LIVE MARKETS-Italy, focus now turns to the rating agencies

* European shares open slightly lower * Italy government hikes deficit target * Italian banks down 5 pct, stay above August lows Sept 28 (Reuters) - Welcome to the home for real-time coverage of European equity marketsbrought to you by Reuters stocks reporters and anchored today by Danilo Masoni. Reach him onMessenger to share your thoughts on market moves: danilo.masoni.thomsonreuters.com@reuters.net ITALY, FOCUS NOW TURNS TO THE RATING AGENCIES (0844 GMT) There's no meltdown for Italian assets as the 2.4 percent deficit figure is far from beingthe worst case scenario, although it has come at the higher end of expectations. Italian banks are falling a heavy 5 percent, on track for their biggest one-dayloss in more than 2 years, but remain above the lows hit in August when there were concerns thedeficit could shoot up to 3 percent. Markets are now focusing on what the rating agencies will say about the government's budgetdeal. Will they downgrade Italy? And what will that mean for banks' capital adequacy ratios? "All the attention will now shift to rating agencies which were waiting for the budget toreconsider their scorings," says Gilles Guibout, portfolio manager at AXA IM in Paris. And here's another comment from analysts at Credit Suisse led by Carlo Tommaselli. "A potential downgrade of the country rating could pose risks to the sovereign investmentgrade and additional potential charges to (banks') CET1 ratios which nevertheless would bemitigated by the internal models which most of the Italian banks adopt," they say. (Danilo Masoni) ***** MORNING SNAPSHOT: ITALIAN DEFICIT WEIGHS ON MILAN (0717 GMT) The pan-European STOXX 600 is keeping its cool, down a moderate 0.35 percent but thesame can't be said in Italy. It took a few minutes before we got a clear picture of how much damage the Italian deficitwould be doing this morning. The losses in Milan looked limited until banking shares started to trade and pulled the bluechip index down, now on a 2 percent fall. The banking index is retreating 4.5 percent. Here's how things played out in the first few minutes of the session on the Italian stockmarket: (Julien Ponthus) ***** WHAT WE'RE WATCHING AHEAD OF THE OPEN (0650 GMT) European shares are seen opening slightly lower with Italian stocks set to underperformafter the Italian government raised its deficit target to 2.4 percent, at the top end of marketexpectations. The figure is still below the 3 percent feared a few weeks ago, although investors may reactnegatively to Finance Minister Tria apparently losing out against M5S and Lega. Futures on main euro zone benchmarks were trading down 0.4 percent, while FTSE futures weredown 0.1 percent. The STOXX 600 was likely to end the week below the one-month high hit in theprevious session but may still post a small weekly gain, its third in a row. A fall in Italian government bonds following the budget decision could put pressure onshares in Italian banks, which have big sovereign bond holdings. Airlines, which have come under pressure due to the recent surge in crude oil prices, willbe in focus with easyJet saying its annual profit would come in at the upper end of a guidedrange, and Ryanair facing another staff strike that will disrupt the plans of more than 40,000travellers. Other headlines movers: BASF's Wintershall and DEA to create independent oil and gasbusiness; M&C Hotels CEO to step down after just five months; Insurer RSA says poor UKunderwriting results hit Q3; Britain's United Utilities sees higher first-half profit, revenue (Danilo Masoni) ***** FUTURES DIP AS ITALIAN DEFICIT DENTS SENTIMENT (0625 GMT) European futures are now trading and they are doing so unequivocally in the red as theItalian government's decision to run a 2.4 percent deficit has set a likely collision coursewith the European Commission and possibly with some foreign investors. The retreat is however limited as, like in many stories, there's quite a lot of room forthing to get much worse. "2.4 pct is probably not scary enough to trigger an immediate full-blown Italian crisis",Berenberg commented. "Italy may well suffer a genuine debt crisis once the next recession (due perhaps in 2021)has exposed the underlying weaknesses of Italy while reducing investor appetite for risk at thesame time". (Julien Ponthus) ***** EARLY MORNING HEADLINES ROUND-UP (0609 GMT) K+S flags 80 mln eur hit on Q3 profit due to drought Netflix to double investments in France, produce more local shows Ryanair strikes set to hit over 40,000 passengers across Europe Freeport, Rio sell majority stake in Grasberg mine to Indonesia SIG Combibloc prices Swiss IPO at 11.25 Swiss francs/share Congo state miner warns Randgold on transfer of Kibali mine to Barrick Swiss group GAM revamps management after share skid Novartis strikes deal with Chinese firm to make Kymriah Shell's Norco hydrocracker restarts; catcracker shut -sources Rolls-Royce still grappling with Trent 1000 engine issues Total Port Arthur refinery small crude unit shut -sources Volvo aims to sell electric trucks in North America by 2020 (Danilo Masoni) ***** MORNING CALL: EUROPE SEEN FLAT AFTER ITALY SETS DEFICIT TARGET (0529 GMT) European shares are expected to open little changed this morning after Italy's governmentraised the budget deficit target at 2.4 percent of GDP for the next three years, defyingBrussels and marking a victory for party chiefs over economy minister. Financial spreadbetters expect London's FTSE to open 8 points higher at 7,553, Frankfurt'sDAX to open 3 points lower at 12,433 and Paris' CAC to open 10 points lower at 5,530, while theeuro was trading little changed. "The euro is remaining resilient in early trade. This means the markets are seeing this as adomestic issue right now, rather than something that is an immediate risk to the eurozoneregion. There is still scope for political jitters to hit sentiment for the euro as the dayprogresses," said Jasper Lawler, Head of Research at London Capital Group. Over in Asia, Japan's Nikkei hit a 27-year high, taking heart from a boost for the dollarafter the Federal Reserve chairman said he did not expect a near-term recession, and stronggains on Wall Street overnight. (Danilo Masoni) *****