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

>>> Up
*A2A RAISED TO OUTPERFORM VS NEUTRAL AT MEDIOBANCA
*ACCIONA RAISED TO OUTPERFORM VS UNDERPERFORM AT MACQUARIE
*CRH RAISED TO NEUTRAL VS REDUCE AT ODDO
*ICAP RAISED TO ADD VS HOLD AT NUMIS
*MERITAGE HOMES UPGRADED TO OVERWEIGHT AT BARCLAYS
*SAINSBURY RAISED TO OUTPERFORM VS UNDERPERFORM: CREDIT SUISSE
*WILLIAM DEMANT RAISED TO NEUTRAL VS SELL AT UBS

>>> Down
*ANTOFAGASTA CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
*BEKAERT CUT TO HOLD FROM BUY AT ING
*BURBERRY CUT TO UNDERPERFORM AT RBC CAPITAL
*FIDESSA CUT TO SELL VS NEUTRAL AT UBS
*FIRST QUANTUM MINERALS CUT TO UNDERWEIGHT AT JPMORGAN
*GENEL CUT TO UNDERPERFORM VS BUY AT JEFFERIES
*GLENCORE CUT TO NEUTRAL VS OVERWEIGHT AT JPMORGAN
*ITG DOWNGRADED TO NEUTRAL AT J.P. MORGAN
*KAZ MINERALS CUT TO UNDERWEIGHT VS NEUTRAL AT JPMORGAN
*KNIGHT TRANSPORTATION DOWNGRADED TO EQUALWEIGHT AT BARCLAYS
*LONMIN CUT TO REDUCE VS HOLD AT HSBC
*ORKLA CUT TO NEUTRAL VS BUY AT UBS
*OSRAM LICHT CUT TO UNDERWEIGHT VS EQUAL-WEIGHT: MORGAN STANLEY
*RICHEMONT CUT TO SELL VS BUY AT BERENBERG
*SWATCH CUT TO HOLD VS BUY AT BERENBERG
*TELE2 AB CUT TO UNDERPERFORM VS NEUTRAL AT CREDIT SUISSE
*ZOOPLA CUT TO NEUTRAL VS BUY AT UBS
*ZURICH INSURANCE CUT TO HOLD VS BUY AT BANKHAUS LAMPE

>>> PT Change


>>> Initiation
*PLUS500 RATED NEW BUY AT BERENBERG; PT 800P

>>> Call

>>> Asian Update

Asian Market Update: Yen hits new 17-month highs; Samsung Electronics tops estimates; China FX reserves on tap

***Economic Data***
- (JP) JAPAN MAR OFFICIAL RESERVE ASSETS: $1.26T v $1.25T PRIOR
- (JP) Japan Mar Tokyo Avg Office Vacancies 4.3% v 4.0% prior; 2nd straight increase
- (AU) AUSTRALIA MAR AIG PERFORMANCE OF CONSTRUCTION INDEX: 45.2 V 46.1 PRIOR; 13-month low; 4th month of contraction
- (NZ) New Zealand Mar ANZ Truckometer Heavy M/M: +2.5% v +1.7% prior; 2nd straight increase
- (TW) TAIWAN MAR CPI Y/Y: 2.0% V 1.4%E; WPI Y/Y: -4.9% v -4.6%E

***Index Snapshot (as of 04:00 GMT)***
- Nikkei225 -0.3%, S&P/ASX +0.3%, Kospi -0.1%, Shanghai Composite -0.8%, Hang Seng flat, Jun S&P500 -0.1% at 2,059

***Commodities/Fixed Income***
- Apr gold +0.3% at $1,227/oz, May crude oil +1.1% at $38.15/brl, May copper flat at $2.14/lb
- CME cuts WTI crude oil margin requirements by 2.9%
- GLD: SPDR Gold Trust ETF daily holdings rise 4.2 tonnes to 819.6 tonnes
- USD/CNY: (CN) PBOC SETS YUAN MID POINT AT 6.4707 V 6.4754 PRIOR
- (CN) PBOC to inject CNY10B in 7-day reverse repos
- (JP) Japan investors sold net ¥1.6T in foreign bonds v bought ¥1.2T in prior week; Foreign investors bought net ¥415B in Japan stocks v sold ¥359B in Japan stocks in prior week

***Market Focal Points/FX***
- Asian equity markets are mixed with investors processing the latest set of minutes from the FOMC while looking ahead to pivota FX reserves data for China expected to be released late in the day. Shanghai Composite saw the most pronounced losses in the morning session as PBoC's open market operations of CNY10B injection was relatively small. ASX200 is up slightly, once again benefiting from a bounce in energy and commodities. Nikkei225 is surprisingly resilient with a marginal decline despite new 17-month low in USD/JPY around 109.20. In other USD majors, AUD/USD traded sideways around the $0.76 handle while NZD/USD was supported by $0.68 level. Yuan fix was slightly firmer after 2 straight days of weaker settings.

- Latest meeting minutes from the Fed showcased the growing polarization on the FOMC, with a couple members calling for a hike in March and several already looking at April as too soon to add to tightening measures. Committee once again discussed strong employment growth against persistent sub-2% inflation outlook. Later in the US session, Fed's Kaplan said there has been some progress on inflation, but the Fed will remain on a gradual and cautious path. Fed's Bullard - a voter known for his often hawkish views - said the economy is showing improvement but the Fed would remain data dependent given the tepid US economic growth.

- In China, traders await the release of Mar FX reserves amid speculation that the figures could show the first increase after 4 months of decline due to stabilization of Yuan and reduced volatility. A press report also noted that NDRC has requested that issuers of corporate bonds and underwriters assess default risks, while CEO of HSBC warned that rising bad debt levels in China will remain a challenge with the clearing of those loans to be slow. Recall overnight China financials NPL ratio was reported to have risen above 2% as of the end of February.

- Volatility in Japanese Yen has persisted, as USD/JPY pair hit new 17-month lows below 109.20. Govt spokesperson Suga remarked that FX markets are becoming one-sided, that the govt is watching exchange rate with vigilance and is prepared to act if necessary. However, traders were also quick to note that sentiment being unchanged from similar remarks of recent days and continued to test the govt's tolerance of Yen appreciation. There is also some speculation that time may be on the side of the Yen bulls, with authorities holding off on the next round of monetary easing until the BOJ decision at the end of the month.

- South Korea's Samsung Electronics guided Q1 well above official consensus at Op profit KRW6.6T v KRW5.5Te, Rev KRW49.0T v KRW48.8Te. As always, these are the "skeleton" estimates for the tech giant without any supporting material, all of which will be presented at the end of the month with the final Q1 release. The beat has been speculated in Korean press some time ago, and Samsung shares are down slightly on profit-taking. Separately, Korea Finance Ministry official noted that the economy does not yet warrant a supplementary budget, with early signs of improvement.

***Equities***
US equities / ADRs:
- VRX: Reportedly a majority of creditors agree to back loan amendment - press; +5.1% afterhours
- APOG: Reports Q4 $0.69 v $0.63e, R$262M v $265Me (1 est); +4.7% afterhours
- BBBY: Reports Q4 $1.85 (ex items) v $1.80e, R$3.42B v $3.38Be; Initiates $0.125 dividend (implied yield 1.0%); +4.5% afterhours
- S: Signs $2.2B deal for the sale and lease-back of certain existing network assets; +3.1% afterhours
- TEX: Zoomlion said to be working to provide Terex with assurances that it can get approvals for and complete a merger deal - press; +2.7% afterhours
- APOL: Reports Q2 -$0.31 adj v -$0.10e, R$465.3M v $471Me; -2.1% afterhours

Notable movers by sector:
- Consumer discretionary: Intime Department Store Group Co 1833.HK -2.8% (Q1 result); Skylark Co 3197.JP -7.3% (March result); McDonald's Holdings Co Japan 2702.JP +0.8% (March result)
- Financials: Greentown China 3900.HK -1.0% (March result); Shanghai Pudong Development Bank 600000.CN -1.1% (FY15 result)
- Industrials: Great Wall Motor 2333.HK -0.8% (March result); Virgin Australia VAH.AU +2.0% (Singapore Airlines buys 6.8M share stake)
- Technology: ZTE Corp 763.HK -8.3% (FY15 results and US investigation); Samsung Electronics 005930.KR -1.6% (prelim Q1 result)
- Materials: Chongqing Iron & Steel Co. 601005.CN +1.1% (set up JVs); St Barbara SBM.AU +0.5% (raises guidance)

>>> US After Hours Summary: VRX +4% after WSJ report of debt amendment


After Hours Summary: VRX +4% after WSJ report of debt amendment agreement; BBBY +2.8% following earnings

After Hours Gainers:

Companies trading higher in after hours in reaction to earnings/guidance: OLLI +5.7%, APOG +4.7%, BBBY +2.8%

Companies trading higher in after hours in reaction to news: CEQP +9.8% (enters into 10-year commercial agreement with BlueStone Natural Resources II in the Barnett Shale), TEX +4.2% (Zoomlion (ZLIOY) is looking to provide assurances to Terex investors over its proposed acquisition offer, according to Reuters), VRX +3.6% (WSJ reports that a majority of Valeant's loan holders have agreed to amend the terms of their debt), S +2.2% (signs $2.2 billion deal for the sale and lease-back of certain existing network assets)

After Hours Losers:

Companies trading lower in after hours in reaction to earnings/guidance:  APOL -2.1%

Companies trading lower in after hours in reaction to news: BPT -15.5% (announces Q1 avg daily production was 95.12K BBLS), ALDR -4% (announces $100 mln stock offering)

>>> US Close Dow +0.46% S&P+1.05% Nasdaq+1.59% Russell+1.18%

Closing Market Summary: Energy and Health Care Lead Rally

The stock market ended the Wednesday affair on a higher note as the major averages rallied in lockstep with crude oil throughout today's session. Other factors that contributed to today's advance included persistent leadership from the heavily-weighted health care (+2.7%) sector and the FOMC minutes from the March meeting that fell largely in-line with expectations. The Nasdaq Composite (+1.6%) ended its day ahead of both the S&P 500 (+1.1%) and the Dow Jones Industrial Average (+0.6%).

The broader market was able to shake some early risk-off tendencies as investors weighed a rally in crude against the imminent release of the minutes from the FOMC's latest meeting. The energy component extended an early rally following the Department of Energy's weekly inventory report. The report showed that crude oil stockpiles had decreased by 4.93 million barrels, compared to the estimated 3.15 million barrel build. As a result, WTI crude ended its day higher by 5.0% at $37.74/bbl.

On the central bank front, the minutes from the March FOMC meeting indicated that an April rate hike was discussed at the meeting, but ongoing concerns regarding global economic and financial developments warranted a more cautious approach. Meanwhile, the committee produced diverging opinions on whether the recent uptick in inflation was transitory or if it represented a firming trend.

The heavily-weighted health care space (+2.7%) ended its day ahead of commodity-sensitive energy (+2.1%) and the consumer discretionary (+0.9%) sector while countercyclical telecom services (-1.0%) and utilities (-0.1%) were the only two sectors to end beneath their flat lines.

In the heavyweight health care group (+2.7%), biotechnology outperformed as it rebounded from larger year to date losses. The iShares Nasdaq Biotechnology ETF (IBB 285.71, +16.07) ended its day higher by 6.0%. The beleaguered sub-group traded higher with Valeant Pharmaceuticals (VRX 34.17, +5.44). Valeant gained 18.9% after Pershing Square contended that Valeant's assets are not fairly reflected in its stock price. Separately, Allergan (AGN 244.74, +8.19) rebounded 3.5% after yesterday's tumble that followed new policies regarding corporate inversions.

Commodity-sensitive energy (+2.1%) displayed broad based strength, as the sector was the main beneficiary of today's rally in oil. Pipeline companies and independent oil and gas names finished with some of the largest gains in the sector. Conversely, refiners underperformed in the space after gasoline inventories showed a build instead of an expected draw. On that note, Valero Energy (VLO 61.68, -1.46) declined 2.3%. 

In the consumer discretionary space (+0.9%), Amazon (AMZN 302.08, +15.94) gained 2.7% after the online retailer announced a new e-reader. On the flipside, the lodging and leisure sub-groups underperformed after Wynn Resorts (WYNN 89.55, -1.37) preannounced revenue results that disappointed investors.

Rail names underperformed in the industrial (+0.2%) group as CSX (CSX 24.85, -0.19), Union Pacific (UNP 78.35, -0.27), and Kansas City Southern (KSU 85.88, -0.70) ended with losses between 0.3% and 0.8%. Elsewhere, machinery companies underperformed following Cummins (CMI 106.43, -1.59) being downgraded to "Neutral" at Buckingham Research.  

The U.S. Dollar Index (94.49, -0.25) surrendered its overnight gains as the greenback ended lower against the yen and the euro. The euro gained 0.1% against the dollar and finished at 1.1399. Separately, the dollar/yen pair lost 0.5% (109.77).

The Treasury Complex ended its day off its low as the yield on the 10-yr note rose three basis points to 1.75%.

Today's participation fell in-line with the recent average as more than 844 million shares changed hands on the NYSE floor.

Today's economic data included the weekly MBA Mortgage Index:

  • The weekly MBA Mortgage Index showed a seasonally adjusted increase of 2.7%.

Tomorrow's economic data will be limited to weekly initial claims (consensus 270k) and Consumer Credit for February (consensus $14.40 billion), which will be released at 8:30 ET and 15:00 ET, respectively. 

  • Russell 2000 -2.4% YTD
  • Nasdaq Composite -1.7% YTD
  • S&P 500 +1.1% YTD
  • Dow Jones +1.7% YTD

FT : Premier Foods says takeover talks with McCormick ‘constructive’

Premier Foods says takeover talks with McCormick ‘constructive’

Premier Foods said takeover talks with US suitor McCormick were “constructive” as it prepared to present to shareholders its argument that the spice company’s bid undervalued the heavily-indebted UK group.
Shares in the maker of Mr Kipling cakes and Bisto gravies rose 5 per cent on Wednesday after the announcement that the discussions, which began on Monday, were going well.
The two sides had also held “detailed” discussions of the potentially thorny problem of Premier’s large pension liabilities, the company said.
Premier will aim to smooth ruffled feathers at some of its largest institutional shareholders by embarking on a round of visits to explain why it believes McCormick’s second offer of 65p a share still undervalues the company.
Two of Premier’s largest shareholders — Standard Life and Paulson & Co — last month questioned the board’s objectivity in striking a tie-up with Nissin, the Japanese instant noodle maker, after it had rejected two takeover offers from McCormick.
A 44-page document, posted on Premier’s website on Wednesday, revealed that Nissin, which now has a 19.9 per cent stake in the British company, offered “value creation potential” that had not been taken into account by McCormick’s offer.
It said Nissin’s global distribution could accelerate Premier’s international expansion strategy, especially in the US, China and Brazil.
Premier said it could also benefit from Nissin’s research and development capabilities, citing Nissin’s 200 patents “in respect of noodle technology alone”.
It said the technology could be applied to some of Premier’s foods, notably its Batchelor’s range of instant soups and noodles.
The Japanese company became Premier’s single biggest shareholder after acquiring a 17.3 per cent stake from Warburg Pincus, the private equity group. Nissin has since acquired more shares to give it a 19.9 per cent stake and therefore considerable sway over the future of the group.

Premier said the benefits of the tie-up would come on top of its medium-term sales outlook of 2-4 per cent growth, which it doubled last week from its previous forecast of 1-2 per cent growth.
Premier was once the UK’s largest food company but a debt-fuelled merger and acquisition spending spree brought it to the brink of collapse in 2008.
Analysts at Liberum said last week that Premier’s “high debt level at 3.9 times net debt/ebitda and large pension liability of £4.2bn weigh on its share price and constrain the group’s opportunities. In our view, Premier is better off as part of a larger group.”
McCormick has until April 20 to make a firm offer for Premier or walk away for six months, under UK takeover rules.
Premier’s shares closed up more than 5 per cent at 58.5p on Wednesday.

FT : Megadeals are monopolising bond liquidity

The trend of blockbuster US corporate bond sales has, at least for now, a silver lining for investors.

For a $6.7tn investment grade market in which complaints about a lack of liquidity — the ability to buy and sell bonds without moving market prices too far — have become a common refrain, the final trading day of the first quarter last week was arresting.

More investment grade bonds exchanged hands on March 31 than on any day since the Financial Industry Regulatory Authority began tracking data in 2005. Nor is a single frenzied day’s trading the only evidence to emerge from a quarter to suggest the picture in a market that has ballooned in size since the financial crisis is far more complicated than one of vanishing liquidity.

Rather, trading is becoming more concentrated in a handful of new, mega-sized bonds. New debt sold by Apple, brewer Anheuser-Busch InBev and just eight other companies during the quarter accounted for almost a tenth of the trading in dollar-denominated investment grade bonds in March alone, according to an analysis of trades conducted by MarketAxess for the FT.

US bonds

“Liquidity is located in a few of the mega deals and a lot of the turnover has been lumped in those extremely large deals,” says James Shepard, head of investment grade debt capital markets at Mizuho. “You will get a $500m to $750m transaction that doesn’t trade very much at all. For smaller sized deals, there might always be a bid just not always an offer.”

Even concentrated trading is likely to be welcomed in a market from which Wall Street banks have been retreating, as higher capital costs force them to scale back from their historic role of facilitating the buying and selling of bonds for investors.

But relying on the ability of a small number of companies to borrow on an epic sale — AB InBev drummed up record orders for its January sale of $46bn of bonds to help fund its takeover of SABMiller — carries its own risks should the companies run into any sort of trouble.


“We want to be cautious,” says Lorenzo Napolitano, a portfolio manager with JPMorgan Asset Management “If there is another flare up that causes markets to trade off, you will see exacerbated moves.”

The muscle exerted by a handful of large bonds during the quarter came against the backdrop of robust issuance for investment grade debt which rose to $364bn in the first three months of 2016, just behind 2015’s record start to a year, according to data from Dealogic.

And while trading volumes have been brisk in vast, high-profile new debt, investors say activity in thousands of other bonds is declining even as the sustained period of low interest rates helps fuel the size of the overall market.

“When we think of liquidity and the challenges we’re seeing, liquidity has migrated to large and topical names,” says Sherif Hamid, a portfolio manager with AllianceBernstein. “It has been hard to trade the [smaller] and not topical names.”

Over the past 12 months, for example, less than two-thirds of high-grade bonds were traded sufficiently to match the size of the issues themselves, according to Finra. After the financial crisis, trading often took place at a frenzied enough pace that nearly 100 per cent of outstanding investment grade debt turned over in a year.

And investors say it is the reluctance of some Wall Street banks to shoulder the burden of creating liquidity that is sharpening the appeal of large issues among corporate fund managers who were accustomed to being able to trade in and out of smaller issues.

“The buy side has gotten so big relative to the dealer community that they need new issuance to add meaningful exposure as flows come in,” Mr Napolitano said. “Dealers don’t have the balance sheet capacity that they once had and as a result our reliance on the primary market has been growing.”

As ever, first quarter trading volumes were also shaped by the broader economic backdrop and appetite for risk, which rebounded after a torrid first six weeks of the year. High grade US debt returned nearly 4 per cent in the first three months, according to Barclays Indices.

Although investors jumped back in, they did so with more relish in the quarter’s biggest issues.

The volume of trades in a $2bn bond sold by Apple as part of a $12bn February financing package, for example, approached $3.1bn by the end of the quarter. If that pace were to continue for a full year, the bond would turn over more than six times.

“There’s less trading activity relative to the overall market size,” says Jon Duensing, deputy chief investment officer of Amundi Smith Breeden. “[Liquidity] certainly has become more focused in the larger issuers.”

That is happy news for the biggest borrowers, but brings its own risks.

>>> Pfizer’s next steps guided by external factors, consumer sale logic touted

MergerMarket

Pfizer’s next steps guided by external factors, consumer sale logic touted

* Consumer health divest rationale gaining traction
* Smaller acquisitions seen more likely than another mega deal
Pfizer [NYSE:PFE] is faced with several options after calling off its tie-up with Allergan [NYSE:AGN], but how it proceeds will likely be guided by factors including the US elections and market conditions, a source familiar with the situation said.

One alternative gaining traction to a proposed two-way split is for Pfizer to sell its consumer healthcare unit, several sector advisors said. This potential move could bring in USD 15bn, an analyst following the company suggested.

A Pfizer spokesperson referred this news service to the company's press release announcing the termination of the Allergan deal.

Pfizer shares rose about 3% Tuesday on expectations the Allergan deal would fail following the US Treasury’s release of new proposals to tackle tax inversion deals. In the statement on Wednesday confirming the deal would lapse, Pfizer said it would make a decision on a split of itself by year end.

The source familiar said that while the parties knew there was a possibility that Treasury could change rules further, no one expected it would be that “aggressive of an interpretation.” In particular, a rule that would lower Allergan’s value for tax inversion calculations presented greater deal risk. Even if it were possible to challenge the proposals, this could not be done before the required deal closing date, he said.

The share price increase indicates investors are more positive on Pfizer’s prospects ex-Allergan and prepared to give it time to rework its corporate strategy. The company had indicated it could separate its Innovative Products and Established Products divisions following an Allergan deal.

The Allergan deal failing does not change the probability of Pfizer being split, the source familiar said. A lot will depend on market conditions between now and year end, he said.

Baxalta’s [NYSE:BXLT] takeover approach from Shire [LON:SHP] so soon after being spun out of Baxter International [NYSE:BAX] could give shareholders hope that one of the divisions could become a target if Pfizer decides to split, one sector advisor said.

If market conditions are not conducive for a split, Pfizer has the option of divesting its consumer healthcare unit, the sector advisors said.

They questioned why the company would keep hold of a division with annual sales of about USD 3.5bn in the face of a number of much larger competitors.

The unit could attract a valuation of about 4x revenue, the analyst said. This is in line with market reports this year that GlaxoSmithKline’s [LON:GSK] consumer health joint venture with Novartis [VTX:NOVN] could be valued at least at 4x.

A sale of the consumer healthcare division would draw interest from large players in the space, such as Reckitt Benckiser [LON:RB], Bayer [ETR:BAYN], Johnson & Johnson [NYSE:JNJ] and Sanofi [EPA:SAN], according to the sector advisors. Reckitt CEO Rakesh Kapoor expressed interest in the division in 2015.

However, the unit’s growth potential and synergies with other parts of the Pfizer business could stay the company’s hand on consumer health, the source familiar and a second source familiar with the situation said. The second source familiar conceded that the unit is smaller than similar businesses owned by competitors.

Pfizer has operated on the basis of three internal units since 2013 comprising global established products, innovative pharma and vaccines, oncology and consumer healthcare. If Pfizer proceeds with a split, the consumer healthcare unit would be included in its new Innovative Products arm with vaccines and oncology.

While the consumer healthcare business could be evaluated on its own, it is a good business and not separated within its existing division, the first source familiar said.

For Pfizer to turn its attention to another mega deal would be a more difficult prospect to see, the sector advisors said. Any acquisitions in the meantime are likely to be in the small-to-medium space to bulk certain divisions up prior to a two-way split.