UK Markets closed

LIVE MARKETS-Dark pool block trading fell back last week

* European shares fall

* Italy stocks hit lowest level since July 2017

* Dixons plummets on profit warning

LONDON, May 29 - 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

DARK POOL BLOCK TRADING FELL BACK LAST WEEK (1534 GMT)

Turning away from Italy for just a second, some interesting data today from Fidessa shows

that block trading - as a proportion of total trades done in dark pools - fell back slightly

last week.

Part of the aim of MiFID II, implemented nearly five months ago, was to force investors to

use dark pools mainly for larger blocks of shares, keeping smaller trades in transparent venues.

From more than 50 percent of dark pool trading, block trades fell back to 47.1 percent

-suggesting there may be an upper limit to the proportion of trades investors can bundle into

large blocks.

Also interestingly, the greatest value traded in a single stock was in Italian bank Intesa

Sanpaolo last week. It saw a total of 124 million euros traded.

(Helen Reid)

*****

ITALIAN EXPORTERS PROVIDE SILVER LINING (1440 GMT)

With (Other OTC: WWTH - news) a political crisis on their hands, investors have dumped their Italian stock holdings

and sold the index en masse today.

But what about those, like Italy-focused fund managers and specialised investors, who can't

exit Italy entirely? They're likely part of the flows pushing up prices of international

Italy-listed stocks as they rush into names that offer more exposure to global growth, and less

to domestic turmoil and the Italian bond sell-off.

STMicro, Fiat Chrysler, CNH, Eni (LSE: 0N9S.L - news) , Tenaris (Amsterdam: TS6.AS - news) and Luxottica (Milan: LUX.MI - news) are among the only stocks on the

FTSE MIB in or near positive territory.

Philip Smeaton, chief investment officer at Sanlam UK, says global companies like Luxottica

have been relatively insulated from the broader sell-off, while Italian banks, which are highly

dependent on domestic growth and BTP yields, have been bruised.

"The market has taken the view that now what's on the agenda is Italy leaving the EU. And

that does seem quite drastic," he says.

Even (Taiwan OTC: 6436.TWO - news) some of the contagion to other European banks could be overdone, he says, echoing other

investors' views as the market moderates its earlier falls somewhat.

"The other banks falling in sympathy makes a lot of sense but I would say, if there was a

bank that I liked that was falling, it may be a good opportunity to top up that position," says

Smeaton.

(Helen Reid)

*****

IS THE SELL-OFF OVERDONE? (1328 GMT)

Italian assets (both bonds and stocks) have come off lows and some less pessimistic views

have started to circulate. Here's a couple:

* UBS Global Wealth Management's Chief Investment Office: "The sell-off in Italian assets

appears

overdone. The spike in two-year yields is dislocated from actual default risk and plausibly can

only be explained by fears of an Italian exit from the euro. Yet on TV Monday night the leaders

of both M5S and Lega confirmed they want the country to stay in the euro. An exit was not part

of their respective or joint policy programs"

* Berenberg economist Holger Schmieding: "It will probably take some clarity on the outlook

for

Italy or, more importantly, a realisation of investors that we are facing an Italian but not a

general “euro” crisis to correct those market moves for non-Italian assets which currently seem

overdone. Of course, the way crises go, markets may well overshoot further first"

Italy's FTSE MIB index is still down sharply, but it has risen as much as 2.1 percent from

its lowest point today. What's sure is that today is shaping up as another roller-coaster

session and further volatility ahead cannot be ruled out.

(Danilo Masoni)

*****

INVESTORS GO TO ITALY... IN SHORTS (1235 GMT)

As newsflow from the would-be anti-establishment coalition has amplified over the past few

weeks, investors have ramped up their short positions in the FTSE MIB index, while short

interest has decreased for the Eurostoxx 50, JP Morgan analysts say.

The proportion of shares on loan for the Italian index has risen sharply over the past

month.

"Not only does this suggest that leveraged equity investors have turned very negative on

Italian equities in recent weeks, but that they also see Italy more as an idiosyncratic story

and (are) thus reluctant to increase their short interest on European equities," they argue.

Retail investors have also been expressing their alarm about the Italian situation, by

pulling money from Italy ETFs.

Over the past week, the biggest Italian equity ETFs (Shenzhen: 395013.SZ - news) saw a massive outflow of almost 10

percent of AUM, JPM notes. "This suggests retail investors have amplified the recent correction

in Italian equities."

A short FTSE MIB ETF by Lyxor, which offers double inverse exposure to the Italian index

, is surging today, having hit a record low just three weeks ago when Italian markets

were rallying. The sister product, offering investors double the FTSE MIB, is,

unsurprisingly, plunging.

The sharp rise in short interest in the market, with no clear news catalyst ahead, means we

could be in for a sizeable reversal soon if shorts suddenly unwind, JPM reckons. "The absence of

any negative news creates the risk of a sharp near-term price reversal."

(Helen Reid)

*****

ITALY'S PERFECT STORM: BONDS, SHARES (Berlin: DI6.BE - news) , EURO, CDS...YOU NAME IT! (1148 GMT)

In a nutshell, "it's a market that is totally in panic", said Giuseppe Sersale, a fund

manager at Anthilia Capital Partners, who notes the danger posed by the surge in short term

yields and "a total lack of confidence in the outlook for Italian public finances".

The Milan bourse is down over 3 percent, close to its biggest fall since Brexit but the pain

is well spread across Europe and asset classes, with some investors reminiscing about the

sovereign crisis of 2012.

Italian bonds are suffering their worst day in more than 25 years with short-term Italian

bond yields set for their biggest one-day jump since 1992.

Rating agency Moody's said Italy is likely to be downgraded if the next government pursues

"insufficient" fiscal policies and the number of investors expecting the euro zone to lose at

least one member state in coming months has increased due to the political crisis, a survey just

showed.

The cost of insuring exposure to Italy's sovereign debt soared to a 4-1/2 year high but also

rose for euro zone periphery sovereigns like Spain and the Greek Foreign Minister said he was

worried that financial instability in Italy could cause problems for Greece too.

With a fall nearly 6 percent, the Italian banking sector is handsomely exposing the market

stress surrounding political risk in Italy but the whole Euro zone sector is under attack with a

fall close to 4 percent.

While credit default swaps for Italian are surging to their highest in more than a year,

Euro zone banks CDS are also suffering, notably for BNP Paribas (LSE: 0HB5.L - news) or Credit Agricole (Swiss: ACA.SW - news) .

More broadly, the stress is also visible on the euro which is close to a year low with

hedging costs spiking.

As the market stress increases, expectations of monetary normalisation from the ECB fade:

money markets now price just a 30 percent chance of a 10 basis point rate rise in June 2019.

Here's the surge in Italy's CDS:

(Julien Ponthus and Danilo Masoni)

*****

EURO ZONE GROWTH SEEN EASING IF ITALY WOES INTENSIFY (1106 GMT)

Berenberg's chief economist Holger Schmieding says that Italy has been their top political

risk in Europe since former Prime Minister Matteo Renzi saw his support start to wane in the

middle of 2016, and an escalation of the crisis could have a knock-on impact on euro zone

growth.

"Responding to mounting political tensions in Italy and a higher oil price, we reduced our

GDP calls for the Eurozone last Friday from 0.5 percent qoq to 0.4 percent qoq for Q2 2018 and

from 0.6 percent to 0.4 percent qoq for Q3," says Schmieding.


While Schmieding writes that they do not see the Italian crisis getting out of hand in the

coming months, he says the risk that Italy could decide to leave the euro in the future is "not

fully negligible".

As you can see from the chart below, euro zone GDP took a hit during the 2007-2008 financial

crisis, and later during the sovereign debt crisis of 2010-2012.

But, at least for now, some investors are in wait-and-see mode regarding Italian stocks.

"In the short term, we keep a prudent view," analysts at Amundi (Berlin: 350155.BE - news) say in a note.

"But when there will be more clarity from politics, Italian banks could rebound thanks to

their cheap valuation," they add.

(Kit Rees and Helen Reid)

*****

"SOME HEDGING OF EQUITY POSITIONS COULD BE ADVISABLE" (1020 GMT)

With the current sell-off on European bourses this could be seen as a piece of advice from

"Captain Obvious" but this caveat from BNP Paribas' research and strategy team is not directly

related to Italy: it's simply based on experience.

"Since 1992, June and September have been the worst performing months, suggesting that some

hedging of equity positions could be advisable over the summer months," the French bank said in

its Q3 2018 Global Outlook.

Just looking at the last ten years for the STOXX 600, the month of June has always returned

a loss for investors, with the exception of 2012:

It would nevertheless be wrong to assume that BNP (Paris: FR0000131104 - news) 's outlook is grim. Quite on the contrary,

the French bank's analysts believe equities are still a promising asset class.

"We remain unashamedly optimistic over the prospects for global equities, in particular for

the unfashionable French CAC 40 and UK FTSE 100 country indices, given our preference for

commodity-exposed sectors and the potential for fundamental reforms to bear fruit in the form of

higher productivity and hence profitability," they write.

Among the things that could go wrong, BNP Paribas analysts note "political tensions,

intensified trade disputes, higher oil prices and a strong USD" and obviously Italy.

"Italy risk remains the one key headwind for financials – as well as for Italian stocks,"

they write.

(Julien Ponthus)

*****

STAY UNDERWEIGHT ITALIAN EQUITIES (0940 GMT)

Those who hadn't ridden the strong rally in Italian stocks this year are likely feeling

pretty pleased with themselves today as the selloff deepens with investors faced with a

constitutional crisis as well as a period of at least four months of further uncertainty until

elections.

"With Italy in political gridlock, we stick to our underweight stance on Italian equities

and favour core markets such as France or Germany," write SocGen (Paris: FR0000130809 - news) analysts.

What happened to buying the dip in markets? They say we should still stay away, for the

following reasons:

- a lack of marginal buyers, with international investors likely to stay on the sidelines

until political upheaval calms

- more downside than upside potential after a dizzy rise in the first quarter of the year

- higher cost of debt for Italian corporates, with a credit rating downgrade from Moody's

likely

"We think a downgrade is highly probable by the next review date on 7 Sep (Shanghai: 600021.SS - news) , but most likely

in the next few weeks," they write. A sovereign downgrade could trigger downgrades of some

corporates.

SocGen also note the FTSE MIB is already the weakest in terms of rating with 14% of the

index high-yield and 69% BBB-rated.

Ditching Italian stocks, investors should turn to Germany for safety, they argue. Pressure

on the euro is a boon for the country's exporter-heavy stock market, German bunds are rallying,

and the DAX is relatively insulated from fears around European banks - with just 2.8 percent of

the index in bank stocks.

As you can see below, the CAC 40 has stolen the top spot from Italy's FTSE MIB in

year-to-date gains:

(Helen Reid)

*****

OPENING SNAPSHOT: ITALY'S SELL-OFF DEEPENS, DRAGGING EUROPE DOWN (0730 GMT)

Worries that a snap election in Italy could become a referendum on the country's membership

in the euro, further strengthening the grip of anti-establishment parties, are hitting markets

today. And understandably the sell-off on Italy's stock benchmark has deepened.

The index touched its lowest since August 2017 before paring some losses and is now still

down 1.6, while the broader European STOXX 600 benchmark is down 0.9 percent. Among single

stocks, Dixons Carphone (Frankfurt: CWB.F - news) is worth a mention, down 17 percent following a profit warning.


(Danilo Masoni)

*****

WHAT'S ON OUR RADAR FOR THE EUROPEAN OPEN (0648 GMT)

After a rollercoaster session with Italian stocks, and particularly bank stocks, plunging on

investors’ fears a snap election could turn into a referendum on Italy’s place in Europe,

futures point to further falls across European benchmarks and the UK today, with the FTSE 100

catching up on Monday’s action after a bank holiday.

Futures have extended losses, now down 0.8 to 1.2 percent across the major benchmarks.

Turning from politics to corporate news, British retailer Dixons Carphone is likely to

suffer a sharp fall after a profit warning, with one indication for a 25 percent drop.

Another likely mover is UK mid-cap miner Vedanta Resources (Other OTC: VDNRF - news) . India permanently closed one of

its copper smelters after 13 protesters demanding its shutdown were killed last week. Vedanta's

Mumbai-listed shares fell sharply on the news, and the London-listed shares are indicated to

fall 2 percent.

M&A moves are also still front and centre with UK firms at the heart of the action.

The Telegraph reported ITV (Frankfurt: A0BLQP - news) is considering buying half of UKTV in a deal with the BBC, while

the FT reported Pret (Shenzhen: 002324.SZ - news) a Manger, the food-to-go retailer ubiquitous in London, could be bought by

JAB for $2 billion. IWG (LSE: IWG.L - news) rejected a takeover approach by Prime Opportunities Investment Group.

Foreign companies are also snapping up European corporates, with a Chinese firm in talks to

take over German car supplier Grammer (IOB: 0OQX.IL - news) .

SLA to return up to 1.75 billion pounds to shareholders

Dixons Carphone warns on profit, to close stores

UK's Safestyle chairman resigns a month after assuming the role

Prime Opportunities Investment says IWG rejects offer approach

(Helen Reid)

*****

EUROPEAN STOCK FUTURES POINT SOUTH (0608 GMT)

It's looking like another day of losses for European stocks, with futures trading down 0.1

to 0.5 percent. The FTSE 100 is set to fall the furthest as it catches up with yesterday's

action. With Italy's FTSE MIB ending the day at its lowest level in nearly three months, it'll

be interesting to see if it declines further from here.

Italian banks lost 4.1 percent yesterday, hurt by their holdings of sovereign bonds which

sold off violently. The next few months could be volatile for them as campaigning kicks off

ahead of the election.

Here's your snapshot:

(Helen Reid)

*****

EARLY MORNING HEADLINE ROUND-UP (0553 GMT)

Quite a lot of company news on the slate today, with M&A moves still front and centre. ITV

was reportedly thinking about buying half of UKTV in a deal with the BBC, while a Chinese firm

is in talks to take over German car supplier Grammer. The FT is also reporting Pret a Manger,

the food-to-go retailer ubiquitous in London, could be snapped up by JAB for $2 billion.

Outside M&A land, there are positive results from lung cancer trials for Roche's Tecentriq

drug, Volkswagen (IOB: 0P6N.IL - news) has told us in an interview that it expects to beat electric car sales goals,

and India has permanently closed a copper smelter controlled by Vedanta Resources after 13

protesters demanding its shutdown were killed last week. Vedanta's India-listed shares

fell sharply on the news, so the London listing is likely to follow suit today.

US and EU again at odds over Airbus subsidies at WTO

ITV mulls buying half of UKTV in deal with BBC -Telegraph

Japanese, U.S., German, Australian team targets big battery projects in Asia-Pacific

Chinese firm in talks to takeover German auto supplier Grammer (Swiss: GMM.SW - news)

JAB set to buy Pret a Manger for $2 bln - FT

Roche's Tecentriq meets targets in lung cancer trial

VW expects to beat electric car sales goal on China, Europe demand

India closes Vedanta copper smelter permanently after bloody protest

New EU bank capital rules favourable for cross-border mergers

(Helen Reid)

*****

POLITICAL RISK TO WEIGH ON EUROPE AGAIN (0530 GMT)

With the FTSE 100 and U.S. markets set to rejoin trading today, spreadbetters' indications

are pointing to a weaker start as turmoil in Italy continues to dent investors' appetite for

risk.

Overnight, Asian shares fell and the euro hovered near 6-1/2 month lows as early elections

loomed in Italy, but a revival in diplomatic talks with North Korea and a retreat in oil prices

from recent highs supported sentiment.

Here's our latest story from Italy on the snap poll, set to be held between September and

early next year, for which the once competing parties League and 5-Star are considering joining

forces.

And our analysis of the risk the election will become a referendum on the euro - a key

reason why Italian bonds, stocks and banks, slumped yesterday along with the single currency.

Spreadbetters call the DAX 28 points lower at 12,835, the CAC 40 down 12 points at 5,497,

and the FTSE 100 36 points lower at 7,695.

(Helen Reid)

*****

(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)