(CS) Global Equity Strategy : Regional allocation

* Japan: reduce the size of our overweight, owing to GEM economic exposure and Abe's loss of popularity, but we stay overweight because Japan scores very well on our quant scorecard, is likely to have the most immediate policy response (we expect QQE to accelerate by ¥15trn in late October), the best earnings revisions (driven by underlying change, not just yen weakness), the best funds flow story (domestic investors, public and private, could buy c.11% of market cap), clear signs of corporate change (that may have been underestimated) and it is the cheapest region on EV/EBITDA. The problem is Japan's very high operational leverage, but if anything, we believe investors are now too pessimistic on global growth.

* Continental Europe: reduce the size of our overweight as 18% of sales come from GEM, it has the fewest signs of investor capitulation relative to other regions, and we fear that consensus is too bearish on the euro. However, we still believe investors should be overweight euro area equities as: (i) European equities are discounting just c.0.5% GDP growth and a sharp fall in macro surprises (with September's flash PMIs showing resilience) – we believe there is a genuine domestic demand story; (ii) to return to an average valuation on normalised earnings against the US, euro area equities have 10% upside potential; (iii) the very large output gap
means that, after Japan, there is the greatest scope for policy proactivity. We reduce German equities to benchmark (having reduced most of our overweight in March and having taken German autos to underweight in July). We stay underweight France but increase Spain to overweight and continue to like Italy.

* UK: remain benchmark: UK equities score second bottom on our quant scorecard, with valuations ex resources extended. UK equities correlate closely with GEM equities, where we are now benchmark. We take domestic cyclicals to underweight as UK growth is slowing, but wages are accelerating. We take the non-food retail sector to underweight.

* US: reduce the size of our underweight: The US has the lowest corporate sales and economic exposure to GEM, (relatively) improving earnings revisions and sentiment is depressed. The problem is that if global growth
accelerates or US rates rise, then the US underperforms and relative valuations (on P/B, Credit Suisse HOLT® and P/E) are now at the top end of their range.

(BofA-ML)FlowShow:Cash is King:Equities $3.3bil Outflows,$2.9b inflows in Europe

* Cash is King: investors put $17bn into money-market funds, $0.4bn into bond funds & withdraw $3.3bn from equity funds…note cash outperforming stocks and bonds this year, 1st time since 1990

* QE hopes spring eternal: inflows to both Europe & Japan equity funds; this week’s equity redemptions concentrated in US funds (in particular SPY)

* BofAML’s Bull & Bear Index (cross-asset flows, positioning, technical) now most bearish
level since Oct’11

>>> Asset Class Flows
- Equities: $3.3bn outflows ($2.9bn ETF outflows and $0.4bn mutual fund outflows)
- Bonds: $0.4bn inflows, ends 6 straight weeks of outflows
- Money-markets: $17bn inflows (largest in 4 weeks)
- Precious Metals: $0.1bn outflows (4 straight weeks of modest outflows)

>>> Equity Flows
- EM: tiny $95mn outflows = smallest outflows in 11 weeks
- Europe: $2.9bn inflows (inflows in 18 out of past 19 weeks)
- Japan: $0.9bn inflows (inflows in 29 out of past 31 weeks)
- US: $7.3bn outflows (note: SPY alone accounts for $7.4bn outflows)
- REITs the winning sector this week ($0.6bn inflows); Healthcare one of the only sectors to record outflows ($0.3bn)

>>> Fixed Income Flows
- $1.3bn outflows from IG bond funds (largest in 4 weeks)
- $0.2bn outflows from HY bond funds (outflows in 8 out of past 9 weeks)
- Govt/tsy funds see 12th straight week of inflows ($0.9bn)
- Small $0.1bn outflows from EM debt funds (9 straight weeks)
- Largest weekly inflows to muni funds since Jan’15 ($1.1bn)

>>> Japan Tobacco in discussions to acquire assets from Reynolds American valued

Japan Tobacco in discussions to acquire assets from Reynolds American valued at about USD 5bn 
Japan Tobacco (JT) [TYO:2914] is in negotiations to acquire assets from Reynolds American [NYSE:RAI] valued at around USD 5bn, according to a newswire report.

JT could acquire tobacco assets of Reynolds American, including part of the Natural American Spirit brand, Bloomberg revealed citing persons familiar with the situation. Although the talks are in the advanced stage, negotiations could still break down, adding that the size of the transaction and the assets involved could change, the persons, who requested anonymity due to the sensitivity of the information, said.

JT has been on an overseas acquisition binge as the domestic market is shrinking and the number of domestic smokers has stagnated, the report said.

Spokespersons for both Reynolds and JT declined to comment.

Newswire Round-up

>>> Elior in talks with US target; earmarks EUR 1bn for acquisitions (translated

Elior in talks with US target; earmarks EUR 1bn for acquisitions 

Elior, the listed French specialist in contract, concession catering and support services, has earmarked EUR 1bn for making acquisitions within five years, Le Figaro reported. The company was especially looking to acquire targets operating in the USA and the UK with annual sales of between EUR 50m and EUR 500m, the French daily reported citing chairman and chief executive Philippe Salle as saying.

Elior was currently in talks with a US company with USD 50m annual revenues and that the deal could be finalised by the end of the year, Salle added.

>>> Imperial Tobacco shares gain on renewed talk of break-up by BAT and Japan To

Imperial Tobacco shares gain on renewed talk of break-up by BAT and Japan Tobacco; CNTC also tipped as potential bidder 

Imperial Tobacco’s share price hit their highest ever price on 24 September on revived talk of a break-up bid from British American Tobacco (BAT) and Japan Tobacco, the Financial Times reported. The newspaper’s market report section did not cite a source for the speculation, but noted that executives from both Japan Tobacco and BAT held investor meetings last week in London.

Analysts cited by the report added a note of caution, however, arguing that Imperial’s strong performance had brought it level with BAT, while the Japanese government’s 33% interest in Japan Tobacco was also an issue.

The Chinese government controlled tobacco company CNTC had been tipped as a possible bidder for Imperial Tobacco, the item added. However, the analysts cited by the report argued that Imperial’s expansion in the US would be an obstacle to a tie-up with CNTC.

Imperial Tobacco’s share price closed 66p up at 3465p, valuing the company at GBP 33.16bn (EUR 45.21bn).

>>> SINOPEC Engineering to acquire EPC firms in Asia and Europe

SINOPEC Engineering to acquire EPC firms in Asia and Europe

SINOPEC Engineering (Group) (SEG) [HKG:2386], China’s state-owned refining and chemical engineering service provider, is scouting for targets of engineering, procurement and construction (EPC) peers in Asia and Europe, people familiar with the situation said.

SEG's spokesperson confirmed that such plans remain under the company's preliminary and internal discussions, but declined to specify details.

Such acquisitions would help facilitate the company to tap into the European refining engineering market, and to shore up its market presence in Central Asia, the Middle East and Southeast Asia, amid China’s efforts to implement its One Belt One Road initiative, the first person explained.

SEG has especially kept an eye on Indonesia, Thailand, Malaysia, India, and Kazakhstan, where the company has signed several engineering projects, and will sign more over the next few years, the first person added. SEG had acquired a local ECP firm in Saudi Arabia last year, where majority of its overseas engineering projects are located, he said.

The Beijing-based company will invest between USD 10m and USD 1bn in each acquisition target, which is subject to change pending the target’s EPC capabilities and client bases, the two people said.

Financial advisor for the Saudi Arabia acquisition was PwC and auditor was EY, the first person said. It will most likely hire them when identifying the next potential targets, he added.

SEG’s acquisition talks with potential targets in Germany and Italy collapsed between late last year and early this year due to difference in takeover prices, but it will keep hunting for targets in Europe though priority will be given to Asia, the second person said.

The HKD 29.5bn (USD 3.8bn) market cap company reported revenue of CNY 20bn (USD 3.1bn) and gross profit of CNY 3bn in 1H15, down 7.7% and 0.3% year on year.

SEG is controlled by China’s state-owned China Petrochemical Corporation (SINOPEC).

>>> What to look at today - 25th of September 2015

Dow-0.48% S&P-0.31% Nasdaq-0.38% Russell-0.26% VIX 23.13 +4.52%
US Market closed lower but on highs of the day. Auto sector pushed Europe lower and put pressure on US equities, Caterpillar (CAT 65.80, -4.40) as the manufacturer of heavy machinery lowered its guidance and announced plans to reduce its workforce by 4,000 to 5,000 people by the end of next year. Shares of CAT settled lower by 6.3%, keeping the industrial sector (-0.7%) among the laggards throughout the day. Financials (-0.7%) and health care (-1.1%) underperformed into the close, but their losses were outweighed by an intraday rally in energy (+0.4%) thanks to crude rallied 0.9% to $44.94/bbl after briefly dipping below $44.00/bbl, technology (unch), and consumer staples (+0.1%), Utilities sector (+0.8%) displayed relative strength throughout the day, building on its gain even as Treasuries slipped from their highs with the 10-yr yield narrowing its loss to two basis points at 2.13% after testing the 2.09%. Volume were ahead of average with 1bil shares. BRazil -0.11% BRL 3.9507 10y 16% US After Hours JBL +9.3%, NKE +7.9%, AEHR +6.2%, INAP -15.1%, PIR -7.4%, BBBY -0.9% following earnings/guidance...BLPH +81% on +ve Phase 2 & Phase 3..MRVL+5.3% on restructuring news (saving of 170/220mil)...Asian Market lower even if S&P trading higher on Yellen comments & Strong earnings from NKE & JBL... Yellen bolstered the case for 2015 liftoff that had been weakened by the unexpected dovish hold in the FOMC policy decision last week, suggesting overseas developments would not derail Fed policy path while also attributing soft price pressure to transitory factors...Japan nationwide core CPI registered its first decline since Apr of 2013. Japan cabinet office cut its overall assessment on economy for the first time since Oct of 2014, citing China slowdown and US rate hike risks contributing to "slowness in some areas" of Japan's economy. Fin Min Aso later stated the govt is still not considering additional fiscal measures and that consumer prices will rise moderately when excluding energy slide...Sharp (6753) -7% on H1 Update...Samsung -1.3% on spec to cut Chip investment.

Nikkei +1.33% Hang Seng +0.01% Shanghai -1.77%

Eur$ 1.1172 CNY 6.3767 JPY 120.34 EURCHF 1.0939 GBP 1.5225 BRL 3.9507 RUB$ 66.05 WTI $45.40(+1.09%)

S&P +0.42% EuroStoxx +1.76% Dax 1.91% SMI +1.18%


Macro :
- Yellen Confirms Fed Still on Track for 2015 Rate Liftoff
- German Minister Seeks to Change Car-Emissions Tests: Bild
- Italy Transport Ministry to Test 1,000 Diesel Cars: Ansa
- U.K. to Retest Vehicle Emissions After VW ‘Unacceptable Actions’
- Japan to Ask Automakers to Report on Emissions Compliance: NHK
- Kone CEO Says Asia-Pacific Mkt Seen Declining Slightly in 2015

Keep an eye on :
- BAYN GY : Bayer Says Benefits of Essure Continue to Outweigh Risks
- BMW GY : Auto Bild Says Has No Indication of BMW Manipulation, BWM ADRs Pare 6.4% Loss Following Spike, Currently Down 0.4%
- EDCL LI : Schlumberger Won’t Extend Pact to Buy Stake in Eurasia Drilling
- RDEN US : S&P downgrades rating two notches to CCC+ from B; outlook Negative
- FNC IM: Finmeccanica Board Approves Merger And Spin-Off Operations
- IAG LN : Accord to Call Off Spain Air Control Strikes Not Reached: ENAIRE
- IMT LN : Japan Tobacco (2914) +3.61%
- KONE AV : Kone CEO Says Asia-Pacific Mkt Seen Declining Slightly in 2015
- NOVN VX : Novartis Says It Will Defend IP Rights in Suit From Rigel Pharma
- SDF GY : K+S Investor Acatis Boosts Stake to Bet on Renewed Potash Bid
- SAN FP : Sanofi Said to Consider Sale of Bio-Surgery, Renal Businesses
- SAP GY : SAP’s Ariba Settles Trade Secret Litigation w/Coupa Software
- RIGN VX : Transocean Cited in Petrobras Carwash Corruption Investigation
- ROG VX : Roche CEO Says Pipeline Risk Has Diminished, FuW Reports
- TRI FP : Trigano FY Sales Beat Est., Further Improvement Seen in FY2016
- UMI BB : Bois Sauvage Raises Umicore Holding; NAV Climbs 12% in 1H
- DG FP : Lyon and Nice airports privatisation to launch mid-October, French Economy Minister says
- VOW3 GY : Seat Investments in Spain Not at Risk, Chairman Tells Europa
- VOW3 GY : Volkswagen to Be Subpoenaed in Diesel Vehicle Joint Probe (2)
- ZC FP : American Airlines has started looking for a new vendor to supply Business Class seats for its Boeing 787-9 http://bit.ly/1iyVea3

>>> Europe : Brokers Upgrades & Downgrades - 25th of September 2

>>> Up
*ARKEMA RAISED TO BUY AT HSBC
*EDP RAISED TO HOLD AT SOCIETE GENERALE
*ERICSSON RAISED TO BUY VS HOLD AT LIBERUM
*EVONIK INDUSTRIES AG RAISED TO BUY AT HSBC
*G4S RAISED TO HOLD AT HSBC
*JYSKE BANK RAISED TO BUY AT NORDEA
*POUNDLAND RAISED TO BUY AT HSBC
*RBS RAISED TO SECTOR PERFORM VS UNDERPERFORM AT RBC
*UCB RAISED TO OVERWEIGHT VS EQUALWEIGHT AT MORGAN STANLEY
*UNILEVER RAISED TO BUY VS HOLD AT BERENBERG

>>> Down
*AGGREKO CUT TO REDUCE AT HSBC
*AIRTAC INTERNATIONAL CUT TO HOLD AT HSBC

>>> PT Change
*SPIRE HEALTHCARE PT SET AT 363P AT MORGAN STANLEY

>>> Initiation
*AEGON ASSUMED AT OVERWEIGHT AT MORGAN STANLEY; PT EU6.4
*ALFA LAVAL RATED NEW REDUCE AT NOMURA; PT SEK123
*CNH INDUSTRIAL NV RATED NEW UNDERWEIGHT AT BARCLAYS
*DELTA LLOYD ASSUMED AT EQUALWEIGHT AT MORGAN STANLEY; PT EU8.9
*DRAX RATED NEW OVERWEIGHT AT BARCLAYS, PT 380P
*GEA GROUP RATED NEW BUY AT NOMURA; PT EU37
*JACQUET METAL SERVICE RATED NEW HOLD AT SOCIETE GENERALE
*JCDECAUX RATED NEW BUY AT JEFFERIES
*POLYMETAL RATED NEW UNDERPERFORM AT JEFFERIES; PT 470P
*RANDGOLD RATED NEW HOLD AT JEFFERIES; PT 4,000P
*SPIRE HEALTHCARE RESUMED AT EQUALWEIGHT AT MORGAN STANLEY
*STROEER SE RATED NEW BUY AT JEFFERIES

>>> Call
>> Country
*GERMAN EQUITIES CUT TO BENCHMARK AT CREDIT SUISSE
*SPANISH EQUITIES RAISED TO OVERWEIGHT AT CREDIT SUISSE
>> Stock
*BANKIA REPLACES DANSKE AMONG MORGAN STANLEY PREFERRED NAMES
*RBS REPLACES BARCLAYS AMONG MORGAN STANLEY PREFERRED NAMES

>>> Asian Update Nikkei +1.14% Hang Seng -0.06% Shanghai -1.83%

Asian Mid-session Update: Fed Chair Yellen solidifies expectations for 2015 liftoff; Japan core CPI turns negative as Cabinet Office lowers assessment

***Economic Data***- (JP) JAPAN AUG NATIONAL CPI Y/Y: 0.2% V 0.1%E; CPI EX FRESH FOOD Y/Y: -0.1% (first decline since Apr 2013) V -0.1%E - (JP) JAPAN SEPT TOKYO CPI Y/Y: -0.1% (first decline since May 2013) V -0.1%E; CPI EX FRESH FOOD Y/Y: -0.2% (largest decline since Apr 2013) V -0.2%E; CPI EX FOOD, ENERGY Y/Y: 0.6% (6-month high) V 0.5%E - (KR) SOUTH KOREA SEPT CONSUMER CONFIDENCE: 103 V 102 PRIOR; 3rd straight month of increase, highest level since May ***Index Snapshot (as of 02:30 GMT)

***- Nikkei225 -0.1%, S&P/ASX -0.3%, Kospi -0.7%, Shanghai Composite -0.8%, Hang Seng -0.2%, Dec S&P500 +0.2% at 1,922***Commodities/Fixed Income

***- Dec gold -0.5% at $1,147/oz, Nov crude oil +0.1% at $44.96/brl, Dec copper +0.3% at $2.31/lb- SLV: iShares Silver Trust ETF daily holdings fall to 9,898 tonnes from 9,928 tonnes - GLD: SPDR Gold Trust ETF daily holdings rise 3.9 tonnes to 680.3 tonnes; 3rd straight increase- (AU) Australia MoF (AOFM) sells A$300M in 4.5% 2033 Bonds; avg yield: 3.1734%; bid-to-cover: 2.39x

***Market Focal Points/FX

***- Asian equity markets are generally lower, tracking continued pressure on US stocks on Thursday, even though S&P futures turned higher in electronic trade. Strong earnings out of NKE and JBL are helping repair some of the damage done by Caterpillar's guidance cut before the open. USD is also notably higher on somewhat more hawkish remarks by Fed Chair Yellen after market close. Yellen bolstered the case for 2015 liftoff that had been weakened by the unexpected dovish hold in the FOMC policy decision last week, suggesting overseas developments would not derail Fed policy path while also attributing soft price pressure to transitory factors. Note that Yellen was also reported to have received some medical attention due to dehydration after that speech, but subsequently recovered enough to avoid a trip to the hospital. EUR/USD was down some 70pips in the wake of her remarks, USD/JPY rose 30pips above 120.30, and AUD/USD fell some 40pips to $0.6980.

- Offshore Chinese Yuan firmed through CNH6.41 after PBoC's Sheng stated the currency devaluation and recent capital outflows would be over in a short term, also adding that interest rate reform is nearly finished. Separately, chief economist from the central bank called on Beijing to promote green investment and control spending on polluting sectors in Belt and Road initiative, just as China and US were reported to have scheduled a conference to announce new climate change measures that may include the former launching cap and trade carbon market by 2017. Also of note, local press reported China issued more formal guidelines requesting that SOEs (state-owned enterprises) accept mixed ownership. Recall about 2 weeks ago China also unveiled SOE reform measures encouraging state entities to become publically traded.- Japan nationwide core CPI registered its first decline since Apr of 2013, prompting a meeting between PM Abe and BOJ Gov Kuroda to discuss economy and monetary policy. Even though the core-core (ex energy) prints were less troublesome, investors will monitor for any hints of the BOJ being urged to do more easing at its late October meeting when it also releases its updates on inflation and growth. Concurrently, Japan cabinet office cut its overall assessment on economy for the first time since Oct of 2014, citing China slowdown and US rate hike risks contributing to "slowness in some areas" of Japan's economy. Fin Min Aso later stated the govt is still not considering additional fiscal measures and that consumer prices will rise moderately when excluding energy slide. Econ Min Amari was of similar opinion, stating there was no need to change the official 2% inflation target or prepare more stimulus at this time.

***Equities***
US equities / ADRs:- BLPH: Announces positive data from interim analysis of Phase 2 Long-Term Extension Study of INOpulse(R) for treatment of pulmonary arterial hypertension; +82.8% afterhours - JBL: Reports Q4 $0.53 v $0.45e, R$4.68B v $4.60Be; +9.4%
afterhours
- NKE: Reports Q1 $1.34 v $1.19e, R$8.41B v $8.22Be; +8.3% afterhours
- MRVL: Restructures Mobile Platform Business; to cut 17% in headcount; to take $100-130M in charges; +5.0% afterhours
- BBBY: Reports Q2 $1.21 v $1.21e, R$3.00B v $3.03Be; Authorizes $2.5B share repurchase (about 25% of market cap); -0.6% afterhours- PIR: Reports Q2 $0.04 v $0.08e, R$430M v $436Me; -6.6% afterhours
- INAP: Guides Q3 R$77.5-79M v $83.2Me; EBITDA $18-19M; lowers FY outlook; -15.1%

afterhours Notable movers by sector:
- Consumer staples: Japan Tobacco Inc 2914.JP +3.0% (speculation to buy Reynolds' asset)
- Financials: Financial Street Holdings Co 000402.CN -2.3% (acquisition); New World Development 17.HK -0.4% (FY15 result); Huishang Bank 3698.HK +1.5% (share issues); Insurance Australia?IAG.AU -0.9% (speculation of investment in China)
- Technology: Sharp 6753.JP -7.1% (update on H1 earnings and guidance); Samsung Electronics 005930.KR -1.3% (speculation to cut chip investment); Leshi Internet Info & Tech Co Beijing 300104.CN -7.1% (new smart TVs)- Healthcare: Alchemia ACL.AU +94.3% (sells drug IP)

>>> Fed Chair Yellen Key Excerpts

Fed Chair Yellen Key Excerpts

  • This framework suggests, first, that much of the recent shortfall of inflation from our 2 percent objective is attributable to special factors whose effects are likely to prove transitory.
  • As the solid blue portion of the bars shows, falling consumer energy prices explain about half of this year's shortfall and a sizable portion of the 2013 and 2014 shortfalls as well. Another important source of downward pressure this year has been a decline in import prices, the portion with orange checkerboard pattern, which is largely attributable to the 15 percent appreciation in the dollar's exchange value over the past year. In contrast, the restraint imposed by economic slack, the green dotted portion, has diminished steadily over time as the economy has recovered and is now estimated to be relatively modest.
  • Fortunately, prospects for the U.S. economy generally appear solid. Monthly payroll gains have averaged close to 210,000 since the start of the year and the overall economy has been expanding modestly faster than its productive potential. My colleagues and I, based on our most recent forecasts, anticipate that this pattern will continue and that labor market conditions will improve further as we head into 2016.
  • Although the unemployment rate may now be close to its longer-run normal level--which most FOMC participants now estimate is around 4.9 percent--this traditional metric of resource utilization almost certainly understates the actual amount of slack that currently exists: On a cyclically adjusted basis, the labor force participation rate remains low relative to its underlying trend, and an unusually large number of people are working part time but would prefer full-time employment.
  • First, the real federal funds rate is currently somewhat below the level that would be consistent with real GDP expanding in line with potential, which implies that the unemployment rate is likely to continue to fall in the absence of some tightening. Second, participants implicitly expect that the various headwinds to economic growth that I mentioned earlier will continue to fade, thereby boosting the economy's underlying strength. Combined, these two judgments imply that the real interest rate consistent with achieving and then maintaining full employment in the medium run should rise gradually over time. his expectation, coupled with inherent lags in the response of real activity and inflation to changes in monetary policy, are the key reasons that most of my colleagues and I anticipate that it will likely be appropriate to raise the target range for the federal funds rate sometime later this year and to continue boosting short-term rates at a gradual pace thereafter as the labor market improves further and inflation moves back to our 2 percent objective.
  • As I noted, most of my colleagues and I anticipate that economic conditions are likely to warrant raising short-term interest rates at a quite gradual pace over the next few years.
  • The economic outlook, of course, is highly uncertain and it is conceivable, for example, that inflation could remain appreciably below our 2 percent target despite the apparent anchoring of inflation expectations. Here, Japan's recent history may be instructive.
  • The Committee is monitoring developments abroad, but we do not currently anticipate that the effects of these recent developments on the U.S. economy will prove to be large enough to have a significant effect on the path for policy.
  • Why not hold off raising the federal funds rate until the economy has reached full employment and inflation is actually back at 2 percent? The difficulty with this strategy is that monetary policy affects real activity and inflation with a substantial lag. If the FOMC were to delay the start of the policy normalization process for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession. In addition, continuing to hold short-term interest rates near zero well after real activity has returned to normal and headwinds have faded could encourage excessive leverage and other forms of inappropriate risk-taking that might undermine financial stability. For these reasons, the more prudent strategy is to begin tightening in a timely fashion and at a gradual pace, adjusting policy as needed in light of incoming data.