Financial Market Research and Analysis

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Euro strengthens on improved inflation expectations
The Eurozone inflation is expected to stay flat in October, the core inflation could have improved to 1.0% y/y.

Since the ECB has been generously dovish on its future plans vis-à-vis the QE program, the inflation expectations improved to 1.70/1.75% band according to the euro 5y5y inflation swaps (closely monitored by the ECB).

German and French stocks are mostly in the green, while EURUSD bulls and bears clash at about 1.10. Decent vanilla puts trail below 1.0925 before the closing bell. Cheaper euro is applauded by the European stocks as it helps improving their competitive advantage in the presently rough market conditions. The Eurozone sovereign bonds remain very much in demand. The motivation to buy Eurozone stocks is disturbing however and the EZ sovereign market carries a decent unwind risk. In fact, the anticipated gain on capital should cover the low yield and the cheaper euro. This profitability threshold is rather unclear, hence the market will keep on seeking for a reasonable ceiling in Eurozone bond prices before the ECB boost its purchases. Until the ECB hints at the size of the QE increase, speculators have no idea whether their bonds are over or under-valued. This is nothing but blindly betting.

In this context, investing in stocks remains a reasonable alternative. Despite a stock price inflation, the underlying value in a stock is somewhat more concrete.

The DAX stocks head north, except Volkswagen and Deutsche Bank of course, while Airbus (+5.20%) lead gains in the CAC as it expects to double deliveries in 2016. A deal for 130 airbus planes has been signed with China this week for a decent sum of $17 billion.

The enthusiasm in FTSE is contained today with energy stocks leading the losses in London.

Equity highlights:

IAG (-4.1%) Q3 operating profit of €1.25bn, ahead of expectations for €1.23M was a vast increase profit for the same period last year of €900m. Clearly the demise of the oil price has been to the benefit of all the major airlines. Raising FY guidance to €2.25-2.3b but valuation at 9x next year’s PE when Lufthansa is on 6X has led Cantor Fitzgerald to stick a sell rating on the stock. Having traded close to its 52 week high yesterday we are seeing some profit taking today. Majority of brokers are bullish on the company with an average target price of 698p.

BG Group (-0.17%) Profits beat estimates and the company has raised its production forecast. Shares are up 19% this year and remain some 10% below Shell’s offer price. Average broker target price is 1250p.

Rolls Royce (+1.4%) Evaluating whether a trend toward bigger planes will provide an opening for it to re-enter the short-haul engine market, according to a person with direct knowledge of the company’s plans.’

RBS (-1.3%) Royal Bank of Scotland reported a drop in Q3 profits owing to restructurung charges missing estimates. Also warned future costs relating to litigation and past misconduct will be much higher than expected.

Meggitt ( +2%) Raised to neutral v underweight at JP Morgan


BoJ keeps the QQE expansion joker in hand

The BoJ refrained from expanding the QQE as we anticipated, yet the inaction disappointed more than one.

Nikkei and Topix stocks closed the week on a positive note however, the USDJPY advanced to 121.50 in Tokyo. The ex-fresh food inflation remained unchanged at -0.1%y/y, versus -0.2% expected; jobless rate remained steady at 3.4% in September.

With the Fed insistently keeping the December rate hike option on the table, the BoJ would’ve just thrown its joker unnecessarily. The Fed hawkishness keeps the BoJ safe from splashing out on its QQE, where the pool of eligible bonds dries slowly. Especially now that everyone is back on expanding their QEs, BoJ needs to expand its QQE carefully, simply because they may run out of sovereign bonds to pursue this onerous QE-race.

This being said, the domestic dynamics in terms of capital flows have changed. The market has digested a weaker yen. Still, a failure to ease could cause an undesired appreciation, as the safe haven character of the yen remains, especially as the Asian markets sit on a shaky ground with the Chinese slowdown.

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