UK Markets closed

LIVE MARKETS-Carnage yesterday: What caused it?

* European stocks mixed: STOXX 600 flat%, DAX +0.3% * Earnings in focus: L'Oreal, CS, BNP, Lloyds * Fed expected to cut rates by 25 basis points * U.S. futures drift higher on Apple results * Trade war concerns hit Asian shares Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Danilo Masoni. Reach him on Messenger to share your thoughts on market moves: rm://danilo.masoni.thomsonreuters.com@reuters.net CARNAGE YESTERDAY: WHAT CAUSED IT? (1216 GMT) We can only take a guess! A massive sell-off yesterday in euro-zone stocks perplexed many investors with reasons ranging from pre-holiday profit-taking to caution before Fed to trade war to Brexit woes. While, its still not possible to zero in on a single reason, the cost of the rout was a whopping $190 billion wipe-off in market value across Europe, including the UK, where export-heavy FTSE was just 0.5% down helped by sterling weakness. The re-emergence of hard Brexit worries for euro-zone stocks seems to be the most popularly cited reasons among traders as the nerve-racking carnage did not spread to the U.S. last evening nor to Asia this morning. Since Boris Johnson took office as Prime Minister in the UK, fears of a no-deal Brexit have mounted with research houses at big banks seeing a higher chance of the UK exiting European Union without a deal. "Seems that most out there suggested the movements having been related to latent Brexit concerns finally getting priced into a number of sectors," according to Goldman Sachs brokerage. Euro-zone stocks underperformed U.S. stocks sharply: Euro STOXX index fell 1.7% versus a quarter percent decline for the S&P 500. This is the biggest underperformance since May 9. "This resounding underperformance does raise more than one question. True, there is a divergence in macro data and Brexit is something that affects more Europe than the U.S. But is this enough to justify losses 4 times as big?", said Giuseppe Sersale, fund manager and strategist at Anthilia in Milan. (Thyagaraju Adinarayan and Danilo Masoni) ***** TAKE HEED OF THE MARKET'S RED FLAGS (1125 GMT) The yawning gap between investor sentiment, flagging macroeconomic data and the rising stock market is an increasing concern among analysts and strategists. Barclays' European equities strategist Emmanuel Cau says stocks' recent outperformance compared with bonds even as leading indicators such as Ifo and PMIs have rolled over further is a "red flag". Expectations of supportive central bank policy are helping to offset worries of slowing growth and supporting equities for now. "However, the current equilibrium is fragile and the decoupling between rising equities and weakening activity is unlikely to carry on for too long, in our view," he says in a note this morning. The chart below illustrates the issue at hand: the sentix investor sentiment index has plunged to 4-1/2 year lows even as equities have rallied. Market experts have been scratching their heads this year wondering when, or even if, investors would turn more bullish and jump aboard the equity rally, but investor flows have shown cash continues to exit global equities. There's evidence of a bearish tone to the market in the derivatives market too. The put-call ratio in U.S. stocks jumped yesterday to 1.03, one of its most bearish readings this year. A reading above 0.7 signals that traders are piling into puts at a faster pace than calls, a bearish indicator. The chart below shows the ratio for the year to date - in fact it has been above 0.7 since January 2018, an analysis of CBOE data shows. Cau says investors need to see better macro news flow and not lower bond yields before they start buying equities again. On the one hand, current positioning looks vulnerable to a sharp reversal if growth and/or inflation were to surprise to the upside, as no one appears to be positioned for good news, he says. But on the other, activity surprises remain decidedly negative, which suggests asset allocators are unlikely to be in a rush to move back to stocks, he says. (Josephine Mason) ***** WHEN YOU'RE PRICEY, THE MARKET HAS LITTLE MERCY (1048 GMT) With markets inflated by bets of central bank largesse, it seems that the high-quality companies whose valuations already bake in much of the positives are facing a harder time to convince investors. It really seems that the bar for them is quite high despite overall earnings for Europe Inc having suffered a string downgrades. There are a couple of examples today: Salvatore Ferragamo: sales at the Italian luxury group rose but the numbers just matched expectations and that has sent its shares tumbling more than 7%. The stock trades at a premium of more than 30% to its historical average and of more than 20% to EU branded goods average, according to Mediobanca Securities. And L'Oreal. The French beauty group posted a 6.8% rise in like-for-like sales in Q2. The growth is strong but expectations were even stronger (+7.4%) and that has sent its shares down more than 4%. Morgan Stanley said the results were "A Little Less Perfect". Looking back to this season, others have followed this pattern: Luxury group Kering slumped on Friday after sales at Gucci rose in Q2 but at a slower-than-expected pace, while software maker SAP posted numbers that weren't a huge miss but still its shares were hit hard when the company published its results earlier in July. One exception, which however seems to confirm the rule is Campari. The Aperol maker is seen as expensive but its shares shot up when it reported yesterday but only because its results were "stellar" (as Berenberg describes them). Shares in LVMH also rose immediately after its results last week showed Q2 sales rose across the group, but then the party was spoiled by a less-dovish-than-expected Draghi. Also see: ANALYSIS-Make or break: second-quarter results will test Europe's confidence What does SAP's drop say about positioning This chart shows the inflated valuations for luxury goods compared with the benchmark index. (Danilo Masoni) ***** EUROZONE BANKS OUTSHINE UK PEERS (0801 GMT) European banking index is almost directionless despite a decent rally in Credit Suisse and BNP Paribas shares after their Q2 beats as UK banks offset those gains after Lloyds Bank's poor earnings update. Those moves have clearly divided the continent's banks in terms of performance: euro-zone banks are outperformers whereas UK banks are sitting at the bottom. Switzerland's second-biggest bank reported highest quarterly earnings in four years, roughly when it launched its restructuring program. JP Morgan analysts say the results were primarily driven by its Asia wealth management business and credit-geared trading business. French peer BNP Paribas also reported better-than-expected results and Credit Suisse analysts say "compared with disappointing results from many peers we expect a positive reaction to the results, especially given the revenue-led beat." Euro-zone banking index is rising 1% with Deutsche Bank, Credit Agricole, Natixis, SocGen and Commerzbank making decent gains on positive read-across from peers BNP and CS. Now let's have a look at UK banks: The underperformance today is all down to Britain's biggest mortgage lender Lloyds, which is down 4% after below-consensus profits. The bank earmarked a further 550 million pounds to meet claims for mis-sold insurance to consumers and that weighed on earnings. Aside one-time costs, KBW analysts point to further dip in net interest margin. "We are not huge fans of Lloyds who continue to generate a disproportionate level of profitability from poor or ill-informed mortgage back book customers," KBW adds. Lloyds is casting a shadow on peers: CYBG down 5%, RBS -2.4%, Barclays and HSBC -0.7%. (Thyagaraju Adinarayan) ***** OPENING SNAPSHOT: EUROPE MIXED (0729 GMT) European shares are off to a mixed start as worries over trade wars and Brexit linger, offsetting encouraging signals from the earnings season just ahead of today's Federal Reserve meeting that is widely expected to cut rates for the first time in around a decade. The STOXX 600 is down about 0.1% in early trading, while the DAX and Italy's FTSE MIB are both slightly higher, as you see in the snapshot. Earning updates are driving the biggest share price moves. Glanbia has tanked 13% after the company revised its outlook and Viscofan has declined 11% after H1 profits fell, while Umicore has risen 11% after better-than-expected H1 operating profit. Among heavyweight stocks, a poor update sent L'Oreal shares down 3.4% while BNP Paribas and Credit Suisse are both rising following solid numbers. Lloyds Bank however is down 4.5% as a fresh charge hit profits. Earnings estimates have improved recently with latest Refinitiv IBES forecasts pointing to a 0.6& earnings growth in Q2, versus expectations of a slight fall one week ago. (Danilo Masoni) ***** WHAT YOU NEED TO KNOW AT THE OPEN (0703 GMT) European shares are under slight pressure at the open extending yesterday's heavy losses when the region sharply underperformed Wall Street on a mix of worries over Brexit and trade, even though signals from the earnings season are encouraging. The pan European STOXX 600 is down 0.1% in early deals, with the focus turning to the Fed which is expected to cut rates by 25 bps and signal more easing ahead. According to data from I/B/E/S Refinitiv, European companies now are expected to report a 0.6% rise in second-quarter earnings, a reversal from 0.5% fall estimated a week ago. If that is confirmed Europe Inc would avoid an earnings recession. Updates released today in Europe including from Airbus, Puma, Credit Suisse, BNP and Swiss RE are also looking good, while in global tech the picture looks mixed: Apple rose 4% after earnings and forecasts beat estimates, offsetting worries over a drop in iPhone sales, while Samsung Electronics fell 3% after quarterly profit fell 56% hit by declines in semiconductor prices amid oversupply. Airbus shares rose 1.9% in early Frankfurt trade after the plane-maker posted stronger-than-expected core second-quarter earnings, led by the switch to efficient new single-aisle jets, and maintained its profit forecast for the year. The company warned of delivery challenges in the second half and one trader says profit taking could eventually kick in. Even banks, which face growing profit headwinds from monetary easing, posted solid results. Credit Suisse was up 2.8% in pre-market trade after it posted its highest quarterly earnings in four years, confirming its 2019 profitability target after second-quarter earnings jumped 45%. BNP Paribas said a strong performance by its corporate and investment banking division had buoyed its profits above expectations during the second quarter. Shares in France's largest bank in terms of assets are called up 3% by one trader. In Spain, BBVA's Q2 net profit rose 2.6% thanks to a stable performance in Mexico and Spain. Still in financials, Swiss RE shares are also rising in pre-market after quarterly net income fell much less than expected. In the consumer space, Puma shares rose 3.3% in early Frankfurt trade after the German sportswear group raised its outlook for sales growth. L'Oreal posted weaker-than-expected second-quarter sales growth, in part as demand for make-up products such as its Maybelline mascaras faltered in North America. UK headlines: UK house prices stay sluggish as Brexit drags on market - Nationwide Indivior profit rises on slower-than-expected Suboxone market share loss Countrywide profit more than halves as Brexit bites BAE Systems reports 9% rise in H1 earnings Funeral firm Dignity halts dividend after H1 profit slumps Smith & Nephew raises full-year revenue outlook Lloyds Bank profits fall after fresh $669 mln PPI charge Glencore says African copper business below expectation Insurer Direct Line profit drops 10.2% (Danilo Masoni) ***** ON OUR RADAR: EARNINGS AND DEALMAKING (0616 GMT) Turning to the corporate front there are a number of good looking earnings updates that could provide support, as well as some fresh dealmaking activity to keep investors busy ahead of the Fed. Futures on main European benchmarks have opened up 0.1-0.4%. In results, Airbus posted stronger-than-expected core second-quarter earnings and maintained its profit forecast for the year while warning of delivery challenges in the second half, and Credit Suisse reported its highest quarterly earnings in four years. In M&A, EssilorLuxottica said it would buy Dutch optical retailer GrandVision in a cash transaction that could amount to a total of 7.2 billion euros ($8 billion). Here is your early morning headlines roundup: Airbus Q2 profit rise beats forecasts, delivery challenges ahead Credit Suisse confirms 2019 target after Q2 net profit jumps 45% Swiss Re net profit falls 5.3% in 1H; better than analysts expected BNP Paribas' Q2 profits buoyed by corporate and investment banking arm EssilorLuxottica to buy Dutch retailer GrandVision, confirms outlook Roche, Spark extend $4.3 bln takeover again, this time to Sept. 3 LafargeHolcim doubles first half profit, confirms outlook BBVA Q2 net profit up 2.6% on lower impairments Air France-KLM profit gain hampered by fuel costs French asset manager Amundi confirms profit target even after outflows Takeaway.com squeezes out core profit on strong order growth Solvay beats Q2 estimates, confirms outlook Kloeckner & Co sees falling demand in auto, engineering sectors (Danilo Masoni) ***** EUROPE SEEN BOUNCING BACK BEFORE FED (0550 GMT) European shares are expected to bounce back today after heavy losses in the previous session on a mix of trade and Brexit with the focus now turning squarely on the Federal Reserve which is widely expected to cut interest rates for the first time in a decade. "Markets have convinced themselves that we will see, at the very least, a 25bps cut in the Fed funds rate later today. A 50bp cut, which some on the margins are calling for, is highly unlikely, given the strength of recent data," says Michael Hewson, analyst at CMC Markets. "The data seen thus far in no way supports the pricing for multiple rate cuts which means a one and done cut could result in a sharp repricing of risk", he adds. Fed funds rate futures are now fully pricing in a 25 basis point rate cut later today and another 25 basis point reduction by September. Sentiment will likely be supported after Apple's April-June earnings beat estimates, sending its shares rising around 4% in after-hours trading. Over in Asia, however, fresh trade war concerns following threats from President Donald Trump to Beijing weighed on shares. MSCI's broadest index of Asia-Pacific shares outside Japan hit its lowest since June 19. Here are your opening calls, courtesy of CMC Markets. FTSE100 is expected to open 16 points higher at 7,662 DAX is expected to open 30 points higher at 12,177 CAC40 is expected to open 8 points higher at 5,519 (Danilo Masoni) ***** ($1 = 0.8963 euros) (Reporting by Danilo Masoni, Josephine Mason and Thyagaraju Adinarayan)