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* European shares trade lower
* Banks retreat after a week of gains
* BAT, homebuilders drag London stocks lower
Welcome to the home for real-time coverage of European equity markets brought to you by Reuters
stocks reporters. You can share your thoughts Joice Alves (joice.alves@thomsonreuters.com) and
Julien Ponthus (julien.ponthus@thomsonreuters.com) in London and Stefano Rebaudo
(stefano.rebaudo@thomsonreuters.com) in Milan.
CLOSING SNAPSHOT: SECOND DAY IN THE RED (1600 GMT)
European shares had a second consecutive day of losses ending a week rally driven by
optimism over a global recovery from the coronavirus crisis.
The pan European index was down 1.2% with banks, travel and oil stocks leading the
losses. Britain's blue chips slid 2% after managing to close in the black yesterday.
HSBC was the biggest weight on the London index after Aviva Investors, an investor
in the bank and peer Standard Chartered, raised concerns over their decision to back a
new security law in Hong Kong.
Just when it felt that stock markets were immune to negative data, the rally took a break as
investors are waiting also to hear from the Federal Reserve's two-day monetary policy meeting,
set to conclude on Wednesday.
Meantime, in its latest Global Economic Prospects report, the World Bank said that advanced
economies are expected to shrink 7.0% in 2020. On a per-capita GDP basis, the global contraction
will be the deepest since the Second World War.
(Joice Alves)
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EU RECOVERY FUND: NOT JUST PERIPHERAL FINANCIALS (1305 GMT)
There's more to it than just peripheral financials: the EU recovery fund could also boost
equities in other industries across Europe.
Morgan Stanley analysts reckon that while the likes of Spanish or Italian lenders are to
benefit the most from the Commission's spending plan, these 9 stocks are also well positioned:
France testing and certification group Bureau Veritas has the highest exposure to
European GDP.
Infineon the largest chipmaker in the auto semiconductor market will enjoy the
electrification trend.
Rexel has the highest exposure to Europe and to a possible renovation wave, such as
more digitalization.
Enel along with utilities will benefit from reduced market concerns about fiscal
situations weighing on renewable subsidies and utility taxes.
Amundi which is inexpensive compared to European peers and well exposed to
sustainable products, which are expected to be the winners of the post-Covid era.
Generali will be supported by yield spread tightening as the insurance sector "has
the greatest negative correlation with Btp spreads" and the group is the most exposed to
peripheral Europe.
Unicredit is a top pick because of its record low price to tangible book value of
0.3x despite having raised 20 billion euros in capital since 2016.
BNP despite a 40% rally since the EU recovery fund was announced as its valuation
is "discounting an excessively punitive outlook.".
AXA is one of the best ways to play the European insurance sector.
(Stefano Rebaudo)
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THE SHAPE OF YOU (1002 GMT)
As coronavirus lockdowns get lifted, the shape of economic recovery is again engrossing
economists' attention. Earlier in the crisis, we explored whether the recovery could be
bounceback, a slow-burn improvement or relapse. https://reut.rs/34lhVYT
The shapes being discussed now go beyond the usual "V", "U", "L"...
THE V: now seems hopelessly misplaced. On the bright side, that's the shape stock markets
are gunning for, having mostly recouped their coronavirus-linked losses. Lets look at the
others.
JOBLESS V -- When output rebounds but jobs return much more slowly "because the sectors most
hurt by social distancing have a very high labour intensity", according to BCA Research. Of most
importance to jobless or furloughed workers.
THE U - The next best thing to a V with a deep but short recession. Possible but starting to
look unlikely: Amundi assigns a 20% chance.
TICK -- Investment bank Berenberg favours a tick-shape -- "a significant but not quite
V-like rebound as economies re-open. After a first partial snap-back, the recovery is likely to
gradually lose some momentum." Berenberg expects most advanced economies to recoup pre-corona
GDP levels two years after the Q2'20 trough.
A REVERSE TICK -- Proposed by Rabobank, this entails "down huge and up a little", with some
jobs returning as economies reopen. But "once government payroll support schemes end we will see
just how ugly things really are", they warn.
SWOOSH -- Asset manager Kingswood tells clients this shape, resembling Nike's logo, is most
likely, with initial recovery followed by slower progress. This hinges also on how quickly
consumers start spending; -- the spectre of unemployment might entrench increased saving in "a
further barrier to a rapid recovery".
BASE SHAPE - A prolonged deep recession through much of 2020 but recovery beginning towards
year-end, then a rebound in 2021. Amundi sees a 50% probability.
THE L - The gloomiest outcome with a deep, long recession and depression, collapsing
businesses and secular stagnation. Amundi sees a 20% chance of this outcome.
THE T -- Another gloomy one, expected by Richard Woolnough at M&G Investments; a collapse,
then a rebound but the economic cycle eventually settling at lower levels than before.
How uncertain it all remains was evident from World Bank forecasts yesterday -- it predicted
the global economy to shrink 5.2% this year, then grow 1.3% in 2021, but released the figures
with a warning that downward revisions were likely.
(Sujata Rao)
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EU BANKS UNDER PRESSURE: NO DIVIS FOR LONGER? (1001 GMT)
Banking shares are the worst hit today as cyclicals have run out of steam while defensives
are back as favourites. A new recommendation on dividends is also weighing on banks.
EU banks shouldn't be allowed to pay dividends, bonuses, or buy back shares at least until
the end of this year, the European Systemic Risk Board (ESRB) said on Monday.
This will probably change the outlook also for shares in periphery financials, which were
expected to outperform as yield spreads are narrowing across Europe and the EU recovery fund is
likely to be approved broadly as announced.
An equity rally makes sense after an extended German fiscal stimulus and the ECB which
delivered with its boosted Pandemic emergency purchase program (PEPP), but a re-rating in banks
is not in the cards, according to a UBS research note.
"Taking them to 10x 2021 EPS and 9% implied cost of equity, puts the sector at real risk of
a substantial pullback at or before a 2Q earnings season," it says.
"With the eurozone banks up 40% since mid-May and a great deal of remaining uncertainty
around loan losses and RWA inflation to come, tonight's announcement is a reminder that for a
while at least, part of the sector is a zero coupon bond," it adds.
(Stefano Rebaudo)
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EXCESS LIQUIDITY CAN SUPPORT A RE-RATING IN EQUITIES (0855 GMT)
Analysts are trying to assess what has already been priced in and what is the long-term
outlook for European equities with the easing of lockdown measures and the announcement of
stimulus package, as Wall Street indexes rose close or beyond their pre-virus highs.
Credit Suisse is tactically neutral but strategically overweight as MSCI excluding U.S. is
expected to move sideways in the near term, but has room to grow 9.1% upside by the end of 2021,
a research note says.
No V-shaped economic recovery is expected, but most likely a U-shaped one with GDP to
pre-virus levels by mid-2022, it adds.
The investment bank forecasts an open-ended fiscal QE until unemployment gets close to
politically acceptable levels or when there is a large rise in inflation, along with looser bank
lending conditions.
This will also mean excess liquidity, as measured by the difference between M1 growth and
nominal GDP growth, is set to increase significantly helping equities re-rating, it notes.
Here are some of the reasons to stay cautious in the near term, according to CS:
- Biggest decoupling between earnings revisions and market performance since 1998
- Recent rise in bond yields
- Credit spreads implying a default rate at the peak of the 1990 and 2000 recessions
- A 31 July fiscal cliff in the U.S.
(Stefano Rebaudo)
*****
CYCLICAL STOCKS: A PIT-STOP OR A BREAKDOWN? (0820 GMT)
A big reversal this morning, cyclicals have run off steam and defensives are back as
favourites. Euro zone bank stocks are down today, the first decline in seven sessions.
Just when sell-side analysts were debating if this risk-on rally was sustainable, doubts
have emerged in the market, triggering a pull back.
"It looks like some profit taking", commented Stephane Ekolo from TFS Derivatives, noting
that U.S. futures had also fallen back in the red.
With the STOXX down 0.9%, it sure looks like a risk-off session is building up.
Some believe it is due to profit taking after nearly a month-long value/growth rotation,
here's a quick chart showing how value stocks performed in the last 1-month:
(Thyagaraju Adinarayan)
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ON THE RADAR: NO SHORTAGE OF M&A (0645 GMT)
This might not be the best year ever for M&A bankers but they sure seem to have a steady
pipeline of fees coming in with private equity buyers out and about.
Telefonica's German division signed a deal to sell thousands of phone masts for 1.5 billion
euros to finance 5G internet investments while Nestle is selling the North American business of
its Buitoni pasta brand.
A group of investors led by Czech billionaire Daniel Kretinsky has raised its stake in
ProseiebenSat.1 to more than 12%, Sueddeutsche Zeitung reported while some Italian
pension funds and bank foundation Cariplo are ready to support Italian infrastructure fund F2i
in its acquisition of a majority stake in motorway group Atlantia's unit Autostrade per l'Italia
(ASPI) wrote Il Sole 24 Ore.
Of course the M&A league table might look quite different at the end of 2020 if competition
authorities unexpectedly step in.
In what is probably giving merger arb funds cold sweats, EU regulators voiced concerns about
the Fiat Chrysler/Peugeot merger about the small vans markets.
On the other hand, Elanco Animal Health secured EU antitrust clearance to buy Bayer's
veterinary drugs unit after pledging to sell some products to address competition concerns about
the $7.6 billion deal.
There's also quite some scepticism though on a merger between AstraZeneca and Gilead
Sciences given the political hurdles involved, Wall Street analysts said.
Still corporates are not letting the sanitary crisis put them off and Swiss reinsurer Swiss
Re said it is looking into possible acquisitions.
COVID-19 pain hasn't however vanished from the radar with British American Tobacco cutting
its adjusted revenue forecast for the full year and housebuilder Bellway reporting fewer homes
sold between August and May.
On the bright side for the travel and leisure industry, Ryanair boss Michael O'Leary said he
believed Britain's coronavirus quarantine will be struck down by the courts or dropped within
weeks.
(Julien Ponthus)
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MORNING CALL: WAKE OF UP AND SMELL THE FOMO (0638 GMT)
European stocks are expected to open slightly up this morning but they just don't seem to
have what it takes to follow their U.S. peers to a yearly gain, let alone to new record highs.
While the Nasdaq yesterday closed at its highest point ever and the S&P pulled off a
year-to-date rise, the STOXX 600 remains 13.5% below its record and 10% down from the beginning
of the year.
There also hasn't been, in terms of the macro picture, the equivalent of the U.S. fall in
unemployment to drastically change the picture of the European economy.
And European bourses do look somewhat toothless without the equivalent of FAANGS to bite
into the V-shaped recovery investors are building their hopes upon.
Sure, the European Tech sector is up 2.8% year-to date, but that's a pale comparison to the
Nasdaq's 13.4% jump forward.
Anyhow, at the moment European blue chips futures are trading 0.5% up, lifted by a ninth
straight day of gains for Asian shares.
(Julien Ponthus)
*****
(Reporting by Stefano Rebaudo, Joice Alves and Julien Ponthus)
