LIVE MARKETS-Stockpicking earnings mispricings

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.

STOCKPICKING EARNINGS MISPRICINGS (1328 GMT)

While STOXX 600 Q2 earnings are expected to show a 50%+ collapse year-on-year, there's still
quite a lot of optimism out there for a V-shaped recovery moving forward, particularly for some
momentum in 2021.

One thing that Morgan Stanley analysts have done on that front is to scan through European
equities, looking for stocks for which the earnings rebound has been over or undervalued.

While insurance is the sector which seems to offer the most value in general, Morgan Stanley
believe looking at misprices stock by stock is the better way forward.

Here are Morgan Stanley's companies "pricing in the least EPS optimism":

Capgemini, Daimler, Elis, Hays, Johnson Matthey, M&S, Meggitt, Sandvik, Sodexo and Veolia.

On the other side of that spectrum where earnings expectations may prove too optimistic are:
BP, Carnival, Deutsche Lufthansa, Norsk Hydro and Volkswagen.

Julien Ponthus

*****

TIME FOR DEFENSIVES TO TAKE THE LEAD (1312 GMT)

Cyclicals against defensives has been the talk of the town for a while, basically since
stocks started bouncing back from its mid-March lows, at the height of the coronavirus crisis in
Europe.

Now JP Morgan is not in two minds, it is pretty sure tactical rotation to value & cyclicals
is over and it is time to bet on defensives plus technology, which are "far from expensive."

They have reflected the move in bond yields over the past two decades. "There is no
mispricing," it says. Since bond yields will stay constrained, "'bond proxy sectors' might not
need to derate."

Besides P/E ratios relatives of Pharma, Utilities and staples are at 10-year lows versus the
market, it adds.

Historically when value lags momentum, the broader market tends to struggle for direction,
as is happening now.

Cyclicals are strongly correlated with the activity momentum; cyclicals can lead for longer
with PMIs in "expansion territory", which means above the 50 threshold, according to JP Morgan.

(Stefano Rebaudo)

*****

RETAIL FRENZY: 3.8 MILLION BRITS JOINING THE CLUB? (1239 GMT)

There's been a lot of talking and writing about how retail investors across the globe have
jumped into the stock market since the COVID-19 financial crisis began and the rise of popular
trading apps such as Robinhood.

Here's more evidence of that trend: research from investment platform eToro estimates that
an estimation 3.8 million Brits joined the retail frenzy.

"3.8 million UK adults have invested in the stock market for the first time since February
this year", a press release from eToro reads.

"This suggests the market volatility caused by Covid-19 has awoken in many the idea of
investing in shares as a means of wealth accumulation", it commented.

"The 3.8m figure was calculated by the Centre for Economics & Business Research using the
results of a survey of 2,000 UK adults (aged over 18), which was conducted via Attest Consumer
Research, and the latest ONS population estimates", a spokesperson explained.

More reading on the retail frenzy:

Retail trading on (COVID-19) steroids

A casino or stock market? Retail buying frenzy goes wild

(Julien Ponthus)

*****

TREAMING SAVED THE VIDEO STAR, BUT NOT FROM COVID-19! (1208 GMT)

Interesting note from Citi which goes deep into the prospects of the music industry and
streaming in the age of COVID-19.

While streaming is widely credited for saving an industry crippled by illegal downloads and
recently helping labels back into growth, its potential is not unlimited and no magic cure
against the pandemic.

One of Citi's key takeaway for the industry is that "if streaming subscription growth does
slow, we expect the labels to extract more from distributors".

Another argument in favour of labels versus distributors such as Spotify if growth slows
down is that "at prevailing multiples, music labels are less dependent on growth to justify
current valuations".

Looking into the Spotify and Warner stocks, the analysts come to the conclusion that there's
not that much upside and give them a "neutral" rating given the premium they currently enjoy.

"As such, we don’t find either stock particularly compelling at prevailing multiples.

More compelling are Sony, Vivendi and Tencent Music which are rated 'buy'."

Nothing much to do with stocks valuation, but here's an interesting chart from Citi research
showing how physical music sales plummeted in the last 45 years and how vinyls are making a
steady comeback:

(Julien Ponthus and Sujata Rao)

*****

SIGNS OF LIFE FROM EZ EMPLOYMENT, INFLATION? (1127 GMT)

June eurozone economic sentiment data showed the expected 'mechanical reaction' to the
easing in lockdowns, staging the largest ever recorded rise. But this is not the point.

Eurozone industry expectations about demand surged to levels seen in the months before the
crisis, but this didn't happened in services, which remained below those levels, a ING research
note says.

Employment expectations improved in both industry and services recently, which means that
employment could rise from late fall, along with selling price's, it adds.

These are good signs of a possible recovery, but they don't say how much lasting damage has
been done from the virus, according to ING.

Oxford Economic on its part notes that "sentiment remains very subdued compared to before
the pandemic, supporting our expectations of a record GDP contraction in Q2".

This initial sharp bounce back "will be followed by a much slower return to pre-pandemic
levels," it adds.

Stocks keep hovering around the floating line after the data, supported by the fact that
Europe has been doing better in controlling the virus, while a surge in cases in the U.S.
worries because of its impact on the global economy.

(Stefano Rebaudo)

*****

CREDIT DYNAMICS STILL STRONG, BUT WITH EUROPE DIVIDE (0954 GMT)

Credit dynamics are more important than usual with the Covid-19 impact in place as they tell
us if the economy is on the right track to a recovery and if there is a risk of a credit crunch.

Banks have huge amounts of liquidity at hands due to ECB and government measures, which are
supposed to go to corporations and families.

We have good and bad signs from data collected by UBS.

Credit to non-financial corporations grew 7.3% year on year from 6.6% in April, "reflecting
strong demand for emergency bridge loans supported by the government", while credit to
households stayed unchanged at 3% in May, a UBS research note says.

The Europe divide is in place also in this matter. Credit growth was strong in France, up
8%, and in line with the Eurozone average of 5.3% in Austria, Finland, Germany and Ireland.
While it underperformed in Spain, up 3.7% and Italy up 1.8%.

"We would regard a sharp widening in divergences between country-specific credit trends as a
warning sign," UBS says.

(Stefano Rebaudo)

*****

OPENING SNAPSHOT: A SWIFT TURNAROUND! (0803 GMT)

Everything seemed to be pointing to stocks losing ground at the open this mornings but the
trend swiftly became positive soon after the bell.

The STOXX 600 regained 0.2%, which was much better than what the futures were suggesting
earlier this morning, falling up to 0.8%.

At the time of writing, the bounce-back faded and the pan-European index is back just very
slightly in the red.

While there's no clear trigger for the switch in mood, there is a clear feeling that
European stocks have the upper hand in the global stock market arena and that's helping at the
open.

"The key is that Europe keeps reopenings safely in light of the low levels of
virus transmission resurgence and far more manageable new cases", Stephen Innes, chief
global market strategist at AxiCorp just told us.

"Investors sill have the reopening fever and money to spend, so they may now view EU stocks
a more attractive investment in that regard", he added.

We also asked Michael Hewson at CMC Markets what was his take on the turnaround at the open
and he argued that "some of the concerns about a second wave are premature".

Among individual stocks there's a lot of action around Wirecard which is up...160%! Traders
reporting the shares are rising on a Frankfurter Allgemeine Zeitung report that private equity
and Worldline may be interested in buying parts of the company.

Another big mover is AMS up close to 7% with the reported EU go-ahead for the Osram deal
boostng the shares.

Speaking of European shares having the upper hand, check out this story:

Investors warm to Europe as Biden lead, virus fears rattle Wall St

Anyhow, here's your opening snapshot:

(Julien Ponthus and Stefano Rebaudo)

*****

ON THE RADAR: AIRBUS, WIRECARD AND BUSINESS SENTIMENT (0645 GMT)

While there's not that much corporate news this morning, traders looking for market action
can turn to Wirecard, which is up 30% in pre-market after the German company said on Saturday it
would proceed with business activities after filing for insolvency.

That, of course, ain't much of a bounce back as the stock has lost about 99% of its value in
less than two months!

Another stock under focus this morning is Airbus, losing some ground after its Chief
Executive said he assumed a 40% drop in production over the next two years.

Traders also see AMS rising as much as 10% at the open after a Reuters exclusive on the
European Union giving its go-ahead to its acquisition of German lighting group Osram.

Talking about M&A, Spain's Iberdrola raised its bid for Australian wind and solar firm
Infigen Energy after Philippine conglomerate Ayala Corp hiked its offer.

Also, International Consolidated Airlines Group is reviewing its planned 1 billion euro
acquisition of Air Europa because of the harsh economic climate caused by COVID-19, the CEO of
IAG-owned Iberia was quoted on Sunday as saying.

In the beaten down euro zone banking sector, a German newspaper reported on Saturday that
the board of Commerzbank's board would likely approve more branch closures and job cuts at an
extraordinary meeting next week.

In Italy, the board of Monte dei Paschi di Siena is expected to meet on Monday to approve a
plan to reduce its burden of bad loans.

Some macro could also spice things up a tad with notably the Euro Zone Economic Sentiment
for June at 0900 GMT:

(Julien Ponthus and Stefano Rebaudo)
*****

MORNING CALL: GRIM VIRUS MILESTONES DENT SENTIMENT (0535 GMT)

There's clearly a risk-off feeling across markets as the week begins with two gloomy
milestones: the death toll from COVID-19 surpassed half a million people and reported cases went
through the 10 million mark.

Asian stocks took losses of about 1% to 2% on average with ongoing fears that the global
pandemic could take a deeper toll on economic growth than expected.

European futures are down between 0.3% to 0.6% and their Wall Street peers are also trading
slightly in the red.

The downbeat sentiment is also showing through oil prices which have slid for a second
straight session.

(Julien Ponthus)

*****