the day ahead - april 9th 2013

7/28/2019 The Day Ahead - April 9th 2013

1/9

THE DAY AHEADREUTERS NEWS North American Edition For Tuesday, April 9, 2013

Stocks edged higher in choppy trade ahead of earningsseason, while Treasuries fell. The yen plummeted to itslowest level in nearly four years as the Bank of J apankicked off its stimulus program. Oil rose, while gold fell.

MARKET RECAP COMING UP

U.S. Treasury Secretary Jack Lew concludes a trip to Europe, hissecond international tour since taking office amonth ago, to discuss recent deterioration in theeuro zone and prospects for boosting globaleconomic growth. Early in the day he is ex-

pected to meet with German Finance MinisterWolfgang Schaeuble in Berlin. A meeting inParis with French Finance Minister Pierre Moscovici was canceled.

Federal Reserve Bank of Richmond President Jeffrey Lackerspeaks on "Ending Too-Big-to-Fail Is Going to Be Hard Work" be-fore the Global Society of Fellows conference at the University ofRichmond. Also, Atlanta Federal Reserve Bank President Lock-hart speaks at the Financial Markets Conference in Stone Moun-tain, Ga., and Minneapolis Fed President Narayana Kocherlakotamoderates a panel at the same event.

Verizon Communications chief executive officer Lowell McAdamspeaks at the National Association of Broadcasters conference in

Las Vegas.

Expect quarterly results from Minneapolis-based Cargill, one of theworld's largest privately held businesses, which markets food, agri-cultural, financial and industrial products worldwide. Back in J anu-ary, Cargill reported a four-fold increase in quarterly earnings, tap-ping its global command of cash markets and food processing andposting strong profits from trading operations after a poor perform-ance in the previous year.

The Bank of Nova Scotia hosts its annual general meeting ofshareholders in Halifax, Nova Scotia. Scotiabank, Canada's third-largest bank, operates in more than 50 countries, with the heaviestweighting in Latin America and a growing presence in Asia. Cana-

dian bank stocks have churned steadily higher in recent weeks inspite of signs that Canadian lending is slowing due to a coolinghousing market and generally more frugal borrowing from heavilyindebted Canadians.

STOCKS Close Change % Chng Yr-high Yr-low

DJ IA 14612.86 47.61 0.33 14684.50 12035.10

Nasdaq 3222.25 18.39 0.57 3270.30 2726.68

S&P 500 1563.01 9.73 0.63 1573.66 1266.74

Toronto 12344.56 12.71 0.10 12904.71 11209.55

Russell 931.54 8.26 0.89 954.00 729.75

FTSE 6276.94 27.16 0.43 6533.99 5897.81

Eurofirst 1164.79 2.58 0.22 1209.05 1132.73

Nikkei 13192.59 358.95 2.80 13225.62 10398.61

Hang Seng 21718.05 -8.85 -0.04 23944.74 21703.28

TREASURIES Yield

10-year 1.7469 -10 /32

2-year 0.2341 0 /32

5-year 0.7084 -3 /32

30-year 2.9147 -25 /32

Price FOREX Last % Chng

Euro/Dollar 1.3002 0.22

Dollar/Yen 99.30 1.49

Sterling/Dollar 1.5246 -0.58

Dollar/CAD 1.0172 0.02

COMMODITIES Price $ change % change

May crude $ 93.56 0.86 0.93

Spot gold (NY/oz) $ 1572.39 -9.11 -0.58

Copper U.S. (front month/lb) $ 3.3680 0.0280 0.84

Reuters/Jefferies CRB Index 289.69 0.91 0.31

BIG MOVERS Price $ change % change

J inkoSolar Holding 5.00 0.85 20.48

Suntech Power 0.50 0.08 19.49

Affymax 1.08 -0.08 -6.90

RadioShack 3.14 -0.20 -5.99

KEY ECONOMICS EVENTS ET/GMT REUTERS POLL PRIOR SOURCE

NFIB small business optimism for Mar 0730/1130 -- 90.8

ICSC/GS Report ww for w/e 06/04 0745/1145 -- 4.7 pct International Council of Shopping Centers/Goldman Sachs

Redbook mm for w/e 06/04 0855/1255 -- 0.8 pct Redbook Research

Wholesale inventories for Feb 1000/1400 0.5 pct 1.2 pct Commerce Department

Wholesale sales for Feb 1000/1400 1.3 pct -0.8 pct

For The Day Ahead - Canada, click here


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MARKET MONITOR

Click on the chart for full-size imageStocks ended a volatile session higher as investors lookedahead to an earnings season expected to show modest growthdespite concerns about macroeconomic conditions. "We're wait-ing for earnings for evidence that the market can be supportedat these levels," said J im Dunigan, chief investment officer atPNC Wealth Management. "We will see growth in earnings, but

clearing the expectations bar could be difficult, which could giveus reason to pause." Shares ofMonster Beverage rose 4.69percent. Lufkin Industries surged 37.59 percent and GE wasup 0.83 percent. Johnson & Johnson fell 1.13 percent. TheDow was up 0.33 percent, the S&P 500 Index rose 0.63 percentand Nasdaq was up 0.57 percent.

The Treasury market was relatively quiet, with long-dated bondsselling off modestly late in the session. Benchmark 10-yearTreasury notes last traded down 10/32 in price for a yield of1.75 percent. "We should see good buying on any backup (rise)in yields," said Michael Cullinane, head of U.S. Treasuries trad-ing at D.A. Davidson & Co. The 30-year bond was down 25/32,yielding 2.91 percent. The U.S. central bank bought $1.399 bil-lion in Treasury inflation-protected securities.

The dollar hit its highest level against the yen in nearly fouryears after the Bank of J apan, in an attempt to eradicate persis-tent deflation, kicked off an aggressive program of monetaryeasing. "Todays price action looks like a continuation from whatwe saw last week, as investors are starting to position them-selves for increased J apanese investment abroad," said CharlesSt-Arnaud, fx strategist at Nomura Securities in New York. "Ithink that for now dollar/yen may take a breather, but reaching100 this week is very likely," he said. The dollar rose as high as99.32 yen, before pulling back slightly to trade at 99.29 yen , up1.48 percent on the day. The euro rose as high as 129.23 yen .It last traded at 129.11, up 1.85 percent on the day.

Oil prices edged higher, lifted by gains in gasoline futures andstrong selling of the spread between Brent crude and U.S.

crude. "Crude oil got a bounce after last week's drop, and fromthe lack of a deal or any progress with Iran in the talks about itsnuclear program, but the dollar's strength may limit the rise,"said Phil Flynn, analyst at Price Futures Group in Chicago. Maycrude was up 0.93 percent at $93.56 a barrel, having reached$93.75 during the session.

Gold fell as a stronger performance in U.S. equities and a dollarrise prompted investors to take profits after its rally in the previ-ous session. Spot gold dropped 0.56 percent to $1,572.66 anounce. On price charts the metal looked vulnerable to re-test a10-month low of $1,539.70 hit last week, analysts said. Junegold futures were down 0.2 percent at $1,572.70 an ounce.

THE DAY AHEAD For April 9, 2013
http://link.reuters.com/vyn66s


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TOP NEWS

Click on the chart for full-size imageGE to buy oil pump maker Lufkin for nearly $3 billionGeneral Electric is buying oilfield pump maker Lufkin Indus-tries for $2.98 billion, sharply increasing its presence in the fast-growing market to extract oil and natural gas from shale rock,the conglomerate said. The deal values Lufkin at $88.50 pershare, a premium of more than 38 percent to the stock's Friday

close. "This deal is really going to round out our portfolio," DanielHeintzelman, head of GE Oil & Gas, said in an interview. GEexpects the oil pump market to grow at 12 percent to 13 percentper year for at least the next decade, said Heintzelman, citingstatistics that at least 94 percent of oil wells will need pumps orlifts at least once in their lifetime. GE has not decided whether itwill keep the Lufkin brand name or retain the company's execu-tives, but it is inclined to keep staff members, Heintzelman said.

Macy's, J.C. Penney resume Martha Stewart courtroom tus-sleMacy's and J.C. Penney were back in court in their fight overMartha Stewart, with Macy's claiming that some of the itemsPenney has begun selling on its website infringe on its exclusivedeal with the home goods guru. After a month-long mediationeffort failed to yield a settlement, the trial resumed in New Yorkstate court over whether Macy's has an exclusive right to sellcertain Martha Stewart home goods products. "The basicshapes and designs are the same," Macy's lawyer TedGrossman told the judge. "They compete directly against eachother."

Ericsson to buy Microsoft IPTV businessTelecom equipment makerEricsson said it had struck a deal tobuyMicrosoft's Mediaroom IPTV business, which makes soft-ware used by phone companies to deliver television over theInternet. Ericsson said it expected to close the deal for the busi-ness during the second half of 2013. It did not disclose a pur-chase price, though a company official provided a ballpark fig-

ure. "This deal is within range where we previously bought acompany called Optimi for $99 million and where we also boughtLG Nortel for $234 million," said Ove Anebygd, Vice Presidentand Head of TV at Ericsson. "So this is somewhere in betweenthe two."

EU regulators to approve $15.8 bln Liberty, Virgin dealJ ohn Malone's Liberty Global will get unconditional EU clear-ance for its $15.8 billion bid for Virgin Media, two people famil-iar with the matter said, in a move which pits the U.S. billionaireagainst rival Rupert Murdoch. "The European Commission doesnot have any competition concerns about the deal," one of thesources said.

Merz Pharma drops out of race for Obagi MedicalGermany's Merz Pharma Group withdrew its offer for U.S. cos-metic products maker Obagi Medical Products, after rival bid-der Canada's Valeant Pharmaceuticals International raised itsoffer last week. "Merz is a disciplined buyer and at this level theeconomics of such a transaction do not meet our requirements,"Merz CEO Philip Burchard said in a statement.

Curbing asset buys could reduce risks -Fed's PianaltoA top Federal Reserve official known for her centrist views de-tailed the potential risks posed by the U.S. central bank's quanti-tative easing program and argued they could be reduced bysimply slowing the pace of asset purchases. Still, Cleveland FedPresident Sandra Pianalto said the unprecedented monetarypolicies have worked to boost economic growth and jobs andstabilize prices, and she repeated the Fed could begin slowingthe pace of purchases if the labor-market outlook were to im-prove "sufficiently."

Airbus seen close to BA deal , add ing pressure for BoeingrevampA potential $7 billion order from British Airways for AirbusA350 jets is set to hand Boeing its next major challenge as itnears the end of a three-month crisis over the grounding of the787 Dreamliner, analysts said. Industry sources said on Sundaythat International Airlines Group, which owns both BA andSpain's Iberia, appeared close to ordering approximately 20Airbus A350-1000 aircraft worth $332 million apiece at listprices.

Avon plans to cu t over 400 jobs, exi t IrelandAvon Products said it will slash more than 400 jobs and exit theIrish market, the latest moves in the new chief executive's plan

to return the beauty products company to profitability in the nexttwo years. Staff will be cut across all regions and functions andwill include the restructuring or closing of smaller, underperform-ing markets, primarily in Europe, the Middle East and Africa,Avon said. The cuts, which will be completed by the end of theyear, are expected to generate $45 million to $50 million in an-nual savings. Total charges are expected to range from $35million to $40 million, with about $20 million coming in the firstquarter of 2013, the company said.

SandRidge names new COO, to probe CEO's land dealsSandRidge Energy said it named a new chief operating officerand hired a law firm to investigate land deals by Chief ExecutiveTom Ward and his family, a month after the company ended aproxy battle with activist hedge fund TPG-Axon Capital. San-

dRidge said it promoted David Lawler to chief operating officer,replacing Matthew Grubb, who resigned at the same time asSandRidge's settlement with the hedge fund. The company saidit hired law firm Mayer Brown to review the allegations againstthe CEO. SandRidge is looking to complete the review by J une15, the company said.

http://link.reuters.com/buv27t


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TOP NEWS (continued)

TNT Express says UPS appeal is not a renewal o f offerUnited Parcel Services' appeal of the European Union regula-tor's decision to block its bid for TNT Express was not a renewalof the offer, the Dutch delivery company said. UPS said on Sun-day it had decided to challenge the EU's decision because itwanted "to ensure a more accurate assessment of the EU com-

petitive landscape and that no precedent is established by theEC that would limit international growth opportunities". TNT Ex-press said in a statement the appeal was intended to clarify theEC's legal assessment of the dynamics of the European expressmarket.


PIC OF THE DAY

Flowers left by mourners are seen outside the home of former Britishprime minister Margaret Thatcher after her death was announced in

London.

ON THE RADAR

ECON INDICATOR ET/GMT REUTERS POLL PRIOR SOURCE

WED: Mortgage index for w/e 05/04 0700/1100 -- 790.7 Mortgage Bankers Association (MBA)

Refinancing index for w/e 05/04 0700/1100 -- 4189.0

Federal budget for Mar 1400/1800 -$112.5 bln -$204 bln

FOMC minutes March 19-20 meeting 1400/1800 -- -- Federal Open Market Committee

THU: Import prices for Mar 0830/1230 -0.5 pct 1.1 pct Bureau of Labor Statistics

Export prices for Mar 0830/1230 0.1 pct 0.8 pct

Initial claims for w/e 06/04 0830/1230 365,000 385,000 Labor Department

4 week average for w/e 06/04 0830/1230 -- 354,250

Continuing claims for w/e 30/03 0830/1230 3.070 mln 3.063 mln

ICSC monthly chain for Mar TIME:TBA -- 1.7 pct International Council of Shopping Centers

FRI: PPI mm for Mar 0830/1230 -0.2 pct 0.7 pct Labor Department

PPI yy for Mar 0830/1230 1.4 pct 1.7 pct

PPI ExFood/Ener mm for Mar 0830/1230 0.2 pct 0.2 pct

PPI ExFood/Ener yy for Mar 0830/1230 1.7 pct 1.7 pct

Retail sales mm for Mar 0830/1230 0.0 pct 1.1 pct Census Bureau

Retail sales Ex-auto mm for Mar 0830/1230 0.0 pct 1.0 pct

ExAuto/gas/bldg for Mar 0830/1230 0.2 pct 0.4 pct

Reuters/UMich prelim for Apr 0955/1355 78.5 78.6 Reuters/University of Michigan

Current conditions prelim for Apr 0955/1355 89.5 90.7

Expectations prelim for Apr 0955/1355 70.0 70.8

Business inventories for Feb 1000/1400 0.4 pct 1.0 pct Commerce Department

ECRI weekly index for w/e 05/04 1030/1430 -- 129.2 Economic Cycle Research Institute


5/9

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THE DAY AHEAD - CANADA For April 9, 2013

COMING UP MARKET MONITOR

Agrium will hold its annual meeting at which results of ashareholder vote are expected on the board of directors, possi-bly including candidates proposed by activist hedge fund Jana

Partners. J ana is proposing five candidates for the 12-member board, who want a review of possibly breaking up thecompany and to make operating improvements to the retailarm in the meantime. This is the biggest proxy battle in Can-ada, since a slate put forward by activist investor Bill Ackmanand his firm Pershing Square defeated incumbents at Cana-dian Pacific Railway a year ago.

Canada's main stock index snapped a five-day losing streak onMonday as strength in the industrials and telecoms sectors off-set declines in gold producers. The Toronto Stock Exchange'sS&P/TSX composite index was up 0.10 percent at 12,344.56.Shares ofAgrium rose 1.63 percent. Bombardiershares wereup 1.78 percent. Royal Bank of Canada slipped 0.30 percent.

The Canadian dollarwas up 0.04 percent at $1.0174.

BIG MOVERS Price C$ % Change

Transcontinental 11.79 0.45 3.97

Gran Tierra Energy 5.85 0.15 2.63

Centerra Gold 5.63 -0.25 -4.25

Winstar Resources 1.91 -0.08 -4.02

TOP NEWS

Jana expects two of its candidates to win Agrium boardseatsJana Partners said that it believed two of its five candidatesgarnered enough votes to joinAgrium s 12-member board, butthe Canadian fertilizer company said it expected to prevail. J ana,

J ana said candidates Barry Rosenstein and David Bullocklooked to be successful. Agrium plans to release the electionresults at its annual general meeting in Calgary, Alberta, on

Tuesday. J ana, which holds a 7.5 percent stake in Agrium, ispressing it to consider spinning off its farm retail division, make

better use of capital and cut retail costs.

Bombardier gets 336 million euro order for German rail op-eratorBombardier said its train unit signed an agreement with Ger-man engineering group Siemens AG to supply train compo-nents to state-owned rail operator Deutsche Bahn worth about336 million euros. The order is an extension of a 2011 agree-ment with Siemens under which Bombardier would supply com-ponents for up to 220 high-speed ICx trains for about 2.1 billioneuros.

Canada to probe report that RBC outsourcing workCanada is investigating a report that Royal Bank of Canada isusing temporary foreign workers hired by an outsourcing com-pany to effectively replace existing staff, a situation the govern-ment said it would not accept. A Conservative government min-ister revealed the probe on Saturday after a report from the Ca-nadian Broadcasting Corporation. The CBC story said thebank was planning to eliminate about 50 employees in its inves-tor services division in Toronto and have the work done by out-sourcing company iGate Corp.

Pharma company Resverlogix to spin off unitThe pharmaceutical companyResverlogix, which is exploring asale, said it would spin off its RVX Therapeutics unit. Share-holders will receive one share in the new company for everyshare held in Resverlogix, the company said. The spun-off unitwill focus on epigenetics, the study of the mechanisms that acti-vate and de-activate genes. The company, which has a marketcapitalization of about C$242 million, said it will continue theclinical development of RVX-208, an experimental drug for treat-ing hardening of the arteries.


6/9

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ANALYSIS AND INSIGHT

FX COLUMNNo end in sight to yen weaknessBy Neal Kimberley

The Bank of J apan's unleashing, on Thursday, of the world'smost intense burst of monetary stimulus should force broaderadjustments across asset classes that feed into even more yen

weakness.The psychologically important rate of 100 yen to the dollar iswithin touching distance. The direction of the move was empha-sised on Monday with the breach of an option barrier at 99.00.With the Bank of Japan (BOJ ) aiming to buy 6.2 trillion yen of

J apanese government bonds (JGBs) in April alone, no one candoubt their commitment.

That "shock and awe" approach will force corporates, foreignexchange speculators and longer-term investors to react as thelikelihood is that such BOJ monetary largesse, as a side effect,lends weakness to the yen.

J apanese importers, natural buyers of dollars to pay for importedproducts, cannot assume they will see a meaningful rise in theyen that will enable them to buy cheaper greenbacks, and so areforced to pay up, adding to the pressure on the yen.

J apanese exporters, natural buyers of yen against the dollar totranslate overseas earnings into their home currency, can sitback and see how the market develops. No one buys somethingtoday if they think it will be cheaper tomorrow.Furthermore, traders on Monday were citing evidence that some

J apanese exporters had sold some dollars against yen on themove above 98.00, and consequently would be inclined to keeptheir powder dry in expectation of even better levels.

These two issues, combined with the extent of the BOJ pro-gramme - it plans to inject $1.4 trillion into the economy in lessthan two years -- might alone justify the interbank foreign ex-change market and the hedge fund community speculating theyen would weaken further.But there is even more to factor in.

With the Bank of J apan absorbing such an immense volume ofJ GBs, the BOJ will hope the liquidity this produces will flow intoother assets.

The central bank's actions should help to keep bond yields artifi-cially low. That, it is hoped, will trigger economic activity and theprice rises J apan needs to escape deflation.Much of that BOJ -supplied liquidity should find its way into J apa-nese equities, as low yields would ordinarily spur rises in shareprices.Offshore investors buying Japanese equities are likely to hedgetheir currency exposure by selling the yen against their homecurrency, anticipating further falls in J apan's currency.

There is no point making gains on J apanese equities denomi-nated in yen if those gains are cancelled out by a loss in the

value of the currency itself.In contrast, J apanese investors in J GBs may venture into over-seas government debt markets in search of yields marginallybetter than those on offer in Japan.

That would entail selling yen for foreign currency to buy thebonds, trades that might arguably be left unhedged on a cur-rency basis in expectation of BOJ policy resulting in the J apa-nese currency going even lower.IRRESISTIBLEFinally, foreign holders of J apanese government bonds mightconsider the BOJ 's bids for JGBs irresistible given that theprices on offer would in no way reflect the lower prices andhigher yields to be expected if the central bank achieves its 2percent inflation target.While the vast majority of J apanese government bonds are helddomestically, if foreign holders do sell and then do not re-investthe proceeds in J apan, the yen would probably be sold and con-

verted into the investors' home currency.In the very worst case, if the Bank of Japan's policies fail, J apanmight be considered to be in an even worse state, and thatmight make the yen even less alluring.

The outlook for the yen remains one of continued weakness.

(Neal Kimberley is an FX market analyst for Reuters. The opin-ions expressed are his own)

COLUMNRio Tinto's asset sales may show bearish commodity out-lookBy Clyde Russell

The lengthening list of assets being put up for sale by Rio Tintoshows the world's second-largest miner is serious about cuttingcosts and exiting non-core businesses, but what does it sayabout the state of commodity markets?Coal and copper assets in Australia and iron ore in Canada havereportedly been added to the for-sale list, joining diamonds inCanada and aluminium smelters around the Pacific.So far the company is winning praise from analysts for the focusof new Chief Executive Sam Walsh on increasing returns toshareholders through a relentless focus on containing costs,paring back capital expenditure and asset sales.While the first two present challenges, they are likely to producefar more tangible results than the planned sale of a grab-bag ofhigh-cost mines and aluminium smelters.

The logic here is simple: if Rio, with all its deep experience ofdeveloping and running such assets, can't make them work, whywould anybody else take them on?Also, it would be very unusual for a company to sell stronglyperforming assets in markets it thought held great long-termpotential, even if they were high cost.Among the assets said to be for sale is a chunk of Rio's 80-percent controlling stake in Coal & Allied, which produces mainly

thermal coal in Australia.While it may well be a high-cost miner compared to rivals, wouldRio be keen to sell down its stake if it believed thermal coal wasgoing to be a top performer in coming years?Certainly thermal coal has been a poor performer in recentyears, with the benchmark spot price at Australia's Newcastleport, at $87.01 a tonne, some 36 percent lower than the post-2008 recession peak of $136.30 reached in J anuary 2011.

The price decline has come even as China and India import re-cord amounts of the fuel and can mainly be attributed to a surgein exports from the United States and increasing supply fromtraditional producers such as Indonesia.CHINA MODERATINGIt would appear that Rio is taking a view that thermal coal isn't

likely to be a strong performer over the longer term, which maybe a reflection of the likelihood of slowing demand growth inChina as its economic growth matures and pressure mounts forcleaner-burning fuels to combat pollution.

The potential sale of the majority stake in the Northparkes cop-per mine in Australia is probably more a reflection of that opera-tion's high costs than the overall outlook for the copper market,although even here it's becoming apparent that the global bal-ance is shifting to surplus after years of deficit.Again, costs and strategic fit are probably behind the plan todivest Rio's 59-percent stake in Iron Ore Company of Canada,given Rio's overall dependence on the steel-making ingredient.Last year about 90 percent of Rio's earnings came from the ironore operations centred in Western Australia state, and much ofthe rest from copper in Chile and the United States.

The trick in both iron ore and copper is to be the lowest costproducer around, as both these commodities may suffer struc-



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ANALYSIS AND INSIGHT (continued)

tural price declines in the next few years as supply increases ata time when China's demand growth is moderating.

This is why Rio, in common with rivals such as BHP Billiton, isfocusing on cutting costs, capex and selling the high-cost opera-tions.

The company wants to reap $5 billion in costs savings and asset

sales could realise more than $10 billion.But the difficulty is going to be translating planned asset salesinto reality, as shown by the fact that the 13 aluminium assetshived off for sale under the Pacific Aluminium unit are still lan-guishing unsold after more than a year on the market.It would seem that commodity assets have gone from the mar-ket's darling during the boom years of the 2000s prior to the2008 financial crisis to the runt of the investment litter.It will be fascinating to see if any investor is brave enough totake a contrarian plunge on the assets up for sale.After all, the big miners have shown that they generally time thebuying of assets wrong, shelling out top dollar just as things areabout to turn, as shown by Rio's $38 billion purchase of Alcan in2007.It's many of these Alcan assets that now can't find a buyer andare in danger of being shut down.In the absence of contrarian commodity investors, it's likely thatRio will find selling assets an extremely slow and frustrating ex-perience, and one unlikely to yield the anticipated returns.

(Clyde Russell is a Reuters market analyst. The views ex-pressed are his own.)

Cyprus is edging towards euro exitBy Hugo DixonCyprus is no longer centre stage. Nicosia has agreed a 10 bil-lion euro bailout deal with its euro zone partners and the Interna-tional Monetary Fund. A visible bank run has been averted bystringent capital controls. International markets, which only eversuffered a mild bout of jitters, have calmed down.

But it would be foolish to forget about Cyprus. The small Medi-terranean island is edging towards euro exit. Quitting the singlecurrency would devastate wealth, fuel inflation, lead to defaultand leave Cyprus friendless in a troubled neighbourhood. Evenso, the longer capital controls continue, the louder the voicescalling for bringing back the Cyprus pound will grow.President Nicos Anastasiades is against Cyprus leaving theeuro. But the main opposition communist party wants to pull out.A smaller opposition group wants to stay in the euro but kick outthe troika the European Commission, the European CentralBank and the IMF. The countrys influential archbishop is alsocritical of the troika.Anastasiades can hold the line for now. After all, he has justbeen elected and the constitution gives him huge power. Whats

more, there are strong arguments for staying inside the singlecurrency not least the fact that, otherwise, it would lose the 10billion euros (or nearly 60 percent of GDP) of bailout money.If Nicosia brought back the Cyprus pound, it would plummet invalue. Nobody knows how much, but economists guess it mightbe up to 50 percent. Cypriots are complaining at the massivehaircuts suffered by big depositors in their two largest banks:Bank of Cyprus and Laiki. Such a massive devaluation wouldsavage the wealth of all other depositors.Meanwhile, devaluation would fuel inflation. Cyprus is a smallopen economy. All the oil is imported. Over 80 percent of thetextiles, chemicals, electronics, machinery and automotive vehi-cles are imported too, according to Alexander Apostolides, alecturer in economics at the University of Cyprus.Cyprus also relies on cheap immigrant labour in its agriculturaland tourism industries. Following a devaluation, their cost inlocal currency would rise. All this would mean that any gain in

competitiveness would be eroded.The islands economy would suffer a further shock because it isrunning a current account deficit of somewhere around 5 percentof GDP. Given that Cyprus has limited access to hard currencyreserves, this deficit would have to vanish overnight. Importswould slump. But so would domestic production, given its reli-

ance on imports.In such a scenario, Nicosia would not be able to avoid defaultingon its debts. Following a 50 percent devaluation, these would bedouble their current value when expressed in local currency. Thedebts come in two forms: the governments own 15 billion eurosof borrowings; and the central banks 10 billion euro emergencyliquidity assistance (ELA) to the banks.Default might seem an attractive option because Nicosia wouldsuddenly shrug off a vast debt load. But it wouldnt be that sim-ple. It would face a slew of lawsuits. Whats more, if the centralbank defaulted on its provision of ELA, the ECB would take thehit. The euro zone would not be happy and would, at minimum,insist on some sort of staged repayment plan.Cyprus could, of course, refuse to pay point blank. But it is notArgentina. Its small size makes it vulnerable to being pushedaround. If it tried to act tough with its euro zone partners, theywould probably play hardball in return. They might even find away to kick Cyprus out of the European Union.Exit from the EU would be another blow for Cyprus. Its best trad-ing opportunities are with the bloc. Most of the rest of theneighbourhood - such as Syria and Egypt - is not in great shape.And Turkey is off bounds until and unless some way can befound of resolving the dispute between Nicosia and Ankara overthe latters occupation of the northern part of the island.Cyprus will also struggle to exploit its offshore natural gas re-serves if it quits the EU. Turkey, which is already trying to stop it,would find it easier to get its way if Nicosia was friendless.Apart from all this, the country would have to decide how to runmonetary policy.

A responsible government would want to contain inflation byeither linking the Cyprus pound to another currency, such assterling, or running a tight but independent monetary policy. Ineither case, Nicosia would have to keep interest rates high andcurb its budget deficit. It might also need to maintain capital con-trols.Such an austerity programme would be worse than that de-manded by the troika. It would then be hard to avoid the tempta-tion to print money. But that way lies hyperinflation.So quitting the euro would not be a good choice. But staying isnot a great one either. GDP could plunge around 20 percentover the next two years, according to the latest guesstimates.And the longer capital controls are in place, the more the Cypriotpeople will feel they are not in the single currency anyway - as a

euro in Cyprus is not equal to one in the rest of the world.The troika should help lift the controls as soon as possible. Oth-erwise, Cyprus may well quit the euro and, small though it is,that could destabilise the zone.CONTEXT NEWS"What was wrong with the Cyprus economy doesnt stop beingwrong if Cyprus is outside the euro area," Mario Draghi, Euro-pean Central Bank president, said last week."The fiscal budget consolidation and the restructuring of thebanking system would be needed anyway, whether Cyprus is"in" or "out". Being "out" doesnt mean the country avoids theneed for action, but exiting entails many risks, big risks. A coun-try would find itself having to pursue the needed reforms in amuch more difficult environment outside."

(Hugo Dixon is Editor-at-Large, Reuters News. The opinionsexpressed are his own.)



8/9

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Company Name Action

Best BuyBernstein raised target price to $23 from $16 on bullish sentiments for the companys stock following better-than-expectedfourth-quarter results and increased confidence in the new management team's plans.

J ohnson & J ohnsonJ P Morgan cut rating to neutral from overweight, says the company is facing a messy first quarter and a likely downwardrevision to 2013 outlook.

L-3 communications J P Morgan cut rating to underweight from neutral and cut price target to $72 from $80, says the companys bears risk fromsequestration due to its relatively shorter-cycle operations and higher financial leverage.

RadwareNeedham cut rating to hold from buy after the company missed first-quarter revenue outlook due to slow re-ordering fromexisting customers in Europe.

U.S. restaurantsJ efferies raised target price on Starbucks to $66 from $60 and raised target on Yum Brands to $65 from $60 citing tangiblesame-store-sales drivers, real cost-cutting opportunities and strong brand propositions.

ANALYSTS RECOMMENDATIONS

StarMine SmartEstimatespredict future earnings more accurately than consensus (or mean) estimates by putting more weight on the recent forecasts of StarMine's top-

rated analysts. StarMine is a subsidiary of Thomson Reuters. The predicted surprise is the difference between the SmartEstimate and consensus. When a predicted surpriseis 2 percent or more, history shows that you can anticipate an earnings surprise in the same direction with an accuracy rate of 70 percent.

Company Smart Estimate Predicted Surprises Market Cap. Industry

Tesla Motors $0.05 62.59% $4,738 Automobiles

Partnerre $2.57 15.05% $5,323 Insurance

Arch Capital Group $1.04 12.71% $6,869 Insurance

Brf-Brasil Foods $0.19 12.60% $19,543 Food Products

Xl Group $0.70 12.42% $9,071 Insurance

Hanesbrands $0.47 11.03% $4,605 Textiles Apparel & Luxury Goods

Onyx Pharmaceuticals -$0.44 10.90% $6,455 Biotechnology

Pultegroup $0.16 10.10% $7,413 Household Durables

Marathon Petroleum $2.20 9.24% $27,252 Oil, Gas & Consumable Fuels

Everest Re Group $4.37 8.84% $7,636 Insurance

Imperial Oil $0.90 8.61% $33,436 Oil, Gas & Consumable Fuels

Phillips 66 $1.82 7.11% $38,642 Oil, Gas & Consumable Fuels

Chicago Bridge & Iron $0.81 5.03% $6,252 Construction & Engineering

Blackstone Group $0.55 4.33% $22,314 Capital Markets

Sandisk $0.80 3.82% $13,244 Computers & Peripherals

Markel $5.42 3.72% $4,908 InsuranceChubb $1.77 3.66% $22,838 Insurance

Kraft Foods Group $0.67 3.60% $30,437 Food Products

Linkedin $0.32 3.55% $18,841 Internet Software & Services

Allstate $1.35 3.45% $23,548 Insurance

Travelers Cos $2.04 3.27% $31,903 Insurance

Westlake Chemical $1.28 3.11% $5,748 Chemicals

Alleghany Corporation $7.13 2.58% $6,414 Insurance

CVR Refining $1.63 2.30% $4,635 Oil, Gas & Consumable Fuels

Continental Resources $1.14 2.10% $15,064 Oil, Gas & Consumable Fuels

PREDICTED RESULTS SURPRISES FROM STARMINE


9/9

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The Day Ahead - North American Edition is compiled by Naveen Mutnal, Benny Thomas and Chandrashekhar Modi in Bangalore; Franklin Paul and Meredith Mazzilli inNew York.

THE DAY AHEAD - North American Edition is produced by Reuters News

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KEY RESULTS vs. THOMSON REUTERS I/B/E/S ESTIMATES

Company Name Quarter EPS Estimates Year Ago Rev Estimates (mln)

No major companies are scheduled to report.

** Includes companies on S&P 500 index. Estimates may be updated or revised.

the day ahead - april 9th 2013

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