Top Stories: Commodities

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Top Stories: Commodities
2009-11-25 08:06:34.415 GMT

Nov. 25 (Bloomberg) -- The following are the day's top stories on commodities:
Gold Rallies to Record in Asia as Weakening Dollar Increases Investment
Gold climbed to a record from New York to Shanghai as the dollar extended its decline and the Financial Chronicle newspaper reported India may buy more bullion for its central bank reserves. Gold has rallied 11 percent since India bought 200 metric tons of gold from the International Monetary Fund on Nov. 3. The metal reached an all-time high of $1,180.20 an ounce today following the newspaper report that said the world's largest consumer was open to buying more gold from the IMF. The Reserve Bank of India Governor Duvvuri Subbarao declined to comment. ``The actions from the central banks are a very important factor at the moment,'' said Eugen Weinberg, analyst at Commerzbank AG. ``The purchase from India was like a seal of the prices above $1,000 an ounce. Also, other central banks are buying gold.'' Gold for immediate delivery traded 0.8 percent higher at $1,179.20 an ounce at 3:13 p.m. in Singapore.
February-delivery gold reached a record $1,181.60 an ounce on the New York Mercantile Exchange's Comex division and last traded at $1,180.40. Futures in Mumbai and Shanghai also jumped to their highest prices ever.
Sugar May Climb 36% on India Production Shortfall, Bajaj Hindusthan Says
Sugar may jump 36 percent to a 29- year high after a drought damaged crops in India, forcing the nation to import for a third year, according to Bajaj Hindusthan Ltd., the country's top producer. Prices may advance to 30 cents a pound after March as the country doubles imports to as much as 7 million metric tons in the year ending Sept. 30, said Joint Managing Director Kushagra Nayan Bajaj. Bajaj correctly predicted in July that sugar will reach 25 cents. Sugar has almost doubled in the past year to the highest level since 1981 as rains delayed the harvest in Brazil, while a drought and a shift to other crops made India the biggest buyer. Global stockpiles likely plunged 92 percent to 1.1 million tons at the end of the 2008-2009 season, according to F.O. Licht. ``If we are going to double our imports, you can have a wild guess what's going to happen,'' Bajaj said yesterday in an interview in Mumbai. There's a ``consensus on the fact that it will definitely reach 30 cents,'' he said.
Indonesian Palm Oil Exporters Threatened by Rupiah at 9,000, Groups Say
Indonesia's coal and palm oil exporters' profit margins may narrow should the rupiah rise 5 percent to 9,000 per dollar and costs of fuel and rice keep climbing, industry groups said.
Seven of 16 analysts in a Bloomberg News survey predict a gain in the currency, Asia's best performer this year, to 9,000 or stronger against the dollar by the end of 2010. The median estimate is 9,150, compared with 9,413 today. Indonesia is the world's biggest producer of palm oil and the largest exporter of power-station coal. The currency rising to 9,000 ``is a critical level,'' Bob Kamandanu, chairman of the Indonesian Coal Mining Association, said in an interview in Jakarta on Nov. 20. ``It's too strong.'' Indonesia's exports, which account for 24 percent of gross domestic product, fell 19.9 percent in September from a year earlier after dropping 15.4 percent the previous month, statistics bureau data showed on Nov. 2. The rupiah has risen 16 percent this year, nearly double the pace of the South Korean won. It reached 9,280 on Oct. 15, the strongest level since September 2008, and last traded at 9,000 in July 2007.
China Leads Record Low-Grade Iron Ore Project Spending to Counter BHP, Rio
Citic Pacific Ltd., an arm of China's biggest state-owned investment company, is leading record spending on low-grade iron ore mines in Australia to profit from surging demand as well as to diversify supply. As much as A$18 billion ($16.6
billion) is being spent on so-called magnetite iron ore projects, 36 percent more than a year ago, according to data from the Australian Bureau of Agricultural and Resource Economics. Citic Pacific this month said it signed sales accords for its $4 billion project. China is pumping cash into developing the mines as its steel mills are forecast by Rio Tinto Group to consume more iron ore during the next five years than Australia has shipped throughout history. Bankrolling rival suppliers will help counter the market dominance of Rio and BHP Billiton Ltd. who are forming a production joint venture in Australia. ``If this BHP-Rio joint venture goes ahead, the Chinese will feel even more under threat,'' said Peter Chilton, who holds BHP and Rio shares at Constellation Capital Management Ltd. in Sydney. ``There are a lot of small projects on the go. If China takes more direct control of these and promotes them with an Australian partner or on their own, at least it guarantees them extra supply.''
Japan Buys Least Milling Wheat in Two Weeks in Tender, From U.S., Canada
Japan, Asia's biggest wheat importer, bought 106,000 metric tons of milling wheat at a regular tender today, the Ministry of Agriculture, Forestry and Fisheries said. It was the smallest purchase since Nov. 13, when Japan bought 97,000 tons, according to the ministry. Shipment for 85,000 tons of U.S.
wheat is set between Dec. 21 and Jan. 20, while that for 21,000 tons of Canadian wheat is scheduled for January, the ministry said. Japan has so far bought 2.82 million tons of milling wheat through regular tenders this fiscal year, compared with
3.91 million tons in the previous year ended March 31. Details for this week's tender are listed below:
Locusts Devouring Wheat Crop Prompts Argentina to Send In Air Force Attack
Argentina will deploy two air force planes to contain a potential locust plague and said rains may help control the insect in the country's largest wheat province. ``We have decided not only to give money for local governments to fumigate but will also send two air force planes to spray crops,'' Argentine Agricultural Minister Julian Dominguez said.
``It's raining and some climate conditions have changed, which will also help us control the situation.'' The government last week promised farmers 15 million pesos ($3.95 million) for fumigation, with the money expected to be sent to city governments this week. Farmers need about 50 million pesos to eradicate the insect, said Diego Raimundi, an agronomist at the Regional Agricultural Experimentation Consortium in Coronel Pringles, Buenos Aires province. Argentina, the world's fourth-largest exporter of wheat in 2008, is set to slip down the rankings to eighth in the year through June 2010 after the worst drought in a century harmed crops, according to U.S.
Department of Agriculture data.
Nippon Mining Seeks Higher 2010 Copper Processing Fees After Yen Advances
Nippon Mining & Metals Co., Japan's top copper smelter, wants to charge mining companies higher 2010 processing fees compared with mid-year levels after the yen's gain and lower byproduct prices cut revenue. ``Given the tough business environment for smelters, we want higher treatment and refining charges for 2010,'' Masanori Okada, president and chief executive officer of Nippon Mining & Metals, said today in an interview in Tokyo, without specifying a level. The company is a unit of Nippon Mining Holdings Inc., which owns 66 percent of Pan Pacific Copper Co. Japanese smelters have met with Freeport-McMoRan Copper & Gold Inc. and BHP Billiton Ltd., the world's largest mining company, in the past two weeks and outlined the effect of lower byproduct prices, such as sulfuric acid, a slowing economy and the yen's strength, Okada said. The two sides earlier this year agreed to a 33 percent fee cut for contracts started in July. ``We are hearing that one mining company has indicated the 2010 fees at $45 a ton and 4.5 cent a pound'' while smelters have wanted around $60 and 6 cents, Okada said. Fees were set at $50 a metric ton and 5 cents a pound mid-year, down from $75 a ton and 7.5 cents a pound for contracts started January.
Chinese Pipe Duties Revised Down to 13.2% by U.S. as Case Heads to Agency
The U.S. Commerce Department cut the average duties on $2.7 billion of Chinese pipe imports to 13.2 percent from the 21.3 percent set in September, a measure taken after both countries last week agreed to ease trade tensions. The decision, on imports of steel pipe used in oil wells, is the final ruling by the Commerce Department, and sends the case to the U.S.
International Trade Commission. China will probably seek mediation through the World Trade Organization, Wu Xinchun, the deputy secretary general of the China Iron & Steel Association, said today. Tariffs have been a point of tension between the two nations since President Barack Obama in September imposed duties on tire imports from China. Obama, during a visit to Beijing Nov. 17, pledged along with President Hu Jintao to work on easing trade frictions. ``No matter what the final duty is, we think the character of this action is pure trade protectionism,'' Wu said by telephone in Beijing. ``The duty, if applied, will seriously hurt Chinese exports of steel pipe next year, and even worse, it sets a bad example and may trigger other nations to follow suit.''
Soybeans Extend Rally on Chinse Demand for Oilseeds; Corn, Wheat Advance
Soybeans rose for the fourth time in five days after reports showed stronger demand from China, the world's biggest oilseed importer. Corn and wheat also gained. Chinese imports in December may exceed 4 million metric tons (147 million bushels), with shipments in November expected to be about 3 million tons, the China National Grain & Oils Information Center said yesterday. Argentine farmers, already suffering after the worst drought in a century, are raising funds to fight an imminent locust plague in the nation's biggest wheat-growing region. ``Chinese demand remains firm and there are not many choices to replace U.S. supplies at the moment,''
said Han Sung Min, a manager at the international marketing division of Korea Exchange Bank Futures Co. in Seoul.
``Soybeans may continue to be strong through early next year, lifting corn and wheat.'' Soybeans for January delivery rose
3.5 cents, or 0.3 percent, to $10.495 a bushel in electronic trading on the Chicago Board of Trade at 12:55 p.m. Singapore time. The most- active contract reached $10.6675 this week, the highest level since June 15. Prices have jumped 13 percent since the end of September, as China increased purchases of soybeans from the U.S., the world's biggest grower and exporter.
Rio Tinto, Still a Target, Set to Better BHP on Talk of Bid: Chart of Day
Rio Tinto Group shares, up 116 percent in the year since BHP Billiton Ltd. abandoned a hostile takeover bid, are a better bet than those of its larger rival because rising iron ore prices may trigger another offer, according to UBS AG. The CHART OF THE DAY shows shares of the world's largest and third-biggest mining companies in the past year since Melbourne-based BHP dropped its bid for Rio on Nov. 25, 2008.
Glyn Lawcock, a commodities analyst at UBS, said Rio shares may rise to A$82 as its earnings benefit twice as much from gains in iron ore prices than BHP. Rio closed at A$71.70 in Sydney. A new bid ``is part of the reason why Rio is again outperforming BHP,'' Sydney-based Lawcock said in an interview. The chance of BHP renewing its bid is about 20 percent, said Lawcock, the top-rated analyst on Rio's Australia-traded shares the past year, according to data compiled by Bloomberg. Citigroup Inc.
said this month that BHP buying Rio is the growth option that makes the ``most sense.'' Rio has cut net debt by 42 percent in the past nine months by selling $21 billion in shares, meaning BHP's original offer of 3.4 BHP shares for every one of Rio's now equates to about 1.6 BHP shares, Lawcock said. BHP had cited Rio's debt and a plunge in metal prices for dropping its
$66 billion hostile bid. BHP and Rio both produce coal, copper and aluminum.
Japan's Trading Houses Rethink Share Holdings in Partners, Marubeni Says
Japanese trading houses are reconsidering their shareholdings in customer companies as a plunge in stock prices has eroded earnings, according to Nobuo Katsumata, chairman of Marubeni Corp. ``Trading companies are reexamining if they need to take equity stakes in partner companies as such investments have had large effects on their earnings due to writedowns,''
Katsumata said today at a Japan Foreign Trade Council press conference. He didn't elaborate on whether Marubeni would sell its stakes in companies including Mizuho Financial Group Inc., Inpex Corp. and Yamazaki Baking Co. Mitsui & Co., Japan's second-largest trading company, said yesterday it sold all its
11.7 million shares of Japan Airlines Corp. between April and September as the carrier lurched toward bankruptcy. Mitsui's net income slid 57 percent last year, partially due to writedowns on shares. Mitsubishi Corp., the nation's biggest trading company, has holdings worth more than $11 billion in publicly traded companies. Marubeni took a 38.4 billion yen
($435 million) writedown on securities holdings in the year ending March 31. Shares of Mizuho, Japan's second-largest publicly traded bank, plunged 49 percent in that period. Inpex, the nation's largest oil explorer, fell 39 percent. Marubeni has stakes worth more than $80 million in both companies.
China to Double Environmental Protection Budget to $454 Billion to 2015
China, the world's largest emitter of greenhouse gases, plans to more than double its spending on environmental protection in the five years through 2015, the Shanghai Securities News reported. The Asian nation may invest 3.1 trillion yuan ($454 billion) during the period, compared with
1.4 trillion yuan allocated for the five years between 2006 and 2010, the Chinese-language newspaper said today, citing an unidentified official from the Ministry of Environmental Protection. China, pressed by the U.S. to set emission targets for the Copenhagen global-warming summit next month, said in September it will lower emissions per unit of economic growth through 2020. Greenhouse gases increased to record concentrations last year, the United Nations said yesterday.
``The doubling of the budget is beyond our expectations,'' Yan Biao, an analyst with Century Securities Co. said by phone from the southern city of Shenzhen. ``The increase in spending will benefit equipment manufacturers in water treatment, air pollution control, and also developers in the renewable energy sector.''
Rubber Declines as Weak U.S. Growth Data Spurs Concern About Tire Demand
Rubber declined for a second time in three days after data showed the U.S. economy expanded less than initially estimated last quarter, raising concern that demand for the commodity used in tires may be slow to recover. Futures in Tokyo dropped as much as 0.9 percent after reaching the highest level since Oct. 2, 2008 yesterday on supply concerns. U.S. gross domestic product grew at a 2.8 percent annual pace, compared with its prior estimate of 3.5 percent, the Commerce Department said yesterday. ``The data added to concern that a slow economic recovery may curb raw material demand,'' Kazuhiko Saito, chief analyst at commodity broker Fujitomi Co. in Tokyo, said today by phone. Rubber for April delivery fell as much as 2.2 yen to
245.3 yen a kilogram ($2,780 a metric ton) on the Tokyo Commodity Exchange before trading at 246.9 yen at 11:01 a.m.
local time. May-delivery rubber, which was listed on the exchange today, traded at 248.6 yen after opening at 248.5 yen.

GS: MARKET DATAPOINTS

1) S&P 500 -0.3% after the EU close - closing +1.4% at 1106. US equities spurred by global strength, an unexpected surge in Existing Home Sales and some dovish Fedspeak, albeit on light volumes, NASDAQ and NYSE volumes are tracking -20% below 30-day averages. Telecom Services (+2.6%) outperforming. Consumer Discretionary (+0.9%) and Retail (+0.9%) underperforming.
2) Quarterly Hedge Fund Trend Monitor - net exposure has increased to 40%, highest since 4Q07 - hedge funds long/overweight Materials, Tech, Consumer Discretionary - underweight Financials & Industrials. David Kostin: (i) This report focuses on hedge fund positions at the start of 4Q and the meaningful changes from the previous quarter. The report is based on an analysis of 684 hedge funds with $604 billion of long stock-specific equity assets and an estimated $363 billion of short positions. (ii) Hedge funds net exposure climbed to 40% in 3Q, from 31% in 2Q09 and 17% in 3Q08, the highest since 4Q07. During 3Q, hedge fund long portfolios increased by 21% and short assets rose by 5%. The equity market appreciated 16% during the quarter, suggesting that hedge fund net exposure increased as a result of active equity buying as well as short covering. (iii) As of September 30, hedge funds owned 3.8% of the Russell 3000, up from 3.6% last quarter and 2.8% in 4Q 2008. Hedge fund ownership of small caps is more pronounced, totaling 7.0% of the Russell 2000, up from 5.8% as of 4Q 2008. (iv) From a sector point of view, hedge funds have got the largest net exposure to Tech (21% of total net exposure), Healthcare (14%) and Consumer Discretionary (13%), and the smallest net exposure to Utilities (2%), Consumer Staples (6%) and Industrials (6%). From a market-relative point of view, hedge funds are net overweight Materials (560 bp), Consumer Discretionary (320 bp) and Telecom Services (290 bp), and net underweight Financials (-500 bp), Industrials (-440 bp) and Consumer Staples (-360 bp). (v) Our hedge fund VIP list (Bloomberg: GSTHHVIP) consists of stocks that appear most frequently among the top ten holdings within hedge fund portfolios (see first attachment, p. 7, Exhibit 9). This basket lagged the S&P 500 by 1,147 bp during 4Q 2008 (-41% vs. -30%). Since then, the VIP basket performance has reversed, outperforming the S&P 500 by 1,368 bp year-to-date (39% vs. 26%). (vi) Our “most concentrated” hedge fund basket (Bloomberg: GSTHHFHI) consists of the 20 most concentrated stocks in terms of the share of market cap owned in aggregate by hedge funds (see first attachment, p. 9, Exhibit 11). This basket outperformed the market by 713 bp in 3Q 2009 (+23% vs. +16%) and 4,744 bp YTD (+73% vs. +26%). Since November 2008, when hedge fund redemption pressures began subsiding, our basket of “High Concentration” stocks has outperformed the market by 7,773 bp (+129% vs. +51%).
3) Large increase in existing home sales in October - but largely due to deadline for the expiration of the homebuyer tax credit. Existing home sales increased +10.1% mom in October (+23.5% yoy) vs consensus +2.3%. Sales of existing homes were bound to increase as the deadline for the expiration of the homebuyer tax credit approached. Although the homebuyer credit has subsequently been extended, we expect home sales to give back some of the extraordinary increases posted in recent months -- almost 20% in the past two months alone and almost 30% since May. The surge in sales, combined with an unusual drop in number of units on the market, cut the months supply of unsold units on the market to 7 months in October from 8 in September.
4) Small gain in Euroland Flash PMI - but still upside risk to our 4Q GDP growth forecast. The Euroland Flash Manufacturing PMI increased slightly to 51.0 in November from 50.7 in October, consensus was for 51.2. The PMI data are now consistent with GDP rising by about 0.5%qoq in Q4 -- an upside risk to our forecast of +0.2%.
5) Spot iron ore price into China have recouped August/September losses and are now printing new 2009 highs - but largely driven by freight costs. Seaborne spot iron ore prices into China have recouped all of the losses that occurred during the August/September sell-off and are now trading just above the previous 2009 peak (see second attachment, p. 1, top-right chart). We estimate that higher Capesize freight costs account for ~70% of the rise in CFR values into China since late September. If we strip out freight, the implied spot FOB price ex-WA is still well below levels seen in early August.

Global FX Strategy 2010: New year, new lows
Click here for the full Note and disclosures.

Global FX Outlook 2010: New year, new lows (John Normand)
The dollar will turn in 2010, but not before marking new lows versus the euro (1.62), Swiss franc (0.91) and possibly the yen (82). This move is more than a carry trade, given broad weakness in the balance of payments.

Five global macro themes and top trades (Paul Meggyesi, John Normand)
The dollar will undershoot (worst-of basket on CHF, AUD, JPY); recover is discounted but exit strategies are mispriced (GBP/CHF, AUD/NZD); the end of inflation targeting? (NZD/NOK); a CNY revaluation’s impact on G-10 FX is overstated (EUR/JPY); and long-term valuation gaps to close in 2010 (EUR/SEK).

FX Derivatives: A macro model for vol and strategy implications (Arindam Sandilya, Talis Bauer)
A macro model for implied volatility suggests that VXY (3-mo implieds) should range between 10% and 14% in 2010, with spike risk more likely in Q3/Q4. Focus on vol carry for trading returns.

Long-term Technicals: Major transition ahead (Niall O’Connor,Thomas Anthonj)
The dollar will undergo a major consolidation phase over the next two months before resuming its bear trend.

Yen: What would push USD/JPY to all-time lows? (Tohru Sasaki, Junya Tanase, Yoonyi Kim)
USD/JPY can decline to 82 this year before rebounding. Even that level would not prompt BoJ intervention.

Euro: Few obstacles to new highs (Paul Meggyesi)
The euro’s drivers are less idiosyncratic than other currencies, but it will still rise in an environment of broad dollar weakness. Most counterarguments – export impact, China revaluation, euro break-up – are overstated.

Sterling: Funding currency or investment vehicle? (Paul Meggyesi)
Sterling’s undervaluation limits the scope for further weakness, but it is premature to expect a rebound. The trinity of deleveraging in the household, banking and public sectors remains a powerful obstacle.

Swiss franc: Franc to rally as SNB steps off the brake (Paul Meggyesi)
Like the yen, the franc is transforming into a pro-cyclical currency in this post-crisis world of low global yields. The currency will rally in 2010 as the SNB end its intervention (EUR/CHF to 1.46, USD/CHF to 0.91.)

Swedish krona: The myth of krona undervaluaton (Kamal Sharma)
The krona is not as undervalued as most think, but it can still rally 7% in 2010.

Commodity currencies: Where's the gold? (Gabriel de Kock, Matthew Franklin-Lyons)
NOK and AUD will lead the advance in 2010, driven by valuations and policy tightening. NOK is the valuation champ, while AUD benefits from Asian growth. Policy disappointment and valuations hobble CAD and NZD.

Risk scenarios and hedging strategies (Ken Landon)
An inflation surprise, a US funding crisis and US mid-term elections are three to hedge.

FX Alpha Strategies in 2010 (John Normand, Matthew Franklin-Lyons)
Carry should deliver roughly 8% returns as volatility ranges but central banks tighten. Forward Carry returns will moderate from 2009’s 10%. Simple price momentum will struggle in Q3/Q4 when the dollar turns.

Global FX Carry Trade Monitor (Yoonyi Kim)
The carry trade has returned as it always does post-recession, but it is half as large as it seems. Currency managers, global macro funds, CTAs and Japanese retail have moderate exposure. US and European have little.

Post-mortem on 2009 forecasts and trade recommendations (John Normand, Kamal Sharma)
Forecasts were correct on direction but too conservative on magnitude. 60% of trades were profitable.

FX Forecasts
EUR/USD targets raised to 1.62 by Q2 and 1.50 by Q4. USD/JPY should reach 82 by Q2 before rebounding to 89 at year-end. EUR/GBP should peak at 0.94 and AUD/USD at 1.02.

Gazprom (Buy, TP=RUB236.0) - Corporate news - Gazprom could take GDF Suez's 5% stake in VNG Verbundnetz Gas (3p)

Please find below our latest publication:

Gazprom (Buy, TP=RUB236.0) - Corporate news - Gazprom could take GDF Suez's 5% stake in VNG Verbundnetz Gas (3p)
Update
Intriguingly, in a letter to the WSJ on 18 November Nord Stream acknowledged that a ‘major French energy company is also negotiating to join the consortium' – which we think is highly likely to be GDF Suez (Hold, TP €28). In our 5 November report Nord Stream: a strategic pipe for Gazprom...could be part paid by GDF Suez!, we explored the advantages for Gazprom of diverting capex from a low return project, i.e., Nord Stream, and reallocating it to more lucrative E&P projects. We also concluded that Gazprom could achieve an additional advantage by increasing its stake in the German gas market, potentially via an increased stake in VNG.
Impact
VNG and Gazprom already have several joint projects: 1) VNG has a 12bcm/year Long Term Take or Pay contract with Gazprom; 2) VNG and Gazprom have a joint storage project in Germany near Bernburg (Saxonia-Anhalt, Germany) that should have a maximum working capacity of 0.5bcm by 2025e. By taking GDF's 5.3% stake in VNG, Gazprom would expand its position in the German gas market. But what could Gazprom give in return for the VNG stake? In addition to a stake in Nord Stream, we believe GDF Suez could seek a long term contract for deliveries via Nord Stream to Greifswald, Germany, mitigating the Ukrainian transit risks.
Target price & rating
We reiterate our Buy rating on Gazprom and RUB236/$8 target price, based on a blend of a SOTP (RUB269) and a DCF (RUB203, beta 1.4 vs 1.5, WACC 9.8%, 1% perpetuity growth, normalised EBITDA margin at 37.5% vs 35.7%e in 09e).
Next events & catalysts
The Nord Stream pipeline will pass through the territorial waters or Exclusive Economic Zones of Russia, Finland, Sweden, Denmark and Germany. So far Denmark, Finland and Sweden have approved construction. With permits pending from Russia and Germany, we believe the permit process should be finalised by end 09 and construction should start in April 10e. For us, the probability of construction is close to 100%, so the longer it takes for GDF Suez to clinch a deal for a stake in Nord Stream, the more expensive it is likely to be… Time is on Gazprom's side.

Lloyds Banking Group (Buy, TP=160.0p) - Corporate news Now for the rights issue (2p)

Please find below our latest publication:

Lloyds Banking Group (Buy, TP=160.0p) - Corporate news Now for the rights issue (2p)
Having announced a successful debt exchange offer yesterday, Lloyds published details of the rights issue this morning to be submitted to the co's shareholders meeting on Thursday.
The capital raising plan –
The innovative £22bn capital raising plan has two stages. First, a £7.5-9bn debt exchange offer to convert into contingent convertibles (CoCos), and, second, a £13.5bn equity rights issue. The debt conversion was a success – attracting demand for conversion of £12.5bn, significantly above the £7.5bn target.
Terms of the rights issue –
Lloyds is raising £13.5bn at a subscription price of 37p, an exchange ratio of 1.34, or c. 4 new shares for every 3 held. Based on a closing price of 91.5p yesterday, this represents a 39% discount to a theoretical ex-rights price of 60p. The discount is deep compared to recent deals, but Lloyds specified a discount range of 38%-42% in the prospectus so this is at the lower end, indicating a decent level of management confidence.
Operating trends –
The prospectus shows key operating trends are all improving: Q3 group impairment charge was 22% below the H1 run-rate, with Lloyds reiterating that H1 09 was the peak; margin is stabilising in a ‘vastly improved wholesale funding market; EU is imposing relatively lenient measures and any revenues foregone should be more than offset by cost synergies of £1.5bn, which Lloyds flagged are currently running ahead of its initial target.
Investment case and valuation –
In conclusion, in view of the rights issue terms and operating trends, we estimate pro-forma normalised earnings of £7.5bn, EPS of c. 12p and NAV per share of 75p is achievable by 2013 (assuming 66bn shares in issue post rights). The announcement this morning removed the last piece of uncertainty for Lloyds, in our view. Implicit multiples of 5x earnings and 0.8x tangible book against the TERP (2013e) look undemanding for a bank showing improving trends and decreasing reliance on the UK government. Our current pre-rights TP is 160p; arithmetically implying 100-105p post rights.

Canada Afternoon: C$ Ends Lower Amid Subdued Risk Sentiment - WSJ.com

Canada Afternoon: C$ Ends Lower Amid Subdued Risk Sentiment - WSJ.com: "'The weaker currencies in the G-10 bloc this week with risk aversion climbing a bit have been the commodity currencies like Australia, New Zealand, and Canada,' said currency strategist Shane Enright of CIBC World Markets in Toronto. 'If the market presses on with theme we've had in the last two days of U.S. dollar strength, my guess is it will stop stalling around those mid-C$1.0700 levels.'
Chief foreign exchange technical analyst George Davis of RBC Capital Markets in Toronto suggested that mounting concerns about an increasingly illiquid year-end trading environment are also contributing to a reluctance to take positions in less widely traded currencies like the Canadian dollar.
Davis said that the U.S. dollar's penetration and close beyond key technical resistance in the C$1.0685 area could in coming days promote a move by the U.S. dollar-Canada pair into the mid- to high-C$1.0800s, which would mark the Canadian dollar's weakest levels since early October.
Currency trading will likely become increasingly illiquid and subject to exaggerated volatility next week, given Thursday's U.S. market close for Thanksgiving, and also holidays in Japan and other Asian countries throughout the week."

"Liquidity is the drug

There was little out in terms of data overnight and it appears that the FX market continues its positioning-cutting/profit-taking heading into month-end. There were some important comments, however, from various ECB policy makers (Trichet, Weber and Bini-Smaghi) overnight.The most interesting of these were from ECB President Trichet, who spoke of the role central banks have played in containing contagion in the global financial market, comparing the crisis management and enhanced credit support to 'emergency medicine.' However, he went on to say that 'if their use is prolonged, they can lead to dependence and even addiction. Eventually, the administration of painkillers must be stopped if patients are to get back on their own two feet.' He also hinted that once the decision to withdraw liquidity is made, various non-standard measures will be unwound in a gradual manner to prevent what he called 'withdrawl symptoms'. He observed that “it is too early to declare the crisis over”, especially since the private sector must understand that enhanced credit support would not last forever. The recent profit-taking notwithstanding, our view has been that risky assets can rally further as policy makers appear unlikely to change their ultra-loose policy stance and unlimited liquidity in the near term. It is clear from Trichet's comments that the ECB isn't quite there yet in curtailing its liquidity measures"

Dollar Revels in Continued Risk-Aversion - WSJ.com

Dollar Revels in Continued Risk-Aversion - WSJ.com: "Plentiful access to liquidity has been seen as one of the reasons riskier assets have rallied. Any suggestion such programs will end is generally viewed as a negative for growth-sensitive stocks and commodities as well as higher-yielding currencies such as the euro.
Until central banks offer clues as to when interest rates might change, bit-by-bit releases of global economic data are likely to drive currency markets, analysts said.
'Economic data will still be key going forward, but we will need to see some very nice numbers to push through $1.50 in the next couple of weeks,' Jane Foley, a research director at Forex.com in London, said of the euro direction."

Dollar Revels in Continued Risk-Aversion - WSJ.com

Dollar Revels in Continued Risk-Aversion - WSJ.com: "Later in the European session, the ECB announced its first active step to unwind the measures it has used to support the financial sector since the global crisis last year. The bank said it will tighten the standards according to which it accepts certain asset-backed securities as collateral for its refinancing tenders."

Dollar Revels in Continued Risk-Aversion - WSJ.com

Dollar Revels in Continued Risk-Aversion - WSJ.com: "The Dollar Index, which tracks the greenback against a trade-weighted basket of six currencies, was at 75.647 from 75.264."

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
Philips
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
Growth
- 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
Question'
- Asia Stocks, Commodities Fall as Bernanke Says Economy Faces
`Headwinds'
*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,
Economy
- Copper Reaches 14-Month High in Shanghai as Widening Contango Lures
Buyers
*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
Bets
*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)
Update
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%).
Impact
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)
Update
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).
Impact
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.

MARKET DATAPOINTS

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

OPENING REMARKS at 7AM

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.

DXY NEW 52 WEEK LOW:

UST 10 YEAR YIELD: COMES INTO IT’S LOW END OF THE MONTH LONG TRADING RANGE

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

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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 kgoyal@bloomberg.net
To contact the editors responsible for this story:
Michael Dwyer at +65-6212-1130 or mdwyer5@bloomberg.net.
James Poole at +65-6212-1551 or jpoole4@bloomberg.net

The recovery of asset markets tells us hardly anything about longer-term growth

HSBC MACRO - Gold prices are a dead giveaway
When can we be sure that economic recovery is in the bag? The world economy seems to be in a much better place today than it was at the beginning of the year. Policymakers haven't repeated the mistakes made during the Great Depression. The banking system seems to be in better shape, thanks in part to a large taxpayer bailout. Asset markets have recovered, suggesting that the earlier collapse in animal spirits may be over. And economists are revising upwards their forecasts for economic activity, concluding that the worst must now be behind us.

For all these reasons, investors are increasingly focused on so-called "exit strategies". How and when should economic life-support policies be removed? After all, interest rates in the developed world are at their lowest levels ever, the gentle hum of the monetary printing press can still just about be heard and budget deficits are huge. Are these policies still necessary, or is it time to expect the world economy to stand up on its own two feet?

It's easy to be seduced by what I might cheekily call "straight-line economics" – the idea that when the worst appears to be over, the best is just around the corner. Straight-line economics assumes that strong economic growth is a "normal" state of affairs, interrupted only occasionally by pesky recessions. If the rules of straight-line economics are applied today, it's obvious that policymakers should be raising interest rates and reducing budget deficits because, with animal spirits now rebounding, we're returning to straight-line predictability.

Sometimes, however, economies end up in a different place, based on the physics of bungee jumping. The economy falls off a cliff. Activity drops a long way. Then there's a rebound. For a while, the rebound looks very good and it's easy enough for economists to stick to their straight-line thinking. But the economy never returns to normal; instead it is left dangling by a thread. The straight line simply doesn't apply.

If we've learnt anything over the last two or three years, it's that straight-line thinking is pretty hopeless. For the economics profession, it's been a bruising experience. At the beginning of 2007, some economists recognised downside risks, but the consensus view was that, if there was to be an economic slowdown, it would be a so-called "soft landing".

For the forecasting community, it was one of the biggest errors ever made.

The economic models that were routinely used to churn out projections for growth and inflation were poorly designed to handle the housing and financial crises which bubbled over on either side of the Atlantic. Even worse, the models fostered the illusion of policymaking invincibility. Most of the models were "self-correcting", assuming that the straight-line approach was appropriate and that recessions were a thing of the past.

This, of course, was rubbish. But the weaknesses of the approach should give us pause for thought today. While it's true that the world economy is now in much better shape than it was last year, is this enough to guarantee that we're getting back to normality?
Central bankers are mostly proud of their efforts to "fix" the global economy. But if the fix is to continue working, the rise in animal spirits since the spring needs to be maintained. That's no easy task, partly because it's not clear what is causing it. The standard claim from policymakers, particularly in the UK, is that equity and corporate bond markets have risen in part because of the benefits of unconventional policies.

If the central bank buys lots of government bonds, the yield on those bond drops, thereby encouraging investors to buy other, riskier, assets. The increase in the value of equities and corporate bonds which follows makes life easier for companies looking to raise funds in the capital markets. It also makes households feel a lot more confident that the worst is over, thereby reducing the desire to hoard cash for a rainy day.

Imagine, however, that the increases in asset prices we've witnessed over past months fail to translate into a lasting recovery in economic activity.

Earlier in the year, investors were beginning to price in a "Great Depression Mark II" – a view which proved to be overly-pessimistic. In a world of bungee economics, it's just as likely that the current hopes of a "Great Recovery" will prove overly-optimistic. Rising asset prices may say something about the success of unconventional policies, but they could just as easily be part of the regular volatility of financial markets and, in fact, say hardly anything about longer-term growth prospects.

Throughout the 1990s, economists following Japan had to cope with similar problems. Every so often, the economic data would show modest signs of improvement. In their haste to declare recovery, investors would pile into Japanese equities, triggering a stock-market rally. The rally gave economists the confidence to revise up their forecasts for future economic growth. These upward revisions led to an even bigger rally. Then came the shocking discovery. The Japanese economy wasn't really recovering at all:

it was the ultimate bungee economy, with occasional signs of rebound followed, as night follows day, by yet another setback. The mistake was to assume that financial markets provided an accurate forecast of future economic developments. As it turned out, the best they could do was to offer an occasional bout of wishful thinking.

The danger for policymakers today is that, again, financial markets are offering not much more than wishful thinking. Indeed, disappointed with the absence of any effect on money-supply growth, the Bank of England is engaged in its own wishful thinking, arguing that the best way of gauging the impact of its quantitative easing programme is via the performance of financial assets – a claim which could easily go wrong given the fickle nature of investors.
The unfortunate reality is that unconventional policies are unconventional because no one really understands how they work. Whisper it quietly, but these policies may be no more than the ultimate economic placebo. Placebos can, of course, work wonders, but their best work is in the mind. Our central bankers are re-inventing themselves for a "new age" economy. They are no longer economic scientists but, instead, mystics who are hoping to persuade the rest of us of their miraculous powers.

If we return to a straight-line economy, central bankers' mystique will be justified. If, however, we're in a bungee world, their mystique will slowly be undermined. I suspect the costs will be seen mostly in increased currency volatility. Those central banks which have engaged in unconventional "funny money" policies need to see sustained results. If those results fail to materialise, we'll be left with weak economies and a broken printing press. The strength of the gold price in recent months suggests that investors still have their doubts about unconventional policies. They're buying insurance in case of failure. They're right to do so.

News from Danske Research

We present the November version of the Emerging Markets Briefer with updated FX forecasts Emerging Markets Briefer - 13 November 2009