase in almost four years. Given the massive drop in business investment during the recession, there is a good chance of an even stronger rebound in the coming quarters. Exports and imports recorded a strong rebound in Q3, reflecting the jump back in global trade volumes. Exports probably increased at a slightly faster pace than imports but, since the latter is still bigger in dollar terms, the contribution of net external trade to GDP growth would have been broadly neutral. Looking ahead, a sharp slowdown in the rate of inventory liquidation alongside acceleration in the growth rate of business investment should ensure that GDP growth remains strong into the first half of next year.

Elsewhere, it seems possible that the further upward progress in the equity markets and the modest dip in gasoline prices may push the Conference Board consumer confidence indicator up (Tuesday, from 53.1 vs. 54.0). But with employment still falling, confidence is likely to remain at historically low levels. Durable goods orders (Wednesday) may have expanded in September (+1.0 % expected for overall and core index). This move could be confirmed in the next few months, as the major vehicle manufacturers start to ramp up production again. In September, a likely increase of 2.0% should help to offset a further dip in orders for commercial aircraft. New homes sales are released on Wednesday. Despite the modest fall in October, the NAHB home-building index is still consistent with new home sales increasing to around 500,000. Meanwhile, the end of the cash for clunkers scheme in August means that personal spending (Friday) is likely to have fallen by around 0.4% m/m in September. The combination of a modest 0.1% m/m increase in average hourly earnings and a fall in the number of hours worked in September means that personal income may have been flat.

At 06.00 BST, Asian markets were mixed this morning, with the Nikkei slightly up (+0.59 %) and the Shanghai composite slightly down (-0.50 %). The Kospi was up roughly 1 %. South Korea’s GDP rose 2.9 % QoQ in Q3, well above analysts’ estimates (+1.9 %) and the highest since Q1 2002. Hong Kong was closed for Chung Yeung Festival. U.S. index futures were slightly up: DJIA +0.08 %, S&P 500 +0.07 %, Nasdaq 100 +0.11 %. European markets should edge down at the opening. No major data is released today.



ECONOMIC DATA WITH IMPACT



US markets will open at 13.30 BST this week.

Chicago Fed national activity index (12.30 BST) for September and the Dallas Fed manufacturing activity index (14.30 BST)



POSITIVE IMPACTS



ELECTROLUX : Q3 sales SK27.6bn (27.1bn exp) / Ebit SK2.23bn (1.4bn exp) /Results improved in all regions… but said that thedemand continues to be weak,although rate of decline has slowed / Said that Europe has not yet hit a bottom

SACYR : A consortium led by Sacyr signed a €2.3bn contract to build and operate a toll highway in Italy (Expansion)

DBK is about to buy 75% stake of Sal Oppenheim forless than €1bn (Handelsblatt) / A deal could be announced this week (FT)

RBS plans to reduce reliance on the govt’s asset-protection program (FT) & may receive billions of pounds from the U.K. government to make up for a cut in the level of potentially toxic assets (the Times) / RBS is actively speaking to shareholders who would be willing to back a modest equity raising, which could be made up of a rights issue and a share placement, in the area of £3 bn to £5 bn (FT)

STANDARD LIFE is considering selling its Canadian insurance business (The Independent)

L&G plans to sell forensic science group LGC for £200m (Sunday Telegraph)

BANCA POPOLARE DI MILANO could dissolve its partnership in banking and insurance with Fondiaria-SAI buying back half of BPM Vita for about €110 m(Il Sole 24 Ore)

WACKER CHEMIE expects sales & profit to decline "significantly" on a yoy basis in the H2, but sees a notable recovery in the Q3

CENTRICA plans to sell its stake in the world’s biggest wind farm for about £400m (the Sunday Times)

PEUGEOT could see an operating loss of between €1-1.5 bn this year, narrowing earlier forecast of €1-€2bn (CEO in Il Sole 24 Ore) / Is open to a reduction of its stake in car parts manufacturer FAURECIA (Les Echos)

FRENCH BANKS : The approval by the France's lower house of parliament on Friday of a plan to impose a 10% tax on bank profits in 2010 was cancelled due to a “technical” problem (Let’s say that…) / A new vote is expected to restart today

LAGARDERE (minor) is considering selling its remaining stake in French local newspaper La Depeche du Midi (La Lettre de l'Exp.)

BARRON’s European Trader this week suggests that the animal spirits of M&A are slowly but steadily reawakening…



NEGATIVE IMPACTS



LLOYDS is set to announce a £23bn fundraising that will free the bank from having to take part in the government's asset protection scheme / Details of the plans should be announced this week by the Treasury in a statement (Sunday Times)

ING : As part of a final restructuring plan filed with the EC, ING will separate its banking and insurance activities / ING will conduct a €7.5bn rights issue for early repayment of the Core Tier 1 securities to the Dutch state / Will take one-off pre-tax charge of €1.3bn in Q4 / Reported 3Q u/l net result of €750m (bank €250m and insurance €500m), in line

MERCK : Q3 sales €1.94bn (1.95bn exp) / Ebit €222m, in line / Cut slightly its FY sales guidance to a growth of 2% from “up to 5%” before / Sees core return on sales of 17% (15-20% before)

DEUTSCHE POST : Germany's new ruling coalition agreed to abolish DHL’s exemption from paying VAT on certain types of mail

BRITISH AIRWAYS : European regulators have told British Airways, American Airlines and Iberia that they could be forced to give up valuable take-off and landing slots if they want their planned transatlantic tie-up to go ahead (FT)

SCHNEIDER-ALSTOM : M. Immelt, the CEO of GE, is expected to meet with French President to protect GE’s interests in the T&D’s dossier / Separately, French press reports that ALSTOM has doubts on informations provide by AREVA on its T&D unit… (Les Echos)

BBVA-SANTANDER-BANCO POPULAR : The Bank of Spain has decided to oblige banks to double their provisions against possible repossesions of houses used as collateral against debts (El Pais)



TRADING IDEAS


BUY E.ON / VEOLIA / QUALCOMM / CARREFOUR


BUY ANGLO GOLD / SELL BHP // BUY REED ELSEVIER / SELL PEARSON // BUY ENI or BP / SELL ROYAL DUTCH // BUY GSZ / SELL EDF // BUY PUBLICIS / SELL LAGARDERE // BUY BAYER / SELL AKZO // BUY VISA / SELL MASTERCARD



BROKER METEOROLOGY



GAZPROM RAISED TO OVERWEIGHT FROM NEUTRAL BY JP MORGAN

NEXANS RAISED TO NEUTRAL FROM SELL BY GOLDMAN SACHS

SCHNEIDER ELECTRIC REMOVED FROM PAN EUROPE SELL LIST BY GOLDMAN SACHS

STANDARD CHARTERED RAISED TO NEUTRAL FROM UNDERWEIGHT BY MORGAN STANLEY

SVENSKA CELLULOSA RAISED TO NEUTRAL FROM SELL BY BANK OF AMERICA – ML

SVENSKA CELLULOSA RAISED TO NEUTRAL FROM SELL BY BANK OF AMERICA – ML

HSBC / SANTANDER / SWEDBANK ADDED TO MOST PREFERRED LIST BY BANK OF AMERICA - ML


HSBC CUT TO HOLD FROM BUY BY CITIGROUP

DANONE CUT TO HOLD FROM BUY BY ING

SCHNEIDER ELECTRIC CUT TO NEUTRAL FROM BUY BY GOLDMAN SACHS

SCHNEIDER ELECTRIC REMOVED FROM PAN EUROPE BUY LIST BY GOLDMAN SACHS

TECHNIP CUT TO NEUTRAL FROM BUY BY UBS

TECHNIP CUT TO SELL FROM HOLD BY CITIGROUP

LUKOIL CUT TO NEUTRAL FROM OVERWEIGHT BUY JP MORGAN

BCP /DBK ADDED TI LEAST PREFERRED LIST BY BANK OF AMERICA - ML

RHODIA CUT TO NEUTRAL FROM OVERWEIGHT BY JP MORGAN

BASF CUT TO NEUTRAL FROM OVERWEIGHT BY JP MORGAN

LANXESS CUT TO NEUTRAL FROM OVERWEIGHT BY JP MORGAN



DATA


WTI : 79,8 (-2,31 %)

Eur/$ : 1,5030 (0,14 %)

$ /Yen : 91,88 (0,04 )

10 Yr US : 3,49 ( 0,18 bp)

10 Yr Euro : 3,35 ( 4,3 bp)


Indices : US close ; Europe close

SOX : -3,19 %;-2,92%

S&P :-1,22 %; -1,07 %

DOW: -1,08%; -0,98 %

NAS :-0,50%; -0,21%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -2,28 %; -1,62 %

ENERGY : -2,14 %; -2,13 %

FINANCIAL : -1,49 %; -1,10 %

HEALTHCARE : -1,05 %; -1,02 %

TECHNO : -0,37 %; -0,06 %

TELECOM : -1,31 %; -1,11 %

INDUSTRIAL : -1,60 %; -1,51 %

UTILITIES : -1,64 %; -1,49 %



TO BE COMING



Tuesday

Results : EU \\ Aegis / Akzo Nobel / Banco Bilbao Vizcaya Argentaria / Banco Espirito Santo / Bayer / BP / Daimler (3Q final details) / Enagas / Klepierre sales / KPN / Norsk Hydro / Petroleum Geo-Services / Publicis / Reckitt Benckiser / Renewable Energy / Saipem / Svenska Cellulosa / Vestas Wind

US\\ Ernst & Young / United States Steel / Visa

Asia \\ Canon / Honda Motor / Tata Steel

Dividend :

Events: Pfizer analyst & investor / SAP TechEd Vienna event



Wednesday

Results : EU \\ Acerinox / Anglo Pacific / Arcelor Mittal / Banco Santander / BG Group (BMO) / British American Tobacco interim / Broadvision / EDP Renovaveis / ENI / GlaxoSmithKline / Heineken trading statement / Mediobanca / NH Hoteles / Nordea Bank / Prudential / SAP / Seche Environnement / Svenska Handelsbanken / Symantec / TeliaSonera (BMO) / TomTom / Umicore

US\\ ConocoPhillips (BMO) / General Dynamics / Goodyear / International Paper (BMO) / Lazard

Asia \\ Nomura / PetroChina

Dividend : Rolls-Royce (GBp 6)

Events :



Thursday

Results : EU \\ Abb / AstraZeneca / BASF final details (BMO) / Continenta / Dassault Systemes / Deutsche Bank (BMO) / Deutsche Lufthansa (BMO) / Geberit / Lonza / Man AG / Neste Oil (BMO) / Renault sales / Standard Chartered / Telenor / Volkswagen

US \\ American Electric Power / Colgate-Palmolive / Eastman Kodak / Electronic Arts / ExxonMobil / Kellogg (BMO) / Procter & Gamble / Sprint /



Dividend :



Events: BHP Billiton AGM / Nordea Bank


Friday

Results :EU \\ Agfa-Gevaert / Alcatel-Lucent / Belgacom (BMO) / Edison / Energias de Portugal / Red Electrica / Sandvik /

Sanofi-Aventis / Shire / SSAB (BMO) / WPP trading statement

US\\\\ Chevron / Constellation Energy / Duke Energy / Electronic Artes / Ford / NYSE Euronext

Asia \\ Hitachi / Samsung Electronics / Sony

Dividend :

Events:



ECONOMIC DATA PREVIEW



Watch in the United-States the Chicago Fed National activity index for October (14.30 GMT) expected to improve led by the economic recovery in the United-States as showed by the rebound of investment and household spending at the third quarter.



ECONOMY


United-States: Existing home sales jumped in September

Existing home sales surge from 5.09 million in August to 5.57 million or 9.4% in September reaching a 26-month rise. This jumped confirmed that the recovery is in place on the real estate market. This rise has been boosted by the tax credit for first time buyers which may be extended beyond November. Furthermore the drop in prices and low mortgage rates will boost sales in the coming months.



Euro area: PMI manufactring and services rose again in October

The PMI manufacturing index rose for an eight consecutive month to reach the level of 50.7. This index over crossed the boarder of 50 marking the limit between and contraction and an expand of the activity for the first time since May 2008 confirming that investment is back in the Euro area. Meanwhile the PMI services index rose for a fourth consecutive month to reach the level of 52.3 the highest level since December 2007 confirming the lasting rebound of investment in the services. If investment is back in the euro area the economy will not support to many bad news as a rise of crude oil, a new rise of the euro currency or an increase of the ECB leading rate.



Germany: New rise of the ifo business climate in October

After five consecutive up months , especially the three last ones, the IFO index increased again in September to reach 91.3. After destocking and over cutting investment, German industries are now matching economic fundamentals. In such conditions, the IFO index rose again to reach 91.9 in October. Nevertheless, German economic recovery remains weak and fragile and the end of the cash for clunkers program, as well as post-electoral uncertainties could weaken the present rebound.



France: Consumer spending surge in September

+1.4% in June,-2.1% in July-August, +2.3% in September. France household consumption remained very volatile. This volatility is not new and confirm that despite the rise of unemployment French consumer spending are still rising . This rise was mainly led by the effects of the deflation and the cash for clunkers program, without forgetting the back to school allowances. The key factor remained the car sector in which household spending surge by 10.2% in September. Nevertheless this dependence will shrink when the cash for clunkers program effects will decrease.