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IBERIAN DAILY 28 AUGUST (ANÁLISIS BANCO SABADELL)

NEWS SUMMARY: GAS SECTOR, TELEFÓNICA.

MARKETS YESTERDAY AND TODAY

Market rally continues
Stock markets rallied somewhat yesterday awaiting news from the political front. Within the Euro STOXX, defensive sectors such as Consumer Goods and Utilities saw the biggest gains, while financial sectors such as Financial Services, Insurance and Banks were the only ones that fell. On the macro side, in Germany, the second reading of the 2Q’19 GDP confirmed the stagnation of activity levels. From the ECB, L. de Guindos stated once again that the monetary policy was conditional on the evolution of indicators, although he revealed that rates will remain low for quite a long time. In Italy, talks between the 5-Star Movement and the Democratic Party to form a coalition government were complicated due to a row over leadership, but the two parties continue to negotiate, with today as a deadline, when the President would have to decide whether he calls for a new election or not . In the US, the Conference Board consumer confidence fell less than expected despite the S&P500’s drop in August, while the Richmond manufacturing index for August improved more than expected, returning to positive territory. In China, a plan to support the auto sector, with subsidies for the purchase of new energy vehicles and removing purchase restriction, was leaked to the press.
What we expect for today
Stock markets would see a slightly bullish opening, with a lack of catalysts.
Currently, S&P futures are up +0.31% (the S&P 500 closed down -0.32% vs. its price at the closing bell in Europe). Volatility in the US rose (VIX 20.31%). The Asian markets that are open are rising (Hong Kong +0.07% and Japan +0.19%).
Today we will learn: in the Euro zone, July’s M3. In debt auctions: the Italian and Greek Treasuries will issue 6M T-bills, whereas the German Treasury will issue 10Y bonds (up to € 3 Bn).


COMPANY NEWS

GAS SECTOR. Pressure from other sectors.
According to the press, the oil sector claims additional compensation cuts for Naturgy and Enagás. Specifically, AOP (Repsol, Cepsa and BP) and another dozen associations (textile, steel, chemical, food, glass and ceramics sectors, which represents 80% of the industrial gas consumption) have submitted allegations to the proposal on CNMC and the referred to the remuneration of regulated gas assets claiming an additional cut of 1,500 M euros (and ~ 26% additional to what proposed by CNMC and July) to gain competitiveness. One of the ways to do this would be to apply the 100% CNMC cuts since 2021 and not progressively 2021-2025 as proposed by CNMC.
News with a negative slant but of little impact, as this is only allegations. We believe that uncertainty will continue until the circular letters are officially approved. We recall that the CNMC has always stated that the door is open to the content of the circular letters being softened during the public information period. In any case, we maintain a prudent stance, taking as a reference the most prudent scenario (that is, assuming 100% of the cuts announced in these circular letters) until it is stated otherwise.
If there is any reaction, which we see unlikely, ENAG could be the most affected. Since the CNMC proposal was known in early July, ENAG has fallen -14% (-7% vs IBEX) and at these levels it could fall an additional -4% to contemplate 100% of CNMC cuts in estimates. The case of NTGY is different, it has fallen less than the market (-2% vs. -5% IBEX) and is discounting 100% of the cuts. Only in a scenario of 50% cuts could we begin to see an interesting potential in ENAG (+ 9%) while in NTGY, to look for interesting potential we would have to assume 0% cuts.
We do not expect impact on REE, ELE and IBE since it does not affect them at the sector (gas) level and although they all beat the index since the cuts were known (+ 2%, + 7% and + 13% respectively) . Specifically, the price of the first two (REE and ELE) is discounting that CNMC could reduce the cuts by 50% (assuming 100% would imply corrections of -7% in both) and in the case of IBE its contribution assumes 100% of the cuts. The situation does not surprise us because we believe that in electric regulated assets there is room for optimism and we rely on a statement by CNMC in the presentation of the circulars: “the cut in electricity is lower than in gas because the first will continue to grow significantly in investment against gas, where significant levels of investment are not anticipated ”