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LIVE MARKETS-Basel III: French banks strike back

* European shares rise on trade deal optimism: STOXX 0.6% * Trump says U.S. is very close to "big deal" with China * ECB keeps generous stimulus unchanged, Lagarde notes recovery * FTSE 100 outperforms as UK polls open, up 1.2% * S&P 500 hits record high Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Julien Ponthus. Reach him on Messenger to share your thoughts on market moves: rm:// BASEL III: FRENCH BANKS STRIKE BACK (1542 GMT) The French banks' lobbying efforts to soften the impact of the so-called Basel III rules have not gone unnoticed. Finance Watch, a Brussels-based NGO which campaigns for stricter financial regulation, said the French banking industry's bid to av oid increased mandatory capital buffers was dangerous for financial stability. "This increased danger would furthermore not bring any benefit for the economy despite what the French and European banking federations claim", Finance Watch wrote in a press release. A study commissioned by the European Union's banking lobby showed in November that European banks could need as much as 400 billion euros in capital to comply with the new rules aimed at making the global financial system safer. Banks also argue that an increased burden in capital will hamper economic growth overall in Europe. A group of French parliamentarians has recently called on the French government to do its part not to significantly raise capital requirements when the Basel III rules are made into law. There are many explanations to the massive underperformance of European banks in the last years: mainly negative interest rates and sluggish growth. What's interesting is that the sector is now outperforming the STOXX (+3.2% vs 0.4% so far in December) as investors hope Lagarde will lead the ECB to more banking friendly policies. Perhaps investors' hope in the banking sector's ability to successfully lobby itself out of the cost of Basel III has also something to do with it. Here's a snapshot from the proposed resolution from members of the French national assembly: (Julien Ponthus) ***** TRUMP'S TWEET SHOOS AWAY THE WISE OWL (1507 GMT) Just when the markets were reading into to Lagarde's ECB debut, Trump jumped in and tweeted that the U.S. was "very close" to sealing a trade deal with China. "Getting VERY close to a BIG DEAL with China." That tweet boosted global stocks to fresh record highs, breaking above the Jan 2018 peak. The trade spat between the world's top economies, slowing global growth or Brexit nothing stopped the MSCI all country stocks index rally this year. Market value of global stocks have risen by a whopping $10 trillion this year alone. (Thyagaraju Adinarayan) ***** THE WISE OWL IS HERE: LAGARDE GETS A WARM WELCOME (1442 GMT) Though Lagarde didn't want to be labelled a hawk or a dove, her first ECB presser was perceived as slightly hawkish and boy, it wasn't a bad debut with the euro and euro-zone banks giving a warm welcome. Euro-zone banks were flat before the press conference but ended up 1.4% higher after Lagarde's speech. "Once and for all, I'm neither a dove nor a hawk, my ambition is to be this owl that is often associated with a little bit of wisdom," Lagarde said. Here's how euro-zone banks reacted: (Thyagaraju Adinarayan) ***** INVESTORS AGREE: WHAM! RULES AND Q1 LOOKS QUITE GOOD (1401 GMT) Deutsche Bank conducted a survey among about 700 clients in December which paints a rather optimistic picture of world markets, at least for the next three months. Key takeaways include that 40% of investors intend to put on some risk three months from now, 38% to stay the same and 22% to go underweight. Looking further ahead, in a year's time, the mood is much more pessimistic with 46% expecting to take less risk and only 40% going overweight. Quite logically investors believe the S&P 500 and the STOXX 600 will rise at least slightly in the next three month but will be both at a lower level in 12 months. Among other findings, a U.S. recession in 2020 is seen as unlikely and there's a massive expectation that Trump will be reelected. More seriously, the survey finds that Last Christmas by Wham! is the best Christmas song: (Julien Ponthus) ***** GREEN BREXIT? (1300 GMT) Today's election could partially be seen as a second opportunity for voters to have their say on Brexit. We have heard about the Brexit impact on all sort of investments: real estate, manufacturing, service, you name it. EdenTree Investment Management's fund manager, Chris Hiorns brings another concern to the table: How much will the UK be ESG-friendly if it leaves the euro bloc? Globally, the world will likely be investing a lot in ESG strategies over the next 20 years, according to BofA Merrill Lynch Global Research report. Precisely, $20 trillion of AuM is expected to go into ESG strategies globally. But how much of it will come from the UK is to the new government to decide. The EU's effort to lower carbon emissions meant there has been increasing investments in a variety of environmental friendly businesses, Hiorns says. But the question now is how closely will the UK be aligned with European regulations, he adds. "I think the EU has been very forwarded coming out with environmental legislation. You can say it's uncertain, if we do have Brexit, to what extent the UK will continue to adopt all the environmental type legislation," Hiorns says. (Joice Alves) **** ECB STATEMENT: SPOT THE DIFFERENCE? (1259 GMT) There you're! ECB's statement is out, and it looks very silimar to the previous one. Understandably, there's zero reaction in markets and the focus now shifts to Lagarde's first ECB press conference at 1330 GMT. Here's the ECB statement just released which shows changes (if you can spot any) from the last one: (Ritvik Carvalho and Thyagaraju Adinarayan) ***** ARE YOU HORRIFIED OR JUST BORED BY THE FED? (1136 GMT) "The Fed is literally telling you that they won't feel the need to hike rates when inflation rises above target, yet this is greeted by a collective yawn", rants Kevin Muir in his MacroTourist newsletter after the Fed kept rates on hold yesterday. "Why the bond market is not more horrified by this progression is beyond me", he adds, predicting an inflation comeback. Muir's warning does feel however like a lone voice in the wilderness. Most analysts seem perfectly fine with the Fed's apparent relaxed attitude towards the 2% inflation target and agree that the central bank is much more trigger happy when it comes to cutting rates than to hiking them. Hugh Gimber, a strategist at JPMorgan Asset Management says the policy does seem "asymmetric" in that rates are expected to be cut swiftly should growth stumble but "the bar is higher for the Fed to raise rates", particularly during the U.S. presidential campaign. Same analysis from Mark Haefele, CIO at UBS GWM who believes that "inflation will need to rise above the Fed's target to trigger rate hikes". BNY Mellon also notes "the possibility that the FOMC may be willing to let inflation run higher than 2% as long as, on average, it hits the target over the cycle". But that prospect isn't spooking many, quite on the contrary, it seems. "Has the Fed become boring again?", asked Rick Rieder, BlackRock’s CIO for fixed income, adding that wouldn't be a bad thing either. One thing is for sure, if inflation does make the unexpected comeback predicted by Muir, markets won't be boring one bit. "Investors have moved further out on the yield curve and take ever more duration in their portfolios, rendering their bond holdings more vulnerable to even small increases in interest rates", David Riley, chief investment strategist at BlueBay Asset Management. Below is an illustration of how a 2% target can be interpreted differently found in the Macro Musing Blog and mentioned by Muir. (Julien Ponthus) ***** ECB COUNTDOWN: STRATEGY REVIEW IN FOCUS AT LAGARDE'S DEBUT (1116 GMT) The first ECB meeting chaired by Christine Lagarde today is likely to be a non-event in terms of near term policy changes but still it will be an interesting one to watch, especially for any clues about timing and focus of a long overdue strategy revamp. "The ECB last undertook a review of its monetary policy strategy in 2003. But since then, the world has changed, presenting central banks with new challenges that make it harder to boost inflation," say UBS economists. "In Europe, the ECB is facing additional challenges related to the strict division between monetary and fiscal policy, tight EU fiscal rules, weaknesses in the institutional framework of the monetary union and a complicated division of labour between the ECB and national authorities in the area of financial regulation," they add. UBS says the review will unlikely touch the bank's governance structure and its ultimate goal of price stability but sees moderate revisions focusing around three questions: 1) Should the ECB's operational target (HICP inflation 'below, but close to 2%') be changed? 2) Does the ECB have the right tools to achieve its target, also considering negative side effects? 3) Are there ways to improve the ECB's communication That being said, it could still be that there won't be that many details on the revamp today with more to come in 2020. "The announcement of timeline and content of the review might come early next year, once the executive board is up and running," says UniCredit. For more ECB previews, check out these stories: UPDATE 1-Lagarde in the spotlight at first ECB meeting GRAPHIC-Bienvenue, Madame Lagarde: Five questions for the ECB (Danilo Masoni) ***** EUROPEAN BANKS: TRAP OR OPPORTUNITY? (0915 GMT) So-called value stocks are (cautiously) back in fashion and perhaps rightly so because the economy is showing signs of stabilising and the high growth stocks look quite pricey. It's natural then that Europe's battered banks are being looked at with some interest but so far investors are still divided over whether the sector is a trap or an opportunity. Just look at how differently Oxford Economics and Natixis see banks, is a neat illustration of the long-standing dilemma. "We believe that Eurozone banks are still a value trap and would not chase their recent outperformance," writes Daniel Grosvenor, Director Equity Strategy at Oxford Economics. He adds net interest margins remain under pressure and loan growth is set to slow in 2020, resulting in an environment not seen since 2011-2012 and meaning that ROEs are unlikely to rise. But Patrick Artus, chief economist at Natixis, sees it another way. "Equity investors should look at euro-zone banks", he argues, adding that one should not overlook that euro zone banks are diversifying their business, default rates remain very low and the yield curve is going to slowly steepen on the back of the improvement in cyclical prospects. Who's right? Maybe history will tell. (Danilo Masoni) **** OPENING SNAPSHOT: THE CALM BEFORE THE STORM? (0824 GMT) It's all quiet on the European front: the wildest move at the moment on the STOXX 600 is Tullow Oil, with a not that spectacular 3.5% rise... Bourses across the continent are flat or just slightly up with Milan pulling off the best performance, up 0.3%. You would think that with the Fed yesterday, the UK election unfolding, Lagarde's ECB presser and the Dec.15 tariffs deadlines on the U.S./China trade war, things could be a bit more volatile than that. Maybe it's the calm before the storm? (Julien Ponthus) ***** ON THE RADAR: UK ELECTIONS, TRADE WAR DEADLINE AND M&A MOVES (0752 GMT) European stock markets are expected to open just slightly in positive territory as the week’s two main news items, UK election and the Dec.15 tariff deadline enter their end game. Of course, Lagarde’s ECB presser will also be closely watch after the Fed said it wouldn’t change rates anytime soon. M&A should secure some market price action this otherwise quite quiet morning on the corporate front. Shares in Anheuser-Busch InBev will be closely watched after Australia's competition regulator raised concerns over an $11 billion deal by to sell its local operations to Japan's Asahi. The latter’s stock lost 1.6% in Tokyo. Nestle has agreed to sell its U.S. ice cream business to Froneri in a deal valued $4 billion and Metro said it hopes to secure net proceeds of 1.5 billion euros from the sale of a majority stake in its China business and its struggling Real hypermarkets unit. In a move which will interest the shareholders of its merger partner PSA, Fiat Chrysler avoided a strike after a union voted in favour of a new four-year labour contract. Among smaller stocks, the jury is still out on Superdry, after the British fashion retailer gave a much awaited trading update. Balfour Beatty on the other hand seems set to rise at the moment. Talking about retail, Ocado’s saw revenue growth slightly slowing in its latest quarter. (Julien Ponthus and Sruthi Shankar) ***** MORNING CALL: "I KNOW NOTHING" (0627 GMT) On June 8 2017, UK PM Theresa May lost an absolute majority in Parliament after calling an early general election, which was expected to be a walk in the park for her. No one saw Jeremy Corbyn's opposition Labour Party rising to frustrate her bid to win enough seats to quell eurosceptic dissent in her Conservative Party and secure a working Brexit-proof majority. On June 9 2017, Channel 4 anchor Jon Snow had these words of contrition to his viewers: "I know nothing. We the media, the pundits, the experts, know nothing. We simply didn't spot it". So, as Britain wakes up to its first December general election in about a century, this could be seen as a friendly reminder that even if the last polls gave a 10%-plus lead to Boris Johnson, caution may be in order. Anyhow, that was kinda for a Morning Call foreword, so let's get to the point: Financial spreadbetters see London's FTSE opening 7 points higher, Frankfurt's DAX up 6 points and Paris' CAC up 4 points. (Julien Ponthus) ***** (Reporting by Danilo Masoni, Joice Alves, Julien Ponthus and Thyagaraju Adinarayan)