(Kepler- Cheuvreux) German utilities

What’s it all about?
E.ON deserves credit for coming up with the idea of splitting conventional from new energy. RWE only followed, but then implemented a split without many of E.ON’s troubles. The only concern could relate to the timing of the IPO before the nuclear situation is resolved. We compare RWE AG (which retains a majority holding in Innogy for now) and Innogy. We also look at RWE once the majority of Innogy is sold (which we expect to happen). We recently published in-depth reports on both groups: RWE: Not out of exile (219pp) 5 October 2016, Innogy: Getaway car (196pp) 5 October 2016). With a EUR10 target price, we are sellers of RWE. Innogy will have its first trading day on Friday 7 October. With a EUR34 target
price, we would buy up to levels of EUR32, hold the shares between EUR32 and EUR35, and sell above EUR35 (pure income investors will probably disagree).

>>> What to look at today - 7th of October 2016

Dow -0.07% S&P +0.05% Nasdaq -0.17% Russell -0.17% VIX 12.83 (-1.23%) VXX 33.20 (-0.90%)
US Market closed near closed to the flat line ahead of job report today. Long-term interest rates continued their recent climb despite some dovish-sounding minutes from the European Central Bank's (ECB) September meeting and accommodative jawboning from ECB Vice President Vitor Constancio. Real Estate, Consumer Staples, Utilities & and telco (yield plays) closed off their worst levels after underperforming this week with yield higher. Six sectors ended in the green today with materials (+0.8%) and technology (+0.2%) leading the advance. Crude oil ($50.44/bbl; +$0.68; +1.4%). IBB -2.3%. Twitter (TWTR 19.87, -5.00) tumbled 20.2% after reports signaled that Apple (AAPL 113.89, +0.84), Alphabet (GOOG 776.86, +0.39), and Disney (DIS 92.83, +0.38) are unlikely to pursue bids for Twitter. Volume were below average with 796mil shares. US After Hours GPS +6% on September comps, RT -10% on earnings/discontinuation of guidance. GBP/USD "flash-crashed" unexpected in low-liquidity early Asian trade, falling by over 8 handles from just above 1.26 to below 1.18. There was no associated news with the event, though some analysts have noted the mention of a hard Brexit by French President Hollande in late US hours. FX traders await more details on what was likely a large order setting off brisk algo selling in what has already been a one-way trade over the past week. China FX reserves outflows have accelerated, falling over $20B to $3.166B - the biggest decline in 4 months and also 3rd straight month of outflows. Analysts suggest the data signifies the extent of PBoC intervention in China currency. Japan PM Abe's economic adviser Honda made a more vocal plea for increase in fiscal stimulus and expanded monetary easy by the BOJ as soon as next month, attributing limited progress on inflation to fiscal restaint of the govt.

Nikkei -0.31% Hang Seng -0.50% CSI Closed Shanghai Closed

Eur$ 1.1121 CNH 6.7134 CNY 6.6718 JPY 103.93 GBP 1.2465 CHF 0.9823 RUB 62.1890 WTI $50.49 (+0.10%)

S&P -0.22% EuroStoxx -0.13% FTSE +0.62% Dax -0.22% SMI +0.02%

Macro :
- Fed Survey Reports Expected Changes Due to Money-Fund Reforms
- Fed Running Out of Excuses to Avoid Rate Hike, TIAA’s Nick Says
- Pound Flash Crash Has Traders Blaming Algos for Selling Frenzy
- Fed Hike Odds Jump to 64% From Coin Toss as Payrolls Test Looms
- Foreigners in London ‘Horrified’ by May’s Immigration Vision

Keep an eye on :
- ABEO FP : Abeo to Raise EU20.7M in Paris IPO; Price Set at EU16.84/Share
- ABN NA : Nordea Said to Have Held Talks to Merge With ABN; Plan Rejected
- AIR FP : Airbus Said to Have Made Offer for Leonardo’s MBDA Stake: Sole
- ASML NA : ASML CEO Still Sees Full EUV Machine Production in 3 Yrs: FD
- CBK GY : Commerzbank to Cut Management Posts by 3 to 41: Boersen-Zeitung
- DL NA : Holder Dasym May Not Oppose NN Bid for Delta Lloyd: Telegraaf
- DL NA : Delta Lloyd Said Planning to Reject Approach From NN Group
- DBK GY : Deutsche Bank Said to Eye Asset Management Unit IPO: FT
- DBK GY : German DAX CEOs Said to Have Discussed Deutsche Bank Support: HB
- DBK GY : Deutsche Bank Hires Two for Structured-Products Team in New York
- EOAN GY : Cevian Said to Evaluate Buying Stake in Eon: Rheinische Post
- INDUC SS : Industrivaerden Wants to Own Shares in Both SCA Companies: DI
- LEO GY : Leoni Evaluates Takeovers, Divestments in Asset Review: Wiwo
- LDI IM : Airbus Said to Have Made Offer for Leonardo’s MBDA Stake: Sole
- NDA SS : Nordea Said to Have Held Talks to Merge With ABN; Plan Rejected
- RWE GY : RWE Sells 55.6m Innogy Shares at EU36 in Frankfurt IPO
- SAF FP : Safran CEO Says Organic Growth Is Priority: La Tribune
- SAN FP : Sanofi Gets $37.6m U.S. Government Contract to Supply Leukine
- SFR FP : SFR Group Mulling Plan to Move Headquarters Within Paris: Echos
- SNAP IPO : Snapchat Said to Prepare Documents for IPO as Soon as March
- FP FP : Total Close to Selling Atotech to Carlyle: Les Echos
- TUI LN : TUI Fly Scraps Operations Friday After Employees Call in Sick
- TWTR US : Charles Gasparino: @salesforce @Benioff facing pressure from his own execs AND investors to rebuff poss $twtr deal
- VIV FP : Vivendi Starts Premium Music-Video Service in Brazil With Vivo
- VOW3 GY : VW Plans to Shift Decision-Making to Brands, Regions: Boersen Z
- ZC FP : Safran CEO Says Organic Growth Is Priority: La Tribune

>>> Europe : Brokers Upgrades & Downgrades - 7th of October 2016

>>> Up
*ANGLO PACIFIC RAISED TO BUY VS UNDERPERFORM AT BOFAML
*DIALOG SEMICONDUCTOR RAISED TO OVERWEIGHT AT MORGAN STANLEY
*DNB ASA RAISED TO OVERWEIGHT AT JPMORGAN
*SCOUT24 AG RAISED TO OVERWEIGHT AT JPMORGAN

>>> Down
*ACTELION CUT TO EQUALWEIGHT VS OVERWEIGHT AT MORGAN STANLEY
*AVEVA GROUP CUT TO NEUTRAL VS BUY AT UBS
*EASYJET CUT TO NEUTRAL VS BUY AT BOFAML
*CENTRICA CUT TO EQUALWEIGHT VS OVERWEIGHT AT MORGAN STANLEY
*EDENRED CUT TO NEUTRAL VS BUY AT UBS
*FIDESSA GROUP CUT TO SELL VS NEUTRAL AT UBS
*HAYS CUT TO NEUTRAL VS BUY AT UBS
*OSRAM LICHT CUT TO HOLD VS BUY AT BANKHAUS LAMPE
*SWEDBANK CUT TO NEUTRAL AT JPMORGAN

>>> PT Change


>>> Initiation
*BANCA TRANSILVANIA RATED NEW BUY AT CITI; PT RON2.94
*DS SMITH RATED NEW OVERWEIGHT AT BARCLAYS; PT 465P
*INNOGY RATED NEW OUTPERFORM AT MACQUARIE, PT EU41
*NOVOZYMES RATED NEW HOLD AT DEUTSCHE BANK; PT DKK300
*WESSANEN RATED NEW BUY AT BERENBERG, PT EU15

>>> Call
>> Stock
*RALPH LAUREN ADDED TO CONVICTION LIST AT GOLDMAN

>>> Asian Update

Asia Mid-Session Market Update: China FX reserves fall at faster rate; Samsung Electronics prelim Q3 mixed; GBP/USD craters 10 handles in a flash crash
Fri, 07 Oct 2016 1:24 AM EST

***Notes/Observations***
- GBP/USD "flash-crashed" unexpected in low-liquidity early Asian trade, falling by over 8 handles from just above 1.26 to below 1.18. There was no associated news with the event, though some analysts have noted the mention of a hard Brexit my French President Hollande in late US hours. FX traders await more details on what was likely a large order setting off brisk algo selling in what has already been a one-way trade over the past week.
- China FX reserves outflows have accelerated, falling over $20B to $3.166B - the biggest decline in 4 months and also 3rd straight month of outflows. Analysts suggest the data signifies the extent of PBoC intervention in China currency.
- Samsung Electronics reported prelim Q3 results; Op profit topped consensus at KRW7.8T v KRW7.6Te while Rev missed KRW49.0T v KRW51.0Te; There is no accompanying commentary or performance/financial metrics with this initial release, they will be posted with final Q3 report at the end of the month. Shares of Samsung were up by just over 0.5%.
- Japan PM Abe's economic adviser Honda made a more vocal plea for increase in fiscal stimulus and expanded monetary easy by the BOJ as soon as next month, attributing limited progress on inflation to fiscal restaint of the govt.
- Hurricane Matthew within 50 miles of the Florida coast; Latest (23:00ET) NHC projections suggest the eye of the storm may stay off shore, hugging the coastline through Saturday afternoon.

***Top US session headlines***
- (EU) ECB ACCOUNT OF THE MONETARY POLICY MEETING (SEPT MINUTES): Downside risks remain; underlying inflation still not showing signs of a sustained pickup
- (US) SEPT CHALLENGER JOB CUTS -44.3K V 32.2K PRIOR; Y/Y: -24.7% V -21.8% PRIOR
- (US) INITIAL JOBLESS CLAIMS: 249K V 256KE; CONTINUING CLAIMS: 2.06M V 2.08ME (4-week average hits 43-year low)
- OPEC Chief reportedly to discuss a non-OPEC production cut with Russia in talks next week - press
- NXPI: Qualcomm said to make progress on NXP bid; considering offer structure of 75% cash, 25% stock; NXP reportedly would prefer all-cash offer - press

***US markets on close: Dow -0.1%, S&P500 +0.1%, Nasdaq -0.2%***
- Best Sector in S&P500: Basic Materials
- Worst Sector in S&P500: Healthcare
- Biggest gainers: WFM +4.9%, CRM +4.2%, LRCX +4.2%, DLTR +4.0%, LYB +3.4%
- Biggest losers: ENDP -3.7%, AXP -3.7%, FCX -3.5%, SYF -3.4%, WMT -3.2%

***VIX 12.84 (-0.2pts); Treasuries: 2-yr 0.85% (+1bp), 10-yr 1.74% (+2bp), 30-yr 2.46% (+2bp)***

***US movers afterhours***
- CIT +7.6%: To sell CIT Commercial Air to Avolon Holdings for $10B; received non-objection to amended capital plan
- GPS +6.5%: Reports Sept SSS -3.0% (including 3% negative impact from Fishkill fire) v -2.9%e
- DVAX +3.5%: Point72 Asset Management (Steve Cohen) discloses passive 5.9% stake (raised from 1.17% in June) - 13G filing
- YHOO -0.9%: Verizon said to request a $1B discount (~20%) in Yahoo bid after the latest hacking reports - NY Post
- HELE -2.3%: Reports Q2 $1.31 v $1.10e, R$368.2M v $365Me
- RT -2.8%: Reports Q1 -$0.11 v -$0.03 y/y, R$256.7M v $279.5 y/y
- HON -4.8%: Narrows lower Q3 $1.67 v $1.69e (prior $1.67-1.72), guides initial Q4 $1.74-1.78 v $1.79e, narrows FY16 $6.60-6.64 v $6.67e (prior $6.60-6.70)
- MG -7.2%: Reports Q1 $0.22 v $0.23e, R$168M v $174Me; Cuts FY17 $0.88-0.97 v $1.04e, R$690-705M v $725Me

***After extended session***
- TRNC: Gannett's current offer for Tronc seen at $18.75/shr - NY Post

***Equity Futures (00:00ET): S&P e-mini -0.2%, Dax -0.1%, FTSE100 +0.5%***

***FX / Commodities ranges (00:00ET):***
- GBP 1.1740-1.2620; EUR 1.1110-1.1150; JPY 103.50-104.00; AUD 0.7560-0.7590, NZD 0.7125-0.7165
- Gold +0.3% at 1,256/oz; Oil flat at $50.42/brl; Copper -0.3% at $2.15/lb

***Asian Equity Markets (00:00ET)***
- Nikkei -0.4%, Hang Seng -0.5%, ASX -0.2%, Shanghai closed, Kospi -0.5%

***Key economic data:***
- (CN) CHINA SEPT FOREIGN RESERVES: $3.166T V $3.183TE; 3rd consecutive decline, biggest monthly drop in 4 months multi-year lows
- (JP) JAPAN AUG LABOR CASH EARNINGS Y/Y: -0.1% V +0.4%E ; REAL EARNINGS (EX-INFLATION) Y/Y: 0.5% V 2.0% PRIOR
- (AU) AUSTRALIA SEPT AIG PERFORMANCE OF CONSTRUCTION INDEX: 51.4 V 46.6 PRIOR

***Speakers / Press / Fixed Income***
China:
- (CN) Morgan Stanley raises China 2016 GDP forecast to 6.7% from 6.4% prior guided
- (CN) PBOC's Yi: Chinese economy is more stable; has more confidence in China's economy overall - press

Japan:
- (JP) Japan Vice Fin Min of International Affairs (currency chief) Asakawa: No talks on FX at G20 finance leaders' gathering today
- (JP) BOJ Gov Kuroda: To convey to G20 that Japan made commitment to ultra-loose monetary policy
- (JP) BOJ offers to buy ¥410B in 5-10yr JGBs, ¥190B in 10-25yr JGBs, ¥110B in JGBs with maturity over 25-yr, and ¥3T in T-bills

Australia
- (AU) Australia MoF (AOFM) sells A$900M in 1.75% 2020 Bonds; avg yield: 1.6936%; bid-to-cover: 3.45x

***Asia movers***
- Consumer discretionary: H2O Retailing Corp.8242.JP +3.0% (sets up capital tie-up with Seven & I); Kose Corp 4922.JP -3.1% (H1 result speculation)
- Financials: Seven & I Holdings 3382.JP -3.5% (Goldman cut to Neutral, H1 result); Cathay Financial Holding 2882.TW -0.6% (Sept result)
- Industrials: Mitsubishi Heavy Industries 7011.JP +0.8% (unit sale speculation); Sinotrans Shipping 368.HK +6.2% (oil gains)
- Technology: Samsung Electronics 005930.KR +0.6% (Q3 prelim result)
- Materials: Galaxy Resources GXY.AU -0.9% (Bell Potter initiates with Buy); Whitehaven Coal WHC.AU +8.2% (Newcastle Sept result); St Barbara SBM.AU -2.0%; Saracen Mineral SAR.AU -2.3% (gold declines to 4-month low); ALS ALQ.AU +0.7% (Macquarie raised to outperform)
- Energy: Japex 1662.JP +2.1%, Inpex 1605.JP +1.6% (oil rises above $50/bbl); Karoon Gas Australia KAR.AU +10.4% (acquisition)
- Healthcare: Estia Health EHE.AU -5.6% (may face writedowns)

>>> US After Hours

After Hours Summary: GPS +6% on September comps, RT -10% on earnings/discontinuation of guidance

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: CMTL +6.6%, GPS +5.6%

Companies trading higher in after hours in reaction to news: CIT +9.9% (Reached agreement to sell CIT Commercial Air to Avolon Holdings Limited for $10 bln; additionally discloses receiving non-objection to amended capital plan), RUN +5.72% (Upgraded to Buy from Neutral at Goldman), DVAX +3.5% (Point72 Asset Management disclosed 5.9% passive stake), VSLR +2.2% (Upgraded to Neutral from Sell at Goldman), UVE +1.79% (Rebounding on optimism that Hurricane Matthew won't hit Florida as hard as initially expected), AHP +0.8% (Raging Capital disclosed 7.9% active stake, has met with management regarding its business operations and ways to enhance shareholder value)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance: RT -10.4%, MG -5.7%, HON -4.8%, HELE -1.6%

Companies trading lower in after hours in reaction to news: XCOM -35.9% (To be delisted from the Nasdaq), SEDG -4.94% (Downgraded to Sell from Neutral at Goldman), FSLR -1.51% (Downgraded to Neutral from Buy at Goldman), YHOO -0.8% (NYPost reporting that Verizon (VZ) is seeking to have its purchase price for Yahoo lowered amid its recent privacy issues), DB -0.2% (Bloomberg reporting that the company is exploring potential capital raising options)

>>> US Close Dow -0.07% S&P +0.05% Nasdaq -0.17% Russell -0.17%

Closing Market Summary: Stocks Finish Flat with Employment Report on Tap

The stock market ended Thursday relatively flat as some interest rate volatility and some caution ahead of the September employment report on Friday kept a lid on things. The Dow Jones Industrial Average (-0.1%) and the Nasdaq Composite (-0.2%) settled slightly behind the S&P 500 (+0.05%).

Long-term interest rates continued their recent climb despite some dovish-sounding minutes from the European Central Bank's (ECB) September meeting and accommodative jawboning from ECB Vice President Vitor Constancio. 

Mr. Constancio briefly rallied global bond markets when he denied reports from earlier in the week that suggested the central bank has held discussions about tapering its asset purchase program. That headline boost proved to be short-lived, however, as Treasury prices soon started to fade again, pushing yields back up.

The yield on the benchmark 10-yr note, which slipped back to 1.71% after the Constancio headline first hit, finished higher by four basis points at 1.74%.

The stock market took the afternoon boost in long-term rates in stride.  While there weren't any big gains (or losses) from a sector standpoint, the real estate (+0.2%), consumer staples (+0.1%), utilities (unch), and telecom services (-0.1%) sectors, otherwise known as "yield plays," held up reasonably well and finished off their worst levels of the day.  Those four groups have lost between 1.6% and 3.7% this week, with the 10-yr note yield climbing 14 basis points since last Friday's close.

Stock market participants, by and large, showed limited conviction ahead of Friday's employment report.

The Employment Situation Report for September is in focus as participants try to assess the fed funds rate hike picture for the remainder of the year. The consensus expects the jobs report to show that 176,000 positions were added to nonfarm payrolls and that average hourly earnings increased 0.2%. The report is slated to cross the wires on Friday at 8:30 a.m. ET, which is when the media should also be busy reporting on Hurricane Matthew, a Category 4 storm that is expected to hit Florida's east coast Thursday night.

Six sectors ended in the green today with materials (+0.8%) and technology (+0.2%) leading the advance. Today's trade also featured an uptick in crude oil ($50.44/bbl; +$0.68; +1.4%) and weakness in the heavily-weighted health care (-0.4%) space. 

Biotechnology underperformed inside the health care sector (-0.4%) as the iShares Nasdaq Biotechnology ETF (IBB 284.16, -6.64) fell 2.3%. Alnylam Pharmaceuticals (ALNY 36.21, -34.09) pressured the group after it announced that it was discontinuing Revusiran developments. The stock plunged 48.5% on the news. Mylan (MYL 36.84, -1.19) underperformed amid continued scrutiny of its EpiPen. Reports indicated that the company misclassified the device under the Medicaid Drug Rebate program.

The financial sector (+0.1%) outperformed as a steepening in the yield curve was seen as improving the earnings potential for the group. The SPDR S&P Bank ETF (KBE 34.20, +0.03) rose 0.1%, extending its weekly gain to 2.4%. MetLife (MET 47.15, +1.16) jumped 2.5% after confirming that Brighthouse Financial filed forms with the SEC to distribute common stock to MetLife shareholders. This is a crucial step in MetLife's plan to separate into two publicly traded companies.

In the technology space (+0.2%), top-weighed Apple (AAPL 113.89, +0.84) gained 0.7% after Canaccord Genuity issued a bullish note on iPhone sales. On the flipside, Twitter (TWTR 19.87, -5.00) tumbled 20.2% after reports signaled that Apple (AAPL 113.89, +0.84), Alphabet (GOOG 776.86, +0.39), and Disney (DIS 92.83, +0.38) are unlikely to pursue bids for Twitter.

Today's participation was below the recent average as more than 796 million shares changed hands at the NYSE floor.

Today's economic data was limited to Challenger Job Cuts for September and weekly initial claims:  

  • September Challenger Job Cuts reported in at 44,300, which compares to the prior month's reading of 32,200.
  • For the week ending October 1, initial claims decreased by 5,000 to 249,000 (consensus 258,000).
    • Continuing claims for the week ending September 24 fell by 6,000 to 2.058 million.

Tomorrow's economic data will include the 8:30 a.m. ET release of the Employment Situation Report for September. The consensus expects the report to show an increase of 176,000 in nonfarm payrolls. Meanwhile, August Wholesale Inventories (consensus -0.1%) and August Consumer Credit (consensus$18.0 billion) will cross the wires at 10:00 a.m ET and 3:00 p.m. ET, respectively.