FT : Diageo drifts after merger talk revival, SAB Merger of Equal ?

A revival of Diageo merger speculation helped give traders a distraction from another grim day for the FTSE 100.
The drinks maker should consider a merger of equals with SABMiller, said Nomura analysts. Cost savings could add 18 per cent to combined profits and would face few regulatory hurdles, it said.

Diageo and SAB have been frequently rumoured to have investigated a tie-up, and in 2007 considered a joint bid for Scottish & Newcastle.
With Diageo’s growth stalled and SAB reported to be looking at strategies to fend off AB InBev, a deal might make sense to both management teams, said Nomura.
“We estimate that with circa 50:50 emerging and mature market split of profits, a merged group could offer a firmer profit base in uncertain times (for SABMiller holders) and potentially increase its growth profile in the longer term (for Diageo holders),” Nomura told clients.
The biggest SAB shareholders, the Altria and Santo Domingo families, might also prefer a merger to an InBev takeover for tax reasons, the broker added.
SAB closed 3.1 per cent lower at £29.46 and Diageo drifted 0.9 per cent to £16.98, which valued the drinks makers at £48bn and £43bn respectively.
Miners led the wider market lower after weak German factory data kept the pressure on metals prices. The FTSE 100 lost 2.4 per cent, dropping 151.18 points to 6,042.92, which took its weekly decline to 3.3 per cent.
Anglo American lost 7.8 per cent to 668.5p to lead Friday’s fallers as open-market diamond prices slipped towards five-year lows.
Anglo’s De Beers unit is seen as the main support for its dividend, having provided 37 per cent of first-half earnings.
Glencore was down 6 per to 123.2p. The commodity trader still needed to cut 2016 net debt by between $6.5bn and $7.5bn to avoid a rating downgrade, and reduced funding for its marketing business would result in sharply lower earnings, forecast JPMorgan.
“Unless commodity prices rise, we believe capital preservation measures will render Glencore’s medium-term equity appeal unattractive,” it said.
Evraz, the steelmaker controlled by Roman Abramovich, was the sector’s relative outperformer on a loss of 2.6 per cent to 66.2p.
A move this week to by Polyus Gold’s owners to take the miner private has increased speculation that Russian companies are facing renewed pressure to delist from foreign exchanges.
BP faded 5 per cent to 337.9p on a downgrade to “underperform” from Merrill Lynch.
The energy major faced a free cash flow shortfall to the end of 2017 as the sector sought to maintain dividends, defend their ratings and bolster reserve bases with mergers and acquisitions, Merrill said.
Engineer GKN fell 3.9 per cent to 270.2p with Investec downgrading to “hold” on a potential slowdown in car production in China and other emerging markets.
Clothing retailer Next faded 3.1 per cent to £75.95. UK consumer strength had been overestimated and, while Next was well positioned to adapt, the headwinds to growth made its valuation look stretched, argued Exane BNP Paribas, which downgraded to “underperform”.

FT : Diageo drifts after merger talk revival

A revival of Diageo merger speculation helped give traders a distraction from another grim day for the FTSE 100.
The drinks maker should consider a merger of equals with SABMiller, said Nomura analysts. Cost savings could add 18 per cent to combined profits and would face few regulatory hurdles, it said.

Diageo and SAB have been frequently rumoured to have investigated a tie-up, and in 2007 considered a joint bid for Scottish & Newcastle.
With Diageo’s growth stalled and SAB reported to be looking at strategies to fend off AB InBev, a deal might make sense to both management teams, said Nomura.
“We estimate that with circa 50:50 emerging and mature market split of profits, a merged group could offer a firmer profit base in uncertain times (for SABMiller holders) and potentially increase its growth profile in the longer term (for Diageo holders),” Nomura told clients.
The biggest SAB shareholders, the Altria and Santo Domingo families, might also prefer a merger to an InBev takeover for tax reasons, the broker added.
SAB closed 3.1 per cent lower at £29.46 and Diageo drifted 0.9 per cent to £16.98, which valued the drinks makers at £48bn and £43bn respectively.
Miners led the wider market lower after weak German factory data kept the pressure on metals prices. The FTSE 100 lost 2.4 per cent, dropping 151.18 points to 6,042.92, which took its weekly decline to 3.3 per cent.
Anglo American lost 7.8 per cent to 668.5p to lead Friday’s fallers as open-market diamond prices slipped towards five-year lows.
Anglo’s De Beers unit is seen as the main support for its dividend, having provided 37 per cent of first-half earnings.
Glencore was down 6 per to 123.2p. The commodity trader still needed to cut 2016 net debt by between $6.5bn and $7.5bn to avoid a rating downgrade, and reduced funding for its marketing business would result in sharply lower earnings, forecast JPMorgan.
“Unless commodity prices rise, we believe capital preservation measures will render Glencore’s medium-term equity appeal unattractive,” it said.
Evraz, the steelmaker controlled by Roman Abramovich, was the sector’s relative outperformer on a loss of 2.6 per cent to 66.2p.
A move this week to by Polyus Gold’s owners to take the miner private has increased speculation that Russian companies are facing renewed pressure to delist from foreign exchanges.
BP faded 5 per cent to 337.9p on a downgrade to “underperform” from Merrill Lynch.
The energy major faced a free cash flow shortfall to the end of 2017 as the sector sought to maintain dividends, defend their ratings and bolster reserve bases with mergers and acquisitions, Merrill said.
Engineer GKN fell 3.9 per cent to 270.2p with Investec downgrading to “hold” on a potential slowdown in car production in China and other emerging markets.
Clothing retailer Next faded 3.1 per cent to £75.95. UK consumer strength had been overestimated and, while Next was well positioned to adapt, the headwinds to growth made its valuation look stretched, argued Exane BNP Paribas, which downgraded to “underperform”.

>>> Weekly Market Update

Weekly Market Update: Market Instability Reigns as Financial Officials Mull Next Moves


Even as the fall season approaches, the dog days of summer continued to hound world financial markets this week. Enduring uncertainty in China and weakness in Brazil took their toll on global equities, and while the ECB made a dovish move, members of the US Federal Reserve signaled that a September rate hike was still very much in play. Friday's highly anticipated US jobs report was strong enough to support a rate liftoff decision, but not enough to guarantee it. Oil prices joined the equity markets in their volatility, and world finance leaders met in Ankara, Turkey, to address all these concerns at the G20 meeting. As US traders worried about overseas trading during next Monday's Labor Day holiday, a risk-off mentality won the week, and the S&P ended down 3.4%, the DJIA lost 3.2%, and the Nasdaq dropped 3%.

On Friday, US stock traders were looking at a lower open even before the release of the Aug employment report, and the report didn't disappoint in terms of fueling the debate around the Fed. Most observers looked past a headline miss in payrolls because the July figure was revised substantially higher, hourly earnings and average weekly rose faster than expected, and the unemployment rate fell to the lowest level since the Spring 2008 at 5.1%. The report was generally viewed as bolstering the case that the door remains open for the Fed to tighten as soon as this month. Subsequently, the spread between 2- and 10 year Treasury yield narrowed to 142 basis points, the flattest level since April, while in equities prices extended declines with the utility sector hitting a new 1-year low. Emerging market currencies experienced a fresh bout of selling against the Dollar as the Euro and Yen found willing buyers once again.

In terms of what members of the Federal Reserve are actually saying, the tone of the Jackson Hole symposium was fairly hawkish over the weekend. The consensus was that the FOMC should begin tightening monetary policy as early as the next meeting, despite the slowing Chinese economy, low inflation, and the elevated volatility in financial markets. The highlight of the event was Fed Vice Chair Fischer's remarks, in which he said there was no need to wait for inflation to reach the 2% target to justify a rate hike. BOE Governor Carney also played down the Chinese situation, noting it did not yet warrant a strategy change and that the BOE is still on course to start raising rates early next year. ECB Vice President Constancio applauded the very gradual increases in inflation seen in the Eurozone supported by stimulus.

In the ECB's post-rate decision press conference, ECB President Draghi asserted that the central bank has the will and the capacity to ease further if necessary after the staff downgraded the Eurozone inflation forecast. The ECB staff cut 2015, 2016 and 2017 inflation forecasts, with 2015 inflation lowered to 0.1% from 0.3% prior and 2016 chopped to 1.1% from 1.5%. Draghi warned that the Eurozone could see another bout of deflation and placed blame once again at the feet of weak oil prices, but said the period of disinflation would be transitory. He also announced that the ECB had raised the amount of any single issue that it could buy under the standing QE program to 33% from 25%, and reiterated that the bank was prepared to do more, if needed. Analysts widely believe Draghi has effectively teed up another round of policy easing with these moves, and EUR/USD has responded in kind, dropping more than one big figure to 1.1111, the 100-day moving average, from 1.1230 ahead of the press conference.

China reported more disheartening data early in the week. The final reading of the Caixin manufacturing PMI confirmed a six-year low, while the official government PMI number entered contraction for the first time in six months. Volatility in the Chinese stock market died down substantially and markets were closed there on Thursday and Friday for a national holiday. At the end of the week, however, Japan bore the brunt of global investors' general de-risking trade. Despite early positive indications that ECB dovish moves on Thursday could buoy Asian markets Friday, the Nikkei ended down 2.2% on the day and down 7% for the week, its worst weekly drop since April 2014. A Wall Street Journal report that Japan and North American auto industry disputes are holding up completion of the TPP agreement didn't help shift momentum, either.

August US manufacturing data was pretty soft, reflecting the stronger dollar and heightened uncertainty seen in the month. The final Market manufacturing PMI survey declined to 53.0, its lowest reading in two years, with declines seen in employment and new orders. Markit said that new orders from abroad have now fallen in four of the past five months, which represents the weakest phase of manufacturing export performance since late 2012. The ISM manufacturing survey hit 51.1, the lowest level since May 2013, with the new orders component down nearly five points to 51.7, which nearly matches the two-year low reached in March.

WTI crude saw its strongest three-day streak in 25 years between last Thursday and this Monday, as the front-month contract rallied from below $38 on Thursday to peak above $49 intraday on Monday. The gains were attributed to a variety of factors including the Baker Hughes rig count stabilizing over the last six weeks, declines in US production over recent months as seen in the EIA's inaugural June Petroleum Supply Monthly report, and an OPEC Bulletin article that asserted the cartel was willing to talk with non-OPEC producers on "a level playing field" about steps to get "fair prices." Analysts dismissed the rally as unrealistic and unsustainable, and prices fell somewhat after the weekly API and EIA inventory reports both showed substantial increases in crude stocks. Friday's oil markets saw some stabilization around $46 in WTI after the Baker Hughes rig count revealed a 2% decline for US oil rigs, the largest weekly decline in months.

US Treasury Sec Lew had some tough comments for China regarding its August yuan devaluation, taking Beijing to task on the ramifications of its FX actions. Meanwhile, there were reports that the IMF was welcoming more steps by the PBoC to provide greater market influence for FX rates, which would make it more inclined to include the yuan in the SDR basket. Back in late August, the IMF board deferred to next year any the decision to include the yuan in the basket.

August auto sales figures beat expectations, though some firms saw a y/y decline because the Labor Day holiday weekend falls outside of the month this year. Ford led the pack with a 5% y/y gain, for its best August in nearly a decade. Fiat-Chrysler saw its 65th straight month of sales growth, with August sales up 1.7%, fueled by continued strong sales in the Jeep division. General Motors sales fell 0.7%, slightly less than expected. Japanese firms also saw declines in the month, with sales from Toyota down 8.8%, Honda off 6.9% and Nissan down 1% y/y, although they met or exceeded expectations.

The pharma sector had some notable M&A action. Lannett reached a deal to acquire generic drug maker Kremers Urban Pharmaceuticals for $1.23 billion, whose main product is a generic form of J&J's Concerta, used to treat attention deficit hyperactivity disorder. The market rewarded the deal with a more than 10% pop in Lannett's stock. Synergetics agreed to be acquired by Valeant for $6.50/share in cash - for a total of $166M - and up to $1.00/share in further milestones. The acquisition is aimed at expanding Valeant's Bausch + Lomb business. Baxalta ended negotiations to acquire Ariad, which it was considering as a defense against Shire's unsolicited all-stock takeover bid. A report on Friday said that some other big pharma firms might be interested in Ariad.

>>> US Close Dow-1.66% S&P-1.53% Nasdaq-1.05% Russell-0.78%

Closing Market Summary: Stocks End Week on Cautious Note Amid Rate-Hike Jitter

The stock market finished the first week of September on a defensive note after a daylong retreat pressured the S&P 500 (-1.5%) back to Wednesday's opening levels. The benchmark index lost 3.4% for the week while the Nasdaq Composite (-1.1%) outperformed, ending the week lower by 3.0%.

Equity indices slumped out of the gate, responding to the overnight weakness in the futures market. To that point, index futures began marching lower during the Asian session, setting pre-market lows after this morning's release of the Nonfarm Payrolls report for August. At first glance, the report appeared mediocre as the headline number came in below expectations (173,000; Briefing.com consensus 217,000); however, better than expected hourly earnings growth (+0.3%; consensus +0.2%) and a drop in the Unemployment Rate (to 5.1% from 5.3%) meant that the report is unlikely to deter the Federal Reserve from raising the fed funds rate as early as this month.

Treasuries fell from their overnight highs immediately after the report, but the 10-yr note found support on its flat line. The benchmark instrument traded little changed as the equity market opened, but returned to its overnight high as equities retreated throughout the day. Thanks to the intraday strength in Treasuries, the 10-yr yield fell four basis points to 2.12%.

Interestingly, the Dollar Index (96.27, -0.13) only saw a brief spike back to its flat line after the jobs report before setting a fresh session low. The greenback surrendered about 0.2% to the euro (1.1145) and gave up 0.9% against the yen (119.05).

In some ways, today's retreat was not that surprising since the U.S. market will be closed for Labor Day on Monday while potentially-volatile trading will resume in China after a two-day holiday. As a result, today's action at the NYSE floor generated a trading volume of 828 million, which was a bit below totals observed earlier this week.

Today's daylong retreat induced some demand for volatility protection, evidenced by the CBOE Volatility Index (VIX 27.87, +2.26), which returned near its closing level from August.

All ten sectors finished the day in negative territory with financials (-1.9%) and materials (-2.0%) ending at the bottom of the leaderboard. Elsewhere, the health care sector (-1.3%) finished a bit ahead of the broader market thanks to relative strength in biotechnology. The iShares Nasdaq Biotechnology ETF (IBB 337.79, -0.84) shed 0.3%, which helped the Nasdaq settle ahead of the S&P 500. Meanwhile, large cap Nasdaq components traded in-line with the broader market.

Elsewhere, the energy sector surrendered 1.7% on Friday, widening its weekly decline to 3.1%. On a related note, crude oil slid 0.7% to $45.97/bbl, ending the week higher by 1.7%.

Taking another look at the August Nonfarm Payrolls report:

  • Nonfarm payrolls increased by 173,000 (consensus 217,000)
    • July nonfarm payrolls revised to 245,000 from 215,000
    • June nonfarm payrolls revised to 245,000 from 231,000
  • Private sector payrolls increased by 140,000 (consensus 210,000)
    • July private sector payrolls revised to 224,000 from 210,000
    • June private sector payrolls revised to 218,000 from 227,000
  • Unemployment rate was 5.1% (consensus 5.2%) versus 5.3% in July
    • The U6 unemployment rate, which accounts for the total unemployed plus persons marginally attached to the labor force and the underemployed, was 10.3% versus 10.4% in July
    • Persons unemployed for 27 weeks or more accounted for 27.7% of the unemployed versus 26.9% in July
  • Average hourly earnings increased 0.3% (consensus 0.2%) after a 0.2% increase in July
    • Aggregate earnings were up 0.7% versus a downwardly revised 0.4% increase in July.
    • Over the last 12 months, average hourly earnings have risen 2.2% versus 2.1% in July
  • The average workweek was 34.6 hours (consensus 34.6) versus a downwardly revised 34.5 hours in July

Bond and equity markets will be closed on Monday in observance on Labor Day.

  • Nasdaq Composite -1.1% YTD
  • S&P 500 -6.7% YTD
  • Russell 2000 -5.6% YTD
  • Dow Jones Industrial Average -9.7% YTD

(BofA-ML) What's Moved this week & why?

WHAT’S MOVED THIS WEEK & WHY?

BofA Merrill Lynch Sales Trading

MTD Performance: SX5E -2.53%,UKX -2.93%, CAC -2.40%, DAX -1.81%, IBEX -4.14%,FTSE MIB -1.92%, S&P500 -2.36%

 

Best & Worst Performing Sectors:

TRAVEL & LEISURE - Short squeeze in the airlines puts sector top of pile..u/c

METALS & MINERS - Bottom of the pile again, China pain still very clear...-7%

 

ELEKTA - Squeezed as orders/sales beat, huge short base, 18.4%............+8%

NEOPOST - Beat on 2Q numbers, sees slight improvement in sales, 7% SI.....+8%

INSAT - Rallying post successful launch, pushing on in flight connectivity+7%

RUBIS - Beat on numbers on Monday 1H net EUR80m vs EUR52m, +45% YTD.......+6%

AIR FRANCE - Indicative of covering in sec, +ve investor meeting with CEO.+6%

UCB - Osteoporosis drug romosozumab met its goals in phase 3 study........+6%

ASHTEAD - Revs +26% incl rental revenue +20%, SI 4.6%, cont to push short.+5%

RYANAIR - Passenger numbers +10% YoY, Jacobs: had a 'very strong summer'..+5%

TITR IM - TI said to consider $6 billion stock conversion.................+5%

ASTRAZENECA - Announces partnership with ARX for brodalumab drug..........+4%

AMEC FOSTER - H1 results in line with recent IMS, rev and EBITDA fine.....+4%

SYNGENTA - To divest global vegtble seeds business & annces USD2bn buyback+4%

GRF/P SM - FTSE AW changes announced, MLe +2.2m 28x ADV, close Sept 18th..+4%

MEGGITT - Continues to rally, bid spec rumours the driver 16% off highs...+4%

COBHAM - Cont August rally (+8%) having digested composites biz to MGGT...+3%

EASYJET - Rallied post solid traffic stats and upgrade to guidance........+3%

AB INBEV – Company not interested in diversifying into spirits, flat YTD..-3%

BASF - BBG says may be liable for asbestos from Englehard acquisition.....-3%

GEMALTO – Continuing selloff aftr disp. #s on 26 Aug(lwr margin & inc opx)-3%

PREMIER FARNELL – To be deleted from FTSE250 on Sept18, MLe -1.8m 1.83 ADV-3%

QSC – According to CFO, Stefan Baustert, company may cut divdend, flat YTD-3%

AIRBUS - We think Asian airlines profit cycle at peak.Poses risks to AIR..-4%

BP - We DOWNGRADE to Underperform. Risks of capex cuts & dilutive M&A.....-4%

BUREAU VERITAS - #s broadly inline but outlook weaker & likely FX d'grades-4%

AMADEUS – We d/grde to Neutral, w/ LHA GDS-surcharge disputes have begun..-4%

VIVENDI - Revenues beat, but margins a touch light. We keep a Buy rating..-4%

IMMOFINANZ – Secondary placing intention regarding BUWOG announced........-4%

PGS – Redces CAPEX 2016 by USD50m, sees weak market conting well into 2016-4%

CASINO – >50% of sales comes from S.America,SA curncies weakened this week-6%

DIPLOMA – Org. growth headwinds continued, COO steps down, -5% YTD........-5%

CAIRN ENERGY – BAML downgrade from Buy to Neutral, -21% YTD performance...-5%

EVONIK – Institutional Inv. sold 6.99m shrs @31.80 (CS is sole book runne)-5%

DRAX – FTSE AW changes announced, MLe -6.9m 3.8 ADV, close Sept 18th......-5%

COMMERZBANK – Chief Risk Officer Schmittmann is stepping down @end of year-5%

GERRY WEBER – Leaves MDAX index will be included to SDAX,-45% YTD.........-5%

INGENICO – Secured backing fom banks for Worldpay bid,-15% snce BID inten.-6%

ENGIE - We DOWNGRADE to Underprfrm, we see grwing risk of dvdnd cut aft‘16-6%

LANXESS – To be deleted from DAX on Sept. 21, BAML BUY-rating, +11% YTD...-6%

TELEFONICA - We d/grde to U/P, EM exposure warrants a more cautious view..-6%

WEIR – To be deleted from FTSE100 on Sep18, MLe-2.1m 1.93ADV..............-6%

ILIAD – Govt is considering audiov. tax on televisn to incl internet boxes-7%

FLGHF ZUERICH – H1 net CHF40.2m vs est. CHF43m, -11% since Aug, +7% YTD...-7%

ASOS – CEO Nick Robertson will step down 15y aftr he co-founded, +8% YTD..-7%

EDF – Flamanville nuclear reactor startup delayed to 4Q ’18 from 2017.....-8%

RWE – To be deleted from Euro Stoxx 50 on Sept. 21th, BAML U/P-rating.....-8%

REPSOL – To be deleted from Euro Stoxx 50 on Sept.21th, BAML U/P-rating...-9%

HALFORDS – Sees cyclng sales belw curnt est. for 2Q,-18% snce high in Aug-11%

GLENCORE – Grwing inv. concerns that it may be forcd into an equity issue-14%

ABENGOA – El Confi report: some banks won’t underwrite planed capitl incr-13%

LONMIN – To be deleted from FTSE250 on Sept 18th, MLe -2.9m 0.46 ADV.....-16%

 

EMEA HF WEEKLY DIGEST:

 

Hedge Fund News:

~ Kevin Stadtler’s Stadtler Capital Management is opening to new investors this month. The equity long/short tech-focused fund has been closed to investors since September 2014 and will be capped at $250m.

~ Aberdeen Asset Management launched the Aberdeen Alternative Strategies Fund with $500m as the firm’s first alternatives fund that can be marketed across the EU.

~ Hedge Fund launches in Asia are on track to decline for the 3rd straight year as equity-market volatility prompted investors in the region to pare risk.
41 new hedge funds opened in Asia in H115, compared to 55 for the same period in 2014 (according to Eurekahedge).
Among the biggest launches this year were Christopher Lee’s Zentific and Adam Levinson’s Graticule Asia Macro Advisors.

~ Hedge funds reduced net exposure to 77% going into Q3 2015, the first reduction since Q3 2013. However, net exposure in USD notional increased by 0.7% to $791bn, a record high.

~ Hedge funds owned 5.95% of the Russell 3000 floats at the start of Q3 2015, a new record high.

 

Flow:

~Cash: Another volatile week, clear selling in the tech and telco space on the move lower (Deutsche Tel, Nokia, Alcatel etc.).
Short covering in the airlines a key theme post strong EasyJet numbers and guidance upgrade, active in all names. Covering in the miners clearly evident over the week, as was reshorting of the oil and gas space.

~ Options: flow has been relatively quiet this week following last week’s chunky hedges whilst futures flow was heavily skewed to sell.
The moves in skew (second-order risk/ indicator of market stress) have been extreme – we are now in the 99th 2yr %ile vs 0 %ile 3 weeks ago as banks scramble to cover positions and put supply dries up.

~ Program: A busy first half of the week on PT with month end and MSCI rebalance on Monday followed by a strong start to the month with total flow above average.
We continue to see ETF redemptions but only 50% of what we saw last week, leaving us small net sellers on the week.

 

Top Research of the Week:Bullish Euro Telcos but Downgraded Telefonica to Underperform (EUR12.50 PO)

~ We believe the European Telcos sector is well positioned to outperform, with investors positioned neutrally and the sector on track to meet and beat growth levels implied in current valuation.

~ Two positive drivers: mobile data (where we see usage growth outstripping deflation in lower tiers), and convergence where we see evidence of structurally lower churn and ARPU stability.

~ Two new thematic drivers: Content, where we see TV as an increasing factor in telco growth strategies, although market make up is significantly diverse and E-Sim, which could be a boost to machine to M2M growth within the wider internet of things, but from a consumer perspective we see as an emerging threat to the telco operators.

~ Bearish on TEF due to EM exposure as a significant risk to earnings, dividend and valuation.

 

Top Trade for Next Week: Sell Home Retail into Trading Statement – Thursday 10th

~ Continues to lose market share to Dixons and Carphone Warehouse.

~ Amazon really starting to hurt them.

~ Yes net cash but burning through it.

~ 45,000 workers will be hurt by new minimum wage changes; management will have to quantify the impact.

 

MEGA Europe:

~ Gilles Moec believes that the ECB will announce an extension to QE by year end, but are waiting for China / Fed before acting.
2015/16 inflation expectations were lowered due to oil, while 2017 core inflation was the delta à evidence the ECB are missing their price stability mandate - more QE

~ Positioning looking more supportive in Europe, limited flow in options market (still dominated by banks), but we have been big sellers of EU futures and cash unwinds continue (note SX7E, SXQP underperformance today)

~ Our flows show short positioning in EURUSD is 35%-40% off the highs so there is scope for Euro to trade back towards 1.10. FX will lead equities, EUR weakness buy Dax

~ Inflation falling in Europe, with growth increasing. Buy high-yielding equities again. BAML basket MLEILRDV Index (low-risk dividend names) outperformed meaningfully in Q1 this year last time this trade worked

 

BAML USA:

~ Hartnett - Expects a Fed hike & a Sept mkt rally, with the stage set by forced selling of crowded winners, limited financial system contagion, China stimulus and a very "dovish" Fed hike will likely spark a tactical rally. If Fed doesn't hike & investors don't abandon hope on growth, barbell of Über-growth & Über-value should outperform.

~ Flows – 1st equity inflows into the US for 3 weeks ($8.4bn). Caveat: $7.2bn of inflows were via SPY, which could be short interest, via create-to-lend process.

~ Risk Parity – Much has been made recently of the threat of forced selling by risk parity and other quant funds during recent market shocks.
However, "vol control" funds are the real culprit, as tail events in vol of vol can exacerbate deleveraging flows.
Estimated selling pressure last week was less outsized than many surmise & less likely to recur given higher vol backdrop.

~ Molson Coors – If you think ABI will buy SAB then TAP is a great derivative trade in the US. Very likely to buy out the US MillerCoors JV which would be 35-55% accretive in 2106 on our numbers.

 

BAML Asia:

~ A continuation of the same theme from European clients, not engaging in the markets and fading the bounce.

~ Shortened China week due to V-day saw some shorts being taken off, especially with the continued National Team support to the markets. Crucial to see CNY and SHCOMP next week.

~ Seeing sellers of India – the well owned names, either due to redemptions or locking in of the performance as the markets feel heavy.

~ Interestingly some Long funds have been looking at consumer staples in China, incoming requests as these are now perceived to be at attractive levels.
~ Likewise in Japan, global long fund concerned with the macro, and while many agree we should see increasing buy back announcements, clients would like to wait for evidence.

 

BAML EEMEA:

~ Between the crucial ECB and Fed meetings, we maintain our constructive view on EEMEA on a one-month horizon though volatility will be high between today’s US payrolls and Sep 17.

~ In EM equities all of our timing tools triggered “buy” signals this week.

~ Chinese monetary conditions improved most since 1Q14, which then led to a multi-month EM rebound. And the Sep 17 Fed hike our US team expects should clear the air for some covering of the large EM underweight across asset classes.

~ From a valuation perspective, EMFX is now the cheapest vs. fair value since 2009 thought not as cheap as after the Asian crisis.

~ In equities we prefer CEE and South Africa as they tend to be relatively correlated with G-10 equities and don’t have much idiosyncratic downside risk.

 

Stock Loan:

~ BWIN.PARTY – Withdraws recommendation for 888 offer and supports GVC’s raised bid – 25p in cash and 0.231 new shares for every share of BPTY. GVC to raise £150mln via s share placing.
Negligible shorts in BPTY, c. $75m in lending pools trading just off GC. c.5% free float on loan in GVC, up from <0.5% pre the initial offer. Borrow is limited, <$2m on lender feeds and traded up to 3.5% fee.

~ NESTE / FORTUM - Reuters reported that Finland is planning to sell shares in state-owned companies worth about €1.6bn by 2018 to finance growth projects.
Eero Heliovaara from Finland's state ownership steering department declined to specify the sales plan, but the state owns stakes of c50% in Neste and Fortum. Short interest of 8% and 5% respectively in the names, both liquid borrows – GC.