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LIVE MARKETS-Closing snapshot: short covering gives Italy the extra boost
* European shares shrug off fractious G7
* Bank stocks lifted as Italy commits to euro
* Italian banks score best day since April 2017
* Trade tremors send autos stocks to 2 1/2 month low
* UK factory output shows biggest monthly drop since 2012
June 11 - Welcome to the home for real-time coverage of European equity markets brought to
you by Reuters stocks reporters and anchored today by Helen Reid. Reach her on Messenger to
share your thoughts on market moves: helen.reid.thomsonreuters.com@reuters.net
CLOSING SNAPSHOT: SHORT COVERING GIVES ITALY THE EXTRA BOOST (1600)
Investors ignored the fractious G7 meeting while comments by Italy's new economy minister,
who promised to keep the country in the euro, supported the mood in Europe and triggered a wave
of short covering that sent the Italian FTSE MIB stock benchmark up index up 3.4 percent.
Even (Taiwan OTC: 6436.TWO - news) though that was its best day since end April 2017 (when Emmanuel Macron won the first
round of France's presidential race), the index remains down 10 percent from its May peak.
Here's today's closing snapshot:
(Danilo Masoni)
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SPANISH BANKS: POTENTIAL FOR CATCH-UP AFTER ITALIAN STRAIN (1527 GMT)
Along with the Italian banks (now up 5.9 percent), Spanish banks are rallying today with
Santander, Caixabank (Amsterdam: CB6.AS - news) , Sabadell and Bankinter (Amsterdam: BI6.AS - news) up 2.8 to 3.7 percent in a broad-based periphery
relief rally.
UBS (LSE: 0QNR.L - news) analysts see potential for the Iberian banks to catch up as the political climate
stabilises.
Italy's effect on Spanish bond yields translates into a 5 to 30 basis point core capital hit
for Spanish banks - a manageable impact, especially as the banks that are most exposed to
Italian and Spanish bonds also have the strongest capital buffers, they say.
Meanwhile on the domestic front, investors and analysts seem pretty sanguine about Spain's
new government.
"After a first negative reaction due to the unexpected nature of the non-confidence vote
against PM Rajoy, the market seems reassured about the incoming government's economic policy not
representing a threat for Spain's ongoing expansion," say UBS analysts.
"Mentioned as a potential area of action in the past, and though not emphasised in the last
week, our main fear remains the possibility of some banking levy to help funding expansive
fiscal policies on the welfare front."
(Helen Reid)
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FROM SHORT TO LONG VOLATILITY (1432 GMT)
An investor who bought into an inverse volatility ETF straight after February's vol blow-out
has now reversed his strategy to build a long volatility position.
Clark Fenton, CIO at Agilis Investment Management, said back then "We had to gather our
courage" before buying the ProShares inverse VIX ETF after similar products had imploded.
Today he's instead betting that volatility is going to come back up, having sunk after a
brief spike over Italian political fears.
"What's interesting is that volatility on the S&P 500 has been very very low. It's really
come down and there's a lot of talk about volatility selling strategies coming back apace,"
says Fenton.
"We pulled away from that strategy, we have started to build volatility positions over the
past few days."
The market hurtling towards a global regime of "quantitative tightening" (QT), with the Fed
and ECB meetings looming this week, is part of his reasoning for the long-vol call.
"In a world of QT every negative headline has a disproportionate effect," says Fenton. "It's
particularly bad if the QT is happening at a time when the European economy is starting to
weaken, and I have my suspicions that that may well be the case. That's the double whammy."
(Helen Reid)
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"STRUGGLING TO MAKE MONEY" (1330 GMT)
Investors have been having a hard time making money from the market this year, according to
JP Morgan.
Both institutional and retail investors have been much more cautious than last year as new
political risks and drifting markets make directional bets both more rare and more risky.
Quantitative funds, such as CTAs and risk parity funds, have done poorly versus
discretionary funds, also due to the lack of strong trends in most markets, says JPM's Nikolaos
Panigirtzoglou and team.
And turnover has been high relative to last year across all asset classes - as it tends to
be when uncertainty is high, driving investors to nervously reshuffle portfolios.
Retail investors have also bought equity and bond funds at a much slower pace since the
February selloff.
(Helen Reid)
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TURNING BULLISH ON TECH AGAIN (1252 GMT)
It looks like high valuations and crowded positioning are no longer a big worry for
investors and after last week's record run for the Nasdaq (Frankfurt: 813516 - news) , confidence is growing that 2018 will
be yet another strong year for European tech.
"In contrast to our view in Jan, we now believe that 2018 will make it seven straight years
of outperformance for the EU Tech sector. While we still see earnings in-line, we now expect the
sector to relatively rerate," says Citi.
Even though economic activity in Europe is set to slow this year, that should not be a
problem for the sector. Citi expects healthy EPS growth for European tech in 2018 and notes how
the sector's valuation premium widens in times of weaker growth.
Over the last 7 years the European tech index has more than doubled in value,
leaving the broader European market well behind. The index is up more than 10.5 percent so far
this year, while the STOXX 600 is down 0.7 percent.
Citi's top picks are SAP (Amsterdam: AP6.AS - news) , Capgemini, ASML (Milan: ASML.MI - news) , Temenos
(Danilo Masoni)
*****
BLOCK TRADING BACK ON THE UP (1138 GMT)
The share of dark trading executed in large blocks has come back up this week, having fallen
the two previous weeks. As of Friday June 8 it's 45.25 percent of the total traded on dark
pools, according to Fidessa. The share of dark trading executed in large blocks has risen since
MiFID II came into force, restricting non-transparent trading for many stocks outside of
"large-in-scale" blocks.
The most traded stock in large blocks was RPC (NYSE: RES - news) with 78 trades, while the highest
value traded was in Novo Nordisk (LSE: 0QIU.L - news) - with 99 million euros' worth changing hands.
Market share remains hotly contested between the big block trading venues, as you can see
below. Liquidnet is currently in the lead in terms of market share - with 28.7 percent of total
dark pool block trades - with ITG (Shanghai: 600755.SS - news) 's Posit second and the LSE's Turquoise Plato in third place.
(Helen Reid)
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PRIVATE EQUITY FUELLED M&A BOOM (1043 GMT)
Shares (Berlin: DI6.BE - news) in UK car auctioneers BCA Marketplace (LSE: BCA.L - news) have hit a record high this morning
after the company rejected a buyout offer from private equity firm Apax Partners.
It's the latest in a flood of attempted or completed takeover deals targeting UK stocks, and
according to Bernstein analysts it's also in line with a broader, worldwide surge in private
equity dealmaking.
The share of deal activity taking companies private has reached a high not seen since 2007,
Bernstein's global quantitative analysts find. Pension funds' allocation to private equity has
also increased in recent years.
"This is a classic sign of a business cycle moving towards a "late expansion" phase," they
write. "This increase in activity tied to the remarkable jump in pension fund allocation to
private equity and increase in committed but uninvested capital seems highly likely to dampen
future returns from private equity."
The rise in pension funds' allocation to private equity, and the jump in dealmaking, are
likely linked to a diminishing breadth of growth opportunities in listed companies. The number
of listed companies is shrinking and buybacks are exceeding issuance globally, Bernstein points
out - meaning investors increasingly need exposure to private assets in order to earn a better
equity risk premium.
(Helen Reid)
*****
A BANK-SHAPED HOLE IN THE EUROPEAN MARKET (1000 GMT)
While banks are the top performers today on relief over the new Italian economy minister's
pro-euro stance, they remain the laggards over this year to date, down 11 percent.
UBS analysts point out that they're the exception, leaving a "bank-sized hole" in a strongly
cyclical-led market.
"Given the move in yields, this pro-cyclical market should not come as a great surprise,"
they write. If yields continue to rise then cyclicals should too.
But the performance of cyclicals versus defensives is now lagging yields significantly -
which is all down to the banking sector decoupling with yields (see chart below).
Why the lag? UBS reckons investors' concerns about growth disappointment and trade disputes
trumped the rising yield narrative.
UBS however reiterate their overweight on banks, saying the sector should catch up with the
rest of the cyclical universe thanks to a supportive long-term environment with domestic growth,
corporate releveraging, a rebound in capex, (slowly) rising rates, and the potential for M&A.
Their top picks? Banco BPM, Credit Agricole (Swiss: ACA.SW - news) , Credit Suisse (IOB: 0QP5.IL - news) ,
Danske Bank (LSE: 0NVC.L - news) , ING, Lloyds, Santander and UniCredit (EUREX: DE000A163206.EX - news)
.
(Helen Reid)
*****
MID-MORNING SNAPSHOT: MOVING HIGHER (0937 GMT)
European shares have started the first day of the week shrugging off the weekend's fractious
G7 and a promise by Italy's new economy minister to keep the country in the euro is providing a
big relief for Italian stocks.
In the UK, factory output showed its biggest monthly drop since 2012, weakening the pound
and boosting the export-oriented FTSE index.
Here's your snapshot:
(Danilo Masoni)
*****
WHAT'S ON OUR RADAR AHEAD OF THE OPEN (0651 GMT)
European stock futures are indicating a strong start, shrugging off the fallout from a tense
G7 meeting over the weekend with gains of 0.3 to 0.7 percent for the major benchmarks.
At the start of a week packed with political and central bank events, with an historic
summit between the U.S. and North Korea on Tuesday followed by Fed and ECB meetings, investors
in Europe are choosing to look beyond the G7 meeting Societe Generale (Swiss: 519928.SW - news) analysts branded
“shambolic”.
They are also likely expressing relief that Swiss voters rejected, by a landslide, a
campaign to radically alter the country’s banking system. The “no” vote pushed the Swiss franc
down, which could deliver a boost to Swiss exporting stocks. The new Italian economy minister’s
vow to stay in the euro and cut debt levels was sending Italy’s bonds higher and is likely to
lure relieved investors back into Italian stocks, too.
M&A is still rampant in the UK stock market. Ones to watch today include Inmarsat (Other OTC: IMASF - news) which,
after a sharp rally on bid speculation on Friday, confirmed after the close that it had rejected
a takeover offer from U.S. firm EchoStar.
British car auctioneers BCA Marketplace could also be moved by news private equity firm Apax
Partners (IOB: 0QOQ.IL - news) is considering making an offer for it. It’s not alone in the private equity dealmaking
space: Bernstein analysts said the share of deal activity taking companies private has reached a
peak last seen in 2007.
Ocado could also be a mover after a double upgrade to “outperform” from Bernstein – a bold
call for a stock already up 152 percent this year.
On the negative side, Daimler (IOB: 0NXX.IL - news) shares could be dented after the Bild am Sonntag reported the
German regulator found defeat devices in its diesel cars. And Rolls Royce shares are indicated
down 1 percent after it said a problem affecting the durability of its Trent (BSE: 500251.BO - news) 1000 engine had
been discovered in another engine type, requiring further inspections.
In other company news/potential stock movers:
German regulator found defeat devices in Daimler diesel cars -BamS
Rolls-Royce says compressor issue found in different Trent 1000 engine
EDP sees merits in Chinese suitor's plans, but offer too low
(Helen Reid)
*****
FUTURES POINT TO MODEST GAINS AT THE OPEN DESPITE "SHAMBOLIC" G7 (0609 GMT)
Futures for the leading European stock benchmarks are up 0.1 to 0.3 percent, indicating a
stronger open.
There's not much on the macroeconomic front expected today but Societe Generale analysts say
investors will be watching the Bank of France business sentiment and UK construction and
manufacturing output - a slow start to a heavy week of political and central bank events.
Here's SocGen (Paris: FR0000130809 - news) 's take on the G7 fallout: "After some initial wobbles at the open, markets in
Asia took the shambolic end to the G7 summit in their stride, regardless of the fact that on the
surface the risk of a further escalation of U.S. protectionist measures has increased."
And some extra headlines that could shake up trading, with M&A still rampant in the UK
market:
Comcast (Swiss: CMCSA.SW - news) to win unconditional EU okay for Sky (Frankfurt: 893517 - news) bid - sources
British watchdog probes reports that meat found in vegetarian meals
Apax considering an offer for BCA Marketplace
Inmarsat rejects EchoStar takeover bid, says it undervalues firm
(Helen Reid)
*****
EARLY MORNING HEADLINE ROUND-UP (0537 GMT)
The G7 fallout includes a further souring of U.S.-Canada relations, and a promise from
German Chancellor Merkel to act against U.S. tariffs on steel and aluminium. She (Munich: SOQ.MU - news) also said
Trump's decision to pull out of the G7 communique via tweet was "sobering and a bit depressing".
In Europe investors will be relieved that the Swiss rejected a plan to transform the
country's financial landscape by barring commercial banks from electronically creating money
when they lend, in a landslide referendum vote.
On the corporate front Swiss chemicals firm Sika (IOB: 0QMA.IL - news) is on a massive takeover drive, and French
energy stocks could be moved by the energy market regulator's plans to recommend higher natural
gas energy prices.
Sika targets up to $1 bln in takeovers a year to quicken growth
U.S.-Canada dispute escalates after tense G7; Trump renews criticism of Trudeau
Swiss voters reject campaign to radically alter banking system
With (Other OTC: WWTH - news) sales boom in mind, Gucci tightens grip on suppliers
French energy regulator to recommend higher natural gas prices
Merkel: EU will act against U.S. tariffs on steel, aluminium
Caixabank To Buy 51 Pct Of Servihabitat Servicios Inmobiliarios For 176.5 Mln Euros
(Helen Reid)
*****
MORNING CALL: EUROPEAN SHARES TO SHAKE OFF G7 SHOCK (0514 GMT)
European stock benchmarks are seen opening stronger this morning after an early wobble in
Asian trading after U.S. President Donald Trump backed out of a joint G7 communique over the
weekend.
The clear lack of a united front among the group dented Asian shares, but they went on to
recover and edge higher as investors looked ahead to an historic U.S.-North Korea summit on
Tuesday.
Investors have also this week to get their heads around a two-day Fed meeting starting
tomorrow, and an ECB meeting on Thursday at which policymakers could signal intentions to start
unwinding the bank's massive bond purchasing programme.
At the start of a busy week, spreadbetters call the DAX 20 points higher at 12,787, the CAC
40 down 4 points at 5,446, and the FTSE 100 16 points higher at 7,697.
(Helen Reid)
*****
(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)
