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Good morning,

Markets are called lower this morning. This is what's happening today in the markets:

  • Japan’s markets are shut for a holiday and U.S. Treasuries aren’t trading because of Columbus Day;
  • European finance ministers will meet in Luxembourg to discuss Spain’s finances and closer banking cooperation, while German Chancellor Angela Merkel visits Greece tomorrow for the first time since the crisis erupted;
  • Spanish Prime Minister Mariano Rajoy will travel to Paris on Oct. 10 for talks with French President Francois Hollande;
  • Growth in developing East Asia will probably ease to an 11-year low of 7.2% this year, the World Bank estimates;
  • Alcoa Inc. unofficially starts the U.S. earnings season with the release of its third-quarter numbers tomorrow, the fifth anniversary of the record highs in the S&P 500 and Dow Jones Industrial Average;
  • Data last week showed China’s official Purchasing Managers’ Index contracted a second month in September for the first time since 2009, while the nation’s non-manufacturing industries expanded last month at the weakest pace since at least March 2011. Still, China’s major attractions saw an average 23% increase in tourism sales from a year ago during the first six days of the Golden Week holiday, industry regulator data showed;
  • On Friday, US jobs data showed that the unemployment rate in the world's largest economy fell to 7.8% in September, the lowest level since January 2009;
  • Venezuelan President Hugo Chavez won his closest election fight since taking office 14 years ago, overcoming cancer surgeries to extend his self-declared socialist revolution by six more years;
  • 10-year Italian debt is trading at 5.043%, 10-year Spain is trading at 5.666% and 10-yer Portuguese debt is trading at 8.101%;
  • Brent is trading at $111.45;
  • Apple closed the session at $652.59

Europe

Markets are expected to open lower this morning despite the positive jobs data out last Friday. The million dollar question is why. There isn't one answer but many reasons for the negative start on a Monday morning. The two major reasons for the turnaround in the markets are as follows. The first is that investors are worrying that Spain will not ask for bailout money. We heard it last week from the horses' mouth that Spain does not need bailout money because if it did accept the conditions required by the ECB in order to get the money, Spain's situation will remain the same. Bottom line is that the austerity measures which Spain would have to put into place in order to be able to be eligible for the bailout money would result in no change to the situation in Spain. So why should the Spanish government be ridiculed with the Troika coming over every three months to see if it is keeping in line with what the ECB is expecting when things will not improve? Finance minsters are meeting tomorrow to put the ESM into force.

The second reason why the markets are lower this morning is the continuation from the US session which closed in negative terrritory last Friday. US jobs data showed that the unemployment rate in the world's largest economy fell to 7.8% in September, the lowest level since January 2009. The markets rallied on this news after it heard that the US added 114k jobs for the month of September. Global equities started to rally and the DAX closed the session 1.27% up. But US stocks closed their session in negative territory! Why? The markets were expecting an increase in unemployment figure from 8.1% to 8.2%. However, the unemployment rate dropped to 7.8%. The thing is that the elections are coming up in the US next month and the unemployment rate is a very important figure for Obama. No president was ever elected in the US with an unemployment rate above 8% and all of a sudden the rate falls to 7.8%! There are rumours in the markets that the figure were manipulated. Obviously, Obama is denying such allegations.

China

The last time China’s stocks were this cheap in 2008, the benchmark index rose 83% in a year. Now is different as policy makers struggle to reverse the worst economic slowdown in more than a decade, the most-accurate strategists say. While the Shanghai Composite Index trades at 11.4 times the earnings of China’s biggest companies, the lowest level since at least 1997, economists predict the world’s second-largest economy will grow at its slowest annual pace in 13 years. Investors anticipate the government will lack focus on the slowdown as the Communist Party prepares for a once-in-a-decade leadership transition.

Stock to watch: LVMH (Price E122.10, Price Target E135)

In our view LVMH is one of the most attractive, diversified and defensive plays in the luxury sector, which itself is enjoying structural growth from a new Asian consumer base. With strong pricing power, c55% group profits coming from Louis Vuitton, strong sales momentum and trading on average valuation multiples, we believe LVMH is well positioned for 2012. In addition, through its 21.4% holding in Hermes and deal with Bulgari, LVMH has a clear strategic direction based around unique assets and is showing itself to be a leader in luxury sector consolidation. Buy.

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

Good day and happy trading!

Kristian Camenzuli