Monday, October 1, 2007

[MORGAN STANLEY] ASIA/PACIFIC MORNING MEETING SUMMARY & AP STRATEGY & DOWN UNDER DAILY

AP STRATEGY: KEY EVENTS: ASIA CPI & US PAYROLLS - Malcolm Wood

Asia Events - CPI (Korea, Taiwan & Indonesia), Trade (Korea, Indonesia & Malaysia) & RBA Rate Decision: With rising food and oil prices, we expect the September CPI to have edged up in Korea (2.5%Y), Taiwan (2.0%Y) and Thailand (1.6%Y), while Indonesia's CPI is forecast to have remained steady. Korea's export & IP growth are expected to have moderated from high levels. The central Banks in Australia & the Philippines are expected to keep rates unchanged. See page 2 for details
Asia Earnings - A Quiet Week: Consensus EPS growth expectations for AP ex-Japan in 2007 and 2008 are 15.3%Y (vs. 15.2% last week) and 11.0%Y (vs.11.3% last week), respectively. Asia was trading on 17.7x 07 and 15.9x 08 consensus earnings estimates. See page 2 for details.
International Economic Events: US ISM, Non-Farm Payrolls, ECB Rate Decision & Tankan Survey: US non-farm payrolls are forecast to have rebounded by 125k, while we expect a dip in the ISM to 52.5. The ECB is expected to leave rates unchanged. See page 3 for details.
International Earnings - A Quiet Week: Consensus EPS growth expectations for the S&P 500 are 8.3%Y in 2007 and 11.8%Y in 2008. The S&P 500 was trading on 16.0x 07 and 14.4x 08 consensus estimates. See page 3 for details.
Market Performance - Asia Outperforms: Global equity markets rallied last week, with Japan up 3.1% and the US & Europe both up 0.8%. AP ex-Japan rose a sharp 3.7%, led by China (7.3%) and Taiwan (+4.9%). US 10-year bond yields declined by 14 bps. Most Asian currencies extended the rally against the US dollar, led by the Aussie dollar (+1.9%). Among commodities, the WTI oil price dipped (-0.5%) from a record high, while copper (+3.7%) and aluminum (+1.2%) rallied. See pages 4-8 for details

DOWNUNDER DAILY : THE PHONY WAR - Gerard Minack

Take your pick: equity markets are either behaving as if the worst is over for credit and housing problems or they remain convinced that the Fed can offset whatever bad news may unfold. The end result is the same: the consensus remains solid that the US will soft-land and that rates will head lower - which is seen as a marvelous combination for equity assets, not just in the US but globally.
This phony war can last a little longer, in my view. Until there are casualties - and, in an economic sense, that means sustained job losses - investors will remain confident in a Fed-engineered soft-landing. While ever that remains the case, equity markets are likely to continue to follow the recent pattern: 'soft growth = Fed cuts = equities rally'.
However, the view that the worst is over is dead wrong in my opinion. Certainly, the residential construction recession has been evident for some time, but even so it seems set to run well into next year, based on our US team's forecast. But the bigger issue - the important issue for investors - has always been the extent of the knock-on to consumer spending, and then the labour market. I expect the knock-on to come through several routes:
First, the household sector continues to draw substantial equity from its dwelling wealth - equivalent to 3⅓% of household income over the year to the June quarter. There is a close relationship between home equity extraction and the change in housing wealth, so it seem likely that extraction will fall in coming quarters (Exhibit 1).
Second, as is well known, the mortgage reset wave is yet to crest. Exhibit 2 is from colleague Janaki Rao, showing estimated resets.
Third, potential borrowers have to cope with a material tightening in financial conditions. One gauge of that tightening is the rise in mortgage rates. Despite the Fed’s rate cut, mortgage rates are now at or near cycle highs (Exhibit 3).