(GS) Strategy : Lower growth, inflation, and Euro: What this means for our view

Goldman Sachs Global Macro Research
Strategy Espresso : Lower growth, inflation, and Euro: What this means for our view on European equities


Revising down our earnings forecast
Following the downgrade to our Euro area GDP forecasts (see European Views: Forecast update: Incorporating downside news to activity and inflation, October 3, 2014) we revise down our earnings estimates. While the European market offers international exposure, close to half of revenue is still derived from the Euro area and therefore this downgrade takes down the aggregated level of growth to which European companies are exposed. The table below highlights, based on our forecasts, the growth in each region as well as the aggregate based on sales exposure. The downgrade to overall growth for 2015 is about 30 bp.

As a result of this lower growth environment, we revise down our estimate of earnings growth for this year to 5% (from 6%) and for next year to 8% (from 12%). We leave unchanged our 2016 and 2017 growth estimates. This downgrade is in-line with our estimated sensitivity of earnings to GDP growth of about 10x (see GOAL Strategy Paper No 12: Profit Pathology, April 4, 2014). These numbers are below I/B/E/S consensus growth of 6% for this year and 14% for next year. Overall, we are 6% below consensus estimates on end-2015 numbers and therefore expect a continuation of negative, but small, earnings revisions at the market level.
The table below details our sales and earnings forecasts. Three points are worth highlighting
* We continue to forecast a low and slow earnings recovery with growth below 10% in the next three years. This is unusual after a recession as earnings tend to expand rapidly as margins recover. This is driven by a combination of low economic recovery for the Euro area and a reasonably high starting level for net income margins.
* For the next few years we have over half of non-financials earnings growth coming from top-line growth rather than margins which is unusual at that point in the economic cycle. This is driven by a combination of limited acceleration in economic growth (which implies only small operating leverage) and a lower Euro which tends to be more favourable to sales than earnings.
* As a result, our EPS forecast for 2017 is still below the level reached in 2007, the previous peak, pointing to close to a lost decade for European profit even in nominal terms. The margin is also substantially below the 2007 level.

In terms of sector breakdown, we continue to expect higher growth in financials than non-financials given the depressed level of earnings for the banks sector and ongoing normalization in loan loss provision. More precisely, we expect financials earnings growth to be close to half of overall earnings growth for the market (44%). While financials help lift the overall earnings growth for the market, it also highlights some vulnerability of our earnings outlook given the large negative revisions we have seen in financials earnings over the last three years.
Lower targets but still good returns
Considering our new earnings numbers, we lower our targets for the STOXX Europe 600 index to 345, 355 and 375 for 3, 6 and 12 months respectively (compared to 365, 375 and 390 previously). Our revised targets point to a price return of about 13% from the current level and a small expansion in the forward multiple from 13.5x currently to 14.7x in 12 months' time. This is driven by a moderation in the equity risk premium which is only partially offset by a rising, but still low, bond yield.
On these numbers, the pan-European market would be 6% below its 2007 peak and 20% below its peak in USD (taking into account our 1.20 12-month EUR/$ forecasts). This offers a stark contrast with the US where the S&P 500 is 25% above the 2007 level.

We also update our forecasts for the FTSE 100 and the Eurostoxx 50. We expect small outperformance of Eurostoxx 50 and small underperformance of FTSE 100. The table below summarizes our new forecasts.

In light of the economic changes we have also made some changes to our thematic and sector views:
What we are changing:
* Take off our long recommendation on the DAX; the German market is inexpensive and operationally geared to rising economic growth, also the index overall is a commodity-consumer and should benefit from falling oil and metals prices and from the weaker Euro given its dependence on exports. But the weakness in growth momentum and inflation is more than offsetting this and the index is down 4.2% versus the market since we initiated a long in September 2013. Furthermore, our Economists' downgrades to German growth have been deeper than for the rest of Europe with sequential growth only returning to 0.4% in the middle of 2015 on their new estimates.

* Remove our long on the DM growth basket (GSSTDMGR): this is up 2.0% versus the market since we recommended it in July 2013. The performance was strong until March of this year; since then the weaker demand profile, especially in Europe, and the lack of other catalysts (further narrowing of spreads in Europe) has pushed performance down. We would look to re-enter this trade when growth momentum shows signs of turning. The basket trades on 11.7x forward earnings, a 12% discount to the market. However on current analyst estimates it trades on twice the average EPS growth in 2015.
* We take off some of our sub-sector basket recommendations: We remove our long recommendation on Staffers (GSSBSTAF) given their gearing to European domestic growth; we also remove our long Luxury goods vs. short Food producers recommendation. Downgrades to EM growth and geo-political concerns are likely to weigh on the luxury companies.
What we are keeping:
* Structural underweights in sectors with EM industrial exposure. We remain Underweight Basic Resources where we think a combination of reduced global demand growth and excess supply in most metals will continue to push down metals prices and negatively impact earnings, cash flows and ultimately the ability to pay dividends. We remain Underweight Oil Services where again we see a lack of capex spending by the oil majors and falling oil prices as ongoing negatives to earnings.
* We remain Underweight Retail and Telecoms which we see as structurally challenged; both suffer from a deflationary environment and a lack of obvious ways out for the incumbent players.
* Strong UK domestic growth combined with unusually mild inflation; we continue to like the FTSE 250 vs. FTSE 100. The FTSE 100 is more exposed to weaker growth in EM and some of the structural problems mentioned above. Also the UK economy is one of the few where we remain confident in our strong growth forecasts, inflationary pressures also remain subdued with sub-par wage growth and falling commodity prices. We think the MPC will raise rates in early 2015 but our Economists foresee a shallow profile for rate increases. Against this favourable macro backdrop, the FTSE 250 is only at a 10% premium to the FTSE 100. On this basis we also continue to like the UK Homebuilders which benefit from both healthy supply dynamics in housing and more recently have started returning capital to shareholders.
* Exposure to greater easing by the ECB; we remain Overweight Banks: support from the ECB by expanding its balance sheet and offering continued cheap liquidity to banks, as well as structural changes which should benefit the sector as the ECB takes over as single supervisor, are ongoing supports in our view. In addition we retain our long on the Financial Leverage basket (GSSTFNLV): this basket should benefit as financial conditions ease and provided that growth in Europe does not turn outright negative.
* Companies with a high yield combined with secure balance sheets and the ability to grow dividends should also remain an attractive combination for investors - arguably even more so in a lower growth environment in which bonds yields have again been pushed down. Companies continue to have excess cash on their balance sheets, making this slowdown in growth somewhat unique relative to previous cycles and we believe paying dividends is one of the key ways in which cash will be used - indeed with growth rates slowing slightly one could argue this case even more strongly. We continue to recommend our high DY Plus Growth basket (GSSTHIDY).

(Citi) Telecom Prospects 3Q14 : Investing for a Better Outlook

* Underlying improvement expected to continue — We expect 3Q14 results in
European mobile to build on the underlying improvement in service revenue decline
seen in 2Q (despite the adverse timing of Easter), with MTR phasing assisting 3Q
growth rate by another c.90bp qoq. Deal activity remains high. Fixed-line assets are
still in demand, as demonstrated by an offer for Get in Norway. Closing of the O2/E+
deal in Germany could result in similar deal attempts in Italy, among others.
Organically we expect continued focus on 4G and fibre connections.

* Investment still rising, All-IP savings targets to see higher profile — We expect
continued upward pressure on capex with more operators stepping up investment in
4G and particularly local fibre broadband. We also expect savings from All-IP
migration to see higher profile following Telia’s (Buy) example. Elisa (Buy) is well
underway with its All-IP migration as is DT (Buy) – we expect DT to feature it at its
December investor event, which we see as a positive catalyst.

* Vodafone to trade better revenue trend for lower margin — We expect
Vodafone to show some further underlying improvement in its service revenue
decline at -2.8% organically vs -4.2% last quarter. We expect FY 1H15 EBITDA to
be weak at £5.7bn but within the full-year guidance, albeit we anticipate some
trimming of the higher estimates among consensus and revise our FY15E EBITDA
forecast down slightly due to revising the accounting policy at Ono.

* Scandinavia mainly benign — In 3Q14, we expect Sweden, Norway and Finland
to have seen mainly benign competition with the Danish mobile market much
tougher. Spain we still expect to be weak and affected by migration to SIM-only from
higher ARPU subsidised plans. We expect Italy fixed line to be weak but we think
mobile will improve beyond the 200bp or so benefit from the phasing of MTRs

* Competitive pressures in B2B and EM — We expect B2B to be under pressure
across the board as companies continue to optimise purchasing. We also expect
greater profile for new entrants in Kazakhstan and Nepal, which are set to affect
Tele2 and Telia with Telenor facing aggressive competition in Thailand and Pakistan
and potentially seeing more price competition on data in India from 3G players.

* Changes Summary — We make minor estimate changes ahead of 3Q results,
however no ratings or target price changes are made.

>>> What to look at today - 8th of October 2014

US Market closed on the lows, Small Caps leaded the move, Disapp. Ind. Prod. numbers in Germany, biggest dropin 6y, after that IMF lowered its 2015 Global growth from 4% to 3,8%. Energy was down 1,3% with crude still trading lower...Industrials was the worst performers -2,4%, Utilities was one of best perf -0,1%...SOADA -21,9% after guiding down, AGCO -10,6% after disapp. earning...VIX @ 17,20 +11,25%...Volumes were ahead of Average with 770mil shares...US After Hours YUM +0.8%, TILE -15.6%, MG -1.0%, LNDC -0.3% following earnings/guidance...In Japan, GPIF panel adviser Ito said 20-25% of assets should be dedicated to Japan stocks, forecasting the portfolio change announcement to come some time in December...In shanghai Investors cheered press speculation the PBoC could expand targeted rate cuts while shrugging the HSBC Services PMI sliding from last month's 17-month high. Nikkei -0.96% Hang Seng -0.82% Shanghai +0.34%

Eur$ 1.2634 S&P +0.06% EuroStoxx -0.75% FTSE -0.48% DAX -0.62% SMI -0.49%

Macro
- Fed's Dudley: Mid-2015 Lift-off Is `Reasonable View to Me'


Keep an eye on :
- AIR FP : Airbus Exploring Sale of Up to 10% of Dassault Aviation
- AIR FP : FAA Sees Safety Approval for Airbus A350 by End-October: Reuters
- AF FP : Air France-KLM Says Pilot Strike May Cut 2014 Ebitda by EU500m
- AREVA FP : Areva to Sell Assets Worth EU450m by End of 2016
- RCUS BB : Arseus 3Q Rev. Growth 34.1%; Keeps Rev., Profit Margin Targets
- BAMNB NA : Royal BAM to Cut About 650 Jobs, Mostly in Netherlands
- BARC LN : Barclays looking to sell some of its Italian branches
- BBVA SM : BBVA Proposes Insurance Alliance With Corte Ingles: Expansion
- BOL FP : Bollore Could Build Telecom Italia Stake to as Much as 20%: MF
- BN FP : Russia May Not Cut Subsidies on Raw Milk Production: Kommersant
- DBK GY : Deutsche Bank Said to Weigh $2b Sale of U.S. Real Estate Loans
- DTE GY : U.K.’s EE Said to Introduce TV Streaming on Set-Top Box: Sky
- DTE GY : Deutsche Telekom Stops Production of Encrypted Phone: NDR Info
- EDF FP : EU Plan to Approve U.K. Aid for Nuclear Plant Faces Opposition
- EOAN GY : EON Sees Rising Demand for Natgas Motor Fuel in Germany
- ESS PL : UnitedHealth Offers EU5/Shr for 51% of ES Saude
- EO FP : Faurecia to Cut 128 Jobs in Les Vosges, France, Echos Says
- GLEN LN : Glencore Only Likely to Pursue Rio If Nil Premium Deal: UBS
- GXI GY : Gerresheimer 3Q Adj. Ebitda, EPS Miss Ests.; Cuts 2014 Outlook
- GOLG NO : Knightsbridge Shipping, Golden Ocean to Merge
- ING NA : ING Plans to Repay Last Tranche State Aid This Yr, CEO Tells FD
- LG FP : Reportedly two construction materials industry groups are looking at Lafarge-Holcim assets valued at up to €7B
- NOVN VX : Novartis Says 3 Division Heads Leave After GSK, Eli Lilly Deals
- ORA FP : Orange in Talks With TF1, Canal+ to Rival Netflix, Figaro Says
- SAP GY : SAP Starts Job Freeze Until 2015 to Cut Costs: Boerse Online
- SCMN VX : Swisscom Works With UBS on Possible Fastweb Sale: Reuters
- TIT IM : Telecom Italia Brazil Unit May Boost Investment, Reuters Says
- TIT IM : Bollore Could Build Telecom Italia Stake to as Much as 20%: MF
- VIV FP : Vivendi looks to substantially increase stake in Telecom Italia 
- VOD LN : Vodafone said to still be interested in purchasing Fastweb in Italy

>>> Vivendi looks to substantially increase stake in Telecom Italia

Vivendi looks to substantially increase stake in Telecom Italia 

Vivendi, the listed French media group, is looking to increase its stake in Telecom Italia (TI) well beyond the 8.5% stake that it is acquiring off listed Spanish telco Telefonica, Italian language daily Milano Finanza reported. The report cited sources close to the dossier who said that Vivendi is looking to increase its stake in TI to 15%-20%. The report said that the holding would be considered strategic and long-term.

The report said that Vivendi would boost its stake by buying shares on the market rather than acquiring them from existing TI shareholders.

The report noted that Vivendi is acquiring the 8.5% stake in TI as part of a wider deal with Telefonica in which it will also sell Brazilian telco GVT to Telefonica. The report said that Vivendi is expected to take formal control of the TI stake in February 2015.

TI has a market cap of EUR 16.61bn.


Source Milano Finanza daily edition

>>> Brokers Upgrades & Downgrades - 8th of October 2014

>>> Up
*AEROPORTS DE PARIS RAISED TO EQUALWEIGHT AT MORGAN STANLEY
*AKBANK RAISED TO OVERWEIGHT VS UNDERWEIGHT AT JPMORGAN
*CAIRN ENERGY RAISED TO HOLD VS SELL AT SOCGEN
*DASSAULT SYSTEMES RAISED TO EQUALWEIGHT AT BARCLAYS
*DIXY GROUP RAISED TO BUY VS NEUTRAL AT GOLDMAN
*GARANTI RAISED TO NEUTRAL VS UNDERWEIGHT AT JPMORGAN
*GEA GROUP RAISED TO HOLD FROM SELL AT CLOSE BROTHERS; PT EU35
*MIGROS RAISED TO BUY VS NEUTRAL AT GOLDMAN
*MOESK RAISED TO HOLD FROM SELL AT DEUTSCHE BANK

>>> Down
*AFRICAN MINERALS CUT TO HOLD VS BUY AT JEFFERIES
*CLARIANT CUT TO NEUTRAL VS BUY AT GOLDMAN
*FLUGHAFEN ZURICH CUT TO EQUALWEIGHT AT MORGAN STANLEY
*GAS NATURAL CUT TO UNDERWEIGHT VS EQUALWEIGHT AT MORGAN STANLEY
*GKN CUT TO UNDERPERFORM VS BUY AT BOFAML
*KLOECKNER CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
*LONDON MINING CUT TO HOLD VS BUY AT JEFFERIES
*PAYPOINT CUT TO UNDERWEIGHT VS EQUALWEIGHT AT BARCLAYS
*PHARMSTANDARD CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
*SEVERSTAL CUT TO EQUALWEIGHT VS OVERWEIGHT AT MORGAN STANLEY
*SKF CUT TO HOLD AT DEUTSCHE BANK
*WORLD DUTY FREE CUT TO NEUTRAL VS BUY AT GOLDMAN

>>> PT Change


>>> Initiation
*ARM HOLDINGS RATED NEW OUTPERFORM AT NORTHLAND, PT $60
*LENTA RATED NEW BUY AT GOLDMAN
*PROSIEBENSAT.1 RATED NEW HOLD AT WARBURG, PT EU33
*R. STAHL RATED NEW BUY AT BERENBERG

>>> Call
>> Stock
*ACTELION REMOVED FROM UBS MOST PREFERRED LIST
*HIKMA ADDED TO UBS MOST PREFERRED LIST

>>> US After Hours

After Hours Summary: YUM +0.8%, TILE -15.6%, MG -1.0%, LNDC -0.3% following earnings/guidance

After Hours Gainers: Companies trading higher in after hours in reaction to earnings: YUM +0.8%

Companies trading higher in after hours in reaction to news: DRL +20.4% (disclosed the appointment of Nancy Reinhard as acting CFO), TST +5.0% (to acquire BoardEx for ~$21 mln), VRX +3.4% (co and Pershing Square intend to increase bid for Allergan (AGN) by $15 per share, AGN also higher by 2.2%), GTAT +3.3% (seeing reports that co's first bankruptcy hearing has been scheduled for Thursday), OXGN +2.2% (announced first patient enrolled in Phase 1b/2 Study of Fosbretabulin combined with Pazopanib in patients with advanced recurrent ovarian cancer), PAH +1.7% (Pershing square disclosed a 26.1% active stake)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings: TILE -15.6%, MG -1.0%, LNDC -0.3%

Companies trading lower in after hours in reaction to news: SAVE -3.2% (co announced announces revenue passenger miles in September 2014 increased 13.5% from prior year, load factor decreased 3.2 pts; co sees Q3 adjusted operating margin in lower half of previous guidance range)

Glencore-Rio Talk Pushes Industry to Evaluate Future: Real M&A

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Glencore-Rio Talk Pushes Industry to Evaluate Future: Real M&A 2014-10-07 22:57:39.198 GMT

(For a Real M&A column news alert: SALT REALMNA <GO>.)

By Jesse Riseborough, David Stringer and James Paton Oct. 8 (Bloomberg) -- The prospect of Glencore Plc buying Rio Tinto Group is sending reverberations through the mining industry that could prompt more deal talks. Combining Glencore and Rio, which both confirmed they held informal discussions in July, would create a $162 billion behemoth. That such a merger would even be attempted speaks to the pressure the industry is under to cut costs and increase shareholder value amid declining prices for commodities. A slump in iron ore gave Glencore a chance to go after a cheaper Rio and make it part of a diversified portfolio. With the deal now likely on hold for six months, Glencore could turn to other targets such as Fortescue Metals Group Ltd. Or Rio could pursue a defensive deal with a company such as Anglo American Plc, according to Sanford C. Bernstein & Co. “This is a hell of a thing they’re proposing,” Paul Gait, an analyst at Bernstein, said in a phone interview. In the past, “we have had that kind of one action precipitate a whole cascade of events that puts a number of other guys in play.” Glencore approached Rio in July about a merger, and Rio rejected the idea a month later. Rio Chairman Jan du Plessis says the $92 billion company is better off with its current strategy of cutting costs and returning cash to investors. Glencore said yesterday it’s no longer actively studying an offer for Rio, and under U.K. takeover rules it will now be barred from a renewed attempt for six months unless it obtains Rio’s board recommendation, a third party makes an offer for Rio or there are other material changes. A representative for Baar, Switzerland-based Glencore declined to comment beyond the company’s statement yesterday. Spokesmen for Rio and Anglo, both based in London, also declined to comment. A representative for Fortescue didn’t immediately respond to requests for comment.

Other Options

Rio isn’t Glencore’s only option. Fortescue, a $9.4 billion Australian iron ore producer, may provide another way for the world’s third-biggest miner to expand in the metal, according to Marc Elliott, an analyst at Investec in London. “Glencore likes deal flow and probably has got some other irons in the fire,” Elliott said in a phone interview. Fortescue is “certainly of the scale that would give interest to Glencore.” Other analysts have speculated Anglo could be more digestible for Glencore than Rio. The $31 billion company controls copper, coal, iron ore, nickel, diamond and platinum mines. Chief Executive Officer Mark Cutifani is open to takeover offers, the Wall Street Journal reported last month, citing an interview.

Not Ideal

Deals for those two companies have hurdles, though. Fortescue’s iron-ore business isn’t of the same caliber as Rio’s and Glencore probably wouldn’t want Anglo’s platinum and diamond businesses, said Jeff Largey, a London-based analyst at Macquarie Group Ltd. Glencore CEO Ivan Glasenberg last month scoffed at the idea he has his sights set on Anglo. That suggests Rio may be the best acquisition candidate for the company. The pursuit is probably not over, say Elliott of Investec and Gait of Bernstein. “It’s much easier for them to sort of step away from it and let speculation cool down for a bit,” Gait said. “The industrial logic and the strategic logic are compelling to the point of being overwhelming.”

Why Rio

For Glasenberg, Glencore’s dealmaking billionaire CEO and second-largest shareholder, the deal logic is simple. Buying Rio adds the world’s most profitable iron ore business. “What we know of Glencore is they like to acquire assets on the cheap, and Rio has a number of tier-one assets that would be of interest to Glencore,” Randal Jenneke, head of Australian equities at T. Rowe Price Group Inc., said by phone. This year’s iron-ore slump has made Rio a more attainable target. The company relies on the metal for almost 90 percent of its profit, and the stock has underperformed the 104-member Bloomberg World Mining Index this year. Its 13 percent slide through last week compares with a 6.4 percent gain for Glencore, which has a broader portfolio of metals including copper, coal, zinc and nickel. “A lot of these assets have been pretty beaten up, and iron ore prices are a big part of that, so asset values are looking more attractive than they have been,” Brenton Saunders, an analyst with BT Investment Management Ltd. in Sydney, which manages A$65 billion ($57 billion) including Rio shares, said by phone. “There are operational synergies to be had as well.”

Elephants in Bed

Still, Rio CEO Sam Walsh has said there are difficulties to a merger between his company and Glencore. “I’m just thinking of two elephants in a single bed, how do you actually make that work without one falling out?” he pondered in a December interview at the company’s London headquarters. The biggest challenges may be reaching an agreed-upon price and obtaining regulatory approval, analysts say. With about $6 billion of his personal wealth tied up in Glencore stock, Glasenberg tends to be cautious about overpaying for targets. His company paid a premium of 10 percent or less in about two-thirds of the deals it carried out over the last decade, according to data compiled by Bloomberg. “I would think that a huge premium goes against what Ivan Glasenberg is about,” Tim Schroeders, a Melbourne-based portfolio manager at Pengana Capital Ltd. where he helps oversee about $1 billion in equities, said by phone. “I don’t think investors will support this unless there’s a huge premium. So there’s your stalemate.”

Premium Dilemma

BHP Billiton Ltd., the world’s largest mining company with a market value of more than $150 billion, offered Rio investors a premium close to 50 percent more than six years ago, which they rejected. Compare that with Glasenberg’s track record, and his challenge becomes clear. Rio investors would need a premium of at least 25 percent to accept a deal, Liberum Capital Ltd. wrote in an Oct. 6 note. “This deal is not something that will happen any time soon,” said Paul Cowan, director of special situations at Religare Capital Markets in Melbourne. “Rio shareholders are not going to stomach a nil-premium merger, or even a reverse takeover with a significant premium. This deal will be held up with so much regulatory red tape, it will make the whole thing unworkable.”

Regulatory Issues

Australia’s foreign investment regulator will likely present a “major hurdle” for any deal, Liberum said. It would also face significant scrutiny from China’s regulators on the combined copper businesses, Paul Phillips, a Melbourne-based partner with Perennial Growth Management Pty, which manages about $19 billion of assets including Rio shares, said by phone. “They’d probably make them divest some coal as well,” he said. “I don’t know whether the Chinese would be that enthralled by it all.” Another possible outcome is that Rio seeks out a takeover of its own to act as a sort of poison pill against the Glencore offer, said Gait of Bernstein. Anglo and Phoenix-based Freeport- McMoRan Inc. would be sizeable, complementary options to consider, he said. A representative for $33 billion Freeport- McMoRan declined to comment. “You need something that’s a little bit chunkier and also is doable,” Gait said. “Those are the two names that would come to the top of most people’s register.”

For Related News and Information: Glencore Abandons Rio Tinto Bid, Forcing Six Month Wait NSN ND2WAU6S972Q <GO> Rio Tinto Jumps After Saying It Rejected Glencore Approach NSN ND2KY86S972V <GO> Glencore’s Glasenberg Seen Eyeing Anglo After Xstrata: Real M&A NSN MHNL7G6JTSEA <GO> Top deal stories: TOP DEAL <GO> Real M&A columns: NI REALMNA <GO> M&A arbitrage: MARB <GO>

--With assistance from Brooke Sutherland in New York and Brett Foley in Melbourne.

To contact the reporters on this story: Jesse Riseborough in London at +44-20-3216-4198 or jriseborough@bloomberg.net; David Stringer in Melbourne at +61-3-9228-8737 or dstringer3@bloomberg.net; James Paton in Sydney at +61-2-9777-8698 or jpaton4@bloomberg.net To contact the editors responsible for this story: Will Kennedy at +44-20-7073-3603 or wkennedy3@bloomberg.net; Beth Williams at +1-212-617-2307 or bewilliams@bloomberg.net Whitney Kisling

>>> Asian Update

Asian Market Update: AUD sinks on downward revision in jobs data; Shanghai Composite returns for trade

***Economic Data*** - (CN) CHINA SEPT HSBC SERVICES PMI: 53.5 V 54.1 PRIOR - (JP) JAPAN AUG CURRENT ACCOUNT: ¥287B V ¥200BE; ADJ CURRENT ACCOUNT: ¥131B (5th straight surplus) V ¥187BE; TRADE BALANCE: -¥832B V -¥771BE - (PH) PHILIPPINES SEPT CPI M/M: 0.1% V 0.2%E; Y/Y: 4.4% V 4.5%E; CORE CPI Y/Y: 3.4% V 3.3%E - (UK) UK SEPT BRC SHOP PRICE INDEX Y/Y: -1.8% (17th month of decline) V -1.6% PRIOR

***Index Snapshot (as of 02:30 GMT)*** - Nikkei225 -1.5%, S&P/ASX -0.7%, Kospi flat, Shanghai Composite -0.1%, Hang Seng -0.8%, Dec S&P500 +0.1% at 1,929

***Commodities/Fixed Income*** - Dec gold +0.1% at $1,213/oz, Nov crude oil -0.4% at $88.52/brl, Dec copper flat at $3.03/lb - (US) API PETROLEUM INVENTORIES: CRUDE: +5.1M (largest build since April 15th) v +2Me, GASOLINE: +2.5M v -1Me, DISTILLATE: -1.1M v -1Me - (CN) PBoC sets yuan mid point at 6.1493 v 6.1525 prior setting (1st firmer Yuan setting since Sept 23rd) - (AU) Australia MoF (AOFM) sells A$700M in 4.25% 2026 Bonds; Avg yield: 3.4582%; Bid-to-cover: 3.83x - JGB: (JP) Japan MoF sells ¥500B in 0.1% 10-year CPI-linked Bonds; Bid-to-cover ratio 2.11x v 2.54x prior

***Market Focal Points/Key Themes/FX*** - YUM missed Q3 top-line consensus, with China-driven weakness (SSS -14% v -13% guidance) weighing on earnings. After an initial extended session dip, shares were modestly higher, as investors take solace in CEO commentary forecasting "continued solid sales and profit growth at our KFC division."

- Shanghai Composite returned for trade after a week-long break, rising to new 18-month highs on the heels of property market support from monetary authorities. Entering its midday break, the index was up 0.3% at 2,370. Investors cheered press speculation the PBoC could expand targeted rate cuts while shrugging the HSBC Services PMI sliding from last month's 17-month high. China Commerce Ministry also estimated retail sales rising 12% y/y during the National Day holiday break.

- In Japan, GPIF panel adviser Ito said 20-25% of assets should be dedicated to Japan stocks, forecasting the portfolio change announcement to come some time in December. USD/JPY fell to 3-week lows below ¥107.80 before bouncing back to ¥108.40 late in the session.

- Ahead of tomorrow's release of Australia employment data, the Stats Bureau announced it was stripping out the "seasonal factors" that yielded a 36-year high net change in the August data. That figure has now been released lower from 121K to 32K, weighing on AUD/USD as it fell about 60pips from the high below $0.8770.

***Equities*** US markets: - YUM Reports Q3 $0.87 (adj) v $0.86e, R$3.35B v $3.46Be; +1.0% afterhours - AGN: Valeant, Pershing Square (Ackman) said to be raising bid for Allergan by $15/shr - financial press; +1.2% afterhours - KRFT Increases quarterly dividend 5% to $0.55 from $0.525; +0.4% afterhours - SAVE Reports Sept load factor 81.5% v 84.7% y/y; Q3 op margin to be in lower half of prior guidance filing; -3.2% afterhours - TILE Guides Q3 $0.12-0.14 (ex items) v $0.26e, R$250-255M v $272Me; approves 500K share buyback program (0.7% of shares outstanding); intends to redeem notes; -17.9% afterhours

Notable movers by sector: - Utilities: Chubu Electric Power 9502.JP +1.1% (to launch jv with Tepco) - Technology: Asahi Glass [5201.JP] -2.1% (speculation of 9-mo result); Lenovo Group 992.HK -1.2% (extend jv with NEC); HTC Corp 2498.TW -0.4% (speculation to halt wearable computing devices) - Financials: Greentown China 3900.HK +1.2% (Sept operating results) - Customer discretionary: McDonald's Holdings 2702.JP -0.9% (FY14 guidance), Toho Co 9602.JP +2.9% (H1 guidance), Lawson Inc 2651.JP -0.8% (H1 results), Skyworth Digital 751.HK -0.7% (Sept results) - Healthcare: CSL Limited CSL.AU -0.5% (expansion in Melbourne)

Knightsbridge Shipping, Golden Ocean to Merge

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Knightsbridge Shipping, Golden Ocean to Merge 2014-10-07 21:55:36.407 GMT

By Jim Silver Oct. 7 (Bloomberg) -- Golden Ocean holders to receive 0.13749 Knightsbridge shr for every Golden Ocean shr, Knightsbridge says in statement. * Knightsbridge to issue 61.5m shrs * Current mgmt of Golden Ocean will manage the combined co. * Merger subject to 75% support by cos.’ shareholders, with EGMs in Dec., Jan.; transaction seen closing soon after

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To contact the editor responsible for this story: Jim Silver at +1-212-617-7342 or jsilver@bloomberg.net

WSJ : Valeant, Pershing Square Plan to Boost Allergan Bid by

Valeant, Pershing Square Plan to Boost Allergan Bid by $15 a Share

Valeant Pharmaceuticals International Inc. VRX.T -2.19% and activist investor William Ackman are planning to boost their offer for Allergan Inc. AGN +1.68% by $15 a share, according to people familiar with the matter.

The price bump would bring the offer from Valeant and Mr. Ackman’s Pershing Square Capital Management LP to about $191 a share based on Valeant’s closing price Tuesday. That is 2.5% above the closing price of Allergan’s shares, which rose Tuesday to $186.20. The new bid would be about 8% higher than the current offer.

The bidders are still ironing out questions of timing and the mix of cash and stock for the additional $15-per-share rise, the people said.