LIVE MARKETS-Emerging markets impact is manageable for Europe

* European stocks edge higher as trade war escalates

* Trump slaps tariffs on $200 bln in Chinese goods

* China hits back, levies tariffs on $60 bln of US goods

* Wall Street edges up as oil, tech resist tariff woes

Sept 18 - Welcome to the home for real-time coverage of European equity markets brought to

you by Reuters stocks reporters and anchored today by Julien Ponthus. Reach him on Messenger to

share your thoughts on market moves: julien.ponthus.thomsonreuters.com@reuters.net

EMERGING MARKETS IMPACT IS MANAGEABLE FOR EUROPE (1515 GMT)

Barclays (LSE: BARC.L - news) ' European equity heads reckon the recent damage control by Turkish and Argentine

central banks will help buoy emerging markets, and although Europe's EM exposure is chunky, the

region should be able to weather the storm.

"European equities derive about 20 percent of revenues from EM, but contagion has been

limited so far," write Emmanuel Cau and team.

They stay underweight materials, but see the recent dip in autos and luxury goods as buying

opportunities.

"European equities have already seen significant outflows year-to-date and appear to be

under-owned at present, but EM equities still look vulnerable to further profit-taking," they

add.

Their basket of European stocks with EM exposure has underperformed but is still up on the

year. And there's one key differentiator: while a strong dollar is bad for EM, it is good for

Europe (see chart below).

The relative performance of European versus U.S. equities is correlated with USD/EUR, as you

can see below - and EPS revisions also rise with the dollar's relative strength.

"The weaker euro combined with resilient private sector and strong U.S. activity will

mitigate some of the negative impact from the challenging EM backdrop."

BAML's September fund manager survey showed allocation to EM stocks fell to a 10 percent

underweight - the lowest since March 2016.

(Helen Reid)

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IS THE GAP BETWEEN U.S. AND EURO ZONE STOCKS JUSTIFIED? (1455 GMT)

Anthilia Capital fund managers led by CIO Andrea Cuturi don't think so, and hence they've

just cut U.S. equities to neutral while lifting their European exposure to overweight.

The move gives some evidence that despite higher political and growth risks, relatively

cheap European valuations are luring some investors back.

The S&P 500 has outperformed the Euro STOXX 50 by 15 percent so far in 2018, plus another 3

percent due to the strengthening dollar. Over 12 months the outperformance widens to 24 percent.

"Such a gap should allow European equities to absorb any moderated pullback in U.S. stocks

and partially catch up if the U.S. rally continues," Anthilia says.

To be sure, not everyone believes it's time to jump on the euro zone bandwagon. See what

Credit Suisse (IOB: 0QP5.IL - news) 's Robert Griffiths told clients earlier this week.

(Danilo Masoni)

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CHINA RETALIATES, EUROPEAN STOCKS WILT, BALL BACK IN WASHINGTON'S COURT (1408 GMT)

China didn't wait that long to retaliate and just before the open of U.S. markets, Beijing

announced it will levy tariffs on about $60 billion worth of U.S. goods.

But the response is less harsh than it could have been: the tariff rates will be levied at 5

and 10 percent, instead of the previously proposed rates of 5, 10, 20 and 25 percent.

All in all, the market reaction has been muted, as most of the short-term negatives are

likely already priced in. European shares wilted with the STOXX briefly hitting a day

low, down 0.3 percent, before recovering and turning back into positive territory.

"Markets are getting accustomed to all these headlines on trade, tariffs, retaliation," says

a Milan-based trader.

Inevitably the focus turns back to Washington.

A few minutes before our headlines on China's response hit the wire, Trump warned China of

possible new retaliation.

Meanwhile, Apple (NasdaqGS: AAPL - news) 's CEO has said he is optimistic that the U.S. and China will eventually

work through their trade differences.

(Danilo Masoni)

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THE TARIFF PUZZLE: IT ALL HINGES ON CHINESE RETALIATION (1242 GMT)

With Trump's 10 percent tariff being digested by markets, retaliation from China is the next

focus, and while investors aren't tearing their hair out yet it's worth looking at what impact

escalation could have.

UBS (LSE: 0QNR.L - news) ' CIO is relatively sanguine.

"The direct impact of the tariff announced today and the retaliation from China will only

crimp U.S. earnings by about 1 percent annualized initially," estimates UBS' Mark Haefele. This

would rise to -3 percent at the start of the new year, when the rate is set to rise to 25

percent.

Chinese stocks are largely pricing in the escalation already, he adds, having fallen around

24 percent since their January peak.

What would cause the market to turn significantly lower, then? China pursuing significant

*non-tariff* retaliation measures, Haefele reckons.

He sees these, in descending order of likelihood and ascending order of market impact, as:

* blocking U.S. companies from doing business in China

* actively depreciating the yuan

* starting to sell down U.S. Treasury investment portfolio

China may be incentivised to use some of these options as the potential impact of tariffs

becomes clear. Here's the latest on China's reaction:

Citi analysts calculate the 10% (and potential 25%) tariffs would reduce China's exports by

1.8% (and 2.7%) and drag down China's GDP growth by 33 basis points (and 50 bps). The new move

could remove another 3.5 million jobs in China (vs 11 million created each year).

And a dire note for U.S. consumers too whose Christmas presents could get more expensive:

"Given its massive imports of consumer goods from China, the tariffs will be inflationary,

especially in the holiday season," writes Citi.

(Helen Reid)

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TURNING LESS BEARISH ON ITALY (1132 GMT)

Italy's long-term structural problems may be far from being solved but this summer's

sell-off caused by stress over the anti-establishment government's first budget looks overdone

to many. And bulls are set to have the upper hand on bears, at least in the near-term.

Investors are banking on expectations that the upcoming budget won't break European Union

rules on fiscal discipline.

Here are some headlines (today and last week), showing the shift in market sentiment:

* BlackRock (Sao Paolo: BLAK34.SA - news) 's Thiel long Italian bonds, expects market-friendly budget outcome

* Deutsche Bank (IOB: 0H7D.IL - news) upgrades Italian stocks after 13% underperformance since May peak

* Morgan Stanley (Xetra: 885836 - news) recommends buying Italian assets ahead of budget

(Danilo Masoni)

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A TIMELY BET ON AN EM COMEBACK (1119 GMT)

There's a sense of bemusement at the fact that Wall Street slipped and Chinese markets

jumped after the Trump administration launched its latest trade salvo.

There are a few narratives out there to explain the divergence, like a "sell the rumour-buy

the news" trade, relief given arguable restraint on the level of the tariffs or bets that

Beijing will step up infrastructure investment to keep the economy humming.

Anyhow, it's interesting to note that Goldman Sachs Asset Management has just made the point

that a Emerging Markets assets could be ripe for a comeback with U.S. growth moderating.

"We think EM assets will be the clearest beneficiary, supported by our view that market

fears of trade tensions and EM contagion are likely to prove overdone", GS AM analysts wrote.

As you can see below, Emerging Market Equity is currently their preferred asset class.

(Julien Ponthus)

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A CONFUSINGLY UPBEAT REACTION TO U.S. RAMP-UP IN TARIFFS (0924 GMT)

The euro zone's leading stocks index is up 0.5 percent, a pretty punchy move

after Trump just launched another salvo in the ongoing China-U.S. trade war, slapping 10 percent

tariffs on $200 billion of Chinese imports and threatening more.

Trade-sensitive autos and miners are up 1.2 percent and Germany's DAX is up 0.6 percent, all

moves that would have been hard to predict when considering the impact of higher tariffs.

Among the potential explanations for this strange reaction, a trader says "I heard

unconfirmed speculation out of Asia that there has been an agreement between Xi/Trump to set

this latest round of tariffs at 10% to give both parties time to come to an agreement which is

apparently closer than we are all led to believe".

Some say the 10 percent tariff is a relief after talk of 25 percent levies, and many still

hope that Trump will want to clinch a deal before November's mid-term elections.

"The market would be a lot lower if you believe there will be no solution, but it seems the

market doubts that," says another trader.

Another potential support is the theory that tariffs will drive more stimulus from the

Chinese economy.

"The narrow focus on Sino (Dusseldorf: 1205802.DU - news) -U.S. relations is obscuring consideration of how an emerging trade

tariff war could stimulate a fiscal drive from China," said Geoffrey Yu, head of the UK

investment office at UBS Wealth Management. "With (Other OTC: WWTH - news) a reasoned domestic response, what currently

seems a damning situation could actually spark a re-orientation of China’s economic model."

If nothing else, this reaction could be a symptom of investors' mood.

"I'm not sure we can see this as a sign of a major turnaround, but evidence of a market

desire to try and seek good news rather than bad news," says Dominic Armstrong, chief executive

of the Horatius Fund. "It's hard to call the bottom, but what's interesting is the market is

looking for signs of the bottom."

Some interesting - and not so reassuring - figures meanwhile from ING economists, who say

the percentage of world trade affected by tariffs now stands at 2.5%. "If the U.S. acts on

further tariff threats this could go up to 4%."

(Helen Reid)

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OPENING SNAPSHOT: EUROPE MUTED AFTER TRADE ESCALATION (0715 GMT)

European shares are off to a muted start after US President Donald imposed 10 percent

tariffs on $200 billion worth of Chinese imports.

The move has already been priced in by markets but sharply escalates the trade war between

Washington and Beijing. Here's your snapshot:

While country indexes are mixed iprice moves for single stocks were much bigger. Online

fashion retailer Zalando (Swiss: OXZALG.SW - news) is down 18 percent after cutting its guidance for the second time in

many months while Clariant (IOB: 0QJS.IL - news) is up 7 percent after a joint venture deal with its new

anchor shareholder SABIC.

(Danilo Masoni)

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"SELL THE RUMOUR BUY THE NEWS" ON THE RADAR? (0645 GMT)

It seems like the latest salvo from the White House in the trade war saga isn’t a game

changer for markets and could even end up in a classic “sell the rumour buy the news” trade.

As Thomas Costerg, senior U.S. economist at Pictet told us yesterday, “10 percent could

actually come as a relief” and that the figure is “bad but manageable”.

Some futures, like for France's CAC and Madrid's IBEX, are actually now in positive

territory.

There is also plenty of corporate news to animate the session, notably in M&A with Nestle (Swiss: NESN.VX - news)

selling its Gerber Life Insurance for $1.55 billion to Western and Southern Financial Group.

Still in Switzerland, speciality chemicals firm Clariant said it was creating a joint

venture in high performance materials with its new anchor shareholder Saudi Basic Industries

Corporation (SABIC).

In the financial industry, Spanish lender Banco Santander (Amsterdam: 817651.AS - news) is in talks to buy the City

stockbroker‎ Peel Hunt, in a move that could kick-start a fresh round of consolidation in the

sector, Sky (Frankfurt: 893517 - news) news reported.

Bayer (IOB: 0P6S.IL - news) putting a stake in a chemical park operator on sale is a Reuters exclusive and Fox

also said that Sky shareholders have until Oct (Shenzhen: 000069.SZ - news) 6 to accept its offer.

Other top news items outside M&A include Zalando slashing its guidance, British retail

'star' Ocado giving a trading update, NHS cutbacks knock 21 pct off Spire (Stuttgart: SIZ.SG - news) earnings, BHP chief

sees pay rise trimmed on production.

There’s also a Ferrari (Xetra: 30092157.DE - news) strategic update and the market has yet to react to France’s Virbac (EUREX: VIRF.EX - news)

raised guidance for the year.

(Julien Ponthus)

*****

EUROPEAN FUTURES RETREAT AS TRADE TENSION BITE (0610 GMT)

European futures have opened in the red but it's looking more like a strategic retreat

rather than a rout at the moment.

The main indexes across London, Paris and Frankfurt are set to lose between 0.1 percent and

0.3 percent at the moment.

(Julien Ponthus)

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EUROPEAN SHARES TO DIP AS U.S./CHINA TRADE ROW ESCALATES (0522 GMT)

European shares are seen retreating at the open after the Trump administration decided to

impose 10 percent tariffs on about $200 billion worth of Chinese imports.

Financial spreadbetters expect London's FTSE to open 37 points lower at 7,265, Frankfurt's

DAX to open 52 points lower at 12,044 and Paris' CAC to open 20 points lower at 5,329.

Markets in Asia took a limited hit lower after the announcement.

(Julien Ponthus)

*****

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