Markets Live: Thursday, 13th June, 2013

This is the transcript of the Markets Live session ending at 12:10 on 13 Jun 2013. Participants in this session were: Bryce Elder Tony Tassell

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Good morning.

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And, obviously ………

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Now, let’s be clear.

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He’s not been sacked.

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It’s just that it was decided he should leave.

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And, after being told he was leaving, Hester agreed to leave.

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“Of course I’d like to have stayed.”

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“This was the board’s decision, not mine, but I am comfortable with their decision.”

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TT

good morning

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see we could not resist the hunting photo

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BE

Morning, Tony. Exciting tear up of the entire newspaper last night.

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inevitable really

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Yeah, we can’t resist a man in a silly hat.

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it was exciting…now though it more about tearing up the website

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BE

All those pre-written obituaries remain on file for another day, while an entire new obituary needed written.

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feel some sympathy for Hester – and he appeared remarkably humble in his tv interviews post ousting – but perhaps not quite as much some commentators this morning

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this appears a man too unhappy with his fate no?

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BE

Hm.

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he might have wanted to stay on for the share options post privatisation

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but this quote seemed to be genuine

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“It has been a very bruising and difficult job so I certainly don’t have to be prised away reluctantly.”

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BE

Yeah, well, I’m struggling to see this as anything other than a Treasury interference story.

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he has done a great job, gets out with suffering the opprobrium suffered by other banking ceos

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BE

Precisely.

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what is wrong with Treasury interference?

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BE

Well ……………

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i know my colleague Jonathan Guthrie was very grumpy about this morning

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Hester’s ousting is shabby example of state meddling
By Jonathan Guthrie
Whoever is anointed as successor should return it to private ownership sharpish
The defenestration of Stephen Hester as chief executive of Royal Bank of Scotlanddispels any doubts that the bank is controlled, albeit at arm’s length, by the UK government. This is a wretched situation for any business to be in. Whoever is anointed as successor by the board – and perhaps more importantly, the chancellor – should get a move on and return RBS to private ownership sharpish.

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but actually this pretty straightforward shareholder stuff to me

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as a big shareholder you have the right to change ceos when you want

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BE

Hm.

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Well, can I develop on that point?

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interfering in the day to day operations is another mattter

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BE

The problem — and let’s highlight that RBS is down 6% at the moment — is that you really shouldn’t invest in anything with a majority owner.

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They can act exclusively in their own interests, not those of independent shareholders.

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So Hester was iced because he was politically inconvenient.

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All this spin about him being unwilling to commit to staying at the bank for three or four years beyond the reprivatisation process …

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That’s only really plausible if we’re talking about “beyond” meaning to 2018 or so, which’d be a sensible target to move RBS back into a functional state.

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and there might be more to reveal about – ie was treasury forcing the 2000 job cuts announdced today or putting pressure on ledning targets

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Yet we’re meant to believe Osborne would be more worried about the effect of changing CEOs after the government had sold down? Gerrofit.

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the share price is down because the privatisation is being delayed

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BE

I don’t believe that take.

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i really think it is fair to want a CEO to hang around a bit

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Nope. Don’t believe it.

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BE

That’s spin. That’s a Emoticon take.

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it is a big operational risk but seems very fair to me.

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maybe that is what the flaks are spinning but it does not mean it is not true

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It’s usually a good indicator that it’s not true.

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(@Nobby: I was going to make exactly that comparison, but decided against.)

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well if you are selling shares in a bank or a company, you do want some clarity on the longevity of management

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makes sense to me

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BE

Why does introducing uncertainty add clarity?

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What kind of doublethink are we dealing with here?

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uncertainty now until you get a ceo yes but then more clarity

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i am not saying there are political influence are not at work

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Osborne is trying to create a narrative of clearning up of the banks before the election

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and as Jonathan Ford pointed out this morning

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The Oxfordshire huntsman with the ruddy features no longer fits the bill.

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that might not be fair….

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Nope. Not buying it. Treasury wanted to get shot of the stock pre the 2015 election, Hester was a roadblock so he was executed.

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Discussing anything beyond 2015 is a total red herring, because to the politicians making the decisions everything beyond 2015 in their diaries just says “there be dragons.”

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Should I cut to some comment here?

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Ian Gordon of Investec is his usual ebullient self.

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but i kind of reject the idea that i am swallowing spin..if i was an investor, i would want a ceo with longevity

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Mr Gordon loves this story

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someone was saying he was mischievously suggesting Diamond Bob as a replacement for Hester

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do you have his note? or shall i post?

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I’ll chuck it up. Hold on.

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(Incidentally: an shareholder, I don’t want a share that’s worth 6% less than it was yesterday. It takes a strange view of the rational price mechanism to suggest his removal was in investors’ interests.)

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We see it as a matter of regret for all RBS’ stakeholders that the widely respected CEO, Stephen Hester, is to depart. Just one month ago, CFO Bruce van Saun’s move to Citizens was also announced. Despite a wholly unhelpful political and regulatory backdrop, Hester and van Saun have done an admirable job in terms of the “repair” and restructuring of RBS, although the outlook for earnings and returns remains weak. Fresh uncertainty is unhelpful, but surely there is an ideal successor? – arise Sir Bob! SELL.

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The manner of Stephen Hester’s departure is deeply unsatisfactory. Despite persistent speculation over whether Stephen would resign, it was not his decision to leave. Officially, no front-runner to succeed him has been identified. If true we believe it is negligent. If untrue, then it may constitute Market Abuse.

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Nice idea that.

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“market abuse”

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Someone call the FCA, or the PRA, or whoever’s in charge of this now. Check if they have a file open on Phillip Hampton.

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Sir Philip Hampton has confirmed “Treasury involvement” in the decision to remove Hester. With the Parliamentary Commission on Banking due to report imminently, and with the Chancellor expected to comment on the “privatisation process” at the Mansion House on 19 June the timing is curious indeed.

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We regard reignited good bank/bad bank speculation, and the idea that RBS could somehow seek to transfer responsibility for loss-making Ulster Bank to the Government of the Republic of Ireland, as unhelpful, inappropriate and in any event, much too late. Surely the Chancellor won’t give any serious consideration to such proposals? Expect grave consequences if we are wrong.

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Since RBS failed in 2008, we believe that the UK Government has repeatedly made a bad situation worse. It overpaid for its stake, it has imposed “moving goalposts” in terms of the regulatory framework, triggering five years of costly rolling-restructuring. Such inconsistency/mismanagement has hurt shareholder value. As an 81% shareholder, the UK Government reaps what it sows.

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Stephen is due to leave RBS “later this year”. He will surely be gone before the Christmas party.

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nah..the 6 per cent fall relates less to him than the timetable for privatisation and changed mood music from osborne on when…just don’t think Hester, even though he was good at his job, is indispensible

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So we shouldn’t expect Osborne to sound the gun on privatisation at Mansion House next week?

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The timetable’s being pushed back from where it would’ve been when RBS was being run by someone competent? I’m deeply cynical of this take.

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my view is that the timetable is being delayed..so it made it more improable for hester to stay on

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re osborne…George Parker and Patrick Jenkins were quoting Osborne aides this morning as saying:

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that the chancellor was not desperately trying to seell the shares before the election

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I’m sure aides are saying that.

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because they know the shares are not going to recover to pre-bailout levels

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The Treasury’s already fudged its average in price to a price rather lower than its actual average in price.

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i am not saying there not other factors at play..the relationship between Hester and Osborne and Hester/Hampton have rumoured to be not be great

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True …..

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and the timing is interesting that it comes just before another whack to the investment banking division cutting jobs

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and probably anguised discussions over the level of RBS lending between treasury/rbs

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…. Which Hester was apparently opposed to, if reports are to be believed.

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yes exactly

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Allow me to cut to some more sellside, if only to give us a rest.

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Here’s Deutsche.

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We believe that Hester did a terrific job restructuring the bank since his appointment in October 2008.

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For now we expect RBS to proceed with current strategy. Most pressing within this is the planned reduction in capital in its i-bank by 35% (B3 RWAs to be cut by £45bn from £125bn at FY12) and moves to float a minority stake in US business Citizens by end 2015 to satisfy the Bank of England’s Financial Policy Committee capital adequacy stress test requirements. Buyers / holders of the stock today, however, have no visibility on strategy under new leadership.

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We have been wary of the technical risks around being a Seller of RBS given the upcoming Mansion House speech (a public share distribution to the public would drive a free float-induced squeeze we think), a risk which appears to be receding according to the FT today. We were also concerned about a decent restructuring announcement from an ever-credible Hester in the coming days. We no longer expect this, given today’s short RNS on the topic. It appears that
the Banking Standards Committee will publish its final report tomorrow, recommending another round of good bank/bad bank restructuring and lower leverage ratios than Basel 3 requires. We don’t see either of these as positive.

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At last night’s 325p close we have RBS trading at 9.5x 2015 EPS and 8.7x Core earnings. This includes assuming that the niche-FICC Markets strategy delivers £800m of PBT in 2015. Even focusing on Core valuation this has RBS at a 54% P/E premium to the Barclays group valuation of 5.6x 2015 EPS, but without as much execution risk and with a ~700 day trading volume overhang.

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Ha! 54% premium to Barclays ……..

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…. 700 day overhang.

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Rather puts it in perspective, I feel.

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Trading at 0.7x TNAV the RBS bull case is around excess capital generation and distribution. But on our numbers if we assume a DirectLine sale at market, Citizens for $18bn and buyback of the Dividend Access Share for £1.8bn, the £12bn in 2015 excess capital over an 11% full B3 capital ratio is only sufficient to bring the Core P/E down to 7.0x, a 25% premium to Barclays. We think the stock too fully valued and downgrade to Sell.

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(RuminationsOn- yep but i think that came from a bloomberg interview – apparently he said chairman normally serve for 5 to 7 years)

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Citigroup saying much the same ……

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His Departure Will Be A Loss… – CEO Hester is well respected and has arguably done as good a job as possible in very trying circumstances, given the difficult political and regulatory backdrop and the external pressures often placed on the bank. During his period as CEO RBS’ disclosure has improved, non-core assets have been substantially reduced and capital & liquidity metrics have been repaired. His departure will be a loss, in our view, although we understand his reasoning. A new CEO may also be better positioned to grow the remaining core business, as opposed to the ongoing restructuring that was the main feature of Hester’s term.

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… And It May Prove Challenging To Attract Candidates – The search for a new successor will start immediately, with the Board set to consider internal and external candidates. However, we fear that the public backlash towards RBS, including the media focus that surrounded Hester’s proposed bonus in 2011 (which was later waived), and the ongoing political interference, may serve to deter potential candidates.

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All Change At The Top – This resignation follows shortly after the announcement that CFO Van Saun is also set to leave his role at end-September, in order to take over as CEO of Citizens ahead of the planned IPO in 2 years’ time. Nathan Bostock, the current CRO, has already been earmarked for the CFO role. We note that Hester and Van Saun are currently the only senior executives on the Group Board.

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Overhang Risk – One should not underestimate the time it will take for the UKFI to exit from the 81% stake. RBS shares are still trading below the average government in-price, net of fees, of 407p and any placing of RBS shares is complicated by the B-share structure and DAS. Furthermore a 10% share placing, for example, would be equivalent to c77 days of ADV. While a number of proposals to distribute shares to the taxpayer have also been suggested, including via a nominee account to which individuals would register (thereby resolving dividend and voting logistical issues), we still see flaws with this suggestion (access, eligibility, floor price, etc).

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do you want some downbeat Credit Suisse reaction?

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Reiterate Sell/High Risk Rating – This resignation adds to the existing political and regulatory uncertainty surrounding RBS. We reiterate our Sell/High Risk rating which is primarily based on the poor profitability of the core franchise. In 1Q13 RBS reported a core RoTE of 8.2%. Adjusting for Basel 3 RWA inflation and a 10% CT1 ratio would imply a pro-forma core RoTE of only c7.0%. Even after assuming an improvement at core Ulster Bank, which represents a 2.1% drag, the medium-term target of greater than 12% core RoTE still looks increasingly difficult to achieve, in our view.

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Sure, Tony. What’s Carla Antunes-Silva saying?

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The group has announced that Stephen Hester is to leave RBS before the end of 2013. Whilst this has been speculated in the past, it still comes as a surprise in terms of timing, and we expect the news will be taken negatively. In particular it could intensify debate about the structure of the group and comes ahead of the report by the parliamentary banking commission. Trading at 0.7x 2014E TNAV for a 5% RoTE in 2015E we remain Underperform with RBS our least preferred UK domestic bank.■ Timing a surprise – as recently as this weekend an interview with Stephen Hester was published in the FT where it was reiterated that he wanted to ‘see the job through’ which is taken to mean lead the reprivatisation. We actually think that his departure is related to the reprivatisation process, with the board looking for someone who would commit to staying at the bank for 3-4 years beyond the reprivatisation process.■ Deeper restructuring uncertainty – we do not think that this move is related to the banking commission report, although this could create further debate about the shape and size of the group. In particular we see several of the businesses reported within ‘core’ as not necessarily part of the longer term group structure. We wrote about some of the challenges facing the group in our report ‘RBS – ‘Good bank/bad bank’: Looking at options’ 12 Mar 2013.■ Remain underperform – Trading at 0.7x 2014E TNAV for a 5% 2015E RoTE RBS is our least preferred UK domestic bank, and one of our least preferred European banks. Stephen Hester is generally seen as having done a good job and we expect the news to be taken negatively.

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at least the call is clear – RBS is our least preferred UK domestic bank, and one of our least preferred European banks.

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Oh, and UBS find a silver lining, albeit a rather tarnished one, to defend its “buy” call.

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We note the bank did not need to say anything about Q2 trading which would have been the case if the results were running significantly below market expectations.

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It appears that timing in the role was at the heart of the decision. While we think Hester would have been willing to see the initial privatisation process through and to return the bank to meaningful profitability, it appears that the Board felt that a longer commitment (3-4 years post sale) was required. If Hester were to have signed up for this, it would have meant an overall tenure of c10 years in the job for Hester against his original expectation of a maximum of 5-7 years in the role.

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With Nathan Bostock succeeding Bruce van Saun as CFO (on van Saun’s return to the US to head up Citizens), once a new CEO is in place, RBS will have an entirely new executive management team in place to take the bank forward from its restructuring years to focus on business as usual and growing the bank again.

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While we would expect a negative share price reaction reflecting an additional level of uncertainty, we remain buyers of RBS with a price target of 370p, based on Gordon growth model on the core businesses.

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All of which is rather brave.

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quoting the Gordon growth model..is that Ian Gordon

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anyway so who do you think will replace Mr Hester

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my theory it will be an Australian

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Why so?

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well whenever there is difficult in filling a UK bank job, headhunters turn down under

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Americans too expensive, don’t like UK regulations

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a Canadian would look weird under Carney

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That’s true. I did think Richard Waugh, though he’s probably too expensive.

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and believe it or not, Australian banks are highly rated for their management

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What about David Thorburn, currently of Clydesdale?

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mainly because they look good with profits being boosted by cabal like profits

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good thoughts

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Thorburn’s Scottish, running an Australian owned bank that hasn’t collapsed.

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I’m sticking a quid each way on him.

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the Richard Meddings idea would be interesting given the run in with the Americans

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That’s a half hour obituary for Hester. Perhaps we should move on.

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wasn;t he the one rumoured to have complained about the “f…king Americans” over the Iranian dealings

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(@Baz: sure, but who gives a toss what the Scottish think?)

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11:33AMBlock
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anyway i note on the internaal candidates, Ross McEwan is a Kiwi..almost as good as an Australian

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phew

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Enough Hester!

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time to move on..apologies

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Let’s take a glance at the wider market, since we’re rallying a bit.

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In the sense that we’re off lows …..

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FTSE down 63 points at 6236, down a mere 1% now.

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It’s the handover from the Japan puke to the sturdier US futures, I guess.

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i thought there was very good email from Miller Tabak’s Andrew Wilkinson that kind of summed it up

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There are simply too many (ugly) charts we could stick inside and so we stopped short of doing so. The earlier rally for US stocks has reversed, with simply too many dominoes waiting to fall causing us concern.

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there was more inside the email if you want it

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a summary of the gloom

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Please.

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Which domino are you watching? – It is hard not to feel as though we are watching out for the lead domino to topple – the one that could set off a chain reaction. Investor sentiment was pretty ebullient at the start of the day following a rebound for Japanese stocks after a horrendous start. US futures sustained an early morning jump and delivered a strong open and despite the fact that there was precisely zip on the calendar to embolden bullish sentiment. Only an overnight dip in yields possibly sustained sentiment – but even that fell by the wayside at one point. Yields are softer now probably because equity prices are starting to snowball.
Stories out of the eurozone offer little encouragement. Incessant television coverage of Turkish protests against the government is not helping matters although it has to be said this is neither Greece nor Cyprus. With an ECB on trial in the German spa town of Karlsruhe where the legitimacy of its Outright Monetary Transactions program is under the
microscope, this does little for relations between the ECB and the local Bundesbank. We heard (unconfirmed) market rumors earlier that Portugal was urging the ECB to step-in and buy its bonds – a reminder of the ill-health of the periphery.

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And then we heard an unconfirmed rumor that the Greek government was likely to emerge from an emergency cabinet meeting and seek a vote of confidence. Greek stocks are lower by 3%. Core equity markets around the zone are no longer higher but settled lower.
Elsewhere the pain continues across the Emerging Globe. Having fallen to a two-year low earlier in the week, Brazil’s benchmark Ibov index is lower again today. Mexico’s stocks slid by 2.00% in the face of rising volatility in US stocks. The CBOE Vix index is fast-approaching last week’s peak and the highest since mid-April.
And then there is the little matter of the yen, whose vacillations continue to trip-up US equity prices. As we noted late on Tuesday the Japanese unit was closing stronger than when it snapped the dollar’s grip last week. And more problematic was a broadening of the yen’s advance against the euro currency, British pound and the Aussie dollar. The dollar index just
snapped to a two-month low midweek indicating a decidedly risk-off mood and one that hardly supports the earlier return for risk-appetite signaled by a move higher for equity prices.
Finally, the S&P 500 has slowly returned to beneath Friday’s low – the low supported by an above consensus payroll reading. Failure to hold that level could arguably cause stocks to have a stab at the fear-inspired lows of last week at 1598.

There are so many dominoes just waiting to topple that we’re no longer sure what to watch

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Eeesh.

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have you seen any views on the big Japan sell-off? Paul Killik was noting the Japan market is still up about 20 per cent ytd despite the sell-off into bear territory

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and Lombard St had a good note out this morning

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Who’s afraid of Kuroda?
Kuroda’s policy could drive money out of Japan and into the rest of Asia. This will provide a further boost to risk assets in the region but for some this could be hugely destabilising. China stands out as having viable candidates for Japanese portfolio rebalancing.

Bank of Japan policy may drive money out of the country and parts of Asia could be swamped by even more liquidity.[1] Bank of Japan holdings of JGBs at the end of 2012 stood at 11% of the outstanding JGBs but the faster pace of buying will push up their share and crowd others out of the market. Banks, insurance companies and pension funds will then be looking for substitute assets. Meanwhile, the decline in the yen is likely to mean that Japan could get some minimal inflation this year, making yields on JGBs look less attractive.

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So far, the decline in the yen has been driven in large part by the hedging activities of foreign investors trying to get into Japanese equities after growth prospects improved. Despite the recent de-rating, on a one year outlook equities could continue on their way up and a further expected decline in the yen could also induce Japanese investors to hold their money outside of the currency, leading to a self-reinforcing downward spiral of outflows. Likewise our stronger US story from end-2013 could mean a weaker yen.

There is little evidence so far that Japanese investors are starting to reallocate their funds abroad. But the major institutional holders of JGBs can take time to adjust their portfolios

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Hm …………..

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mmm…you see any reason not to hunker down

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The argument seems to be that institutional fund flows lag trends.

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And fund flows evaporate during volatility, as we’ve seen a thousand times. The fact that the FTSE’s up 5% in the year doesn’t matter much when it’s down nearly 10% from highs.

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barclays had a client survey out this morning which did seem show a lag in sentiment at least..presumably taken a while ago and then taken a while to get through compliance

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Ha.

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Cautiously bullish equities it is titled

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by the appropiately named Guillermo Felices

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Financial markets are in the midst of pricing the beginning of what is likely to be a long process of withdrawal of monetary policy stimulus by the US Fed. In particular, market volatility picked up following comments by Chairman Bernanke about the possibility of tapering asset purchases if the US recovery remains in good footing. A few days after that statement (between May 31-June 7), our clients were invited to participate in our quarterly Global Macro Survey. The main findings from a sample of more than 300 investors are:
· The market remains constructive about the outlook for global equities. For the second time in two years, more than 50% of investors favour equities over other asset classes in the next quarter (Figure 1). Equity investors continue to favour the US market, but they have switched their preferred sector from global growth beneficiaries to domestically focused cyclicals.

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The predicted outperformance of equity markets contrasts with the two biggest risks to the global outlook over the next 12 months: a reduction in Fed stimulus and weaker global growth. Equity investors share these concerns, but are slightly more sanguine about tighter Fed policy (31% fear tighter monetary policy) than about slower growth (33% cite slower-than-expected growth in the US and Europe as a concern). Interestingly, worries about the euro area crisis have diminished significantly.

Together with the strong rally in the major equity markets in H1, these risks are leading equity investors to be more cautious over the next quarter. As such, they are gradually paring back their near-term returns expectations. 56% expect returns of -5% to 5% in the next three months (vs. 45% in December) and 29% expect returns of 5-10% (vs. 44% in December, Figure 2).

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About 40% of rates investors expect Fed tapering to start in December 2013 and almost none expect it to start at the June 2013 FOMC meeting. However, most respondents expect the Fed to hike for the first time only in Q3 15. A large majority of investors (about 70%) see UST 10y yields at 2-2.5% by end-2013, up from 57% in Q1. Note also that the distribution is now more skewed toward higher rates than in the previous quarter (Figure 3). · A strong USD is a consensus view for the next 12 months. Investors are broadly evenly split when asked which FX group will be the worst performer versus the USD over that time. Most expect the yen (30%) and EM currencies (30%), followed by the safe havens (CHF and AUD) and commodity currencies. More than 50% think USD/JPY will trade as high as 110 as a result of macro policies in Japan.

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How many rates investors expected Fed tapering to start in December 2013 when they were asked in December 2012?

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I find limited worth to this stuff, other than from a Keynesian beauty contest perspective.

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yes i know…a bit like the merrill study..though sometimes sentiment surveys can be a contrarian indicator

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True. Bullish sentiment = sell.

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mmm…any more thoughts on Japan or shall we move on?

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Let’s push on. There must be something cheerier to talk about.

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Go ahead Bryce cheer us up

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Um ……………

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Anousha’s been badgering me this morning about some theory that Abu Dhabi might go after Pennon.

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Pennon Group PLC (PNN:LSE): Last: 674.00, up 13.5 (+2.04%), High: 674.00, Low: 653.00, Volume: 232.16kBlock
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Think it was given a line in one of the papers this morning, though not this one.

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Seems very unlikely to me.

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One industry specialist said the developments made it unlikely for a
counterbidder to emerge given the reticence of the board to engage in
talks and now potentially shielded the other two listed UK water
companies from buyout approaches as the sector faces a regulatory
review.

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It is unclear what the consortium will do next. One potential bid
target is a stake in Yorkshire Water that is being up for sale by
shareholders, UU is probably too big for anyone
penon isn’t pure water although as a counterpoint
ive also been told in the past water companies tend not to get counter bids but someone ends up going for something else but generally the trend of UK public to privates has not been a happy one this year.

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That’s the gist of it.

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11:48AMBlock
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Argos?

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Home Retail Group PLC (HOME:LSE): Last: 129.70, down 14.4 (-9.99%), High: 140.50, Low: 128.60, Volume: 2.41mBlock
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So Homebase is the problem now.

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Weather, partly.

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Parasols and rattan furniture not selling in the first quarter, which crunched margins.

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200bp weaker than expected.

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hah

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(They’re still 25% doing off barbecues, incidentally.)

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So Homebase needs an amazing Q2 to make up the difference.

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Which looks unlikely if you believe the Met Office

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keep it mind for your new place in harlesden

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a bit of rattan furniture can do a lot for a place

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and strategicly-placed parasols

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Yeah, think I’ll be investing more in barbed wire and gun turrets, if they sell them.

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(We should also note in passing that Paul Murphy doesn’t generally believe the Met Office, and gets tends to get a bit cranky on the subject. http://ftalphavill…-suncream-futures/ )

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So, given Homebase is massively first-half weighted, that means flat earnings at best this year, which is rather less than expected.

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We’re only really taking about a £5m downgrade or thereabouts, but it’s more the direction than the size of the move that matters.

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This all deflects from the apparent good news that Argos and Homebase both showed positive LFLs for the first quarter in six years.

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Here’s what the downgrades look like ….

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Citi first.

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Argos 1Q LFL +1.9%, GM –75bp (Citi +4%, -75bp) — A slightly weaker performance versus our expectations with consumer electronics maintaining its positive performance driven by growth in tablets and TVs alongside continued
growth in white goods, offset by weaker performance in seasonal products. We would also note little increase in penetration of online sales which grew +4% yoy in Q1 vs +12% in Q4 despite the increased push here by Argos.

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v Homebase 1Q LFL +1.4%, GM -200p (Citi flat, -75bp) — Main strength was driven by the performance in big ticket products offset by reduced sales of seasonal products adversely impacted through the adverse weather (seasonal is about 40% of total sales in the quarter). The -200bp decline in the gross margin was driven by a more normal level of promotional sales versus 1Q last year.

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v 1Q LFL Gross Profit; Argos -0.3% (Citi +1.8%) and Homebase -2.3% (Citi -1.4%) — for the 13 week period to 1 June. These trends drive LFL Gross Profit of -0.3% at Argos versus Q4 (+3.0%) and –2.3% at Homebase (vs-1.2% in Q4).

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v What does it all mean? — Argos is still pushing on with its transformation plan but as yet there is little visibility on whether it will be capable of achieving its target of £4.5bn of sales (vs £3.9bn in FY 2013) and mid-single digit operating margin (vs 2.6% in FY 2013) by FY 2018. In addition we expect the underlying demand environment to remain volatile whilst Argos will also face tougher comparatives on tablets during the year despite some benefit from competitor capacity reduction.

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v Low single digit downgrades expected to FY 13 consensus PBT, worse for sentiment — Despite it being so early in the year, the soft performance at Argos and weaker than expected gross margin performance at Homebase (where profits are weighted towards H1) we expect modest downgrades in the region of 2-3% to consensus PBT which currently stands at £98m, EPS 8.6p. For reference we have a FY 13 PBT of £94m, EPS of 8.2p (+8.7% yoy).

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n Sell, 105p target price — This is based on a c.7x EV/EBIT multiple for FY14E, in line with its long run average and equates to c13x PE and a 2.9% dividend yield. We continue to believe the valuation at the current price looks excessive with HOME trading on a Feb 2014 PE of 19x and EV/EBIT of 11.1x.

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… And Merrill, which is a buyer.

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In Q1 LFLs were stronger than we expected for both Argos and Homebase but gross margin was weaker, particularly for Homebase. We have reduced our FY14/15 PBT forecasts by 1-2% as although Argos LFL was stronger we don’t assume Homebase can now recover lost Q1 sales later this year. However we don’t read too much into Q1 as Argos remains very much a Christmas business and we think the UK consumer and Argos’ offer should be in better shape in time for then. Also Homebase has been hit hard by weak sales of seasonal products in the cold weather but in our view its FY15 figures should benefit from an improving UK housing market and also a late Easter in 2014 versus two years of soft comparisons. Our FY15 PBT estimate is around 5% above consensus and we maintain our Buy rating with a 180p price objective.

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Argos LFL was +1.9% in Q1 ahead of our low end +0.7% forecast with net space impact also better at -0.7% vs our -1.0% estimate. Gross margin was down -75bps vs our -50bps estimate, albeit against Argos’ toughest gross margin comp last year. Consumer electronics was better than forecast with less of a negative impact on sales than expected from comping the new iPad launch and the digital switchover last year. However this also caused a higher negative mix impact than anticipated. Homebase LFL sales were better than expected at +1.4% vs our -2.5% estimate, however gross margin was down -200bps vs our -125bps forecast due to extra promos in May (-150bps), mix (-25bps) and clearance (-25bps).

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Small readthrough for Kingfisher, though their own-sourcing drive makes their margins generally more robust.

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Kingfisher PLC (KGF:LSE): Last: 336.10, down 6 (-1.75%), High: 339.00, Low: 333.90, Volume: 1.84mBlock
11:54AMBlock
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another note on Japan just landed from Capital Economics if you want or ist there something more stock related

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Oh, give us more Japan doom.

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I’ve just got to check on Evraz while you do.

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it is a bit more positive than that

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• There are two main reasons for the reversal in the yen, one domestic and one external. The first is disappointment that the Bank of Japan failed to ease monetary policy further at its meeting on Tuesday in response to the recent volatility in the financial markets. (The yen was still at 99 on Monday.) But this disappointment is surely exaggerated. The most likely change would have been a lengthening – from
one to two years – of the maximum maturity of low interest rate loans made to financial institutions as part of the Bank’s regular money market operations. However, the Bank already has plenty of scope to provide cheap finance to those institutions who want it. (For a fuller discussion see our Japan Economics Update, “Bank of Japan declines to panic”, published on 11
Any suggestions that the Japanese central bank is cooling on the need for a substantial and prolonged easing in monetary policy are certainly wide of the mark. After all, it was only in April that the Bank set out a clear and aggressive strategy of doubling the monetary base within two years to lift inflation to around 2%, which was much more than most had anticipated at the time. It would be quite wrong to conclude that the Bank is backtracking on that commitment now, just because it is wary of tweaking
policy to chase every twist and turn in the markets. Instead, the adverse reaction to the Bank of Japan’s decision illustrates how the markets’ expectations have become increasingly unrealistic.

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(@RuminationsOn: apologies, I’ve not looked at the JKX story for a few days. Will make some calls on it for tomorrow.)

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11:57AMBlock
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Okay, Evraz ……………

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EVRAZ plc (EVR:LSE): Last: 120.80, up 7.1 (+6.24%), High: 121.00, Low: 107.60, Volume: 3.06mBlock
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Sorry, Tony, did you have some more Japan to share?

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sorry..slow on the update

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• The other factor strengthening the yen is renewed safe haven demand. The markets now appear to be in panic mode over the prospect of a tapering of QE3 in the US, even though the Fed itself has stressed that monetary policy would remain “highly accommodative”. Given the weakness in overseas markets, it would not be surprising if the yen is being boosted by repatriation flows. Japanese institutions have already returned to being net sellers of foreign bonds, despite widespread expectations (not our own) that the Bank of Japan’s easing would prompt a wall of money to head overseas for yield. (See Chart 2.)

So what next? We will be reviewing our key market forecasts in the coming days, but the changes for Japan will probably not be large. On the yen, we had pencilled in a partial recovery later in the year due to a revival of safe haven demand as the euro-zone crisis flared up again. This revival has come sooner than we had anticipated, and for a different reason. However, over the next few years the big picture should be one of renewed yen weakness as the Bank of Japan keeps monetary policy relatively loose.

On Japanese equities, we had already predicted a substantial correction, with the Nikkei falling well below 13,000, before a sustained recovery in 2014. that Still seems the view to hold

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from Julian Jessop that was

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go ahead with Evraz please

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Super. Thanks.

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Though, frankly, there’s not much to say.

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“Short squeeze” is the excuse being offered most commonly.

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Post FTSE rejig last night, everyone who was short them / long Persimmon etc is unwinding the pair.

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they were kicked out of the FTSE?

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Yup, them and Polymetal.

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ENRC is the only Russian diaspora stock left in the blue chips.

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For Evraz you have tight liquidity, plus you have some surprisingly positive stuff coming out of China about steel demand.

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well at least we have ENRC as a fine ambassador

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Eurasian Natural Resources Corporation PLC (ENRC:LSE): Last: 238.60, up 5.3 (+2.27%), High: 238.90, Low: 230.10, Volume: 1.03mBlock
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Interesting the way it trades during selloffs. Seen as a counterintuitive defensive.

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Because the oligarchs will have to carry you out at some price (in theory, though they could also just delist if they dared).

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12:02PMBlock
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Hey! Midday already!

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Anything to finish up with?

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no sadly not…but shoudl draw people’s attention to

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the fun calculator we posted last night calculating the worth of your personal info to data collectors

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Missed that. Do share.

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mine being very low even by hack standards

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good fun

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(“Hack” in the Fleet Street sense, to be clear.)

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yes we need to make that clear in these times

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Oh, and can I finish up by sharing some more Ian Gordon? He’s been very busy today.

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Has a note out pushing HSBC via a reference to Chernyshevsky.

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oh yes..this is his kind of story

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In his 1863 novel, What is to be done?, Nikolai Chernyshevsky set out a “handbook for radicalism” – a key inspiration to Lenin (and others) ahead of the Russian revolution half a century later. Quite sensibly, CEO Stuart Gulliver has set his face against the “radicalism” of HSBC’s recent past, de facto ruling out any further major value-destructive acquisitions – misguided attempts to deploy surplus capital/liquidity which organic opportunities could not absorb.

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Sellside “excess” in relation to HSBC is nothing new, but the scale of corrective downgrades to consensus Net Interest Income forecasts ($1-1.6bn during May alone) has been remarkable, thankfully balanced by similar improvements in costs and impairments. Management is rightly, and out of necessity, taking an increasingly aggressive approach to cost reduction, as well as delivering tangible evidence of a sustainable step-change improvement in credit metrics.

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The HSBC investment proposition is clear – a significantly de-risked bank, subject to ongoing revenue pressures, but one with surplus capital generation which requires a home. Management’s “conversion” to the concept of share buybacks is (so far) somewhat limited – apparently just (future) SCRIP-neutralisation, but HSBC’s dividend paying capacity is strong. Consensus is now catching up, and we reiterate our unchanged DPS forecasts of 52c in 2013e, 60c in 2014e and 66c in 2015e – that’s a 6.1% 2015e dividend yield!

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Rec to Buy (from Reduce). RoE-g/CoE-g derived TP to 740p (from 735p).

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HSBC Holdings PLC (HSBA:LSE): Last: 680.50, down 11.6 (-1.68%), High: 684.20, Low: 675.70, Volume: 9.04mBlock
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Have to admit, I’ve not read What is to be Done. Have you, Tony?

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errr..wasn’t that a detective story

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Not quite. All I know is that it’s been widely panned.

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“Insuperably talentless,” according to Martin Amis.

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Anyway, we’re done.

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always enjoy a bit of a takedown literary review

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time for lunch then…and chasing more RBS speculation

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Thanks for joining, Tony. Thanks for keeping us company, ROTR.

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we should have some fresh lines up on the site soon

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many thanks for having me

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an honour to be here

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Yeah, I think that every single day. Emoticon

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by the way on the excerpt did you do a search for the word The

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probably not the term you would use normally to refine a search

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Oh, think I searched “Koba the Dread”, which is where the extract’s from.

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I should’ve mentioned that before. Copyright Mr Amis. Please buy his books, in case he needs another set of new teeth.

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ah,,,anyway on that note of “extraordinary torpor”…

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time to go

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Yup – that’s us. Thanks again everyone. Back tomorrow.

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