LIVE MARKETS-Closing snapshot: Starting December on a "truce rally"
* Stocks trim gains after strong start
* Miners, autos, tech, oil surge
* Trump and Xi broker trade war truce
Dec (Shanghai: 600875.SS - news) 3 - 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: STARTING DECEMBER ON A "TRUCE RALLY" (1713 GMT)
The truce in the U.S./China trade war has fuelled a relief rally across markets even though
it has lost a bit of its thrust in the last few hours.
Anyhow, there are worse ways to begin December, certainly for those who have put their hopes
in a Santa rally.
As noted by IG (Frankfurt: A0EARV - news) 's Chris Beauchamp, there is also room for further improvement if the hatchet
is buried for good.
"If this is the kind of reaction we get just for a ‘truce’ in the trade wars, imagine what
will happen if peace breaks out?"
(Julien Ponthus)
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FOR THE BRAVE: A HIGH-RISK CONTRARIAN BET ON EUROPE (1610 GMT)
Europe has been quite a disappointment with its stock markets well into the red year-to-date
and badly underperforming a back-in-the-black Wall Street.
"MSCI Europe has only outperformed the U.S. 23% of the time during the last 10 years,
compared to outperforming 66% of the time in the 10 years prior to the financial crisis", SocGen (Paris: FR0000130809 - news)
analyst Andrew Lapthorne notes.
For those who believe that the trend could reverse, Lapthorne has come up with a "high-risk
strategy". The analyst noted that a very big discount in European shares lays in "value stocks"
which are trading at PEs of about 8 against roughly 20 in the United States.
"Therefore, 'for the brave' who see a potential reversal in fortunes for Europe next year, a
long Europe Value vs a short US Value trade may be the way to go", Lapthorne writes.
"It would certainly be a high-risk strategy, and Europe has plenty of issues to deal with,
but prior to previous periods of outperformance, the starting point was always ‘cheapness'
caused by a crisis".
(Julien Ponthus)
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EUROPEAN MID-CAPS "CLOUDED BY UNCERTAINTIES" (1450 GMT)
Fresh from a mid-cap CEO conference, Exane analysts report that European mid- and small-caps
are feeling pretty uneasy about the political landscape and the way the economy is heading,
after a bruising and volatile 2018.
"There was a general acknowledgement that there are still quite a lot of uncertainties in
2019 around U.S.-China trade, Brexit, and whether the current moderation in global growth will
become more pronounced," they write, saying the sector is clouded by uncertainties.
Flows figures in the small- and mid-cap space are impressive, showing just how significant
investors' loss of confidence in Europe's smaller companies has been.
"The year started on a wave of optimism and record inflows to SMID cap funds," writes Exane.
"The situation gradually reversed during the ensuing months, with October seeing large
redemptions notably from U.S. investors."
You can see that rapid unravelling in Exane's flows data below:
(Helen Reid)
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MIFID II UPDATE: DARK BLOCK TRADING IS SO LAST SEASON (1409 GMT)
The latest data from trading software firm Fidessa confirms what we reported last week: that
traders went straight back to their old habits after MiFID II caps on dark trading were lifted.
The proportion of dark trading done in large blocks fell last week to 30.9 percent - the
lowest share since March, when the caps were first implemented - Fidessa reports.
The regulatory changes, which were implemented in January aimed at restricting the size of
trades that can be done in dark pools, coaxed investors to trade in large blocks to make it
harder for high-frequency traders to front-run trades in non-transparent venues.
As you can see below, that worked initially as investors were forced to do most of their
dark trading in blocks (up to a peak of 50.3%) - but the block trading fell back rapidly after
the caps were lifted.
(Helen Reid)
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MULTI-ASSET MANAGERS STILL IN DE-RISKING MODE (1338 GMT)
The volatility of markets this quarter has been a headache for multi-asset portfolio
managers wondering where to turn - to sell out of volatile equity markets and brave the low
returns offered by bonds, to bet the farm on cash, or to venture into unpredictable commodities?
While the G20 trade war truce has given investors cause for optimism today, the direction of
travel for some multi-asset managers still seems to be towards trimming stock exposure. For
JPMAM, it's the first time in nearly a decade they're doing this.
"Given the shift in the economic environment, the ongoing path of policy tightening and the
slowing of earnings growth we expect in 2019, we have chosen to meaningfully de-risk our
multi-asset portfolios — most visibly by reducing stock-bond to a small underweight for the
first time in nine years," writes John Bilton, global head of multi-asset strategy at JP Morgan
Asset Management.
JPMAM also raises cash allocation to overweight - a sign among many that investors are
turning back to cash in a year that's seen the U.S. dollar outperform stocks and bonds.
Though it's a treacherous environment to navigate for multi-asset portfolio managers,
Goldman Sachs (NYSE: GS-PB - news) , on the other hand, advocates investors stick to their guns. "We remain modestly
pro-risk in our asset allocation (overweight equities, underweight bonds)," they say, though
they're also overweight in cash.
Next (Frankfurt: 779551 - news) year will bring better, but still low, returns, GS reckons. As you can see below,
Goldman expects taking risks will be better rewarded next year than it has in 2018.
(Helen Reid)
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A FRESH BURST OF OPTIMISM (1244 GMT)
The future ain't what it used to be a few weeks ago! With (Other OTC: WWTH - news) the U.S./China trade war truce,
traders have switched to risk-on and are positioning themselves for a Santa rally and, possibly,
a bullish 2019.
As noted by France's LBPAM, there are now three positive signals when it comes to 2019:
Trump looks pretty serious in trying to keep oil prices down, the Fed now seems unlikely to rock
the boat and a full-blown trade war won't happen, or at least not just yet.
With a consensus among analysts that a U.S recession isn't likely at least until 2020, the
new year actually looks pretty good.
"2019 has the potential to be a good year for equities," writes Jeremy Podger, a portfolio
manager at Fidelity, noting "decent earnings growth and relatively attractive valuations".
"Equities remain relatively attractively valued versus bonds," Podger adds, while cautioning
that political risk remains high, especially in Europe.
It's the same positive tone from JP Morgan:
"In our view, before this cycle is finished, equities can still deliver a period of
significant outperformance versus fixed income," the bank's global equity strategist Mislav
Matejka writes in a note.
The only real negative for European investors is that Europe itself isn't such a shinny
spot with riots in France, Italian populists spending more than Brussels can accept, and
lingering Brexit uncertainties.
"Regionally, we remain OW US vs Europe, despite an already significant US outperformance,"
writes JPM's Matejka, adding that Italy "needs to improve in order for Eurozone to have a chance
of leading".
Unrelated but in case you missed it: dealmaker Albert Frere, Belgium's richest man, died at
age 92 https://reut.rs/2DZC9Mn
(Julien Ponthus)
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FRANCE: LUXURY COMPANIES BOUND TO SUFFER FROM RIOTS (1134 GMT)
Besides sweeping up broken glass and repairing shop fronts, luxury brands in Paris may have
a longer-term impact from this weekend's riots to worry about.
Berenberg analysts note the protests aren't likely to be very helpful for luxury brands
which rely on high-spending foreign tourists visiting the city, especially in the run-up to
Christmas, and say those stocks most exposed to France could lag the market as sales may be
impacted.
"The ongoing disruption could have an adverse impact on tourist arrivals in France
(especially from China) as well as local demand due to temporary store closures," writes the
Berenberg team.
"In our view, while part of lost sales could be recouped in other countries, as consumers
may decide to change their travel plans, the negative impact on local consumption may be more
difficult to recover."
They estimate the following sales exposure to France:
* SMCP (41% )
* Hermes (14%)
* LVMH (10%)
* Richemont (8%)
* Hugo Boss (IOB: 0Q8F.IL - news) , Kering (LSE: 0IIH.L - news) , Moncler, Pandora (Swiss: PNDORA.SW - news) (6% each)
* Burberry, Ferragamo, Prada (HKSE: 1913-OL.HK - news) , Swatch, Tod’s (5% each)
* Brunello Cucinelli (3%)
One Chinese tourist who spoke to Reuters on Sunday, in the aftermath of the riots, said:
"We're here to shop but we wondered if we'd have to go straight to Milan instead."
The words of every Paris luxury brand's nightmares...
Overall today, though, luxury is doing pretty well (with LVMH up 4 percent and Kering up 5.4
percent) as trade war risks diminish after Saturday (Shenzhen: 002291.SZ - news) 's truce. Below is a reminder of how badly
the trade war rhetoric has bruised the sector in Europe.
(Helen Reid)
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OPENING SNAPSHOT: MINERS, CARS AND TECH LEAD BROAD EU RELIEF RALLY (0838 GMT)
Xi and Trump have injected some festive spirit into European stock markets, with the major
bourses all up between 1.5 and 2.6 percent, with mining stocks, carmakers and the semiconductor
sector, hit hard in recent months by worries about a slowing global economy, leading the gains.
Germany's DAX, which is considered to be most exposed to the prolonged spat between the
world's two largest economies, and the STOXX 600 were on track for their best day since April,
with the latter hitting its highest level since mid-November.
(Josephine Mason)
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WHAT'S ON THE RADAR: AUTOS, OIL AND MINERS TO SURGE, MCCOLL'S TO SINK (0745 GMT)
European stocks were set to surge on Monday after U.S. and Chinese leaders brokered a trade
war truce at Saturday’s G20 dinner. Futures for the European benchmarks were up 1.7 to 2.3
percent, with Germany’s DAX – the most sensitive to China and trade war fears – leading the way.
Car (HKSE: 0699-OL.HK - news) stocks, which have been battered by fears of rising tariffs, were indicated up 3 to 5
percent with German carmakers Daimler (IOB: 0NXX.IL - news) , BMW (EUREX: BMWE.EX - news) , and Volkswagen (IOB: 0P6N.IL - news) leading the way. Auto suppliers were
also seen gaining, traders said.
The oil sector was also indicated around 2 percent higher after oil prices soared by 5
percent on the trade war truce and ahead of this week’s OPEC meeting, expected to result in a
supply cut. Miners were also seen rising strongly on the trade news.
On the corporate front, plastics and packaging maker RPC (NYSE: RES - news) could fall 5 percent, traders said,
after the firm announced it was ending merger talks with Bain Capital, but granted an extension
to discussions with Apollo until Dec 21.
One trading desk saw French supermarkets underperforming after this weekend’s unrest in some
of Paris’ main avenues as protests over rising fuel prices turned sour and culminated in
violence and looting.
Another profit warning from a UK retailer with convenience store and newsagent chain
McColl’s which blamed problems relating to a new supply contract with supermarket group
Morrisons, and difficult trading conditions, for a cut to its earnings forecast. The shares were
indicated down 10 percent by some traders.
And more bad news for the semiconductor industry, with bellwether ASML (Milan: ASML.MI - news) warning of delays in
the new year to deliveries after a fire at one of its suppliers, electronic components maker
Prodrive.
(Helen Reid)
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TRADE WAR RELIEF SENDS FUTURES SHOOTING UP (0718 GMT)
Futures have opened up 1.7 to 2.3 percent across European benchmarks, indicating a strong
relief rally after the Trump-Xi truce. Trade-sensitive sectors like industrials and miners are
likely to get an extra boost, and the China-sensitive DAX is set to lead the way.
(Helen Reid)
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TAKEAWAYS FROM A "HIGH STEAKS" G20 DINNER (0650 GMT)
Analysts are dissecting the takeaways from Trump and Xi's dinner on Saturday which saw the
leaders agree a truce over grilled sirloin steak.
It's left a lingering aftertaste - and not a good one - for Rabobank senior strategist
Michael Every who says this "high steaks" dinner deal isn't all it's cracked up to be.
"The steak was undoubtedly very good; but the ‘trade deal’ that came out of it was not," he
writes. "The markets will love the U.S.-China trade truce – but there is far less than meets the
eye. It is a can-kicking at best, and arguably puts the US in an even stronger position ahead."
The outcome of the talks was interpreted quite differently by the White House and by Chinese
media, Every points out (see his table below), with both sides presenting the deal as a win for
them.
Societe Generale (Swiss: 519928.SW - news) economists also point to challenges still lying ahead: "This is certainly a
great relief, and the downside risk to our global scenario is lowered somewhat. However, there
remains many difficult discussions between the US and China, particularly on technology and
intellectual property rights, and so we see little reason at the moment to alter our forecasts
for global growth next year."
(Helen Reid)
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STOCKS TO SURGE AFTER TRADE WAR TRUCE (0614 GMT)
European stocks are set to surge after Saturday's G20 meeting resulted in a truce between
Trump and Xi Jinping, a big relief for global markets.
China and the United States agreed to halt additional tariffs in a deal that keeps their
trade war from escalating as the two sides try again to bridge their differences with fresh
talks aimed at reaching an agreement within 90 days.
The White House said Trump told Xi he would not boost tariffs on $200 billion of Chinese
goods to 25 percent on Jan 1 as previously announced.
Asian shares rallied after the leaders brokered the truce, a relief for the global economic
outlook and a tonic for emerging markets and battered oil prices.
Financial spreadbetters at IG expect London's FTSE to open 114 points higher at 7,094,
Frankfurt's DAX to open 211 points higher at 11,468 and Paris' CAC to open 84 points higher at
5,088.
(Helen Reid)
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(Reporting by Helen Reid, Danilo Masoni, Julien Ponthus)