November 17, 2009

News from Danske Research

EMEA Daily - 17 November 2009

Back on its feet (RBS)

The world economy is getting back on its feet, with the recovery in Japan gaining momentum and the Euro Area pulling out of recession in Q3. However, a sustainable rebound is not yet assured, as growth in the developed world remains dependent on the fiscal and monetary stimulus packages put in place to stem the downturn.

There were encouraging signs from the UK labour market. The unemployment rate ticked up only slightly to 7.8% in the three months to September, from 7.7% in August. Moreover the rise was driven by an increase in the number of people looking for work, rather than from job losses. (The first rise in employment since July 2008.)
But scratch beneath the surface and market conditions remain difficult. The rise in employment was very small (just 6,000) and the changing composition of employment provides ample evidence of continued weakness. A sharp fall in full time employment was offset by a near identical rise in part time working. Indeed, the 997K people working part time as they couldn’t find a full time position was the highest on record (almost 5% of all employees). In addition, average earnings growth fell to its lowest level since 2001, to just 1.8% y/y, while the number of vacancies also declined to its lowest ever level. In total this points to continued softness in consumer spending.
The housing market recovery continued. The Government's "official" measure by the Department for Communities and Local Government was the latest house price index to confirm rising prices. Although prices in September were still 4.1% lower than last year, they were 3.1% higher than the summer lows (seasonally adjusted). Price declines are showing significant differences across the home nations. Annual house prices have fallen least in Scotland (-0.9%), moderately in England (-4.0%), and most violently in Northern Ireland (-18.3%) y/y.
Even commercial property prices are getting in on the act. Prices rose by 2% m/m in October, the largest gain since December 2005. Prices are now 3.2% above their July trough, though this is still 42% below their June 2007 peak. On the way down the price correction was pretty indiscriminate, with all sectors falling in broadly equal measure, but figures suggest we might see much more variety in the recovery: retail is leading the revival (+4.5%), with office prices trailing (+1.9%).
The Bank of England’s quarterly Inflation Report provided more insight as to why the Monetary Policy Committee opted to extend QE at its November meeting. Inflation is still expected to undershoot the 2% target (at 1.6%) at the two-year forecast horizon, as the amount of spare capacity in the economy bears down on price pressures. Even
assuming unchanged interest rates, inflation is projected to only slightly overshoot the target two years out (at 2.2%).
In the US, the trade deficit widened by much more than expected in September, rising $5.7bn to $36.5bn, the largest gap since January. Exports grew 4% but this was not enough to offset the 7% rise in imported goods. Much of this increase was due to a rebound in petroleum inflows which climbed by $4.4bn due to both higher prices and volumes. Excluding petroleum, imported goods still advanced by a healthy 4.4%, underscoring the recent improvement in US domestic demand. On a less positive note, the University of Michigan consumer sentiment index for November fell by nearly five points to 66.0, dropping back to its July/August levels. Consumers’ assessments of their finances and the outlook for the economy grew noticeably more negative - both barometers fell to their lowest levels since the spring.
The euro area emerged from recession in Q3, expanding 0.4% q/q in the three months to September, marking an end to the worst recession since World War II. France and Germany saw economic output growing for the second consecutive quarter and Italy declared an end of its recession, recording a +0.6% q/q gain in Q3.
Japanese growth was stronger than expected at +1.2% q/q in Q3. Growth was evenly split between private consumption, increased inventories and net exports. External demand has helped industry bounce back from a very deep recession. Capacity utilisation has improved to 80% from 60% in February. Consumers are also feeling more positive about the outlook with confidence indicators rising to their highest levels for two years.
China’s trade surplus doubled from $12bn in September to $24bn in October. The fact that China has weathered the downturn better than almost any other nation and is leading the global recovery, makes it an appealing prospect to investors. But large trade surpluses and strong global capital flows poses risks. It requires the authorities to keep amassing foreign exchange reserves to maintain their managed exchange rate. But these actions are fuelling asset price growth, even as consumer price inflation remains in negative territory. Preventing a bubble without de-railing the recovery will be a tricky feat to achieve.

MS Daily

*US - U.S. stocks rose broadly on Monday, sending indexes to fresh 13-month
closing highs, after Federal Reserve Chairman Ben Bernanke reinforced
expectations that interest rates would stay low to spur growth.
Bernanke repeated that the Fed was likely to keep interest rates
exceptionally low for "an extended period," a pledge that weighed on the
U.S. dollar and drove investors to snap up shares of natural resource
companies as prices of global commodities.
Steel: AK Steel: + 8%, US Steel: + 4.76% after JPM adds on Focust List=>
Cliffs' Resources:+5%
Barrick Gold: +2.6% after new record of gold at $ 1.144.20, Newmont
Mining: + 2.8%
Cons Disc: Target:+2.7% SEARS:+4.1% after strong retail sales #,
Norstrom: + 3.1% after broker upgrade
Fin: Banks: M Whitney statement: expects a so called double dip
recession=> GS: +0.3%, C: + 3.21%
*AH - Buffett: released 13 F for quarter ended Sept. 30th: added: 17.9m Wal
Mart, added 10.75m Wells Fargo, 422k Exxon cuts: 7.06m shares in Conoco
new: 3.4m share stake in NESTLE ADRs
3.625m share stake in Public Services maintained: Coca Cola, AMEX,
Procter and Kraft (GS stake via warrants not disclosed) *Dow +1.33%, Nas +1.38%, S+P +1.45%, Driven Higher by Auto&Comp +3.27%, Energy +2.45%, Real Estate +2.40%, on Volumes Nyse 1.15bn Nas 2.13bn, Breadth +ve Nyse 9:2, Nas 7:2, Vix -2.01% 22.89pts, 10yr Yield 3.340% *LATAM - Mexico Closed, Argentina +2.74%, Brazil +1.99%, Chile -0.36%
- Bovespa Advances to Four-Week High on Commodity Rally, Brazil Job
- Petrobras May Boost Output Target as Q3 Profit Meets Estimates
- Panama Sells $1 Billion of 10-Year Bonds in International Debt Markets *Asia - Japan -0.63%, HK -0.44%, China +0.29%, Taiwan -0.76%, Aust -0.54%,
Sing -0.11%, Korea -0.30%, Thailand +0.08%
- Australia's Central Bank Says Pace of Rate Gains Remains `Open
- Asia Stocks, Commodities Fall as Bernanke Says Economy Faces
*Comdty- Crude -0.30% $78.66 Yest +3.34%, Natural Gas -0.24% $4.603 Yest +5.05%
Gold -0.38% $1134.900, Silver -0.98% $18.205, Shanghai Copper +2.01%,
LME Yest Nickel +4.32%, Zinc +4.90%, Alum +4.34%, DRAMDXI +0.10%
- Gold May Climb to Record for 2nd Day as Weakening Dollar Fuels Demand
- Oil Trades Near $79 After Rising Most in 6 Weeks on Dollar Drop,
- Copper Reaches 14-Month High in Shanghai as Widening Contango Lures
*FX - £1.6825 / €1.4955 / s₣1.0093 / ¥89.070 ... vs $
- Dollar Near 15-Month Low as Fed Officials May Reaffirm Zero Rate Policy
- Australian Dollar Falls From Near 15-Month High as Minutes Curb Rate
*LUFTHANSA no plans to purchase SAS (BZ); plans increasing density of seats (FTD)
*RWE to build Serbian develop hydro-power plants; plans to sell remaining
shares in American Water (BB)
*DT BANK Sal. Oppenheim rejects Macquarie bid for IB division, sources (BB) *SIEMENS / Drägerwerk: poised to buy back Siemens medical stake for min.
EU 230m, sources (FTD)
*UBS targets SF 15 bln annual pretax in mid-term, targets 65-70% cost income ratio & 15-20% ROE, WM Americas targets SF 6 bln pretax, Asset Management targets SF 1.3 bln, expects reversal of the outflows, effect of tax amnesties on assets was overestimated, sees 'risk-weighted' assets rising to SF 290 bln vs SF 211 bln, sees 'restrictive' dividend policy *NOVARTIS says half a dose of Swine Flue vaccine may be enough, cites clinical data on a H1N1 2009 vaccine *ROCHE Genentech submits supplement applications to FDA for Avastin *REINET 6m profit ERU 406 mln, NAV per ordinary shar EUR 11.51 on 30 Sep. *GAM AuM increased to SF 113 bln, Swiss Asset & Management AuM SF 71 bln, says year-to-date Swiss & Global AM has ssen solid inflows, not planning to refinance SF 150 mln Bond,grants options over 30.27mln shs in incentive plan *TECAN in OEM pact with Hologic to supply papillomavirus tests *TORNOS 9M EBIT SF -23 mln, net loss -21,7 mln, sales Q3 19,4 mln, orders SF 20,3 mln *MICHELIN wants to build a $867m factory in India (les echos)
*BOUYUES will buid a €950m real estate complex in Qatar *PPR ready to spin off CFAO *EADS studying mid size acquisitions in the US (les echos) *ACCOR decision before year end on splitting hotels & services divisions
*ADP October passanger traffic down 3.3% *FAURECIA to Buy Plastal Deutschland Soon, (Sueddeutsche)
*RETAIL Experts predict Christmas sales will be worst for shops since 1980s (Independent)
*INT POWER Is International Power on Warren Buffett's menu ? (Mail) *BP Finds oil in a test well in the Gulf of Mexico.
*BT Telegraph article on UK pensio deficits highlights could be underestimated by £268m.
*BRIT AIRWAYS Crew vote today on strike action ... looks likely to be a huge majority yes vote, this basically means strikes will
start Dec 21st onwards in time to screw up all our plans for Christmas ! *TDY - US ECO: Producer Price Index,PPI Ex Food & Energy, Net Long-term

Natixis (Hold, TP=€4.20) - Rating downgrade - The party is over. Time to get down to business (3p)

Please find below our latest publication:

Natixis (Hold, TP=€4.20) - Rating downgrade - The party is over. Time to get down to business (3p)
Natixis reported Q3 earnings at €268m below our estimate of €386m. Nevertheless, these results included several exceptional items (GAPC +€66m, CDS -€319m, capital gain +€463m, revaluation of the spread on own debt -€143m and +€309m taken from collective provisions). Restated for exceptionals, earnings broke even, in line with our estimates. We were disappointed by the 5% increase in costs, as we had been expecting a decline like during the past 1.5 years, particularly as the deterioration was mainly attributable to Corporate & Investment Banking (+20% after -16% in Q2 and -19% in Q1). Conversely, risk weighted assets are still well under control, down -3.5% quarter on quarter, notably thanks to Corporate & Investment Banking (-8%).
The company reported Q3 results based on its new strategic orientation (CIB, Services and Asset Management) which reduced visibility. The group was slightly impacted by GAPC in Q3, only because of provision write-backs on its monolines (€500m). Q3 performances were in line with our projections in most businesses except for Asset Management, which remains disappointing compared with peers (outflows of €1bn vs inflows of €10.9bn at CASA). The cost of risk restated for part of the Q2 sector provision allocation was up sharply (196bp for the group) mainly on LBOs and real estate financing. Thus, we see no reason to raise our earnings estimates at this stage.
Target price & rating
The orientation of the strategic plan is positive but lacks visibility and the numerous exceptionals may cloud the visibility of the accounts over the medium term. Following an excellent performance (68% over three months), the low valuation (1x 2010e tangible book value) reflects this poor visibility. In our opinion, the market today discounts factors that are much too uncertain, such as the use of €3.9bn in deferred tax over an unknown period of time. We downgrade our rating to Hold vs Buy. Our SOP-based target price is unchanged at €4.2.
Next events & catalysts
The group will not provide details on the progress of its plan until the full year results publication at end-February

Dexia (Hold, TP=€5.20) - 12m target downgrade - Difficult to determine the future size of the group (3p)

Please find below our latest publication:

Dexia (Hold, TP=€5.20) - 12m target downgrade - Difficult to determine the future size of the group (3p)
Dexia reported Q3 earnings at €274m, ahead of our€245m estimate, but below consensus. We note that our estimates were at the bottom of the consensus range owing to a high cost of risk. As expected, Public & Wholesale banking revenues dropped 27% over the quarter after a 17% fall in Q2 09 as the bank deliberately reduced its exposure to non-domestic markets. Conversely, costs for the group as a whole were under control, down 11% in Q3 after -7% in Q2. The group continued to reduce its bond portfolio, which is being phased out, at €139m vs €149bn end-Q2, thanks to the maturity of part of the portfolio but also due to new disposals (€11.3bn over nine months of which €4.7bn in Q3).
Dexia's main problem, i.e. the mismatch between its new production and the cost of financing, still has not been resolved. The company continues to see its cost of financing improve without the state guarantee at 43bp (38bp in October) on covered bonds, but this is 95bp on non-guaranteed senior debt. The group still has positive net margins on new production; however, in our view, these margins will erode owing to aggressive competition from other banks, notably in France. The deleveraging of the balance sheet had a negative impact on pre-tax profit in Q3 of €43m, and should continue to impact the group, as we do not expect strong performances from the treasury business over the few quarters. Thus, we have cut our earnings estimates by 12% for 2010e and 2011e.
Target price & rating
Hold maintained. Efforts have been made to reduce the portfolio in run-off, which has improved the risk profile but does not directly benefit minorities. Even including the improvement in the AFS reserve, our new 2010e tangible book value at €4.6 gives a valuation that may appear attractive (1.2x 2010e vs 1.7x for the sector) but is unwarranted given the group's weak appeal. Target price cut to €5.2 vs €5.6 (see next page) owing to the Corporate Centre.
Next events & catalysts
Full year earnings on 25 February, during which we hope to have more visibility on 1) Brussels validation of the bail-out, and 2) the disposals that Dexia may be forced to realise.


1) S&P 500 -0.1% after the EU close - closing +1.5% at 1109. Following risk-on sentiment from overseas as APEC pledged to maintain stimulus measures, S&P 500 took out the 1100 resistance level early and then managed to stay above to close at a new YTD high. NASDAQ and NYSE volumes were trending -6% and -9% below 30-day averages, respectively. Crude +3.4% to $78.02. Copper +5.1% to $6850/mt. Energy (+2.5%), Materials (+2.3%) and Industrials (+2.0%) outperforming. Consumer Staples (+0.7%), Telecom Services (+0.8%) and Tech (+1.0%) underperforming.
2) Large decline in fed funds rate expectations & interest rates over the past three weeks. December 2010 Fed funds futures have declined to 0.85% from 1.34% (see first attachment). The US 2-year yield has declined to 0.77% from 1.02%. The US 10-year yield has to 3.34 from 3.55%.
3) Core retail sales +0.5% mom in October vs. +0.2% expected - but offset by downward revisions to prior months - 3Q GDP likely to be revised down 0.5 ppt. Retail sales were firmer than expected in October once you strip out the sales that are not direct entries into GDP. The "core" component of sales (excluding vehicles, for which unit sales are used directly in GDP, building materials, which are intermediate product, and gasoline, which is often affected by price) rose +0.5% in October. We had expected an increase more like +0.2%. However, the better-than-expected result for October was diluted by downward revisions to prior data, which took 0.2 percentage points away from the increase posted for August (to 0.5% from 0.7% previously for core sales) and an additional 0.1 point (to 0.4% from 0.5%) for September. As a result, the consumption component of the 3.5% annualized increase reported for GDP is apt to come down a bit, adding to other factors that currently point to a downward revision of about half a point prior to the retail sales report.
4) Empire Manufacturing index suffered a larger-than-expected setback in November - but coming from a high base. The 11-point drop to 23.5 (consensus 30.0) masked even larger corrections in key subindexes -- more than 14 points in orders to 16.7, and 22 points in shipments to 13.0. The inventory index edged up slightly. However, while the tone of this report was considerably weaker than expected, the starting point was exceptionally high. The mid-teens readings for orders and shipments still imply growth in the manufacturing sector.
5) US GDP set to slow again to below-trend pace in 2H2010 as pick up in final demand will be smaller than loss of boost from fiscal policy & inventory cycle - consensus seems to underestimate effect of tighter bank credit, lower personal saving rate, less cyclical labor market, more excess housing supply, and deeper state & local budget gaps. Jan Hatzius: Despite the sharp pickup in real GDP growth since the dark days of early 2009, we estimate that real final demand—net of the boost from fiscal policy—is still contracting at an annual rate of around 1% in the second half of 2009. Although we expect a moderate recovery of around 2% by the second half of 2010, such a 3-percentage-point improvement would be insufficient to offset the loss of 4-5 percentage points of stimulus from fiscal policy and the inventory cycle. Hence, real GDP growth is likely to slow anew to a below-trend pace. The significantly stronger recovery that is now anticipated by a number of forecasters would require a much sharper acceleration in underlying final demand, along the lines of prior recoveries from deep recessions. But this ignores some key differences between the current situation and the aftermath of prior slumps. In particular, bank credit is tighter, the personal saving rate is much lower, the labor market is less cyclical, there is much more excess housing supply, and state and local budget gaps are deeper.
6) Several important parallels between 2004 and what 2010 might bring - slowing industrial momentum, fading fiscal stimulus & fears of exit from stimulative policy. Kamakshya Trivedi: (i) Slowing industrial momentum: between March 2003 and year end, the ISM manufacturing index surged from the mid-40s to 60, well above the 50 no-expansion threshold. Over the same period the new orders to inventory gap moved from close to 4 to a level close to 25 in December 2003. In the subsequent year, while the ISM stayed in expansionary territory, indeed never dipping below the mid-50s, the acceleration in the industrial surveys clearly faded. The ISM ended 2004 at 56.6, tracking the sharp fall in the new orders-inventory gap down to 5.5. Given the sharp drops in the new orders-inventory gaps already in the last two ISM reports in September and October, it is odds on that we go through a phase where the industrial sector while still expanding, suffers a loss of momentum in the next twelve months. (ii) The fading impulse of the fiscal stimulus next year is another concern that has parallels from 2004. During 2003-04 fiscal policy turned gradually restrictive in 2004 due to the frontloaded nature of the Bush tax-cuts package. In the current situation, as our US economics team has highlighted, the boost to growth from the fiscal stimulus has probably already peaked in Q3 of this year, and should gradually subside over the next year. (iii) Fears of an exit from stimulative policy are likely to remain an important concern for much of 2010, and these were relevant in 2004 as well. Over the next twelve months, in addition to the fading boost from the fiscal stimulus and inventory re-stocking, the global economy is also going to have to digest the withdrawal of a number of other temporary support measures, such as the Fed’s asset purchases, and analogous schemes in the UK, and interest rate rises in parts of the world where the economic recoveries are on a firmer footing. Whereas there were less exceptional QE type measures to exit from in 2004, interest rate rises were very much on investors minds, with the first 25bp rate hike from the Fed coming in June 2004. (iv) In both cases markets were coming off quite a sharp rally, staged coincidentally from March in the prior year. From March 2003, the S&P staged a 40% rally by year-end. The percentage increase from March 2009 is already greater (c. 55%), but of course, the initial falls were greater as well.
7) What 2004 tells us about likely asset market performance in 2010: Modest positive index returns, declines in implied volatility, rates-equity tango. Trivedi cont'd: (i) Lots of choppy trading with modest positive returns. The S&P 500 traded in a +/- 4% range for the first ten months of 2004 until October, only breaking out to the upside in the final two months of the year to end the year up 9%. In other words, a decelerating but still expansionary industrial cycle is consistent with modest positive index returns. (ii) Declines in implied volatility. Even as the index itself chopped around without any direction, implied volatility moved decisively lower. By November 2004, ten months in which the equity market had made next to no progress, the VIX declined from around 16 to around 14, falling further to around 12 by the year end. Realized equity volatility, which was lower to start with, stayed low. 21-day realized vol started and ended the year at around 9. (iii) Watch out for the rates-equity tango. 2004 provided at least two clear examples of how the rates-equities tango can play out. First, starting in the spring of 2004, 2 year swap rates in the US moved sharply higher, from 1.8% to a high of 3.2% in June, as markets began pricing in the post-recession rate hike cycle. As mentioned above, equities struggled to progress over this period. But things were quite different later in the year. After hovering around the 3% level until October 2yr rates moved higher again in the last two months of the year, up to 3.4% as evidence of better growth prospects accumulated. Over this period, equities moved significantly higher as well, hand-in-hand with the moves in the rates markets. These two episodes suggest that as long as it is better growth (rather than higher inflation) that drives rates up, equity markets may be able to hold their own or even move higher. To be clear, we expect no rate hike from the Fed for all of 2010, but that may not stop markets from worrying about inflation and exit policy. We are likely to see an increase in headline inflation in early 2010 on account of the base effects borne of the commodity price gyrations of last year. With core inflation firmly on a declining trajectory, these fears will, we believe, be ultimately unfounded. But as we pass through them, equity markets may face a bout of indigestion as in the spring of 2004.
8) One important difference between 2004 and 2010: Divergence between weak advanced economies & strong BRICs = better global growth & easier financial conditions = good environment for risky & cyclical assets. Trivedi cont'd: Probably the most important difference is the very significant divergence that we expect in our outlook in the US relative to the rest of the world. Our forecasts for US GDP growth are well below trend at 2.1% in 2010, compared to the 3.6% actually recorded in 2004. As a group, we expect advanced economies to grow by only 1.9% in 2010 compared to the 3% outturn in 2004. On the flip side though, this tepid recovery in advanced economies does imply that financial conditions might remain easier for longer. Despite this much weaker US growth profile, we actually expect higher global growth in 2010, 4.2%, relative to the 3.8% recorded in 2004. This is powered by the 9% growth we expect for the BRICs. It is this combination of better global growth and easier financial conditions that still keeps us pro-cyclical and constructive on risk for now. But with a more complicated trading environment like 2004 ahead of us, we are focussing actively on strategies that differentiate between places and sectors with different growth recoveries.
9) A late US harvest has contributed to the lack of OECD energy demand - farming distillate demand likely to materialize in the coming weeks. Jeff Currie: Part of the recent weakness in OECD demand can be explained by the record late US harvest. Harvest activity typically requires significant amounts of diesel to complete, however, poor weather has delayed most US fieldwork in both September and October this year. As a result, the pull from farming distillate demand has failed to materialize and we expect this demand to become visible in the coming weeks. We estimate from its current progress that the harvest will generate a further 170 kb/d increase in distillate demand and consume a further 11 million barrels at the national level.
10) GS spend on air travel turns positive on a year-on-year basis for first time in 18 months. We've just received our latest internal travel data which tracks what we as a bank spend on Air Travel. Our index rose +20% in Oct vs a -18% fall in Sept and -26% fall in Aug. This is the first time our index has moved into positive territory this year (see second attachment). Our absolute spend on Air Travel is now higher than the levels we saw in Oct 05 and a touch below Oct 06. Clearly comps have gotten much easier vs post Lehman months last year but there are also indications that underlying demand is starting to improve.
11) Research focus today...
GS SUSTAIN - Media........................Returns dispersion across the media value chain Semiconductors................................Industry capacity data suggests sound supply-side dynamics. Opera Software.................................Near-term business transition risks still to clear; down to Neutral Arriva...............................................Buy: Valuation compelling: Upgrade to Buy and onto Conviction List
Eurazeo...........................................Our favorite Buy idea, disconnect remains; reiterate Conviction Buy Aveva...............................................Positive tone at GS hosted investor meeting; Reiterate Conv. Buy Oce.................................................Canon makes cash offer for Oce at 70% premium TRG Weekly Market Drivers


EUROPEAN DESK TRADING COLOUR (Cash Only): Overall: -16.9% vs. 20D vol., paired off.
Asset Manager Flow: 67%, 1.26:1 better to SELL. Hedge Fund Flow: 32%, 1.18:1 better to BUY.
Key Sector Flows: Consumer Discretionary: 15.1% (+4% vs. 20D average), 1.95:1 better to SELL. Materials: 14.1% (+5.5% vs. 20D average), paired off. Financials: 12.45% (-7.2% vs. 20D average), 1.36:1 better to sell. Industrials: 11.7% (+1.6% vs. 20D average), 1.34:1 better to BUY. Energy: 7.9% (-1.9% vs. 20D average), 1.21:1 better to BUY.
Key Stock Flows: VIV 6.9%, 20.3:1 better to SELL. VED: 3.07%, all to SELL. TOTAL: 2.6%, 1.37:1 better to BUY RYA: 1.85%, 1.45:1 better to BUY. ENI: 1.77% 1.18:1 better to SELL
How MS ranked: VIV: 1st, traded 6.7m. VED: 1st, traded 1.35m. TOTAL: 1st, traded 905k. RYA: 2nd, traded 7.2m. ENI: 1st, traded 1.34m.

ASIA SO FAR: (J Grafton) A-Shares unch, Kospi -10bps, MXASJ -20bps, Nifty -20bps, STI -25bps, Taiwan -25bps, ASX -30bps, NKY -40bps, HSI -45bps, H-Shares -55bps. Asia not convinced by the overnight breakout with all indices fading fast after opening on the highs. Meredith reiterates her concern about the capitalisation of US banks and without their sponsorship an acceleration to the upside faces headwinds. Taiwan and China signed the long awaited MoU but the local market did not follow the 4% premium priced into the ETF and MSCI Taiwan futures overnight. The agreement lacked detail and could take months to implement. Perhaps reality is sinking in that this agreement is more of a silent Chinese invasion, highlighted by BOC and ICBC both issuing statements of their desire to open branch networks in Taiwan. AUD gets knocked following a more dovish statement from the RBA saying the pace of interest rate increases is an 'open question'. Crude and Gold lower on Globex as DXY claws back to 75. Shanghai Copper futures are strong following the 5% rally on the LME. We have seen strong demand for all the Chinese metals not least in Maanshan Iron & Steel following out upgrade today. Flow continues to improve - 25% heavier than the 20-DMA and we have been 2.6x BTB. Financials (28%) 1.2x BTB, Materials (21%) 5.5x BTB and Consumers (18%) 1.6x BTB.

US RECAP: S&P 500: 1109.30, +1.45% DJIA: 10406.96, +1.33% NASDAQ: 2197.85, +1.38% Equities ended sharply up at new 2009 highs on dovish Bernanke comments despite poor data prints. USTs saw longer end gains, continuing to ignore the rally in risk assets. 2ys yield fell 5 bps to 0.77%, 10ys 10 bps to 3.33%, 30y 10 bps to 4.26%.. Dow futures are slightly negative, oil prices trading below 79$/bbl, gold near 1137 $/oz. NY DESK TRADING COLOR: US Cash Flow: 1.2:1 to BUY, MF: 60% Paired Off HF: 40% 1.7:1 Better to Buy. Volumes down about 10% vs. the YTD avg. Below avg: * requests for capital, * crossing ratios & * 7 fig+ orders on the desk. % of shares traded short on the desk was 2.8% near record lows. Lack of the conviction in the market: With about 46% of the HF’s out there still under their high-water mark and only 5-6 weeks left to play in the game it felt like forced buying. ETF’ Volumes 2.5x the 20 day moving avg. (been busy the last 2 weeks here too) All HF’ buying 2 to 1 better to buy. Particular focus on EM ETF’s.

EURO RECAP: (M Briggs) ESTOXX +1.5% FTSE +1.63% DAX +2.07% CAC +1.5% This week kicked off with a relatively benign morning despite a strong Asian session (on Chinese officials quashing speculation regarding Yuan devaluation and speculation China/Taiwan MoU has been signed) resulting in the 1100 level being broken and Europe opening up around 80bps. The break in the S&P futures was similar to that of Wednesday last week - the level was broken but markets failed to push on, trading in a tight (30bp) range until lunchtime. The mining names lead the markets following a positive broker note but they will also have benefitted from investors seeking high beta names. The retail space struggled due to disappointing numbers from H&M (-3.6%) as well as Pou Sheng (biggest Adidas and Nike distributor in China) announcing a profit warning. US macro data looked a bit disappointing (Advance Retail Sales 1.4% v 0.9% cons but with a worse revision and disappointing less autos number, Empire Manufacturing 23.51 v 30 cons), and caused a small sell off, before the US market rallied from the open through to the European close. The US futures desk saw index buying along with short covering, however in London we saw little notable activity.

CREDIT RECAP: (E Pénot) Main 82-83.5 (-2), Xover 510-511 (-7), HIVOL 135-136 (-2). Credit indices were tighter on the day but failed to rally as much as equities as it seems there are some decent longs out here. The underperformer is Sovex which took another leg wider (+ 3.75bps) with 3 potential explanations for this move: (i) fear of next year's supply, (ii) profit taking in peripherals and (iii) potential ECB tender limits on Government stocks. In cash, it was a busy day with good volumes going through and generally better buyers of bonds with recent new issues driving the market tighter. In terms of news flow, we are seeing more headlines from companies that are engaging aggressive activities reminiscent of an outright bull market. Take for example Vivendi that is paying a hefty price for GVT, Ahold announcing that it is ready to use cash to make acquisitions or last week Liberty Global buying Unity Media and leveraging the company up. All this can be negative for credit and we like monitoring companies such as Morrison's that offer cheap optionality for a takeover story and subsequent widening in spreads.

US TREASURIES: (T Wieseman) Treasuries posted strong longer-end-led gains Monday, as a broader continuation of the post-refunding rebound that started Thursday afternoon was added to by weaker than expected economic data and dovish remarks from Fed Chairman Bernanke. On the day, benchmark Treasury yields fell 5 to 10 bp led by the 7-year, though the strongest area of the market was off-the-run bonds. The 2-year yield fell 5 bp to 0.77%, 3-year 6 bp to 1.29%, 5-year 8 bp to 2.18%, 7-year 10 bp to 2.86%, 10-year 10 bp to 3.33%, and 30-year 10 bp to 4.26%. TIPS managed to keep pace with the strong nominal gains as real yields continued plunging to their lows since spring 2008. This further strength came as the dollar index sank to another new low for the year, taking out the prior lows hit in mid-October, and commodity prices continued moving higher, with broadly based gains led by industrial metals, with the LME composite index up 5%. The 5-year TIPS yield fell 9 bp to 0.36%, 10-year 9 bp to 1.17%, and 20-year 11 bp to 1.83%. After last week’s big outperformance versus much more muted Treasury upside, mortgages paused, posting only small upside that lagged Treasuries significantly and a big narrowing in swap spreads more so.

BERNANKE (D Greenlaw) Bernanke’s discussion of the economic outlook was right in line with expectations – a sustainable recovery has unfolded but there are some important headwinds and thus the pace of growth is likely to be subpar. As a result, inflation pressures should remain muted. He reiterated the “extended period” language from the FOMC statement, but qualified that message by including a bit of a caveat, as follows: “significant changes in economic conditions or the economic outlook would change the outlook for policy.” So, while the Fed Chief does not see any need for removal of policy accommodation over the near term, he is hinting that the Fed needs some flexibility so that they can be responsive to the incoming data. It’s somewhat unusual for a Fed Chairman to discuss dollar policy – this is normally considered to be the purview of the Treasury Department. Some might argue that Bernanke is merely indicating that policy will respond to conditions that might be influenced by changes in the value of the dollar. But, Bernanke is also trying to make the case that Fed policy is consistent with a strong dollar. However, this sort of message rings hollow when it is followed by a reference to the FOMC statement language that conditions are likely to warrant an exceptionally low federal funds rate for an extended period. We’re a bit concerned that Fed jawboning on the dollar risks the same sort of loss of credibility that has plagued Treasury Secretaries who blindly repeat a strong dollar mantra regardless of the market and policy environment. The most interesting exchange during the Q&A session came when Henry Kaufman asked about the link between monetary policy and asset bubbles. Bernanke noted that it is difficult to know if the price of an asset is in line with its fundamental value but that it is not obvious there are any significant misalignments at present. Moreover, Bernanke argued that a supervisory approach to regulatory authority should be used to restrain undue risk taking -- not changes in the fed funds target.

MSBCI: (D Cho / D Berner) Morgan Stanley Business Conditions Index (MSBCI) maintained its strong run well into expansion mode in early November. The headline index repeated last month's positive showing - coming in at 79% and posting its 4th consecutive reading over the critical 50% threshold. The credit conditions, business conditions expectations and advance bookings indices all yielded strong results in November. Moreover, after struggling to break out of contractionary territory for over a year, the price index reached the 50% plateau this month. Finally, the capital expenditures plans series jumped dramatically by 14 percentage points to 25% in the November MSBCI - the highest level for this indicator since October 2008.nearly three-quarters of all respondents reported that the quality of their earnings estimates had either improved or remained the same in the past year. After nearly doubling to 17% in the October MSBCI, the hiring series relinquished last month's gains and declined four percentage points to a paltry 13% in November. Furthermore, the hiring plans series was almost flat, only increasing one percentage point to 18%. Surprisingly, only 11% of analysts definitively reported that uncertainty over healthcare reform was making their companies reluctant to hire.

MACRO CALENDAR: UK Inflation (Oct) @ 09:30, CPI ~ MSe 1.4%Q / Cons 1.4%Q / Last 1.1%Q: We expect a rise in year-on-year inflation on both the CPI and RPI measures in October (to 1.4% from 1.1% in the case of CPI and to -1.3% from -1.4% in the case of RPI) courtesy of energy-related base effects. The further easing in food price inflation should provide some offset. There are some upside risks to our estimates in the near term on further lagged feed-through from weaker sterling, and RPI could again get additional support from second-hand car prices. Risks are not all to the upside, however. Food prices have been below our expectations recently and the weakness in the underlying economy may continue to push down some prices (services inflation is about 2ppt lower than this time last year). Inflation is likely to rise sharply in December and January, as last year’s VAT rate cut is reversed. EMU Trade Balance (Sep) @ 10:00 ~ MSe €3.5bn / Last €1bn: Despite the strength of the euro, exports should have picked up considerably in September, courtesy of a solid performance in Germany. We expect a gain to the tune of 2.5%M – quite a change from the large fall in August. However, currency movements affect exports with some lags. The chances are that the euro will start exerting detrimental effects some time next year. Of course, the currency is not the only factor that matters. The hope is that, by then, the expected acceleration in foreign demand will alleviate some of the pain. But while some key markets have now started to expand at a brisk pace, i.e. Asia, demand in both the UK and US, the two major destinations for euro area exports, remains subdued. US Producer Price Index (Oct) @ 13.30 ~ MSe 0.2%Q / Cons 0.5%Q / Last -0.6%Q, CORE ~ MSe -0.1%Q / Cons 0.1%Q / Last -0.1%Q: An unusually sharp rise in food prices – driven mainly by higher quotes for dairy items, soft drinks, fruits and vegetables – is expected to help push up the headline PPI this month. The energy category is likely to register only a slight uptick following on the heels of some big up and down swings in prior months. The main wildcard this month is motor vehicles. The PPI always switches over to new model year pricing in October, which often leads to some big swings. Indeed, there is considerably more variability in the core PPI readings for October than for any other month of the year. We suspect that price increases for 2010 models will be somewhat less than in recent years, so we look for a decline in car and truck prices. But, there is a considerable amount of uncertainty surrounding these estimates. Thus, the main focus in this report should probably be on the core ex motor vehicles, where we look for a rise of 0.1% -- right in line with the recent trend. Industrial Production Capacity Utilization (Oct) @ 14.15 ~ MSe 0.0%Q / Cons 0.4%Q / Last 0.7%Q: The employment report – together with figures on vehicle assembly schedules and electricity output -- points to little change in industrial production during October. Industries such as autos, printing, furniture and nonmetallic minerals are expected to post significant declines, with offsetting gains evident in petroleum, food & beverage, apparel, chemicals and utilities. The key manufacturing component is expected to be -0.1%, while manufacturing ex motor vehicles is projected to be unchanged.



India Talking With Thailand, Vietnam to Import Rice (Update1)


2009-11-17 08:04:54.268 GMT

(Adds rice output forecast in fourth paragraph.)
By Kartik Goyal
Nov. 17 (Bloomberg) -- India, the second-most-populous nation, is in talks with Thailand and Vietnam to secure rice supplies after a drought in half the country destroyed crops.
A panel of ministers will discuss the proposal on Nov.
20, Trade Minister Anand Sharma told reporters in New Delhi.
Imports will be under government-to-government contracts.
Purchases by the second-biggest producer may tighten rice supplies that have been strained because of weather disruptions to crops in the Philippines, the biggest buyer.
India may become a net importer for the first time in two decades, and may buy 3 million tons, Samarendu Mohanty, a senior economist at the International Rice Research Institute, said in an interview Oct. 29.
India’s rice production may decline 18 percent to 69.45 million tons from a record 84.58 million tons last year after the driest monsoon since 1972 ravaged crops, according to the farm ministry. The Philippines is accelerating purchases for 2010 supplies after two storms destroyed about 1.3 million tons of the grain.
In comparison, exports from Thailand, the top shipper, may increase to a record of more than 10 million tons next year, fueled by demand from India, the Thai Rice Exporters Association said Nov. 11. Exporters in Vietnam, the second- biggest supplier, have shipped 5 million tons in the first nine months, according to government figures.
Record Exports
Thai production in the crop year that began Oct. 1 may increase to 35 million tons, from an estimated 32 million tons in the 2008-2009 year, according to the association.
Exports reached a record 10.14 million tons in 2004.
Rice futures traded in Chicago have jumped 36 percent from this year’s low of $11.195 per 100 pounds on March 16.
The price surged to a record $25.07 in April 2008 as concern that there would be a supply shortage prompted India and Vietnam to cut exports.
India’s state-owned trading firms, PEC Ltd., MMTC Ltd.
and State Trading Corp., on Oct. 30 sought to import 10,000 tons each for delivery during November and December.
PEC has scrapped the tender, a government official said yesterday, while MMTC Chairman Sanjeev Batra said on Nov. 11 that the company won’t buy at "high prices."
"The tenders are only to shore up availability,"
Minister Sharma said.

--With assistance from Pratik Parija in New Delhi. Editor:
Ravil Shirodkar
To contact the reporter on this story:
Kartik Goyal in New Delhi at +91-11-4179-2030 or
To contact the editors responsible for this story:
Michael Dwyer at +65-6212-1130 or
James Poole at +65-6212-1551 or

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