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LIVE MARKETS-Banks: 7 days on fire

Tue, 6th Oct 2020 14:52

* European shares in positive territory

* Tech top fallers, banks shine

* Trump returns to the White House

* S&P 500 gains on prospects of more stimulus
Welcome to the home for real-time coverage of European equity markets brought to you by Reuters
stocks reporters. You can share your thoughts with Joice Alves (joice.alves@thomsonreuters.com)
and Julien Ponthus (julien.ponthus@thomsonreuters.com) in London and Danilo Masoni
(danilo.masoni@thomsonreuters.com) and Stefano Rebaudo (stefano.rebaudo@thomsonreuters.com) in
Milan.

BANKS: 7 DAYS ON FIRE (1350 GMT)

Banks may not be a great long-term equity investment in a world of sub-zero rates but over
shorter time frames their record cheapness gives them the potential to shine, especially when
markets rebound from sharp pull backs.

Take today, bank stocks are stealing the show in Europe by rising 3.3% which brings
their cumulative gains since the Sept. 25 sell-off to an outstanding 9.8% -- their best
seven-session streak since early June.

Falling bond prices that sent 10-year Treasury yields to their highest in over 5 weeks are
giving a helping hand, as optimism about fiscal stimulus in the world's No.1 economy grows.
Fresh M&A chatter doesn't hurt either.

Over the same 7 sessions, EU banks have outperformed the STOXX 600 by more than six
percentage points.

(Danilo Masoni)

*****

CREDIT HIGH YIELD BETTER THAN EQUITIES? (1345 GMT)

The TINA (there is no alternative) effect has been pretty much in play recently but there is
more than stocks in the financial markets for yield hunters.

UBS relative valuations indicate “high-yield credit is still valued attractively relative to
equities from a tactical risk-reward perspective.”

Its base case forecasts indicate high yield could continue to outperform, particularly in
the EU.

Total returns expected through 2020 stand at roughly 3.1% for U.S. high yield and 1.3% for
EU high yield, versus 3.6% for the S&P 500 & -5.2% for the Stoxx 600.

Central banks liquidity is expected to provide “a buffer to credit” in risk-off scenarios
such as a contested U.S. election, no U.S. stimulus as well as a hard Brexit, a UBS research
note says, adding the bank sees U.S. high yield spread widening to be limited to 50-75 basis
points and EU’s to 55 basis points.

“Global high yield credit markets have seen an increase in quality this cycle. Low
defaulting BBs equal 55% and 68% of U.S. and EU high yield, near all-time highs.”

(Stefano Rebaudo)

*****

SUEZ: MAYBE MACRON COULD LEARN A THING OR 2 FROM BOLLORÉ! (1305 GMT)

A long time ago, in a country far, far away, there long had been a sense that one couldn't
go hostile against a national blue chip without some sort of implicit go-ahead from the
government.

After what was seen as a humiliating blow when Canada's Alcan successfully took over
aluminium group Pechiney after an acrimonious stock market battle in 2003, the French state
seemed determined to oust unwanted capitalist riff-raff from its home turf.

It was credited a few years later with saving French yoghurt giant Danone from the U.S.
hands of Pepsi and successfully engineering the merger of energy group GDF with Suez to protect
the latter from the appetite of Italy's Enel.

Fast forward to 2020, the French government has been unable to stop Engie, in which it holds
close to a quarter of the capital, to sell its 29.9% Suez stake to hostile rival Veolia.

In a rare twist, the French state's representatives voted against the deal but were ignored
by the rest of Engie's board.

"By far the biggest shareholder with over 20% and not even able to win a vote at the
board!", French economist Jean-Charles Simon jokingly commented on Twitter.

Ouch.

Simon added that the French state could probably learn a thing or two from business mogul
Vincent Bolloré, known both as a successful raider and for his ability to control companies
through minority shareholdings.

"The state should really take lessons of de facto control of companies from Vincent
Bolloré", Simon commented on Twitter, referring to how the businessman became chairman of the
board of Vivendi after gradually increasing his minority stake in the media and telecom
conglomerate.

Bolloré is currently in an uncertain tug-of-war over French media group Lagardere with
France's richest man Bernard Arnault.

Asked to comment on the Suez situation, a French M&A banker added a pinch of salt to simon's
take, arguing it actually didn't look as if the French government had thrown all of its might in
the battle and that a foreign company may have face much stronger resistance.

In fact, the negative vote at Engie's board could very well have been casted in a bid to
save face rather than to spoil the deal entirely, he said.

There's indeed been some rumours in the French press that behind the scene, Veolia's bid for
Suez was not as badly received as last night's vote might suggest and that a friendly deal was
all the government was asking for.

Some reading:

French Finance minister urges Suez and Veolia to reach an agreement

Suez vows to fight Veolia's $13 billion takeover project

(Julien Ponthus and Gwenaelle Barzic)

*****

ESG SPLASH (1254 GMT)

Fund flows are a magnificent tool showing where investors are putting their money to work.

A monthly research from Barclays reveals that investors have been more risk-on in September
with global equity inflows reaching the highest levels since the start of COVID-19.

But what is also gathering momentum are the so-called ESG-labelled funds, which have self
reported as SRI/ESG.

Such vehicles "have picked up pace after a brief summer lull," Barclays writes.

YTD, flows into global ESG-labelled equity funds as a percentage of asset under management
was a whopping 32.3%!

See the numbers from Barclays below:
All regions, except EM, received more inflows into ESG-labelled funds last month compared to
August. In the chart below, Barclays shows ESG fund flows YTD compared to last year.

(Joice Alves)

*****

SHORT-SELLERS IN CORONAVIRUS TIMES (1128 GMT)

We know short positions can be risky but also extremely profitable and during a pandemic
there's no short of investors trying to fetch some profits amid high volatility.

Let's take a look at what's happening at the London stock exchange:

Short sellers returned to profit on bets against the UK’s blue-chip index in September after
recording 420 million pound of losses in the previous month, according to the latest data from
Ortex Analytics.

The pendulum has swung back quickly as in September we’ve seen short sellers continue to
“profit from the uncertainty surrounding the pandemic,” Peter Hillerberg, co-founder of Ortex
Analytics says.

Four of the top 5 most profitable trades this month were significant loss-making trades in
August, he adds.

(Stefano Rebaudo)

*****

REAL BREXIT COUNTDOWN (1030 GMT)

Much has been written on the chaos that could run over businesses when a Brexit transition
period ends in December as the UK and the EU have yet to set the terms of their future trade
relationships.

Three months to the deadline, more and more bankers are now pointing that they do expect at
least a 'skinny deal' because amid the economic distress caused by the pandemic the two parts
just can't afford a no-deal Brexit.

"We believe the mutual determination to avoid compounding the economic challenges posed by
the COVID-19 pandemic should ultimately ensure that disruption to trade and economic activity at
the end of the transition period is minimal," UBS writes.

The UK and the EU have said recently that they have made progress but not yielded a
breakthrough.

But what are the main hurdles?

The Swiss bank compared the proportion of the time negotiators employed discussing main
areas in the first round of conversations in March and now, finding out that state aid and
fisheries "are two of the most significant remaining bones of contention".

See in the chart below other areas that are taking up a large share of negotiators' time.

(Joice Alves)

*****

BEWITCHED BY THE BANK SIRENS (1009 GMT)

They may not be as bewitching as the mythological sirens that Ulysses tried (and managed) to
resist but bank valuations are so low that indeed you can't just pass by and ignore them.

Among those being tempted this time are Barclays analysts. And today's price action, with
European banks up 1.9%, would suggest they are not the only ones.

"We find valuations hard to ignore," they say. "The market appears to be discounting either
dilution or profitability remaining at 2020/21 levels indefinitely."

To be sure risks remain in a sector often seen as a value trap and Barclays suggests that
investors be selective.

Check out this chart showing how European banks are trading at record cheap valuations.

(Danilo Masoni)

*****

MARKETS ARE IMPROVING BUT THE ECB IS NOT DONE (0859 GMT)

The latest numbers show a much better situation for financial markets than before the
summer, but that doesn’t mean the ECB has completed its job.

A Unicredit research note argues that the ECB has less “need to fight market fragmentation”
though with inflation well below its target it will “continue buying assets in large size also
next year.”

The Pandemic Emergency Purchase Programme (PEPP) was at 67 billion euros in September up
from 59 billion in August but well below the pre-summer pace.

Unicredit expects “another 220-275 billion euros of purchases until the end of the year, so
total purchases of public security assets this year should amount to almost 1 trillion euros.”

It also calculates that ECB purchases should be enough to cover net supply in most countries
this year, while in Germany and the Netherlands net government bond supply is likely to exceed
ECB purchases.

The ECB bought less Italian and Spanish government debt in the past two months as market
pressure on both indebted countries stayed low despite a resurgence of COVID-19 cases.

(Stefano Rebaudo)

*****

BREXIT: REMEMBER THE HUNDRED YEARS’ WAR? (0825 GMT)

Seems quite far-fectched to compare Europe's longest military conflict with the current
Brexit fishing rights row but there is an understandable case in managing investors' sudden
optimism on the UK securing a comprehensive trade deal with the EU.

The pound is currently displaying a fresh sense of optimism about the current negotiations
and the FTSE 250, a typical gauge of Brexit market stress, is easily outperforming most of its
peers with a 0.4% rise.

But according to Commerzbank FX analyst Antje Praefcke, the fishing rights issue opposing
Paris and London, however secondary it might seem, shouldn't be underestimated.

"History has shown that any disagreements on matters of sovereignty between the two
countries can take a very long time – just remember the Hundred Years’ war", she wrote in the
German bank's morning note today.

Not that it's the only sticking point.

"Even without this issue there are still a number of other contentious matters, such as the
Irish border, that have to be solved quickly", she noted as the deadline for a deal by mid or
end October (depending on who you listen to) looms.

Some issues however, as Praefcke reminds us do take some time to settle. Like 116 year...

(Julien Ponthus)

*****

OPENING SNAPSHOT: EUROPE OFF TO MUTED START (0730 GMT)

Equities in the old continent are trading around parity with the STOXX 600 regional
benchmark dipping below the two-week high reached during the previous session as optimism about
Trump's health progress and a new U.S. fiscal package fades.

Among top movers are shares in Suez, up 4.3%, after the French waste and water
firm vowed to fight Veolia's $13 billion takeover project.

Logitech is the top faller, down 4.8% from yesterday's record high, on reports Apple will
stop selling rival earphones, speakers ahead of launches.

Moves in sectors are muted too with price changes ranging from -0.6% of healthcare to +0.9%
of telecoms.

Here's your opening snapshot:

(Danilo Masoni)

*****

ON OUR RADAR: M&A MUSIC, LUFTHANSA'S CASH BURN, UK PUBS (0643 GMT)

European shares are set for a muted open today as the Trump-returns-to-the-White-House
rebound looks to be losing steam with Euro STOXX 50 futures now trading just above parity,
having earlier gained as much as 0.2%.

In corporate news developments, M&A headlines will continue to keep traders' somewhat busy.

France's Veolia succeeded in its bid to buy a 29.9% stake in waste and water
management rival Suez, paving the way for a full takeover offer despite an attempt by
the French government to stall the deal.

Among banks, Deutsche Bank CEO told Bloomberg the bank could consider a merger or
acquisition as early as next year if its profitability and share price recover, though for now
it remains focused on implementing its turnaround plan.

Meantime from the COVID-hit airline industry, comments from Lufthansa are a stark reminder
that the pain is far from being over. Its CEO said the German airline is burning cash at a rate
of 500 million euros per month and is far from breaking even.

Traders also say UK pub stocks could get a lift after as dozens of Conservative MPs are
reportedly set to vote against 10pm curfew on Wednesday night.

Back to M&A, K+S has signed an agreement to sell its North and South American
salt business to Stone Canyon Industries Holdings and affiliates for $3.2 billion, the German
minerals miner said in a statement on Monday.

Milan-listed Newlat Food has made a non-binding offer for Hovis, the 134-year old
British bread maker, which is owned by Premier Foods and The Gores Group.

Kering said it would sell part of its Puma stake.

Premier Oil has reached an all-share merger deal with oil exploration and production
company Chrysaor that will result in a cash payment of $1.23 billion to creditors of the
debt-saddled British firm.

(Danilo Masoni)

*****

MORNING CALL: EUROPE SEEN UP BUT GAINS LOOK FRAGILE (0537 GMT)

Markets got the headline they were expecting -- Trump leaves hospital to return to White
House -- and although the upbeat mood looks set to spill over to today's trading,
there is no big rally in sight with Euro STOXX 50 trading up just 0.2%.

Meantime U.S. futures are down slightly, suggesting that if losses accelerate there, Europe
too could reverse course. Over in Asia, Trump's return to the White House and brighter prospects
for a fresh stimulus sent stocks to a two-week high.

(Danilo Masoni)

*****

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