Very little reason for the US market to rally last week. But rally it did.

US Equities

The April Institute for Supply Management's purchasing manager's survey was expected to come in at 47, but instead disappointed with a reading of 45.4. Any figure below 50 is generally considered to signal a contraction in the manufacturing sector.

Initial jobless claims rose to 448,000 exceeding consensus' estimate by 58,000. The first quarter productivity figure of 1.6% came in below expectations of 2%. According to our Chief strategist

On headline basis, 48,000 job losses in April were at the low end of expectations of job losses. However, exclude 32000 jobs added by governments, the private sector has shed 80,000 jobs. Job losses in February and March, which were estimated earlier at 396,000, are now seen at 477000. Together with 48,000 jobs lost in April, more than half a million jobs have been shed in the last three months. We have always maintained that the employment report is a lagging indicator for the last economic cycle but a leading indicator for the next one. If firms expect any slowdown to be fleeting, they would not lay off workers in droves (Source: CSPB regional Head of Investment Consulting)

We believe that there is very little to shout about on the fundamental front. Companies are still on the whole overvalued and analysts' forecasts are not coming down as promptly as we would like.

April's 16.5 million U.S. light vehicle sales were weak given the pricing environment. 0%, $500 "bonus cash", $1000 "friends & family" discounts, and "$5 per day leases" were not enough to overcome tired consumers, as well as their realization that such discounts are permanent, rather than occasional. Sales in April were down 6.3% y-o-y. The bright spot came from sales of light trucks, which were flat y-o-y, and light truck share at 53.7% of total sales, up from 52.2% m-o-m. However, Big Three (Ford Motor Co., $10.04, CSFB: Neutral; General Motors Corp., $35.80, CSFB: Neutral; and DaimlerChrysler AG, €29.08, CSFB: Outperform) inventory is 85 days, 90 days in truck and 76 days in car, both 24% above normal (source: Goldman Sachs). Therefore, higher incentives or production cuts could occur the following weeks, adding pressure on US carmakers. GM's sales were down 9% y-o-y with a 27.8% share, down 0.8% y-o-y, while F's sales declined 7% y-o-y with a 19.8% share, down 0.2% y-o-y. Hence, we do not recommend investing in neither GM nor Ford for the moment, preferring auto components suppliers, like Johnson Controls Inc. (JCI, $83.44, CSFB: Not rated). We believe JCI diversified customers worldwide would partly offset the current weak U.S. car industry.

With the war on Iraq being officially over, what would happen with U.S. defence stocks in the next months? Several events would drive U.S. defence contractors. Among them, there are:

- Individual military services are doing their own after-action assessments of the Iraq war, and these studies could be reported in July-September (source: Merrill Lynch), and influence the FY2005 U.S. Department of Defence (DoD) budget, which will be drawn in autumn.

- U.S. military is currently under a debate related to its transformation into a more "technology-oriented" army.

- In our view, the federal budget deficit would be the major issue for defence sector. If the economy does not show clear signs of recovery, and budget deficit increases, defence spending would probably be reduced.

- Budget over-run would be another key factor for new weapons programs, and would weigh on stock prices.

- Finally, in autumn, the Democratic candidates for presidential election campaign should be known, including his stance on the national security.

With a myriad of uncertainties, we recommend investing in defence companies involved in several major weapons programs, in order to diversify the risk. Therefore, we remain positive on Northrop Grumman Corp. ($89.83, NOC, CSFB: Outperform) due to its wide range of competencies, being used in several programs.

Exxon Mobil (XOM, $36.04, CSFB: Neutral) released 1Q03 EPS from continuing operations of $0.71 versus consensus of $0.70. Those looking for a sign that the XOM earnings machine is slowing down will not find it in this set of results. There are some areas of concern (US downstream) and some of the E&P outperformance is due to unusual factors like cold winter weather. Still, it is hard to argue with these numbers; especially given less convincing results from other integrateds so far.

European Equities

• The DJ EUR Stoxx 50 closed the week 2.2% higher at 2321.90
• SAP - take profit, up 23% since beginning of the year
• Where are we standing in the reporting season?

It was a short week due to the public holiday on 1 May in most European countries, but nevertheless it was filled with earnings reports.
In the chemical sector the focus was on BASF (BAS GY; EUR 40.53), which reported results roughly in line with expectations, but their tone remained cautious for the remainder of the year. In the telecom equipment sector, all eyes were on Ericsson (ERICB SS; SEK 7.8) and Alcatel (CGE FP; EUR 7.43). Ericsson jumped 17% after reporting its 10th successive quarterly loss, lowering its guidance (from a 10% decline to a greater than 10% decline in the telecom equipment sector) and warning of a weaker market. Although the company seems to be on the right track with regards to restructuring, we remain cautious as we expect the top-line to show continued weakness. In the oil sector, BP (BP/ LN; GBP 4.0525) reported profits above consensus, however the key business of exploration and production missed forecast. Production volume growth came in at 3.5% yoy. We continue to prefer ENI (ENI IM; EUR 12.878) and TotalFina (FP FP; EUR 121.5) as both of them show stronger volume growth. Around 10 days ago, CSFB upgraded TotalFina from neutral to outperform. The stock underperformed the sector over the last three months on investor concerns that it may not meet its 05 ROACE targets. According to CSFB's study, Total needs an annual profit improvement of EUR 1.1-1.2bn, which is in line with its target, and lower than the group's historical performance to meet this target. Total aims to increase output by 5% p.a. to 2005, this should provide 35% of the profit improvement required and is backed by a diverse project portfolio, a good reserve replacement rate and a strong track record both on volume and costs.

CSFB sees 19% upside potential to their fair value at EUR 145 compared with the European sector of 10% and 7% for the majors. TotalFina will report tomorrow 6 May.

Given our positive view on the energy sector and our preference for dividend yield, we continue to like the stock. The stock has a dividend yield of 3.6%.

Instead of buying the stock outright, an alternative would be to buy an ELN with a 90% floor for 60 days, which yields around 12%, indicative strike EUR 109.35, indicative breakeven EUR 107.14.

Based on results released by Stora Enso's (STERV FH; EUR 9.79) competitor UPM Kymmene (UPM1V FH; EUR 13.20), global paper demand is showing signs of recovery with prices stabilising in Europe and increasing in North America. Stora Enso confirmed these trends by reporting a pre tax profit of EUR 130m in line with consensus. Early cycle grade of fine paper had a particularly strong quarter and the management gave a brighter picture for North America with signs of advertising picking up after the war and materialising price increases.
This is exactly what we were waiting for and given Stora Enso's relatively larger exposure to early cycle grades and a larger domestic exposure in North America, the company should see the benefits earlier and in a greater magnitude than its competitor. Rising demand and stable to rising prices should lead to stronger results in the second half. In addition the stock trades on low valuation in both sector and historical terms, has high operational gearing and an ongoing share buy-back program. We maintain our buy.

JC Decaux (DEC FP; EUR 8.65) released 1Q sales slightly lower than expected (EUR 352.9m vs EUR 358.6m in the 1Q02) but were in line with company guidance given earlier on. The weaker USD and GBP against the EUR impacted the results adversely. Organic growth was driven by strong performance in the billboard and transport advertising business. Given the current geopolitical environment, the strong rebound in its transport advertising business was especially encouraging. On the other hand, street furniture sales were on the lower side declining 3.7%, but still in line with management's earlier guidance. Although the results were slightly lower than expected we believe the company with its unique business model has the potential to outperform once the economic environment turns more positive.

Aventis (AVE FP; EUR 46.50) released a 13% higher 1Q profit on the back of reduced SG&A and a lower tax rate. On the other hand, sales were slightly disappointing with exchange rates having a negative 12% impact. Nevertheless, EPS came in at EUR 0.61, exceeding expectations. The two main products, Allegra and Lovenox, are expected to accelerate in the US over the reminder of the year and management also reiterated its outlook for the full year expecting 2003 sales to increase 7-9% and EPS to increase 14-18%.

We reiterate our buy rating on the back of low valuations (around 30% discount to global peer group) and our belief that the company can deliver on its promises.

We took profit on SAP (SAP GY; EUR 96.00) last Friday (up 23% since the beginning of the year). Please note that we continue to like the company and especially its business model from a fundamental point of view. The technology sector shows the best YTD performance and given the still weak economic environment, we believe the sector is due for a correction. In addition, the share price ran nicely on the back of its 1Q earnings report and we believe the stock's upside is limited. The stock is trading at 26.5x and 23.9x PER 2003 and 2004 estimates, which is near the top of its trading range. Hence, we prefer to protect our profits and wait for lower levels to re-enter.

Where do we stand after another week of earnings? Most companies have managed so far to meet expectations. However these were often revised downward when many companies guided lower ahead of the earnings season. In addition, let's not forget the profit warning from Volkswagen (VOW GY; EUR 30.62) and Deutsche Bank (DBK GY; EUR 47.05) two weeks ago. Positive surprises were often the result of cost cutting and few companies managed to post show better than expected top-line growth. The top-line was also often impacted by adverse currency effect due to the stronger Euro.

We believe that for the rebound to show further sustainability we need to see a pick-up in economic growth. The ECB is meeting this week on Thursday. However the Council is likely to keep the rates on hold. We believe they would like to get more information on where the European economies stand and are also waiting for inflation to come down below the 2% target. Given the lower oil price, we could expect inflation to finally reach the point whereby the ECB would be inclined to cut rates in June.