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GLOBAL EQUITIES RESEARCH

The dollar went as low as 1.4967 EUR/USD on Friday, within a whisker of 1.50 EUR/USD. Will the dollar fall further against the euro? On a fundamental basis, the COFER (Currency Composition of Official Foreign Exchange Reserves), released by the IMF, does not indicate any decrease in the share of the dollar in Central Banks foreign exchange reserves. This share is steady, averaging 40 % worldwide and 60 % for central banks of advanced economies. In addition to that, the percentage of “indirect bidders” (mostly central banks outside the U.S.) in U.S. massive Treasury auctions is still very high (around 50 %) and has recently increased. The upshot is that there is no reluctance from foreign investors and central banks to finance the huge U.S. budget deficit which is now around 17 % of GDP. So, at a time when China is asking for a new reference as a global reserve currency (remember that the renminbi is not a convertible currency!) it looks like the demand for the dollar as a reserve currency, international trade currency and issuance currency is still very strong.

But the dollar, that has been trending lower against the euro since March, is clearly on the downside on the short term and a target of 1.60 EUR/USD seems realistic (a level already reached in November 2008, before a sharp pull back to 1.25 EUR/USD which is close to the Purchasing Power Parity). The decrease in the EUR/USD exchange rate is partly a reflection of worries that quantitative easing and the surge in government borrowing will debase the dollar (factors which have also undermined sterling) and partly due to diminishing demand for the dollar as a safe haven now that the world economy is recovering. The euro may also have benefitted a little from the fact that Germany and France exited recession in the second quarter, before either the US or the UK. This downward trend in the dollar will presumably continue until these negatives are removed, or replaced by something new. For a start, without the exceptional policy stimulus, the US economy would have collapsed and the fiscal position would have been even worse. If the result of the emergency support is that the US economy rebounds more quickly, the dollar should actually benefit over time – especially if a stronger economic recovery allows an earlier withdrawal of the monetary stimulus. In the meantime, inflation fears are wildly exaggerated, given the huge amount of spare capacity opened up by the global recession and the growing downward pressure on labor costs from soaring unemployment. The large increases in the stock of central bank money are not finding their way into the broader money and credit aggregates, which are continuing to stagnate. It is of course possible that central banks will leave this stimulus in place for too long once the usual monetary transmission mechanisms start to work again. This is the policy mistake that gold bugs in particular now fear. But it seems just as likely that central banks will withdraw the stimulus on time, or even prematurely. What’s more, US GDP is likely to record strong rates of growth in the remainder of this year and in early 2010, perhaps as high as 4% at an annualized rate in Q3. In contrast, the strength of the euro is already an increasing headwind for the euro-zone economy, where the recovery is still heavily dependent on net exports. The upshot is that, even without a faltering in the global economic recovery that might reignite safe haven demand for the dollar across the board, the US currency probably does not have much further to fall against the euro even if the EUR/USD peaks at 1.60 on the very short term. This move may be sharp and rapid as we face a huge “carry trade” on the dollar (short term U.S. interest rates are close to zero) pushing up prices of financial assets, oil, raw materials and gold…

The dollar was not the only worry on Friday. Q3 results of Bank of America and General Electric were a reminder of what IBM released earlier last wek: even if profits may be somewhat spared by productivity gains, revenues can be in free fall as economic activity remains weak, mainly due to a sharp contraction of credit. Equities were on the downside on Friday. U.S. index futures were slightly down this morning (06.30 BST): DJIA -0.14 %, S&P 500 -0.15 %, Nasdaq 100 -0.08 %. Asian markets were roughly flat, with the exception of the Shanghai composite (+1.00 %) and the Shenzhen composite (+2.00 %). European markets, which peaked at YtD records early Friday before retreating sharply will certainly keep on consolidating this morning.

Fed Chairman Ben Bernanke starts the week with today’s speech on Asia and the global financial crisis (16.00 BST). He will also be speaking about financial regulation on Friday. Elsewhere, this week’s housing market data will show that the housing sector is continuing to recover. Not only do we think today’s NAHB housing market index (08.00 BST) will nudge up a bit to 21 in October, from 19 in September but the recent sharp increases in the pending home sales index suggests that the dip in the number of existing home sales (Friday) in August, from 5.24m to 5.10m, was only temporary. The number of housing starts (Tuesday) may increase from 598,000 to a 10-month high of 610,000.


ECONOMIC DATA WITH IMPACT


US NAHB (National Association of Home Builders) housing market index for October (18.00 BST) expected to rise to 21 from 19 / Important


POSITIVE IMPACTS


ABB said it will report roughly Q3 net income of $1 bn (€660m exp.), following changes in how much it sets aside in provisions.

ROCHE's rheumatoid arthritis drug, Actemra, significantly halted the progression of joint damage in patients with rheumatoid arthritis…

BP won approval from the Iraqi government to lead a consortium of companies to develop the country's biggest oil fields (Sunday Tel.)

AVIVA launches IPO of Delta Lloyd = Price range of the offering is €15.50 -€19, valuing Delta Lloyd at €2.6bn to €3.1bn / Delta Lloyd expected to begin trading on 3 November

MEDIOBANCA may post net income of about €500m for the year ending June 30, 2010 / Revenue should be in line with the €2.1bn reported in 2008 (Il Sole 24 Ore)

UBS : Companies and institutional clients are starting to return to UBS (Sonntagszeitung)

TECHNIP expects an increase in the level of new projects awarded in 2010 (CEO) / Sees quite strong recovery end of 2010-early 2011

SANOFI : The FDA approved Elitek, to help fight a serious complication of cancer treatment

GAS NATURAL agreed to sell its 64% stake in Empresa de Energia del Pacifico for $1.1bn

DAIMLER : Results continue to improve and the company remains on track to hit its financial targets (WirtschaftsWoche)

AXA : Sumitomo Trust said it will join hands with AXA to set up a $1.1 bn real estate investment fund to buy office buildings in Tokyo



NEGATIVE IMPACTS



VIVENDI & GE are about $500 m apart in talks over what Vivendi should be paid for its minority stake in NBC Universal (WSJ)

GDF-SUEZ : Belgium has demanded GSZ agree to a deal by Thursday on an energy charge of up to €500m = €250m for operating nuclear power stations, the same to a renewable energy fund… (Le Soir)

SULZER reported a 9M order intake of SFR2.28 bn (-32% vs year ago) but in line with consensus + said it sees lower FY orders

CONTINENTAL is considering a bond sale to refinance debt, in addition to a planned capital increase (Bloomberg)

LLOYDS : Short-selling doubled last week as the shares is exp. to collapse when LLOY launches a £25bn fund raising (Sunday Tel.)

THYSSENKRUPP will shed as many as up to 20,000 more jobs in its current fiscal year (CEO in FAZ)

TELECOM ITALIA : Telco, the holding company that owns 24.5% of TLIT is mulling a €2.6 bn bond (Il Corriere della Sera)

BRITISH AIRWAYS : Barron’s writes that it may be a good time for investors to take their profits = Any positive news on a merger or on antitrust immunity has been priced in, and sentiment has shifted



TO BE NOTED : The World Bank chief economist said that the global economic recovery isn't yet a sustainable upswing, and called on industrial nations to implement additional economic support packages to further stabilize the economy (Welt am Sonntag)



TRADING IDEAS



BUY EADS / EDF / PERNOD to play upside trend & BUY PINAUL ahead of results tomorrow

BUY ACCOR / RWE on double bottom possibility / buy CARREFOUR on reversal Head & Shoulder possibility

SELL BASF to play double top possibility


BUY NORSK HYDRO / SELL STATOIL // BUY PINAULT / SELL LOREAL // BUY PUBLICIS / SELL LAGARDERE // BUY ALSTOM / SELL SIEMENS // BUY BAYER / SELL AKZO


BROKER METEOROLOGY


FIAT RAISED TO BUY FROM HOLD BY DEUTSCHE BANK

UNILEVER RAISED TO NEUTRAL FROM SELL BY UBS

NESTLE RAISED TO BUY FROM NEUTRAL BY UBS

INTESA SANPAOLO RAISED TO OVERWEIGHT FROM EQUALWEIGHT BY MORGAN STANLEY

JULIUS BAER RAISED NEW OUTPERFORM BY CREDIT SUISSE


KBC CUT TO MARKETPERFORM FROM OUTPERFORM BY KBW

GAMESA CUT TO BUY FROM CONVICTION BUY LIST BY GOLDMAN SACHS

TELEKOM AUSTRIA CUT TO UNDERPERFORM FROM BUY BY BANK OF AMERICA - ML

CABLE & WIRELESS CUT TO HOLD FROM BUY BY CITIGROUP


DATA


WTI : 78,6 (0,95 %)

Eur/$ : 1,4880 (-0,17 %)

$ /Yen : 90,77 (0,30 )

10 Yr US : 3,41 ( -0,19 bp)

10 Yr Euro : 3,29 ( -1,1 bp)


Indices : US close ; Europe close

SOX : -2,11 %;-3,24%

S&P :-0,81 %; -1,10 %

DOW: -0,67%; -1,01 %

NAS :-0,76%; -1,29%



DJ Stoxx US Sectoral Indices : US close ; Europe close

BASIC MATERIALS : -1,28 %; -1,13 %

ENERGY : -0,09 %; -0,73 %

FINANCIAL : -2,37 %; -2,17 %

HEALTHCARE : -0,40 %; -0,60 %

TECHNO : -1,07 %; -1,69 %

TELECOM : -0,99 %; -0,90 %

INDUSTRIAL : -0,91 %; -1,48 %

UTILITIES : 0,11 %; 0,12 %



TO BE COMING



Today

Results :LVMH sales (AMC) / Sulzer sales / Soitec / Transgene / Apple / Texas Instrument (AMC) /

Dividend :

Events :Abengoa EGM



Tuesday

Results : PPR sales / Ahold trading statement / Iberdrola Renovables / ST Micro (After US close) / Swedbank / Yara International (BMO) / Xtrata / San Disk / Caterpillar (BMO) / American Express / Bank of New York Mellon / Du Pont de Nemours / Pfizer / Coca Cola Co / Lockheed Martin / United Health / Yahoo ! / UnitedHealth / United Technologies / Omnicom / SanDisk / Zain

Dividend :

Events: Soc Gen end of subscription time / Abengoa EGM



Wednesday

Results : Iberdrola / Fiat / Valeo / Alpha Laval / Cadbury / Skandinaviska Enskila Banken / Swedbank / Tele 2 / Synthes / Boeing / US Bancorp / United Tech Home Retail / eBay / Wells Fargo / US Bancorp / Biogen / Elan / Altria / Eli Lilly

Dividend : BAE Systems (GBp 7,111111) / British Sky Broadcasting (GBp 11,22222) / Hays ( GBp 4,388889)

Events :



Thursday

Results : Novartis / Schneider sales / Fortum / Credit Suisse / Reed Elsevier / Aviva trading update / Atlas Copco

Dividend :

Events:



Friday

Results :Danone sales / Schlumberger / Syngenta / Ingenico / B Sky B / Volvo / Gazprom / Morgan Stanley / Honeywell / Microsoft

Dividend :

Events:



ECONOMIC DATA PREVIEW



Watch in the United-States the NAHB index for October (18.00 GMT). The NAHB index is expected to rise for a fourth consecutive month. Indeed the real estate market has now reached a bottom as showed by the housing starts and building permits rebound.



ECONOMY



United-States: Industrial production rose more than expected in September

After having increasing by 1% in July, ending eight consecutives months of decline, and progressing by 1.2% in August, US industrial production confirmed this rebound by rising by 0.7% in September (forecast 0.2%). Looking at the breakdown Consumer goods rose by 1.1%; Defence and space rose as well by 1.1% and materials by 0.8%. After four consecutive quarters of cut in capital spending, US industrial companies are now matching economics fundamentals, and investment again. In such conditions, after having increased by 69% in July, which followed eight consecutive months of decline, and after rising by 69.6% in August, capacity utilization logically increase again to reach 70.5% in September.



Euro area: Sharp drop of the trade surplus in August

Euro area trade surplus dropped from 6 billion euro in July to 1billion euro in August. This sharp drop was led by the slump of exports declining by 5.8% the most in seven months which more than reversed July 4.7% rise. Euro area exports have been widely penalized by the high level of the euro currency humping the demand for goods abroad. Meanwhile imports fell by a modest 1.3% on the month. These figures suggest that external sector recovery remained limited and fragile and looking ahead export improvement should remained modest. Nevertheless as the United-States and China are recovering exports should pick up in 2010.