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LIVE MARKETS-Is the bond market the next widow maker?

* STOXX 600 flat, set for 1st weekly drop since late May * DAX (+0.1%) lags after China trade data, Daimler warning * Daimler falls slightly after profit alert, but peers rally * Autos, Miners, chemical sector leads gains Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Josephine Mason. Reach her on Messenger to share your thoughts on market moves: IS THE BOND MARKET THE NEXT WIDOW MAKER? (1527 GMT) Just last week, bond investors were paying more than 40 bps for the privilege of lending to the German government. German 10-year Bund yields have risen sharply this week, but they are still firmly in negative territory and some have suggested there's still room to fall further, perhaps as low as 200 bps. That's prompted Jim Leaviss, a fixed income fund manager at M&G, to consider the circumstances that could lead to what currently looks far fetched but could become a deadly trade. Or rather the market's next "Widow-Maker". So what are the ingredients needed for a drop to minus 200 bps? * aggressive deposit rate cuts, from the current -40 bps to -120 bps (any easing stimulus by the ECB would likely involve a cut to its depo rate more deeply into negative territory and the resumption of QE) * long-dated German bund yields to fall by more than shorter-dated so the German yield curve flattens to look something like Japan's (German bond issuance is low as the government runs a budget surplus and because Germany is triple-A rated its bonds are in strong demand, espECIALLY by banks who need high-quality assets for collateral) * German Bunds become more expensive relative to other European fixed income assets (a scarcity of Bunds will reduce yields further under fresh QE) As outlandish this may all sound, it's worth bearing in mind that investors were pricing in ECB rate hikes at the start of the year. And with that, Leaviss ends his blog: "Beware the Widow-Maker." Here's a chart of 10-year Bunds this week: (Josephine Mason) ***** DAIMLER: THAT "KITCHEN SINKING" FEELING (1336 GMT) All auto stocks are having a surprisingly strong day. Even Daimler's only slightly lower, down 0.4% That's despite a slew of bad news: * Daimler's second profit warning in less than a month * expectations the luxury carmaker will deliver a Q2 loss of 1.6 billion euros ($1.8 billion) vs. profit of 2.6 billion last year * global auto suppliers slashed their earnings forecasts blaming slowdown in car sales "We are surprised by the share price reaction today with the market clearly attempting to look through this announcement as a one-off kitchen sinking," Citi analysts write in a note. "We believe we could see further cash/earnings risks as management's strategy and the levels of investment required to achieve their aims becomes clear." Credit Suisse says there remains a debate whether the latest warning reflects a deteriorating business or a kitchen sinking by the new management. Seeing it fall just 0.4% today and the fact that its rivals BMW and VW are rising suggests investors are for now perceiving it as a kitchen sinking. Credit Suisse says there is no negative read across as both companies are likely to stick to their outlook. But analysts continue to warn that it's not the end of bad news for Daimler. Credit Suisse says: "What makes us hesitant to become more constructive yet is the impact that these effects have on the balance sheet." Jefferies believes a dividend cut may be on the cards, seeing a sharp cut to 0.5 euros from 3.25 euros. With a price-earnings ratio of just under 7, Daimler's also one of the most expensive European auto stocks: (Thyagaraju Adinarayan) ***** RATE CUTS: THERE'S NOTHING TO CELEBRATE (1301 GMT) Falling bond yields and surging stocks have been this year's playbook. But Jefferies warns collapsing government bond yields are not fundamentally bullish for equities, since they reflect expectations of declining nominal GDP growth. "This lesson should have been learnt in 2008 with the global financial crisis," says Christopher Wood, global head of equity strategy at Jefferies. "But it clearly has not been as investors, or at least algos, celebrate anticipated monetary easing while failing to reflect on the fact that it is not a fundamental positive that G7 central banks are finding it so hard to normalise monetary policy in a context where global debt levels grow ever larger." Non-financial sector debt has swollen to $180 trillion vs. $117 trillion in 2008, according to BIS data. A record $13 trillion negative yielding bonds is the best evidence that things "are not as they should be in the world of finance", Wood adds. Still, hopes that looser monetary policy are offsetting concerns for the global economy for now. "Politics has become the key driver of world financial markets since the election of Donald Trump in November 2016, replacing G7 central banks (main driver since 2008)," Wood says. He also argues that the recent rally on Fed rate-cut hopes could in a way be fuelled by Trump, pointing to an interesting factoid that Trump mentioned the Fed or Powell, or a combination of both, in nine tweets last quarter. Check out the chart below to see who's moved the markets this year: (Thyagaraju Adinarayan) ***** CATCHING A CHILL FROM CHINA (1144 GMT) The market celebrated the temporary trade truce between the U.S. and China a few weeks ago that averted Washington imposing further punitive tariffs on Chinese goods. But trade data showing a drop in exports and lower than expected imports in June this morning demonstrates how existing tariffs on $250 billion worth of Chinese goods are inflicting deep pain as domestic demand remains tepid despite Beijing's flurry of measures aimed at shoring up the world's No. 2 economy. In fact, June marked the first full month of higher U.S. tariffs on $200 billion of Chinese goods, which Washington imposed after trade talks between the world's largest economies broke down. "Despite (the truce), the existing 25% tariff (....) has materially weighed on Chinese exports and the economy. The supply chains have started to move out of China to avoid the tariff war, and the unemployment pressure is likely to rise further," say Citi analysts. It helps explain why the DAX, with about 6% or roughly 80 billion euros of its constituents' revenues originating from China, is underperforming the broader region this morning. It's recovered the ground lost as Daimler sank after its profit warning, but is now flat and underperforming the other euro-zone bourses. "Today's figures highlight why this U.S.-China trade war has such a substantial contagion effect on global exporters," says Josh Mahony, senior market analyst at IG. "As long as we see Chinese imports suffer, we are likely to see the weak growth for the big exporting nations like Germany." Worries are now growing that tensions are about to escalate again after Trump took to twitter overnight to complain that China wasn't keeping to its promise of boosting agricultural product purchases, such as soybeans and corn which are used in animal feed. But China's in a tricky position. With African swine fever killing pigs the world's largest hog market, and curbing demand for animal feed ingredients, it's hard to see how Beijing can satisfy Trump's demands. The oilseed, used in animal feed, was the biggest U.S. agricultural export to China in 2017 worth $12.7 billion. Cool winds may continue to blow next week too. According to a Reuters poll, China's Q2 GDP data is likely to show a growth slowed to 6.2%, its weakest pace in at least 27 years. (Josephine Mason) ***** WHAT WEAK EARNINGS? MARKETS ARE BULLET-PROOF (0943 GMT) Autos and chemical stocks are among the top sectoral gainers today, shrugging-off profit warnings from Daimler and BASF (on Monday) -- big names in those sectors -- this week. Investors seem to be rotating back into cyclical stocks, suggesting they are in a risk-on mood as Fed rate-cuts loom, ignoring risks from little or no earnings growth seen in U.S. and Europe. For our preview on second-quarter results click on Luxury carmaker Daimler said on Friday it expects 2019 profits "significantly" below the prior year after lower-than-predicted growth in the automotive markets. Its the second profit warning in less than a month, but Daimler shares are down just 1% and the autos index is up 0.8%. A trader says the bad news seems to be priced in -- "market is bullet proof". The warning comes just a few days after BASF's U-turn in earnings expectations citing U.S.-China trade war's impact and weakening auto markets. Chemicals index is up 1% on day. (Thyagaraju Adinarayan) ***** OPENING SNAPSHOT: EUROPE EKES OUT GAINS (0743 GMT) European shares are slightly higher in early deals, as investors cling to dovish comments from Fed chairman Jerome Powell overnight, while Frankfurt lags after Daimler its latest profit warning, underscoring worries about a slowing automotive sector. The news has sent the autos index to its lowest since June 18. "More from Fed chair Jerome Powell yesterday on The Hill. And it was more the same rhetoric. The more Powell talks up the risks to the U.S. economy, the more equities rise," says Neil Wilson, chief market analyst at In other big individual moves, investors are shunning Thomas Cook shares after struggling UK tour operator confirmed it's in talks abuot a rescue package with its largest shareholder Fosun Tourism, which will involve a debt-for-equity swap that will dilute shares. Stock has fallen almost 50% in early trading, hitting all-time lows. Other individual moves are in Gjensidige which topped the STOXX 600 after its Q2 profits beat expectations, while Storebrand is down 6% after its results. (Josephine Mason) ***** AHEAD OF THE OPEN: "CARMAGEDDON" AS DAIMLER WARNS ON Q2 (0655 GMT) Another profit warning from Daimler has put the brakes on early gains in European stock futures this morning. Stock futures started on a fairly solid footing as markets drew more strength after Fed chairman Jerome Powell left the door open to interest rate cuts, but Daimler's warning that Q2 will be significantly below expectations due to provisions related to Takata airbags has pushed German stock futures into the red and seen Eurostoxx 50 pare gains. Daimler is down 3% in premarket Frankfurt trade and shares in VW and BMW are down 3%. The news is likely to reinforce worries about Q2 earnings and follows auto-related warnings this week have come from BASF, Geely, Johnson Electric, Sensirion, Aumann and Vishay which have all mentioned auto demand decline in their statements. Mark Taylor, sales trader at Mirabaud Securities in London described the recent slew of bad news as "carmageddon". Earlier this morning EMS Chemie, the Swiss chemicals and polymers company, said it had seen a "significant worsening" of consumer and investment mood in China and Europe, inventory stocks were reduced and the auto industry in particular, as well as other industrial sectors showed a "substantial" decline. Weak profits from Yaskawa Electric, a Japanese motion control equipment maker with exposure in China, is likely to reinforce worries about weakening demand from the world's No. 2 economy as investors await key trade and credit data due this morning. (Josephine Mason) ON OUR RADAR: THOMAS COOK, OIL AND MACHINERY (0600 GMT) The big corporate news is that China's Fosun Tourism Group is in advanced talks with Thomas Cook about a rescue deal, with a fundraising that would give it control of its packaged tour business. It was well flagged last month but confirmation will be well received amid worries about mounting debt. Fosun Tourism, owner of the Club Med holiday business brand, is already Thomas Cook's biggest shareholder with an 18 percent stake. London's likely to get a lift from its heavyweight oil stocks as crude hovers near six-week highs as a tropical storm cuts half of the Gulf of Mexico production. Industrial machinery stocks may come under fresh pressure after weak profits from some firms such as Yaskawa Electric, a Japanese motion control equipment maker with exposure in China. Some early headlines: CEO doesn't see Deutsche Bank M&A in coming 3 years - Handelsblatt China's Fosun in talks to take control of Thomas Cook's tour business SEB Q2 operating profit above expectations Atlantia says to look into possibility of taking Alitalia stake Private equity firm Pai makes formal offer to acquire Dutch Wessanen Axel Springer Boards Recommend Acceptance Of KKR Offer (Josephine Mason) ***** EUROPE'S STILL FOLLOWING THE FED (0531 GMT) After its weakest close in two weeks yesterday, Europe's benchmark STOXX 600 is expected to inch slightly higher this morning, drawing strength from Asia and Wall Street, which shot to records (again) overnight amid continued rate cut optimism after Fed chairman Jerome Powell left the door open to interest rate cuts. Signs have emerged this week though that the enthusiasm - or rather the strength of buying the bond proxies and defensive stocks - that's fuelled this stellar rally may be flagging. Last night's weak close is one, the fact that Powell-induced excitement on the last two trading days has fizzled by the end of play in Europe as investors have locked in profits instead and it's also notable that factors far away from the Fed - pharma policy and the White House - determined direction yesterday. The market is also closing out the week on a weaker note, set for a loss of about 0.9% based on last night's close and notching up its first weekly drop since late May, in a sign that interest rate cuts and dovish central banks' policy stances are priced in and investors are turning their attention with some caution to Q2 earnings season. See our story out overnight that looks at what's at stake: ANALYSIS-Make or break: second-quarter results will test Europe's confidence For now though, IG financial spreadbetters expect London's FTSE to open 31 points higher at 7,541, Frankfurt's DAX to open 47 points higher at 12,379, and Paris' CAC to open 21 points higher at 5,573. All eyes remain on key trade and credit data from China due this morning, which will give an insight into the health of the world's No. 2 economy and impact of its spat with the United States. GDP data is due on Monday. Eurozone industrial production is due out at 0900 GMT, and the consensus estimate is 0.2% on a monthly basis. (Josephine Mason) ***** ($1 = 0.8893 euros) (Reporting by Danilo Masoni, Helen Reid, Josephine Mason and Thyagaraju Adinarayan)