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Good morning,

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

  • House Republicans rejected President Barack Obama’s demand for higher tax rates, heightening the confrontational tone of budget negotiations;
  • A report showed US manufacturing unexpectedly contracted last month. The Institute for Supply Management’s factory index fell to 49.5, the lowest since July 2009, from 51.7 in October;
  • Europe’s finance chiefs voiced confidence Greece will succeed in buying back bonds, a key element in efforts to stem the debt crisis;
  • 10-year Italian debt is yielding , 10-year Spanish debt is yielding and 10-year Portuguese debt is yielding;
  • The Reserve Bank of Australia cut its benchmark interest rate to the half-century low set during the 2009 global recession as hiring falters and an elevated currency hurts industries such as manufacturing and tourism;
  • The British Chamber of Commerce said that Britain's economic growth in the next two years will be weaker than previously thought, held back by a global slowdown and domestic austerity measures;
  • Brent is trading at $110.62/bbl;
  • Gold is trading at $1701.55/t oz;
  • Apple closed the session at $586.19

We saw a negative session in the US yesterday for two main reasons. The first is the ISM data in the US which came out worse than expected. A report showed US manufacturing unexpectedly contracted last month. The Institute for Supply Management’s factory index fell to 49.5, the lowest since July 2009, from 51.7 in October. The second reason for the negative session is that Obama and the Democrats rejected a proposal by House Speaker John Boehner and other Republican leaders on a plan that would reduce entitlement program costs by at least $900 billion, including raising the Medicare eligibility age, and cut $300 billion in discretionary spending.

Because of fear of the fiscal cliff, economists cut their forecasts for US 10-year yields. Ethan Harris, the co-head of global economic research at Bank of America Corp., trimmed his call for the end of 2012 by a quarter percentage point to 1.5 percent on Nov. 30.

Oracle said on Monday that it would pay more than $800 million in next year’s dividends to shareholders later this month, joining a growing number of companies accelerating such payments or declaring special dividends because of the possibility that income tax rates will rise in 2013. The world’s largest supplier of database software said it will pay one dividend of 18 cents a share, instead of three separate 6 cent-a-share payments for its fiscal second, third and fourth quarters of 2013. Oracle will issue the dividend on Dec. 21 to stockholders of record on Dec. 14.

Moving on to Europe, Spain formally requested €39.5bn of European funds to recapitalise its struggling banks, while its prime minister held back from ruling out a bail-out for the state also. What we saw yesterday is Spain was a call for BANK AID not STATE AID. The money represents €37bn for its four nationalised banks – Bankia, Catalunya Banc, NCG Banco and Banco de Valencia – and €2.5bn for a so-called “bad bank”. It should be paid to the state’s banking fund by mid-December. Despite the bail-out for its stricken banking sector, Spain faces speculation that it will require a sovereign rescue also. So far, its prime minister Mariano Rajoy has resisted making a decision on that count, although in an interview over the weekend he did not rule out the possibility of a rescue by the European Central Bank. Spain is trying to reduce its deficit to 6.4% GDP for this year, but could struggle to hit that target as its economic downturn shrinks tax revenues.

Greece began the 10 billion-euro repurchase of bonds maturing from 2023 to 2042 yesterday, offering a higher-than-planned price in order to increase demand for the debt-reduction measure. The buy back is one of the measures that will trim Greece’s debt as of 2020 to 124% of gross domestic product from a previous estimate of 144%. The buyback would be the biggest component, lopping 11 percentage points off the debt.

After two recessions in four years in the UK, Britain bounced back to growth in the Q312, helped by extra working days and London's hosting of the Olympic Games. But analysts reckon the economy will expand by a far lower 0.1% in the current quarter and will barely pick up in the year ahead. The recovery has been hampered by a protracted debt crisis in the euro zone, Britain's main trading partner, as well as by the government's debt-cutting plans.

What will make the markets rally for the last few weeks of this year? The answer is more stimulus from cental banks. Federal Reserve Bank of Boston President Eric Rosengren said he sees a “strong case” for the central bank to buy bonds at the current monthly pace of $85 billion after its Operation Twist program expires this month. Policy makers convene Dec. 11-12 and minutes from October’s meeting showed a “number” of Fed officials said additional monthly purchases of bonds may be warranted next year.

Stock to watch: RSA Insurance Group (Price 119.3p, 136p)

Deutsche Bank Comments – Low interest rates have been a powerful headwind to RSA's earnings and balance sheet over the last few years. While the effect of these looks set to continue, we believe that management's actions to improve the business mix by growing in better margin markets is beginning to show through. Specifically, adjusting for 2012e weather losses, we forecast EPS growth recovering to 11% in 2013e and 8% in 2014e. This also helps to underpin the group's attractive dividend yield, improving the payout ratio to <70% in 2014e. Buy.

For further information on RSA Insurance Group or other stocks and bonds we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli