LIVE MARKETS-Buy the losers, sell the winners

* European shares lower as investors sit on hands ahead of ECB, after Chinese data * STOXX 600 down 0.2% as funds rotate out of defensives * Bank stocks continue to rally ahead of ECB, Fed * Galliford rallies after Bovis deal * Wall Street opens lower Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Thyagaraju Adinarayan. Reach him on Messenger to share your thoughts on market moves: rm://thyagaraju.adinarayan.thomsonreuters.com@reuters.net BUY THE LOSERS, SELL THE WINNERS (1413 GMT) Scouting for the bad guys has been the theme this week and Austria's outperformance today shows how investors are desperately bargain hunting in Europe. The Austrian stock index has been one of the worst performers of 2019 rising less than 3% in dollar terms. But, it's been the best European index today, rising 1%, while rest of Europe is barely positive. Poland, the only index in negative territory (in $ terms) for the year in Europe, has only been quietly rallying this week nearly +2% in the last two days. Meanwhile, Switzerland and Greece, the star-performers of 2019, are down more than 1%, confirming that investors are rotating out of winners and buying losers. Here's a quick look at European stocks' country-wise performance: (Thyagaraju Adinarayan) ***** UTILITIES: TIME TO GET PICKY (1356 GMT) Rising yields are shaping up price action this week and one sector that has much to lose if this trend continues is utilities. Their index is set for its worst 4-day slide since 2018, indicating that investors are getting nervous after a run that has lifted the bond-like sector to over 3-year highs. "We know the sector looks expensive, and we know that consensus doesn't want risk... If PMIs bottom out in 3-6 months from here, as our economists expect, these names could have a chunky 20-30% premium to give back," UBS say. While cautioning over premium expensive plays like Orsted and Iberdrola , analysts at the Swiss bank single out names with un-priced growth or specific catalysts, citing Enel or Engie. On Brexit-hit UK utilities they say: "It feels too early to us for a confident call". As you see in this UBS chart you, utilities PE is about 10% higher than the market and at the highest relative level since the financial crisis. Summing up, it really looks it's time to get picky. (Danilo Masoni) ***** MUTED EQUITY RETURNS AFTER EXPLOSIVE 2019 (1314 GMT) Major stock markets are enjoying a double-digit percentage rally so far this year, but the longer term outlook is a little more muted characterised by low interest rates, minimal inflation and timid policy responses, according to Northern Trust's annual report with a five-year outlook. The asset manager's capital market assumptions group says equity returns will be limited by slower growth as well as modest margin and valuation pressures. On a global basis, the report expects equity returns in the range of mid-single digits and low-but-positive fixed-income returns, the report says. The highest average annualised equity return is forecast for Latin American emerging markets at 8.9%, with overall emerging markets at 6.1%. The next highest equities forecasts are for the U.K. 7.4% and EMEA at 6.9% while the lowest forecasts are for Canada and Japan, both coming in at 4.5%. Those growth rates look pretty paltry compared with the 15% rise year to date for the euro-zone stocks benchmark and the FTSE 100's 7.4% gain so far this year, but are pretty decent on an historical basis - the London blue chip index has grown on average about 3.3% each year over the past ten years while euro-zone index has notched up just 1.3% growth. (Josephine Mason) ***** HOW WOULD EUROPEAN EQUITIES COPE WITH NO-DEAL BREXIT? (1224 GMT) The good news: Julius Baer has cut the likelihood of a no-deal Brexit on Halloween to just 10% and the Swiss bank's head of equities research Patrik Lang reckons continental Europe can digest a hard Brexit. The not-so-great news: He sees high single-digit negative earnings revisions for continental European equities and a downside of around 10% for the euro-zone equity market if there is a hard Brexit. Most of the downside comes from financials and consumer cyclicals, primarily from euro-zone banks and automobile producers, followed by industrials. For all other sectors, he would expect a low single-digit downside and most of those losses would be covered by the dividend yield. See the chart below which shows euro-zone equities currently offer a dividend yield of 3.7%. Financials would be the hardest hit sector, with a downside of around 15%, followed by consumer cyclicals, where he sees a downside of around 13% from current levels. "However, we would expect the impact of a hard Brexit to be essentially a one-off shock rather than a long-term headwind," he says. "Against this background, we would be inclined to consider a double-digit decline in the sector indices as a buying opportunity, as earnings growth beyond Brexit would be broadly unchanged again." (Josephine Mason) ***** "BRUTAL ROTATION" (1139 GMT) Time to sell your Ferrari and buy an Italian bank? Not in literal terms, but yes, that's been the theme this week with the best-performing stocks of 2019 selling off and the biggest laggards making a comeback. "The whole market is talking about it," one trader says. "Been a brutal unwind." Looks like investors have rotated out of this year's top performers into names in sectors such as euro-zone banks and German auto stocks which have suffered big losses amid worries about a no-deal Brexit and the protracted and messy U.S.-China trade war. Check out this chart below which shows the divergence in fortunes over the past five days between the MSCI Europe value and growth indices. With the ECB very likely to cut interest rates and point to further bond buying stimulus and Fed to follow another 25 bps cut at least, investors have turned to some bargain hunting in EU banks and autos -- one of the cheapest stocks in Europe. On the other hand, they have been offloading healthcare, food & beverage, financial services and tech stocks which have made solid gains so far this year. "Buying the winners and selling the losers has worked really well since the middle of February, but we think performance has been too good," Jefferies strategists write in a note. "We think rotating back to valuations mattering makes sense and we have started to see this happen here in September." Coming back to selling your Ferrari (the stock) if you own one, it's one of those good performers and perhaps the only auto stock that has done very well this year rising 70%. Today it's down 5%, while its peers are rallying. "There is no news (on Ferrari). It's just the result of a rotation out of momentum into value that's been going on for a couple of days," said Angelo Meda, head of equities at Banor SIM in Milan. Here's a chart on today's best & worst performers (stark contrast to YTD performance): (Thyagaraju Adinarayan and Danilo Masoni) ***** UNWINDING OF 'EVERYTHING RALLY' (1041 GMT) The optimism that's spreading across financial markets ahead of the ECB's monetary policy meeting on Thursday is raising some flags among investors, who say the market may be setting unrealistic expectations for what the central bank will and can do in terms of stimulus measures. With inflation expectations collapsing and after recent disappointing data, Swissquote strategist Arnaud Masset says he is anticipating a full blown bazooka with a 20 basis point cut to rates and a return to QE on corporate and sovereign debt, which would weaken the euro and likely boost equities. But echoing Kepler's Potts (see earlier blog), Unigestion's cross asset solution teams says the biggest risk to its relatively upbeat view of the market is the "considerable optimism" about central bank easing. It could get messy if the central bank underdelivers. "This could trigger a highly correlated market unwind/reversal of the "everything rally"," they caution in a note this morning. Based on expectations of support from key central banks, Unigestion is overweight carry-related risk premia such as high-yield bonds, emerging credit and volatility and it has "relatively light positioning" in pro-growth assets, supporting its view on risk-on assets relative to hedging assets. (Josephine Mason) ***** MONETARY POLICY EXHAUSTION? (0930 GMT) Debate over whether central banks are running out of ammo is heating up and Christopher Potts, top strategist at Kepler Cheuvreux, believes markets should receive a "practical demonstration" of that when the ECB and the Fed meet over the next two weeks. "The exhaustion of the effectiveness of monetary policy in the major developed economies is no longer an argument. It is an observation," he says. "The re-pricing in debt markets has been so dramatic this year that Central Banks are no longer able to 'get ahead of the curve' or to create 'dovish surprises'... They are condemned to follow and validate the behaviour of debt markets; they can no longer lead them," he adds. As a result he doubts there will be any positive market response to the ECB or the Fed and instead says central banks may even amplify profit taking in government bond markets. Implications for equities? The main peril, says Potts, is being overexposed to the crowded trades, especially in the defensive growth space. (Danilo Masoni) ***** ACTIVE VS PASSIVE: THE WINNER IS .... (0907 GMT) Morningstar has run an analysis of active funds and how they have fared against passive peers over the past ten years and their findings are not very encouraging for stock pickers. Here are their key takeaways: * European stock-pickers' long-term success rates are low. A majority of active managers both survived and outperformed their average passive peer in just two of the 66 categories examined over the decade through June 2019 * Over the 10 years through to June 2019, active managers' success rate was less than 25% in nearly two thirds of the categories surveyed * Active managers fared better in some categories than others. For example, those in the UK mid-cap category consistently outpaced their average passive peer. Over three fourths of active funds available to investors in this category 10 years ago both survived and outperformed their average passive peer over the ensuing decade * Comparing mortality rates between active and passive funds shows that the latter have had better odds of survival over the long term. The contrast is starker over longer lookback periods * Active fixed-income managers' success rates have also been low. Over the past decade, less than a fourth managed to both outlive and outsmart their average passive peer in 11 of the 15 categories studied Active funds' 10-year success rates in the largest equity categories, as measured by assets under management, were among the lowest of all the categories Morningstar examined, says Dimitar Boyadzhiev, an analyst at the company's passive strategies division. "Between 9.1% and 35.5% of managers achieved long-term success in the Europe large-cap blend, global large-cap blend, and global emerging-markets categories, which is a small percentage," he says. For the full report, click here: https://bit.ly/2lNCcUs Also see: LIVE MARKETS-Don't give up on stockpicking! (Josephine Mason) ***** RISING YIELDS: A RELIEF TO BANKS (0749 GMT) European banks are the stand out gainers in opening deals with the sector running higher for its fifth day in a row and set for its best 5-day streak since April 2017. The bounce has been quite remarkable, as it comes just ahead of policy meetings at the ECB and Fed where both central banks are expected to unveil new stimulus to prop up the economy. Despite the expectations of more easing measures, bond yields have started to recover and that's helping banks stocks - which have been suffering because of years of ultra low interest rates and are traditionally sensitive to rates and yields. "The move on (yields) is fizzing up the banking sector," says Giuseppe Sersale, fund manager at Anthilia in Milan. The rise may reflect the idea that central bank policy has reached a limit with pressure now turning to governments (such as Germany) to boost spending, as well as some macro that after all is not that bad. European banks have risen as much as 1.2% in opening deals, shrugging off disappointing news from Citi, which tempered its profit guidance. The sector has now pared gains, up 0.2% but still on track for its biggest 5-day gain since April 2017. (Danilo Masoni) ***** OPENING SNAPSHOT: IT'S ALL ABOUT BANKS (0734 GMT) Banks are leading the pack, but a stronger sell-off in defensives is keeping the pan-European STOXX 600 index in the red this morning -- this is exactly how the index closed last evening. Major European bourses are down 0.3%-0.5%. Euro-zone banks have risen 9% in the last five days in one of their strongest rallies since April 2017 with expectations running high that ECB chief Draghi will deliver a stimulus package later this week. As flagged earlier, the U.S. software rout overnight is spreading to Europe with Nemetschek down 2.5%, Aveva Group -1.8%, SAP -1.3% and Dassault -1.6%. Meanwhile, autos index is quietly marching on for its sixth straight day of gains amid easing no-deal Brexit fears and as U.S.-China are likely to be back at the negotiating table on trade. In defensives, healthcare stocks have lost more than 3% in the last two days. (Thyagaraju Adinarayan) ***** WHAT WE'RE WATCHING AT THE OPEN (0655 GMT) Stock futures are pointing to a flat to slightly negative open as investors stick to the sidelines ahead of the ECB's monetary policy meeting on Thursday, where the central bank is widely expected to come up with a string of easing measures. All the major stock futures are down 0.1%. Yesterday's euro-zone bank stocks' rally (+2.2%) showed investors had high expectations for ECB governor Draghi to deliver a stimulus package that would help the bloc's ailing economy to spring back to growth. European tech stocks, especially the software names such as SAP, Temenos, Software AG, among others in focus after yesterday's rout in software stocks in the U.S. Meanwhile, UK's Sage is seen up 1% after the company said it's looking at options, including a sale, for its payments unit. More woes for the autos sector: Moody's downgraded Ford's bonds to junk rating citing the "considerable operating, competitive, and market challenges facing the company, and the resulting pressure on its earnings and cash generation measures." UK housebuilders could see some action after Britain's Galliford Try said it had restarted preliminary talks with Bovis Homes to combine their housing businesses. One dealer reckons Galliford could rise as much as 10% while Bovis may come under pressure. Barclays shares are seen down 1%-2% after it raised the money it set aside for the mis-selling of payment protection insurance (PPI), hot on the heels of similar moves by Lloyds and RBS in recent days. In Spain, banks are bracing for a preliminary ruling from the European Court of Justice on Tuesday on whether they charged some customers too much for mortgages, a decision which could eventually lead to them paying out billions of euros in compensation. Keep tabs on Caixabank, Bankia, Santander and BBVA. Richemont shares, which have had a decent run recently, could come under pressure after the luxury goods maker's head of fashion & accessories stepped down for personal reasons. In earnings, JD Sports is seen up 3% after in-line results; Ashtead down 1% on in-line results as traders see this as opportunity for profit taking; Switzerland's Partners Group seen falling 2% on first-half revenue miss. Key headlines: Lloyds and Barclays hit by $4 bln insurance mis-selling claims UK's Sage Group considers sale of its payment processing unit SAP chief says German headquarters an advantage amid U.S.-China trade war [nL2N26101G Deutsche's overhaul is hitting investment bank revenue less than expected - CFO Bovis Homes, Galliford restart talks to combine housing units Santander to increase its Mexican business ownership to 91.6% ProSiebenSat. 1 is doubling down on its free-to-air model - FT Spanish banks on edge for European ruling on mortgage pricing JD Sports defies weak UK high street with profit rise (Thyagaraju Adinarayan) ***** EUROPEAN STOCKS SEEN OPENING SLIGHTLY LOWER (0531 GMT) European stocks are seen opening slightly lower as weak China data and tech stocks sell off in the U.S. brought back fears of a global economic slowdown offsetting optimism from rising expectations of a stimulus package from the ECB later this week. Asian stocks were on the backfoot after data showed China mainland factory prices were shrinking at their fastest pace in three years as flagging demand at home and abroad is forcing some businesses to slash prices. Financial spreadbetters IG expect London's FTSE to open 9 points lower at 7,227, Frankfurt's DAX to open 14 points lower at 12,212, and Paris' CAC to open 3 points lower at 5,586. Meanwhile, German bund yields hit a one-month high on Tuesday following a report by Reuters that Germany is considering a "shadow budget" to allow the government to circumvent its strict national debt rules. (Thyagaraju Adinarayan) ***** (Reporting by Danilo Masoni, Josephine Mason and Thyagaraju Adinarayan)