LIVE MARKETS-Closing snapshot: worst fall in 2 months for European stocks

* European shares drop

* French, German PMIs disappoint

* Govt uncertainty pressures Italian stocks

* M&S shares jump after FY results

* Pound falls on weak UK inflation

* Eyes on FOMC minutes

May 23 (Reuters) - 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: danilo.masoni.thomsonreuters.com@reuters.net

CLOSING SNAPSHOT: WORST FALL IN 2 MONTHS FOR EUROPEAN STOCKS (1636 GMT)

It's been a pretty sharp pullback across Europe today with the STOXX 600 suffering its

biggest slide in two months. A drop in crude prices, weighing on oil stocks, is partly to blame,

while U.S.-China talks hitting a speedbump are also not helping risk appetite, with Wall Street

also declining.

Italian banks were further dented as political uncertainty continued to push Italy's bond

yields higher. And a sharper than expected slowdown in euro zone business activity added to

investors' jitters, casting doubt on the timing of the ECB's wind-down of QE.

French telecoms were among the rare bright spots as analysts crunched the numbers on

potential consolidation.

(Helen Reid)

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NO RISK, NO GAIN: GRIM PROSPECTS FOR RETURNS (1450 GMT)

The future ain't what it used to be, according to Pictet Asset Management (PAM), and

investors will need to cast their net wider to find returns in coming years.

Returns for bonds and equities in the developed world will fall dramatically in the next 5

years, the asset manager predicts in a research note.

PAM believes bond markets are set for "an era of rising yields" and that equities are bound

to suffer when the economic cycle reverses after one of the longest expansion phases in recent

history.

"That uninspiring investment outlook reflects the prospect of developed countries struggling

to match past expansion rates, hampered by demographic challenges and paltry productivity

growth," Pictet writes.

"Anyone looking to achieve even modest returns over that timeframe needs to complement safe

assets – developed-economy bonds and equities – with those from off the beaten track."

Here's how little Pictet believes bonds and equities could return in the next 5 years in

developed markets (note only 1.7 percent for equities):

(Julien Ponthus)

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ITALIAN BANKS: VOLATILE AND RISKY BUT STILL LOVED (1341 GMT)

Citi is sticking to its positive view on Italian banks despite what it calls a "political

roller-coaster" denting the sector widely used as a proxy for political risk in the country.

The Italian banks index is currently down 1.8 percent, just slightly more than

Euro zone banks, which are retreating 1.5 percent on what is turning out to be quite a

sharp "risk-off" session.

As Citi analysts note, Italian banks outperformed their Euro zone peers since the beginning

of the year on the back of falling non-performing loans and improving profitability, but the

March general election has since made that investment more stressful than most investors would

probably like: Italian banks have dropped 11 percent in just a week.

"Given the lack of clarity on the political landscape/actions, we maintain our positive

stance on Italian banks but acknowledge the potential risks," Citi analysts say, adding that

they "expect banks' share prices to continue to experience volatility until more clarity is

available on government reforms/potential actions."

As you can see below, Italian banks have recently given up a good chunk of their 2018

outperformance but are still hanging in there.

In the meantime, here's the latest on the Italian political front:

Italy bond selloff resumes, German yields tumble as weak PMIs fan growth worries

(Julien Ponthus)

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UK RETAIL: A REVIVAL? (1223 GMT)

Marks & Spencer (Frankfurt: 534418 - news) shares are leading the way today, up 5.5 percent after its profit

for 2017/18 beat forecasts and it kept its dividend payout. The widely-shorted stock also gets

an extra boost on good news when investors cover their short positions.

While UK retail stocks have been widely avoided due to concerns over the domestic economy

and pressures on consumer spending, some investors have been dipping back into the sector amid a

broad change of tone on British stocks with many brokers turning more positive.

Some have held on tight, staying positive on domestic UK against the market. Invesco

Perpetual's head of UK equities Mark Barnett admits it's been a tough ride as these stocks have

de-rated significantly, but he is sticking with it.

"The portfolio positioning has, for a while, been more skewed towards sterling denominated

assets or companies which derive a large part of their revenues from the domestic economy and

that feature I have continued to reinforce," says Barnett. Invesco (Frankfurt: 3IW.F - news) 's UK equity income fund

includes Next (Frankfurt: 779551 - news) as a top ten holding.

With (Other OTC: WWTH - news) cyclical oil and mining stocks suffering today, Northern Trust analysts also recommend

UK domestics as an unlikely alternative: "If looking to rotate into something still with

reflation links that has under-performed, and has a significant margin of valuation safety, then

consider more U.K. domestics," they write.

As you can see below, the volume of M&S shares on loan has increased over the past 15

months, as has the cost to borrow, both indicators investors have been keen to short the stock.

Cost to borrow has however come down since a peak in January, a sign pessimism has dissipated

somewhat.

Perhaps, similarly to brokers' overall argument for turning more optimistic on the UK,

investors' expectations had simply sunk as low as they could go on retailers.

(Helen Reid)

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ITALIAN SCENARIOS (1052 GMT)

There's still much uncertainty about the make-up of Italy's next government and trading

remains headline-driven as markets wait for President Matterella to name a prime minister and

pave the way for the creation of an anti-establishment government in the euro zone's third

largest economy.

After the attempt by little-known professor Giuseppe Conte to become premier hit a hurdle on

Tuesday, investors don't appear to be ruling out any outcome, including a new general election.

Alessandro Balsotti, portfolio manager at JCI Capital, sees three potential scenarios:

* The worst-case scenario would be one where Five Star and League leaders, Di Maio and

Salvini,

form a government which sticks to their joint coalition programme, putting Italy on a collision

course with Brussels. (Conte as prime minister and eurosceptic economist Paolo Savona as economy

minister)

* A second option would be one where Di Maio is appointed prime minister but Mattarella

manages to

impose an investor friendly figure at the key Ministry of the Economy, such as Carlo Cottarelli,

a former senior International Monetary Fund official, or Bank of Italy Director Salvatore Rossi.

* A new vote would be positive for markets because it could give a centre-right coalition

between

the League and Berlusconi another chance to win enough electoral support to form a government.

Stay tuned.

(Danilo Masoni)

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THE WORST OF BOTH WORLDS: POUND DOWN-FTSE DOWN; EURO DOWN-STOXX DOWN (1035 GMT)

There's usually good news and bad news: a falling pound or euro on the back of weak macro

data typically gives a boost to the FTSE 100 or Euro zone shares.

Not today.

"Lower than expected inflation in Britain and weak PMIs in Germany and France are dragging

down the currencies but provided no support to the stock market," Joshua Mahony, Market Analyst

at IG (Frankfurt: A0EARV - news) notes.

At 1030 GMT, Euro zone shares are down 1.2 percent with the euro losing about 0.5

percent. The FTSE is falling about 0.7 percent while sterling retreats 0.6 percent, a

2018 low as the Bank of England seems less likely to raise rates this year.

As Rabobank analysts argue, the same goes with the ECB and weak economic data from the Euro

zone's two biggest economies.

"This, in turn, strengthens our view that the first rate hike is not to be expected before

September 2019..." they write. Money markets are now pricing in less than a 60 percent chance of

a 10 basis point ECB rate hike by June 2019.

Adding more gloom to the bigger picture, French unemployment rose slightly in Q1,

confounding economists' expectations for a decline and suggesting President Emmanuel Macron's

policies to boost jobs and growth are struggling to find traction.

For ING, today's data is clearly another nail in the #Euroboom narrative.

"Contemplating the Eurozone’s growth perspectives we, unfortunately, might have to refer to

the famous Looney Tunes catchphrase "That's all folks!".

Good luck to these two:

(Julien Ponthus)

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OPENING SNAPSHOT: COMMODITIES DRAG DOWN EUROPEAN SHARES (0714 GMT)

European stocks are taking a breather as they open lower, with losses among miners and oil

stocks the biggest weight.

Financials might be in negative territory too but Barclays (LSE: BARC.L - news) shares are modestly higher after

the FT report it is looking at possible mergers with other banks, while Standard Chartered (BSE: 580001.BO - news) ,

which was mentioned in the report, is up 2 percent.

UK stocks are stealing the show today with retailer Marks and Spencer up 5.7 percent after

its full-year results. Before the market opened, traders highlighted that M&S had maintained

both its guidance and dividend.

Shares (Berlin: DI6.BE - news) in Britvic (Stuttgart: A0HMX9 - news) are also among the biggest gainers, up more than 5 percent, after the soft

drink company gave a half-year update.

Here's your opening snapshot:

(Kit Rees)

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WHAT'S ON OUR RADAR BEFORE THE OPEN: BARCLAYS (Swiss: BARC.SW - news) & MACRO (0644 GMT)

European shares are expected to pull back from recent highs with futures on main country

indexes down 0.3-0.6 percent as optimism over U.S.-China trade talks cools. The session is

likely to be dominated by the release of macroeconomic data with the global Purchasing Managers

Indices squarely in focus, along with inflation data in the UK and the FOMC minutes after the

market close.

On the corporate front, the UK banking sector will take centre stage after the Financial

Times reported that Barclays is exploring a potential merger with rival banks, including

Standard Chartered. While Standard is seen up as much as 5 percent in pre-market, there are

mixed calls on Barclays shares, between a fall of 2 percent and a rise of 3 percent. Sources

later said Barclays has no plans for a tie-up with rivals.

Elsewhere, Marks and Spencer shares could see a volatile session after its pretax profit

beat expectations, although traders said 4Q LFL clothing-and-home unit sales fell short of

expectations.

(Danilo Masoni)

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EUROPEAN STOCK FUTURES OPEN DOWN 0.3-0.5 PCT (0615 GMT)

European shares are set to pull back from 3-1/2 month highs hit on Tuesday with futures

pointing to losses of around 0.3-0.5 percent, tracking losses in Asia, after U.S. President

Donald Trump tempered optimism over progress made so far in trade talks.

Here's your snapshot:

(Danilo Masoni)

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EARLY MORNING HEADLINES ROUNDUP (0553 GMT)

Barclays explores potential mergers with rivals - FT

Rio Tinto (Hanover: CRA1.HA - news) in talks for Grasberg copper stake sale

Swiss bank Julius Baer (LSE: 0QO6.L - news) breaks 400 bln Sfr AuM mark

BT signs four-year extension to football TV production deal - The Telegraph

India's Vedanta hits over 10-mth low as protests against copper plant turn violent

Norway's wealth fund voted in favour of Shell CEO pay, against climate targets

German solar battery maker sonnen secures Shell (LSE: RDSB.L - news) cash to expand

"Referendum" result due on France's big railway shake-up

Global M&A hits record $2 trillion in year

Shell's oil spill dispute with Nigeria's Bodo villagers back in UK court

(Danilo Masoni)

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MORNING CALL: EUROPEAN shares seen slightly lower (0522 GMT)

European shares are set for a slightly negative start today, with CMC Markets (LSE: CMCX.L - news) expecting

London's FTSE to open 19 points lower at 7,858. Frankfurt's DAX is expected to open 20 points

lower at 13,150, while Paris' CAC is seen down 12 points lower at 5,628.

Over in Asia, shares were mostly weak with investors cautious after U.S. President Donald

Trump tempered optimism over progress made so far in trade talks between the world's two largest

economic powers.

(Danilo Masoni)

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