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Weekly Market
Perspectives
September 24th, 2012
.
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Spain – Another week ended…and Spain hasn’t submitted
a formal request for external support.• Bailout speculation - According to some
news, Spanish’s policy makers could, this
week, unveil an economic reform program
that would allow it to seek a bailout.
Nonetheless, last Saturday, Spain’s Economic
Minister said They will not rush to seek
external aid;
• ECB Governing Council member Luc Coene
said “If Spain does not submit to
conditionality we will not buy its bonds… I
don’t think it will take for the Spanish spreads
to rise (if Spain doesn’t submit to the
program)”;
• The performance of short-dated Spanish
bonds since late July suggests that the market
has probably priced in ECB buying;
• Critical week? - Spain will announce the final
results of an expected audit to its banking
sector. Its draft budget plan for 2013 and new
structural reform will also be unveiled.
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
1-Aug 8-Aug 15-Aug 22-Aug 29-Aug 5-Sep 12-Sep 19-Sep
2Y Bond Yields Spain
“The Euro is Irreversible”
Draghi Speech
OMT announcemennt
Source: Bloomberg
Greece – Will the EU/ECB/IMF report be delayed?
• The mission in Athens will take a brief pause. It
expects to return to Athens after about a week.
• Troika demands additional €11.5bn in austerity
measures;
• The local Government is divided in how to achieve
it. Fotis Kouvelis, Leader of the Democratic Party,
said that “The troika must stop attacking Greek
society. The Troika must understand there are
limits”. Several Government members stated that
they intend to negotiate a 2 years delay to
achieve the established budget targets. The Greek
economy is expected to stay trapped in a
recession during 2012/13;
• OPAP, Greece’s biggest gambling company,
declined 19 percent during last week, after the
government reached an agreement with the
European Commission to increase taxes on the
company;
• Without an agreement with Troika, Greece won’t
receive its next tranche of aid.
Source: Bloomberg
2,25%
5,55%
3,08%
-0,15%
-3,28% -3,38%
-6,95%-6,50%
-2,30%
2005 2006 2007 2008 2009 2010 2011 2012F 2013F
Greece: GDP Growth
The Italian Government has revised Its fiscal targets.
• 2012 public spending will exceed revenues by
2.6% of GDP. The previous forecast was 1.7%.
The 2013 budget target has now more than
tripled to 1.8% from 0.5%;
• 2012 GDP is now expected to contract -2.4%,
while the previous forecast pointed to an
economic contraction of -1.2%. The economy is
forecast to contract by 0.2% next year;
• The 2012 debt-to-GDP forecast was raised to
126.4% from 123.4% previously. The 2013
forecast was hiked to 126.1% from 121.5%;
• The Government announced an austere belt-
tightening budget with tax increases and
spending cuts. Prime Minister Mario Monti
stated that “only a fool could think it’s possible
to act on a decades long Italian structural
problem without bringing about a short-term
reduction in demand.”
Source: Bloomberg
Source: Bloomberg
0,90%
2,20%1,70%
-1,20%
-5,50%
1,8%
0,40%
-2,25%
0,40% 0,50%
2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
Italy: Real GDP
4,40%
3,40%
1,60%
2,70%
5,40%
4,60%
3,90%
2,50%
1,70%
1,10%
2005 2006 2007 2008 2009 2010 2011 2012F 2013F 2014F
Italy: Government Deficit as GDP %
Europe – Economic data still points to a recession.
25
30
35
40
45
50
55
60
65
70
2006 2007 2008 2009 2010 2011 2012
PMI Manufacturing
Eurozone
Germany
France35
40
45
50
55
60
65
2006 2007 2008 2009 2010 2011 2012
PMI Services
Eurozone
Germany
France
Purchasing Managers
Index indices still showing
a contraction (below 50).
Source: Bloombergc Source: Bloomberg
France: €16.968bn
Germany: €4.0844bn
Spain: €9.465bn
Portugal: €2bn
Greece: €3.557bn
• Spain issued last week a large amount of
government bonds. However, only €859m
were issued with a 10 year maturity, which is
negligible. All the other auctions were done
with maturities shorter than 3 years;
• Portugal’s cost of borrowing dropped to the
lowest since 2010. The debt management
agency sold 18-month notes at an average
yield of 2.967%. 6-month bills were also
auctioned, with its average yield falling to a
one-year low.
• Luc Coene said that the European Central Bank
still has a large number of options to ease
monetary policy: “you could further lower
interest rates, you can also try to extend the
LTRO to some extent, you can also do some
LTRO with private credit claims as collateral”;
• Chinese Prime Minister said that his country is
investing in sovereign bonds from the region to
diversify its assets and support the European
fight against the Sovereign Crisis.
Europe – Week highlighted
by Bond Auctions
The ECB still has fire-power.
US - The recovery in the US Housing Market continues to
gain traction…
• Data released last week showed that the US housing market recovery is becoming more convincing.
Existing home sales reached the highest pace since May 2010;
• The FED will keep low interest rates until 2015 and will start buying every month $40B in Mortgage
Backed Securities.
Source: Bloombergc Source: Bloomberg
450
500
550
600
650
700
750
800
850
900
in thousand
Housing Starts
3
3,5
4
4,5
5
5,5
6
in million
Existing Home Sales
US – But other indicators showed some weakness.
13.48
19.53 20.21
6.56
17.09
2.29
7.39
-5.85
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12
Empire Manufacturing
200
300
400
500
600
700
2004 2005 2006 2007 2008 2009 2010 2011 2012
in thousand
Initial Jobless Claims
0
0.7
0.2
-0.1
0.3
-0.5
0.5
-0.1
Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12
Leading IndicatorsSource: BloombergSource: Bloomberg
Source: Bloomberg
Will QE3 be effective for an economic recovery?
• FED’s Dallas President said that he was unsure
that QE3 would bring any positive outcome to
the employment data. On the other hand, he
revealed his concern over inflation. Richard
Fisher is a non-voting member of the FED;
• PIMCO’s El-Erian told in a speech that Central
Banks will face unstable periods, due to the
increased holdings on their Balance Sheets.
Long-Term Consequences of this posture will
be hard to quantify.
BOJ increases its QE program.• The Bank of Japan launched a round of
monetary stimulus;
• The BOJ will increase its asset-purchasing
program to a total of Y80tn, by buying another
Y10tn of government bonds until the end of
2013;
• BOJ’s interest rates are already near zero;
• Guido Mantega, Brazil’s finance minister,
warned that FED’s QE3 could reignite the
currency wars.
Conflicts are Erasing in the
rest of the World• US and other 28 countries started military
exercises in the Persian Gulf. Iranian officials
have threatened to close the waterway in
response to threats to force the Islamic
Republic to abandon its suspected nuclear
weapons program.
• Tensions between China and Japan rising. The
dispute over the islands, known as Diaoyu in
China and Senkaku in Japanese, seems to have
produced a diplomatic crisis between China
and Japan.
-20%
-15%
-10%
-5%
0%
5%
10%
1999 2001 2003 2005 2007 2009 2011 2013
Japan Real GDP growth rate(Annualized QoQ %)
Source: Bloomberg
Portugal
BCP Rights Issue:
• Today will be the last trading day for BCP’s rights. During last week, they were down 10%, while BCP’s
stock only lost 3%. If you wish to engage on arbitrage opportunities on the stock, please contact us.
A merger between Sonaecom and Zon – Is it going to happen this time?
• Optimus CEO, a subsidiary of Sonaecom, gave an interview to a Portuguese newspaper, Last Friday. He
underlined the benefits of a merger between the two companies. Are the two companies holding
conversations regarding a possible deal?
Portuguese Politics:
• After an eight-hour meeting of the presidential state council, Portugal's government has agreed to
negotiate alternative solutions to a social security tax hike that created the worst backlash to austerity
since last year's EU/IMF bailout.
Weekly Preview
US • In the US, durable good orders, GDP, and
the U. of Michigan Consumer Sentiment
will be published during this week.
Europe • Will Spain ask for external support this
week? Next Friday, it should be released
the Banking Audit for the Spanish banking
sector;
• Some experts from the EC/ECB/IMF
mission will remain in Athens to assist the
authorities with further technical work.
• Italy and Germany will auction 10Y
Government Bonds. Germany’s
unemployment data is expected.
Rest of
the
World
• In Asia, we will follow the increasing
geopolitics risk in the region. Will the
markets take notice?
Market IndicatorsThis week, we remain positive for the markets, due to action that have been deployed by the various
Central Banks. A formal request for external support by Spain and a positive news flow from Greece should
be well received by the markets.
Weekly Preview
Vicious Cycle of Europe. We are still on level 2.
1.2
1.22
1.24
1.26
1.28
1.3
1.32
2-Jul 17-Jul 1-Aug 16-Aug 31-Aug 15-Sep
EURUSD
3.00%
4.00%
5.00%
6.00%
7.00%
Mar Apr May Jun Jul Aug Sep
10Y Bond Yields: Spread vs Germany
Spain
Ideas for the week: Portugal
Zon and Sonaecom. Short Term Buy. Reasons to buy:
•From a intrinsic valuation perspective, both companies seems attractive;
•The probability of a merger between the two companies seems to be increasing, after the latest news flow.
•The deal could generate attractive synergies (€250 million).
•This would create a bigger player to compete in the Residential and Mobile markets;
•Zon is the market leader in Portugal in the Residential sector, a sector that has proved to be resilient in the
current economic backdrop;
•Sonaecom has the appropriate infrastructure, market positioning and experience on the Mobile Sector that
Zon doesn’t have;
•Zon can expand to new markets, as its leading shareholder Isabel dos Santos mentioned in the past. Zon’s
Angolan JV is showing an interesting evolution. This is probably not priced currently in the stock;
•Isabel dos Santos has a 28.8% stake in Zon. She also enjoys close ties with Sonae’s retail arm;
•Some other issues should be considered:
• France Telecom has announced its intention to divest Sonaecom;
• It is important to now BES’s position on the possible M&A deal;
• French group Altice recently acquired Portuguese cable operator Cabovisão. What will Altice do, if
anything?
Weekly Preview
Disclaimer
Disclaimer
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