Good morning,

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

  • Asian stocks fell for the fourth day, the euro weakened and commodities dropped to their lowest this year as German Chancellor Angela Merkel’s party lost a state election and concern grew that Greece would exit the single European currency. Bond risk climbed in Asia;
  • The entire London staff of JPMorgan Chase & Co.’s chief investment office is at risk of dismissal as a $2 billion trading loss prompts the first executive departures as soon as this week, a person familiar with the situation said;
  • Greece’s political deadlock looked set to continue for a second week as President Karolos Papoulias failed to secure agreement on a unity government and avert new elections with the country heading toward a possible exit from the euro area;
  • 10-year Italian debt is yielding 5.509%, 10-year Spanish debt is yielding 6.007%, and 10-year Portuguese debt is yielding 10.938%;
  • Brent is trading at $111.87;
  • EU finance ministers meet in Brussels for a two day meeting;
  • EFSF to sell up to Eur1bln in 2% Notes due 2017.

Markets are called lower this morning as the European finance ministers meet for a two day meeting to discuss the fact that Spain will probably not meet its budget target s for 2012 and the concern in Greece that politicians are finding it hard to set up a coalition government. If a coalition government is not set up, the Greeks will have to go to the polls and this could lead to the election of a government that does not want to accept the austerity measures set by the European union. Not to mention the $2bln loss reported by one of the safest investment banks after a hedge gone wrong. All of this uncertainty is causing the markets' volatility to increase as investors put risk back on the table. It would be wise at this point in time to be invested in low beta stocks in order to limit the amount of volatility in one's portfolio. The markets have lost half the gains they made in Q112. However, if a coalition government is formed in Greece and the Spanish government lends further money to the banks in order to cover the shortfall capital of E50bln, the markets will start moving back up in Q312 and continue the rally till year end. The rally will also be fuelled by further monetary policy easing which is expected to come out of China. I remain of the view to be invested in Chinese and US equities and stay away from European equities for the time being. In my opinion it is still premature to start adding on to positions. I would wait for further clarity in the markets though keep in mind that it is in times like these where a bargain is made by picking up stocks on the cheap end, However, in my opinion we will see further weakness in the markets in the immediate short term followed by a pickup in the rally in H212.

JP Morgan Chase

It ironic how one of the safest investment banks comes up with a $2bln loss from a trade gone wrong. Be careful what you wish for. Back in December 2008 when JPMorgan boss Jamie Dimon was being routinely feted as the great survivor of the financial crisis, he popped up on CNBC television. ‘‘The pedestal is a terrible place to be,’’ the banker declared. ‘‘I almost want to get knocked off the pedestal so I don’t have to hear this anymore.’’ Well, he’s managed that. On Thursday night, Dimon dropped the bombshell that a bank renowned for its financial rectitude had somehow blown $2 billion. Not only that – it had racked up the losses at the London wing of its chief investment office (CIO), the very bit of the business that’s meant to hedge all the risks that go with JP Morgan’s thumping $2.3 trillion balance sheet. In trademark style, Dimon didn’t mince his words. ‘‘This puts egg on our face and we deserve any criticism we get,’’ he admitted, as he told of self-inflicted ‘‘egregious mistakes’’. As mea culpas go, it was a decent effort. But Dimon stopped short of telling the whole story, of how a trader nicknamed the ‘‘London Whale’’ had made an ill-fated attempt to corner a part of the credit derivatives market and was now drowning in losses.


Greece’s political deadlock looked set to continue for a second week as President Karolos Papoulias failed to secure agreement on a unity government and avert new elections with the country heading toward a possible exit from the euro area. Greece’s biggest anti-bailout party, Syriza, defied overtures to join the government yesterday, deepening the impasse. Leader Alexis Tsipras won’t attend a new meeting called by Papoulias today for 7:30 p.m., state-run NET TV reported, without saying how it got the information. “Syriza won’t betray the Greek people,” Tsipras said in statements televised on NET TV after the meeting with Papoulias and the leaders of the New Democracy and Pasok parties. “We are being asked to agree to the destruction of Greek society.” Papoulias spent the day trying to coax the country’s three biggest parties into a coalition after a week of talks failed to deliver on mandates to form a government. If Papoulias’s efforts fail, new elections will need to be called. Today’s meeting will be with the leaders of two of the three biggest parties, and the head of the smaller Democratic Left party, NET said.


The Spanish government said May 11 it would require banks to take about 30 billion euros of additional provisions to cover potential losses on 123 billion euros of real estate-linked lending that is still performing. The provisioning, part of the government’s fourth attempt in three years to clean up the industry, comes on top of 53.8 billion euros of charges and capital ordered in February. Spain will also hire two auditors to value the industry’s assets as it seeks to address investor concerns about hidden losses on bank balance sheets.


China’s stocks rose the most in a week on speculation the central bank will ease monetary policy to bolster the economy after cutting lenders’ reserve requirements for a third time since November. “The reserve-requirement ratio cut is a positive and it may help company earnings in the long term,” Zhang Qi, an analyst at Haitong Securities Co., said in a telephone interview in Shanghai. “Some investors are still bothered about the recent data so stocks today didn’t gain as much as expected.”

Stock to watch: Voestalpine (Price E22.70, Price Target E32)

Voestalpine is an integrated steel producer (25% iron ore) and exposure to premium flat steel, specialty stainless steel (20% of 2010/11 EBIT) and railway systems (30% of EBIT) help to stabilise earnings over the trough of the cycle, making Voestalpine the company with the lowest volume risk in the sector. In steel, we particularly like Voestalpine's focus on premium flat steel and heavy plates. The company has taken market share during the past years, continuously running at higher-than-average utilisation rates, and has proven that it can defend margins better vs. peers. We also like the company's strong management team and hence, recommend Buy.

For further information on Voestalpine or other stocks we follow, contact our offices on 25688688.

Good day and happy trading!

Kristian Camenzuli