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LIVE MARKETS-Closing snapshot: Calm before the storm

Mon, 15th Apr 2019 17:05


* European shares inch up * Goldman Sachs results fail to impress * IWG jumps by a fifth after sale of Japan operations * Broker notes drive Nokia, Siemens Gamesa April 15 - Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Danilo Masoni. Reach him on Messenger to share your thoughts on market moves: rm://danilo.masoni.thomsonreuters.com@reuters.net CLOSING SNAPSHOT: CALM BEFORE THE STORM (1604 GMT) There's a definite sense of calm before the storm today in European markets as investors brace for the onslaught of earnings to come later in the week. Look under the bonnet of broadly flat indices though (in keeping with the minimal moves we've seen most of this month), and there have been some big moves: office space firm IWG has soared 21 percent after selling its Japanese operations, and Indivior has jumped 19 percent after Bernstein suggested there is potential for a $3 billion fine from the U.S. DoJ to be reduced. Otherwise, the top movers are mostly driven by broker notes. Results from Goldman Sachs failed to impress the market, with revenue declines across nearly all its main businesses sending shares down. European banks ended the day up 0.4 percent, after trading up as much as 0.7 percent earlier in the session. (Helen Reid) ***** UK BANKS: AS HARD BREXIT RECEDES, POSSIBLE CORBYN VICTORY LOOMS LARGE (1507 GMT) With the chances of hard Brexit receding, you'd think the headwinds around the country's chaotic exit from the European Union that have alarmed investors would be reducing. But analysts are now turning their attention to the growing possibility of a snap general election in the UK as lawmakers struggle to agree on the future of Brexit negotiations and the consequences of a possible left-wing Labour party victory. Labour leader Jeremy Corbyn has pledged a radical shake-up of public ownership of infrastructure, utilities and public services, including a renationalisation of Royal Bank of Scotland. Citi puts it pretty bluntly in a note today. "The impact on UK domestic bank EPS could potentially be similar in magnitude to a no-deal Brexit outcome, mainly due to a fall in business investment, housing controls, less cost flexibility and higher taxes," Citi's Andrew Coombs and team write. Earnings cuts of 15-25 percent are not beyond the realm of possibility, they say. UK banking shares would likely fall sharply if Corbyn was voted into power. How they react thereafter would depend on the state of the economy and how many election manifesto pledges are enforced. It may be surprising, then, that in the same note, the team say they have switched their preference within the UK banking sector to domestically focused firms over international ones. That's the opposite of a year ago. Their reasoning? The economic and political environment is uncertain, but valuations are well below their long-run average, giving some allowance for those risks. UK domestic banks' shares fell significantly in 2018 - down 22-26 percent - compared with 16-22 percent for UK international banks, whereas consensus EPS expectations for 2019 were stable to up year on year for the three large-cap domestic players. "Overall we believe the risk-reward remains attractive for the UK domestic banks, especially as the risk of no-deal Brexit looks to be receding," the report says. Meanwhile, international lender HSBC has a valuation in line with its long-run average, with EPS risks to the downside, according to them. They have a 'sell' rating. The bank has a 'buy' rating on RBS and Lloyds - the former offers a 10-14 percent all-in yield and the latter 9-11 percent. Below Citi has charted the UK banks' implied equity risk premium which has risen to above 10 percent, well above the long-run average of about 6 percent: (Helen Reid and Josephine Mason) ***** FALLEN ANGELS IN A CREDIT CRUNCH (1343 GMT) During the next credit crunch, will the markets be able to absorb the debt that moves down to speculative grade? That's an increasing concern among investors as we enter the late stages of the prolonged upturn, particularly given the large number of loans issued at 'BBB', the lowest category of investment grade. Some $2.2 trillion of non-financial corporate debt in Europe, the Middle East and Africa was sitting just one notch above junk status at the end of 2018, according to S&P Global Ratings. That's up 80 percent from 2007. The Triple Bs pose a risk of credit market disruption if a large proportion of issuers are downgraded during the next global recession or credit cycle downturn. Based on historical downgrade rates, some $250 billion of Triple B debt could be cut to junk in a severe downturn, S&P says. The good news? While it sounds big, S&P says it's manageable for the market to absorb. "This market has been able to accommodate sizable downgrades in the past without notable disruption, and while this would have some effect on borrowing costs, we consider this amount in itself to be manageable," the report says. (Josephine Mason) ***** ARE U.S. STOCKS, THE DOLLAR, AND GROWTH STOCKS STILL SAFE? (1135 GMT) To all those holding the U.S. dollar, U.S. equities, and growthy stocks, hoping these assets will differentiate portfolios in volatile times, don't be so certain! Traditionally, investors have flocked to these for their defensive "low-beta" properties. "But history gives a much more mixed picture (for all three), and on a trailing three-year basis all have been acting like high-beta assets," write Morgan Stanley strategists. Let's rewind a bit: what exactly is beta? It's easy to confuse it with correlation. But while correlation measures how closely two assets move in relation to each other, beta also measures the magnitude by which the asset moves relative to the market. Morgan Stanley strategists define it as "a measure of risk arising from exposure to overall market moves" and say it's critical to portfolio construction. Those assets widely seen as "low beta" should actually not be categorised that way anymore, they argue: * U.S. equities' beta to global equities has risen to a 15-year high, while the rest of the world's beta has hit a 15-year low * Growth has been lower beta than value for most of the last decade, but recently the beta of Value stocks to global equities has been falling - making them a lower-beta asset compared with Growth * The beta of USD to global equities has started to rise Food for though ahead of the next sell-off, perhaps! (Helen Reid) ***** AUTO INVESTORS HAVE ALREADY PUT THEIR HELMETS ON (1030 GMT) Export-oriented autos are likely to be much in focus here in Europe as the earnings season gets underway but UBS argues there are high chances that (very bad) Q1 numbers may just be shaken off as the focus has already turned to a recovery in Q2. "With global car sales down -4% y/y and production down even -6% in Q1, investors have already put their helmets on, just waiting to shake off the debris of a likely very bad Q1 results season," analysts at Swiss investment bank say. "Sentiment has clearly been on the rise as of late, and we agree that a gradual recovery starting Q2 (driven by a positive swing in China demand and de-stocking coming to an end) is the most likely scenario," they add. That being said the team led by Patrick Hummel doesn't believe it's time to uncork champagne: "We don't get enthusiastic on the sector as Western markets are likely to decline this year". Turning back to Q1 they see Volkswagen posting the best OEM result with a drop in operating profit of just 6 percent year-on-year. Daimler stands at the other end of the spectrum with an expected EBIT drop of 32 percent excluding one-offs. Despite the poor expectations for the first quarter, Europe's auto index has rallied strongly year to date as the sector has joined a global catch-up rally following a turbulent end to 2018. (Danilo Masoni) ***** WHEN QUALITY IS TOO PRICEY (0922 GMT) "With a U.S. recession widely expected at some point over the next 12-18 months and very little earnings growth forecast in Europe, many wish to be positioned in 'Quality'. However the valuations seem prohibitive." That's how Bernstein summarises what it calls the quality dilemma. It then tries to offer investors looking for shelter during a possible economic slowdown a cheaper way out. "While there is strong evidence that ROE performs well in a Slowdown and Recession, with these all-time high valuations we prefer to cast a wider net and look for Quality elsewhere. Our preferred measures are a blend of Earnings Quality in Europe, and Low Leverage within sectors globally," strategists at the U.S. firm say. Unlike operating quality measures such as ROE which are trading at all-time valuation highs, they highlight that Earnings Quality in Europe remains cheap both on PE and PB metrics. Want some picks? The screens they include in their note feature names across various sectors. Their "Europe: Blended Earnings Quality - high" list, for example, includes stocks such as phone group Deutsche Telekom, brewer Heineken, oil major Eni, transport conglomerate AP Moeller Maersk, builder Vinci, miner Glencore , telco equipment supplier Ericsson, and utility Enel. Below a chart showing how valuations of ROE in Europe have become pretty expensive. (Danilo Masoni) ***** GREEN SHOOTS IN EARNINGS SENTIMENT (0834 GMT) Spring has well and truly sprung, even for microeconomic indicators which are, according to Goldman Sachs, pointing to an uptick in the global economy after a weak first quarter. EPS sentiment bottomed in early January, oscillated for two months, and has recently improved again, GS analysts say (see below). "This should be encouraging to macro investors who are still on the fence about the prospects of global growth improving heading into Q2," they argue. What's more, earnings sentiment in sectors seen as economic bellwethers has been giving a positive signal since January. Which are the best bellwethers? GS says delivery companies, home improvement stores, banking institutions, and technology exporters most often tend to lead the macro data. Overall, "EPS sentiment has improved the most in consumer and real estate companies, has just turned the corner for Information Technology, but is still lagging in Industrials," they write. This sector divergence may reflect the fact an easing in financial conditions and lower interest rates helps consumer companies, but the capex cycle is still relatively weak. (Helen Reid) ***** CHINA, CHINA, CHINA (0756 GMT) Looks like global markets have turned their attention towards China, yet again. Be it growth or the U.S.-China trade deal, research houses at global banks are optimistic. They see strong activity levels recently and believe that's going to drive another round of all-time highs in global markets. "We still expect global equities, led by China and the S&P 500, to make a significant new all-time high before one should start to position for the next recession," JP Morgan equity strategists say in a note. Goldman Sachs sees mining companies well positioned as China property staged a V-shaped recovery post Chinese New Year. "China concerns are overdone." The economy is responding to stimulus measures put in place, according to a GS note from last week. "...we could well be starting to see the beginnings of an economic pickup in China, after several months of poor data," Michael Hewson at CMC Markets says. Investors are next looking to China's March-quarter gross domestic product data due Wednesday. (Thyagaraju Adinarayan) ***** BANK BOOST, DEFENSIVES SLIDE, STOXX FLAT (0732 GMT) European shares have opened broadly stable today with banks showing further strength and hitting their highest in more than 6 months as last week's earnings beat from JP Morgan and easing worries over the economy bring some relief to the battered sector. No surprise then that the bank-heavy Italian index is outperforming its peers, climbing to its highest in more than eight months, while the broader STOXX 600 is just about flat as defensives like consumer and healthcare stocks are taking a hit with Nestle falling further from the fresh record high hit last week. Its fall is dragging on the Swiss SMI index, last down 0.15 percent, while gains in sterling have put a cap on the exporter-heavy UK FTSE 100 index. Here's your opening snapshot: (Danilo Masoni) ***** WHAT YOU NEED TO KNOW AT THE OPEN (0657 GMT) European shares are expected to start the week on a positive note with the STOXX 600 seen climbing back towards its mid-August highs after fresh trade optimism and encouraging Chinese data lifted shares in Asia overnight. Futures on main country benchmarks are up 0.1-0.2 percent. In corporate news, results have started to trickle in with Vivendi posting higher first-quarter revenue and saying it was making progress on the planned sale of up to 50 percent of its UM music arm. Its shares are up 2 percent in premarket trade. In M&A, eyes on Publicis after saying it will pay $4.4 billion to acquire Alliance Data's Epsilon marketing unit. Elsewhere, Daimler is seen falling at the open on reports that Germany's motor vehicle authority is investigating the carmaker on suspicion that 60,000 Mercedes cars were fitted with software aimed at tricking emissions tests. Other stock movers: Acacia Mining backs full-year production forecast; Monocle CEO says no one has asked to buy company - FT; ING Group Chairman Andy Green to step down; Barclays activist Bram son in fresh letter to investors over board seat; Remus operator WIG to sell Japan operations for 320 million pounds For more headlines check out the previous post. (Danilo Masoni) ***** FUTURES ON THE UP, EARNINGS START TO TRICKLE IN (0615 GMT) The good mood seen in Asia on the strong Chinese data and signs of the Sino-US trade talks entering a final stage has spread to Europe this morning with futures on main country benchmarks opening up around 0.2 percent. On the corporate front, earning updates have started to trickle in (Vivendi and Mowi) and dealmaking talk continues. Media conglomerate Vivendi posted higher Q1 revenue and said it was making progress on the planned sale of up to 50 percent of its UMG music arm, while Publicis said it will pay $4.4 billion to acquire Alliance Data's Epsilon marketing unit. Meanwhile Mediaset and ProSiebenSat.1 denied merger talks. Here is you full headlines roundup: Publicis pays $4.4 bln for Epsilon to extend digital reach Vivendi Q1 sales jump; makes progress on UMG stake sale Top fish farmer Mowi's Q1 earnings lag forecast Rio Tinto commits extra $302 mln for Resolution copper project Italy's Mediaset, ProSiebenSat.1 deny merger talks Regulators press Deutsche Bank to shrink U.S. investment unit- FT Swiss insurer Baloise to buy Belgium's Fidea for 480 mln euros Volkswagen expects core brand's global 2019 sales to be in line with last year German motor authority probes more Mercedes emissions software -Bild Britain's Brewin Dolphin in talks to buy Investec's Irish wealth business Santander seeks full ownership of Mexican business with $2.9 bln deal Portugal's market regulator gives ultimatum to China Three Gorges in bid for EDP Britains's Non-Standard Finance flags errors on past dividends Ethos Foundation asks shareholders to vote down UBS executive pay proposal Norsk Hydro's earnings delayed by 5 weeks due to March cyber attack (Danilo Masoni) ***** EUROPEAN STOCKS SEEN HIGHER (0529 GMT) European shares are expected to edge up at the open today following gains in Asian markets overnight on signs of the Sino-U.S. trade talks entering a final stage. Financial spreadbetters expect London's FTSE to open 9 point higher at 7,446, Frankfurt's DAX to open 23 points higher at 12,023 and Paris' CAC to open 6 points higher at 5,508 Over in Asia, shares neared nine-month highs after U.S. Treasury Secretary Steven Mnuchin said he hoped U.S.-China trade talks were approaching a final lap, while strong Chinese export and bank loan data boosted confidence in the global economy. (Danilo Masoni) *****



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