Good morning,

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

  • Asian stocks tumbled the most since November and the euro weakened to a three-month low after French Socialist Francois Hollande was elected President and US employers added fewer jobs than forecast;
  • Hollande, the first Socialist in 17 years to control Europe’s second-biggest economy, pledged to push for less austerity;
  • Greek voters flocked to anti-bailout parties;
  • U.S. payrolls increased by 115,000 in April, the smallest gain in six months, according to Labor Department data on May 4;
  • Indonesia’s economy grew more than 6% in the first quarter as domestic consumption helped counter a global slowdown;
  • 10-year Italian debt is yielding 5.434%, 10-year Spanish debt is yielding 5.734%, 10-year Portuguese debt is yielding 11.099%;
  • Brent is trading at $112.50/barrel.

There’s been a lot of concern about what’s going on in the US, China, and recession in Europe and now we have more concern about Europe. There are two main concerns worrying the market after this weekend. The first is that a Socialist President has one the election in France and the second is that Greece’s political leaders struggled to find the support needed to form a coalition government after voters flocked to anti-bailout parties.

Hollande has stated in his campaign that if he was to be elected president of France he will re-negotiate the fiscal pact with Europe. Because of this statement made by Hollande, Merkel made it clear that she would rather have Sarkozy as president rather than Hollande to be able to continue building on what they have achieved for Europe so far. Now that Hollande has been elected, we have to see how long it will take for the two leaders to find a common ground on the future for Europe. This uncertainty is increasing risk aversion in the markets as uncertainty about the future of the Eurozone is increasing.

Despite all the noise made by Hollande his strength is limited when it comes to Merkel. Merkel doesn’t need to compromise because Hollande is going to be forced to climb down due to France’s weak economy. France lost its AAA credit rating at Standard & Poor’s this year. The German jobless rate of 6.8%, a two-decade low, compares to almost 10% for France. French gross domestic product grew 1.7% last year while German GDP grew 3%. Merkel is just going to sit back and watch Hollande jump into the icy water and try to swim. Investors can handle good or bad news, but they hate uncertainty. For all their differences, German and French leaders of opposing political camps have a history of cooperation. Germany and France, former enemies that fought three wars between 1870 and 1945, were founding members of the EU that was created to make military conflict between them impossible.

Greece’s political leaders struggled to find the support needed to form a coalition government after voters flocked to anti-bailout parties, calling into question the country’s ability to impose the measures needed to guarantee its future in the euro. New Democracy won 20% of the total vote with more than 50% of the ballots from yesterday’s elections, according to the Interior Ministry website. Socialist Pasok, which partnered with New Democracy in securing a second rescue package for the country, trailed in third place with 42 seats. Official projections predicted the two would fall one short of the 151 seats needed to win a majority. Syriza, a coalition of left parties which has vowed to cancel the bailout terms, got 16.1% and has 49 seats as the second-biggest party, boosting its showing from the 2009 election nearly four-fold. The new Greek parliament will have three new anti-bailout parties represented. The chance of a pro-EU bailout coalition of New Democracy and Pasok is on a knife-edge. The scale of opposition is such that even if a pro-bailout coalition can be formed it will be tough for the new government to push ahead with further austerity, risking a halt to EU bailout finance. This test could come within weeks.

All this uncertainty in Euroland caused the euro fell to a three-month low after Socialist Francois Hollande was elected president of France and as Greek voters flocked to anti-bailout parties, stoking concern austerity efforts in Europe may be derailed. The 17-nation currency slid for a sixth day, its longest series of losses since September 2011, after German Chancellor Angela Merkel’s party had its worst election result in more than half a century in the state of Schleswig-Holstein.

Stock to watch: SAP AG (Price E48.12, Price Target E65)

SAP continues to be our core holding as we believe it is best positioned to take advantage of the ongoing consumerisation of Business IT. We believe software, especially application software, should continue to gain share of wallet of overall enterprise IT spending. 2012 should an important year for SAP, during which we believe its new products (HANA, mobility, Cloud) will start to generate significant growth opportunities. We believe corporate investment in SAP in 2011 reflects a focus on rationalization and consolidation of existing SAP architectures, to ready the business for stepped investment in 2012 to take advantage of in-memory, mobility and cloud-based solutions. Even with some uncertainty, we expect SAP to deliver good double-digit licence growth in FY12. Buy on valuation.

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

Good day and happy trading!

Kristian Camenzuli