Good morning,

Markets are called to open higher this morning. This is what's happening today:

  • Singapore’s economy expanded more than initially estimated last quarter after a smaller contraction in manufacturing, adding to evidence of a recovery in Asia. The island’s currency rose;
  • US stock-index futures rose, indicating the gauge may rally from two-day drop. Shares of Hewlett-Packard Co., the largest personal-computer maker, increased in extended trading after the company forecast fiscal second-quarter profit that exceeded analysts’ estimates;
  • China’s new home prices rose in most cities the government tracks for a third month, adding pressure on leaders to intensify policy-tightening efforts to prevent asset bubbles and inflation as the economy rebounds;
  • German GDP data will show decline in capital investment lead contraction in 4Q, according to economists;
  • IFO business confidence will rise for a fourth month, a survey shows;
  • EU Commission comments on Spain’s deficit, economic outlook and publishes euro area growth forecasts;
  • CNP, Generali, Air France-KLM report earnings.

Markets are called to open higher this morning after a two day drop. Its all about elections in Europe this weekend and the possibility that the Fed will cut expansionary monetary policy in the US. The problem in Italy is that there is no indication as to who will win the elections. The problem is that both Grillo and Berlusconi are moving up the scale. Quoting from a Bloomberg report, 'Grillo is a visionary, but he says Five Star won’t join any coalition government and he won’t serve in parliament. Instead, he promises to oppose and obstruct, and says his goal is to have enough legislators in parliament to topple the next government. If Grillo can suck enough votes away from other parties on Feb. 24-25, then he could make the formation of a stable government impossible from the outset, forcing new elections.'

New elections in Italy will bring about further uncertainty and a selloff in the markets. Moving on the the US, the selloff continued yesterday after the FOMC minutes weree out on Thursday and we found out that it is a possibility that the Fed will cut the $85bln injection into the US economy each month. The problem is that this injection of cash can create inflation problems aswell as a bubble in the financial markets.

So the negative sentiment in Italy and the US is having its effect on the markets worldwide. Yesterday, the FTSE MIB was down more than 3% and the NASDAQ was down 1.04%. Don't forget that with high yield prices where they are, there is more to lose in high yield than in the equity markets because from a valuation point of view, high yield is much more expensive than equities.

Air France report results today. Ari France is trading at E8.33/share and Deutsche Bank have a price target of E9/share with a HOLD recommendation. This is there comments, 'Air France-KLM has the highest operational and financial gearing of the major European airlines. With increasing competition (from easyJet at its hubs and from Gulf carriers to destinations in the Middle East/Asia) and an uncertain global economic outlook, Air France-KLM will need to substantially cut its cost base (especially personnel costs). We see more and more signs that restructuring efforts at AF-KLM are intensifying. At the same time, the yield situation remains satisfying, despite challenging competition and economic uncertainties. The level of indebtedness remains challenging. Furthermore, the macroeconomic outlook for its major home market France has worsened lately. An investment in AF-KLM combines good chances with high risks. Given that balanced risk-return profile, we rate the stock a Hold.'

An interesting stock to watch is Michelin. Michelin is trading at E67/share and Deutsche Bank have a price target of E90/share with a BUY recommendation. This is what they have to say about the company 'Mgt is guiding for flat volume and stable OP this year. The incremental start up costs and depreciation (Euro 100m each) should be entirely offset by a raw mat tailwind of Euro 250m (entirely in H1) net of pass trough agreements. And a small volume effect, +2% (mostly in H2) explain why we are Euro 150m more optimistic than Mgt (1% volume delta translates into Euro 80m on OP). In 2014, assuming a volume growth back to trend (+4/5%) and most of the start up costs being non recurrent (Euro 290m in 2013), OP growth should increase double digit again (+10%e). With Capex reaching a high 9% of sales in 2012-13, the group is generating a high Euro 600m of free CF. This strong Capex program will end in 2015. In the following years, with Euro 300m lower Capex and Euro 200m higher depreciation, the group is preparing itself for a strong free CF in excess of Euro 1.0bn per annum. BUY.'

For further information on Air France or Michelin, or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli