LIVE MARKETS-Deteriorating outlook for equities as inflation risk rises
* European stocks slide
* Credit Suisse (IOB: 0QP5.IL - news) , Kering (LSE: 0IIH.L - news) jump after results
* Shire (Xetra: S7E.DE - news) to recommend improved Takeda offer to shareholders
* Sky (Frankfurt: 893517 - news) pulls support for Fox bid as ComCast (Swiss: CMCSA.SW - news) offers $31 bln
LONDON, April 25 (Reuters) - Welcome to the home for real-time coverage of European equity
markets brought to you by Reuters stocks reporters and anchored today by Kit Rees. Reach her on
Messenger to share your thoughts on market moves: kit.rees.thomsonreuters.com@reuters.net
DETERIORATING OUTLOOK FOR EQUITIES AS INFLATION RISK RISES (1304 GMT)
With (Other OTC: WWTH - news) so many indicators flashing red, can you really blame investors for hoping, perhaps a
bit desperately, that Q1 earnings will give extra fuel to the bulls?
The longer-term view for equities has deteriorated as the risk of an inflation surprise is
rising, says Unigestion in a note. And although implied volatility has declined, volatility of
volatility remains high.
"Dispersion across sectors suggests the positive growth environment is no longer
broad-based, and in fact a large part of the recent equity rebound came from the energy sector
which is up 8 percent this month," Unigestion's multi-strategy team adds.
The French asset manager's inflation indicator, Nowcaster, which gauges the risk of an
inflation surprise, currently points to high upside risk for equities despite a positive recent
rebound which should keep supporting stocks in the short-term.
Inflation is a risk especially in the U.S. where the Fed is tightening (see U.S. inflation
forecast in the chart below).
Employment markets in developed countries are close to pre-crisis levels, commodity markets
have rebounded significantly and fiscal policy has turned from restrictive to accommodative -
all factors which point to a higher likelihood of an inflation shock.
Given this risk what should investors do to prepare?
"Increasing exposure to both USD and cyclical commodities could make sense, as they would be
able to protect a portfolio in case of such an inflation surprise and a more aggressive monetary
policy response," writes Unigestion.
(Helen Reid)
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EARNINGS TO THE RESCUE (1245 GMT)
Some comments from investors today really do show how much hope is being pinned on earnings
this season to shake off all the concerns caused by trade troubles and geopolitics.
Even (Taiwan OTC: 6436.TWO - news) though the below views are more focused on the U.S. market, European stocks do also get
some prompts from what's going on with U.S. earnings (see our post below about Caterpillar (LSE: 0Q18.L - news) 's
results).
"While earnings results from a couple of large companies were slightly disappointing in the
last 24 hours, overall earnings are quite strong, in our view," David Lefkowitz, senior equity
strategist for the Americas at UBS Wealth Management Chief Investment Office, says in a note,
referring to yesterday's numbers from big U.S. firms.
Lefkowitz does admit that investors will need more reassurance around inflation, and that
this isn't going to encourage the Fed to hike rates "aggressively". He adds that they're
overweight equities in their tactical asset allocation.
And here's another upbeat view:
"While we still see the environment as more challenging, the earnings season is alleviating
some of the recent concerns. We had expected earnings to become a more dominant theme, and they
are delivering the anticipated support to risk appetite," Patrick Moonen, principal strategist
of multi-asset at NN Investment Partners, said in a note.
Moonen added that markets are also being supported by U.S. companies' share buybacks.
(Kit Rees)
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HOW ABOUT A "FREE OPTION" ON BLOCKCHAIN? (1228 GMT)
Also in the tech space, Berenberg analysts are still pretty excited about the potential for
a "free option" on blockchain offered by IT services stocks following their recent blockchain
conference.
And who doesn't like free stuff?
Berenberg believes that IT services stocks are not yet pricing in the blockchain option
(they admit that widespread adoption of the technology is not going to happen overnight). Their
thesis is predicated on two key points:
1) blockchain needs to be customised in order to meet different company requirements, and
2) private blockchains have faster transaction processing and validation compared with
public blockchains, so they are more "scalable".
They single out Accenture (NYSE: ACN - news) as the leader in the space, with Capgemini and
Cognizant in pursuit. Berenberg also highlights EPAM and Luxoft as
niche service providers which could also benefit.
Here's how the aforementioned stocks have performed over the past three years:
(Kit Rees)
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MIDDAY SNAPSHOT: LOTS OF EARNINGS BUT NO CHEER (1124 GMT)
European stocks just keep on sliding and at the halfway point in the session they are just
slightly above a session low. The main culprits? Cyclicals, especially shares in miners with
Antofagasta (Other OTC: ANFGF - news) down after reporting a drop in Q1 copper output and Anglo American (LSE: AAL.L - news) also falling
after selling a stake in RBPlat.
The picture looks similarly negative across the pond with futures on Wall St down around 0.4
percent. The focus there is on Twitter (Frankfurt: A1W6XZ - news) 's update (it beat estimates) and Facebook (NasdaqGS: FB - news) 's results, due
later in the day.
Here's your midday snapshot:
(Kit Rees)
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UNSTOPPABLE KERING? VIEWS FROM THE STREET (1050 GMT)
Gucci owner Kering's results have sent the shares up 6 percent to the top of the STOXX in a
broadly negative market. The earnings - with, once again, booming sales growth at Gucci - are
being cheered by most but investors and analysts are keeping an eye on potential risks to this
seemingly unstoppable luxury stock, up a cool 65 percent over the past 12 months.
- "All engines running at full speed" say Berenberg analysts, noting that the smaller brands
including Saint Laurent are also growing strongly.
- Berenberg also notes M&A potential: "Kering will soon have more balance-sheet fire power
to potentially complement its luxury portfolio with new brands that will drive long-term
growth."
- Goldman Sachs (NYSE: GS-PB - news) analysts note ongoing growth of Gucci is key. "We have not seen a brand
turnaround to this magnitude before with 90% of the product available in store being new," they
write.
- Online distribution could become an issue, for GS: "In the event Kering does not wish to
expand retail revenues via multibrand third party platforms, it would likely result in our
long-term forecasts (sales and EBIT) being too optimistic."
- But UBS analysts are pretty bullish: "Our Buy case on Kering is based on still more upside
to earnings and free cash flow from the Gucci brand which is benefiting from upbeat Chinese/ US
consumers, millennial spending and price/mix growing double digit."
- One portfolio manager says "Next (Frankfurt: 779551 - news) quarter could be tougher on currency, but very high
quality results - better quality than LVMH."
- And a trader reckons there are signs of strain: "Blow-out numbers on Gucci, but otherwise
a bit of an unwind going on."
Kering's shares are still ruling the roost of European luxury names:
(Helen Reid)
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INDUSTRIALS HIT BY CATERPILLAR, COST PRESSURE FEARS (0947 GMT)
European industrials are one of the main points of attention today, weighed down by
Caterpillar's fall in U.S. trading after the heavy equipment manufacturer, seen as a bellwether
for the industry, said first-quarter performance was the "high watermark" for the year and that
it wouldn't have the same pricing power to pass on increased material costs (especially from
steel tariffs) in the rest of 2018.
The feeling Caterpillar's earnings have peaked, along with fears over pricing power, has hit
Europe's leading industrials firms, with Siemens (BSE: SIEMENS.BO - news) , Airbus, Schneider
and ABB (LSE: 0NX2.L - news) all falling.
"Any cyclical business like industrials or even semiconductors, people always like buying
near 'trough earnings' and selling near 'peak of the earnings cycle'," says a sales trader.
"Caterpillar calling ‘high water mark’ for its earnings spooked markets – expectations were as
much about outlook as Q1 itself."
Swedish industrial machinery firm Atlas Copco (LSE: 0R82.L - news) , meanwhile, is down 7 percent after
its earnings, with profits at its top divisions just missing forecasts.
Analysts have been growing more pessimistic on industrials' earnings, revising them down
over the past month while stocks have risen sharply - giving them further to fall on similar
fears as today's:
(Helen Reid)
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EARLY TRADING SNAPSHOT: NO BLOODBATH BUT A LOT OF RED (0740 GMT)
Half an hour after the open, it's not a bloodbath but there's quite a lot of red across
European bourses and sectors.
Q1 earnings have their winners (Kering up 6.5 percent) and losers (Siltronic
down 8.5 percent) but the scare on U.S. bond yields sure is taking its toll with the
STOXX down 0.4 percent:
(Julien Ponthus)
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WHAT'S ON THE RADAR AHEAD OF THE OPEN (0644 GMT)
European shares are expected to retreat this morning as stocks futures trade around 0.6
percent lower. With rising bond yields spoiling the fun and disappointment around the U.S. tech
sector putting a dampener on sentiment, hopes are pinned on earnings delivering.
Today is a busy one for results, especially for banks. Credit Suisse’s revamp seems to be
paying off as the Swiss bank beat Q1 profit expectations and premarket indications see the
shares around 2-3 percent higher, though Britain’s Lloyds Bank is still grappling with fallout
from PPI mis-selling and has slightly missed analyst expectations.
Elsewhere Gucci’s popularity shows no signs of waning as owner Kering beats forecasts – its
shares are seen around 5-7 percent higher.
While Europe isn’t expected to see the same strength in earnings growth as the U.S., it’s
still pretty robust with reported actual Q1 year-on-year growth clocking in at a respectable
16.7 percent for MSCI EMU so far this season, according to Thomson Reuters I/B/E/S data.
And M&A news is never far away with further developments in the Shire saga. The British rare
disease drug maker said that it was willing to recommend Takeda’s sweetened $64 billion offer to
shareholders. Shire's shares are seen popping 7 to 10 percent higher.
(Kit Rees)
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MORNING HEADLINE ROUND-UP
Among the flow of Q1 earnings, the accepted $64 billion offer from Japan's Takeda
Pharmaceutical stands out on the front page this morning.
Also, to watch in the banking sector:
Credit Suisse posts Q1 profit beat as revamp hits home stretch
Nordea Q1 profit tops forecast, cautious on revenue guidance
Lloyds Bank just misses forecasts with $2.23 bln first quarter profit
Income funds turn sights on UK banks as end of PPI saga draws closer
U.S. senators push banks for information on Russian 'oligarchs'
ANALYSIS-After Carney surprise, chance of May BoE rate hike down but not out
For the Apple (NasdaqGS: AAPL - news) supply chain saga:
STMicro Q1 profits grow, sees "healthy demand" in second-half
Apple shares drop on more warnings from iPhone supply chain
Earnings reports in other sectors:
Statoil Q1 lags slightly, uses cash to reduce debt ratio
Aluminium maker Hydro to miss cost target amid Brazil woes
Kloeckner & Co raises profit outlook on higher steel prices
Linde (IOB: 0H3X.IL - news) beats profit expectations, confirms full-year outlook
Clariant (IOB: 0QJS.IL - news) posts Q1 sales beat as catalyst business
Telefonica Germany confirms guidance as mobile revenues edge
Gucci craze keeps sales at luxury firm Kering booming
(Julien Ponthus)
*****
EUROPEAN STOCKS FUTURES DIP (0606 GMT)
It's looking like it's going to be a downbeat session with stocks futures heading south. On
the other hand, index moves could remain range-bound given that attention is going to be on the
flurry of earnings reports this morning.
Here's your futures snapshot:
(Kit Rees)
*****
RISING BOND YIELDS - TROUBLE FOR EQUITIES? (0553 GMT)
As the yield on the U.S. 10-year Treasury holds close to the psychologically-significant 3
percent level, this may prompt investors to reconsider their allocations to equities, especially
those sectors which pay relatively high dividends whose yield could now be eclipsed by bonds.
For analysts at Credit Suisse's wealth management division, equities still retain their
appeal even if they do see bond yields gradually going higher.
"Solid economic growth should see policy normalization continue, thereby keeping yields on
an upward path. On the other hand, spikes in risk aversion and moderately rising inflation will
likely limit the pace of rise in bond yields," analysts at Credit Suisse WM said in a note.
"This gradual climb in yields is not likely to threaten our overweight equity stance."
Another worry is whether this rise in yields will lead to a soft spell in equity markets, or
a correction.
"The market’s reaction is decidedly more measured this time. Not only have stocks stayed out
of the correction zone so far, flows into the yen (the risk off trade) are nowhere near levels
seen two months ago," Jasper Lawler, head of research at London Capital Group, said.
(Kit Rees)
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MORNING CALL: EUROPEAN SHARES SEEN OPENING LOWER (0528 GMT)
Good morning. European shares are expected to open lower this morning, according to
financial spreadbetters, as worries over rising bond yields persist while weakness in tech held
back U.S. indexes.
Spreadbetters see Britain's FTSE opening 53 points lower, Germany's DAX falling 111 points
and France's CAC down 42 points.
Results from industrial heavyweight Caterpillar and tech giant Alphabet (Xetra: ABEA.DE - news) prompted drops in
both stocks in the U.S. - it just goes to show how little room there is for disappointment.
Overnight in Asia equities were also downbeat.
(Kit Rees)
*****
(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)