ECB cut by the expected 50bps - market reaction was moderate (page 1 of 3)

Reasons for the Council's decision were 'the evidence that inflationary pressures are easing somewhat and downside risks to economic growth have not vanished'

US Markets
• Recommendation update

Several news items, which we believe will have a direct impact on Boeing Co. (BA, $33.40, CSFB: Outperform), were released last week. Firstly, Boeing's union for engineers and technical workers approved a three-year contract. The contract includes annual wage increases of 4% and requires them to pay more for certain health insurance plans. With this agreement, we believe the company will be able to focus on its businesses. Secondly, Air Force officials are reviewing all major weapons and electronics programs after learning of a $690 million overrun on the Lockheed Martin Corp. F/A-22 fighter. This could negatively impact Boeing Co. in the near-term. BA is one of the top F/A-22 subcontractors, providing parts of the fuselage and wings, and could make the news with other military programs. Finally, UAL Corp (UAL, $0.93, CSFB: Underperform), the parent company of United Airlines, failed to obtain the $1.8 billion loan guarantee from the Air Transportation Stabilisation Board. UAL's likely bankruptcy should not affect BA's fundamentals. The company does not see further write-downs on aircraft leases to UAL Corp. In October, Boeing took a $158 million charge to write down the value of aircraft leased to airlines, including UAL.

Furthermore, according to BA's CEO, United Airlines would keep flying even if it files for Chapter 11. Boeing is still expecting to deliver 275 to 285 (vs. 380 expected in 2002) aircraft next year, and has only one aircraft planned for UAL. Furthermore, through Boeing Capital Corp., the company has a $1.267 billion ($1.59 per share) exposure to UAL. This represents 11.4% of Boeing Capital's portfolio, financing about 10 777-aircraft by UAL. The risk is if UAL defaults on finance obligations, Boeing will have to seek out new customers. However, demand for 777 remains, and Boeing should not have to write down the entire amount. We maintain our BUY rating on Boeing for the long-term.

Citigroup Inc. (C, $37.56, CSFB: Outperform) would also be impacted by the potential UAL bankruptcy. Citigroup and other banks, including JP Morgan Chase & Co. (JPM, $24.43, CSFB: Outperform), have lent a total of $2 billion to the airline company. According to people familiar with the matter, they will most likely seek court protection. On a fundamental basis, we do not believe that a UAL bankruptcy would have a strong impact on Citigroup. The financial institution is well diversified and should be able to digest this potential loss. However we think the UAL affair could put pressure on Citigroup's stock price in the near-term. In any case, profit taking after a 41% rise since October 10th is not unexpected. Hence we maintain our HOLD rating on Citigroup.

The gold spot price rallied over the week, peaking at $329 an ounce last Friday. It is not the demand for physical gold that drives the price, as global demand is 12% lower than last year, but it is the fact that mining companies continue to reduce their hedging programs thus reducing the selling pressure on gold.

Gold being an attractive asset class has also served to move prices up. The current low interest rate environment in the US, global economic uncertainties and several political issues support the attractiveness of gold as a way to diversify one's portfolio.