LIVE MARKETS-Europe bounces back, defensives in demand, Infineon -8%

* European shares end higher, up 0.3% * Infineon slumps to Sept 2016 lows after Cypress deal * Kier drops 41% after profit warning * Wall Street edges higher, June 3 - Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Thyagaraju Adinarayan. Reach him on Messenger to share your thoughts on market moves: rm://thyagaraju.adinarayan.thomsonreuters.com@reuters.net EUROPE BOUNCES BACK, DEFENSIVES IN DEMAND, INFINEON -8% (1604 GMT) After suffering their worst monthly performance since January 2016, European stocks started June on a better footing with the STOXX 600 index managing to shake off initial weakness and end up 0.3% on the day, while most other indexes also ended in positive territory. A helping hand came from a positive Wall Street after a survey showed that U.S. manufacturing growth unexpectedly slowed last month, fuelling expectations that the Fed will start cutting interest rates to stave off a recession. "It seems we are back to the 'bad news is good news' trope for equity markets again. The downdraft from trade is now starting to be offset by the market making a big bet on the Fed slashing rates. This appears, for now at least, to be overly optimistic. All eyes are on Jay Powell's speech tomorrow," says Neil Wilson at Markets.com in London. Back to Europe, healthcare provided the biggest uplift to the market, as continued uncertainty over trade pushed investors into buying defensive stocks. In consumer staples, Nestle managed to end well above 100 CHF, up 1.9%, also illustrating appetite for defensives. Infineon suffered an 8.5% drop after Europe's largest chip-maker agreed to buy Silicon Valley-based Cypress Semiconductor for $10 billion, in an expensive move to expand further in next-generation automobiles and Internet technologies. Infineon, which fell to its lowest since September 2016, was the biggest faller on the STOXX today. (Danilo Masoni) ***** WHY SPORTING GOODS INVESTORS SHOULD CARE ABOUT TARIFFS (1422 GMT) Markets are giving higher chances to the U.S. slapping tariffs on the final $300 billion of Chinese imports and if that's indeed going to be the case, investors in sporting goods stocks will likely be affected. The U.S. is by far the biggest sporting goods market (35% of global sales in 2018) and China is still the second biggest source of supplies (25% of global supplies), Societe Generale says. That being said, how are the sector's main players positioned? Here's a summary of what analysts at the French investment bank say: 1. Adidas: "We believe Adidas is better positioned to absorb the shock of potential tariff hikes due to: i) its lower sales exposure to the US market, which accounts for c.20% of group sales vs the sector at c.35%; ii) its lower exposure to Chinese suppliers, which account for c.21% of the group’s supplies vs the sector at c.25%; and iii) its higher exposure to China, which generates c.20% of group sales vs the sector at c.13%." 2. Puma: "We view Puma's ability to absorb the shock of tariff hikes as slightly better than the sector... but below Adidas due to: i) its slightly higher sales exposure to the US market (vs Adidas), which accounts for c.23% of group sales but which is still below the sector at c.35%; ii) its higher exposure to Chinese suppliers, which account for c.24% of the group’s supplies, but slightly lower than the sector at c.25%; and iii) its lower exposure to China of c.13%, in line with the sector at c.13%, limiting the potential to develop local-for-local initiatives." 3. Nike: "We think that US peers, including Nike, would be in a much tougher position with their significantly higher exposure to the US market (>35%)." In this chart you can see how Adidas and Puma have both outperformed Nike over the last three months with the gap widening further after Trump surprised markets last month by saying Washington would raise tariffs on $200 bln worth of Chinese imports. (Danilo Masoni) ***** WHAT RABBIT CAN DRAGHI PULL OUT OF THE HAT ON THURSDAY? (1324 GMT) Sluggish economic growth, trade tensions ratcheting up, Italian budget worries, investors rushing for the exits... All eyes will be on ECB chief Mario Draghi on Thursday as the market hungers for reassurance euro zone assets will be supported. Short of another "whatever it takes" moment, BNP Paribas economists look at what Draghi might be able to cook up to comfort investors. Their preferred option, they say, would be a pre-announcement or more convincing language on the possibility of interest-rate tiering. "It would have a powerful signalling effect (which would probably be the ECB's main aim)," write BNP economists. More practically, it could: * boost banks' profitability * buy the ECB the option of cutting rates further into negative territory, if needed * help fend off any potential appreciation of the euro "Given low expectations for the outcome of Thursday's meeting, a move in this direction might be welcomed," the economists argue. You can read our piece on five questions for the ECB here and below, you can see how sluggish euro zone lending growth has been since the crisis. (Helen Reid) ***** "AMBITIOUS" PURCHASE PRICE, REGULATORY RISKS LOOM OVER INFINEON-CYPRESS DEAL (1100 GMT) Thumbs down for Infineon's $10 billion Cypress bet? Analysts point to regulatory risks and believe its an "ambitious" purchase price. These factors are likely weighing on the shares of the German chipmaker, which are slumping 7.4% to more than 2-1/2 year lows. Citi analysts, ranked five stars for estimate accuracy on Infineon, see the deal's risk-reward as "unfavourable", citing hard-to-substantiate revenue synergies and deal execution risks. Several brokers remind us about Infineon's failed purchase of Cree's Wolfspeed Power as regulators deemed the deal posed a risk to U.S. security. "(The deal) faces significant questions over regulatory overhang, a cycle peak price at a time cycle is at trough and visibility is low and deal synergies in this space aren’t as easy as the appear on paper," says Mirabaud Securities analyst Neil Campling. U.S. lawmakers passed reforms last year that increased CFIUS' ability to scrutinise deals. Citi also points to recent deals called off in the semis sector. DZ Bank analysts say the deal is a good step, but comes with an ambitious purchase price. (Thyagaraju Adinarayan) ***** TRADE WAR COULD TRIGGER RECESSION IN THREE QUARTERS (0953 GMT) If the U.S. goes on to impose 25% tariffs on the remaining $300 billion imports from China, Morgan Stanley economists believe we could end up in a recession in three quarters. Morgan Stanley says when 10% tariffs were imposed the corporate sector had greater capacity to absorb them, but if they rise to and include all imports, they are likely to result in "higher pass-throughs with more knock-on effects". How will the knock-on effects pan out? MS says: * Tariffs will increase costs, and consumers, facing higher prices, may pull back on demand * Tariffs will spill over to domestic and global supply chains and consequently global trade flows * In the medium-term, multi-national companies will incur more costs to develop alternative supply sources * Corporate confidence will take a hit and companies will pull back on capex, hitting global growth * Corporates take additional hit on growth and profitability from international operations "My recent conversations with investors have reinforced the sense that markets are underestimating the impact of trade tensions. Investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook," Morgan Stanley's chief economist Chetan Ahya says. The whole Street is shifting its opinion of the trade war as the possibility of a resolution seems further away: Goldman Sachs pegs the chances of a next round of tariffs on Chinese goods at 60% (40% earlier), saying the rhetoric in China has intensified. Below you can see the crux of the matter: the large gap between U.S. exports to China and imports from China. Tariffs have lessened that gap very slightly so far. (Thyagaraju Adinarayan) ***** WHICH ASSETS HAVE YIELDS ABOVE 30-YEAR AVERAGES? (0847 GMT) UBS have looked into this and they've found European equities are interesting when it comes to yields. "They are one of the few large asset pools to have a yield above their 30-year average (4.0% vs 3.4%)," strategists at the Swiss house led by Nick Nelson say. But given recent high-profile dividend cuts such as Vodafone and Royal Mail, it's also worth asking how sustainable they are. Here's what Nelson and tem say, which looks somewhat reassuring: 1. Pay-out ratios are not extended (57% vs a long run average of 53%) 2. Free cash flow cover is also reasonable at 1.38x for 2019E 3. Balance sheets are under-geared with gross cash on the balance sheet set to reach c. €900 billion by end-2019 4. Dividends are far less volatile than earnings – the gap between EPS and DPS momentum tracks the PMI where there are signs of stabilisation As you can see in this chart, the gap between Europe's STOXX 600 dividend yield and yield on the German bund has been rising to its highest in at least a decade. (Danilo Masoni) ***** WHO'S THE SECRET BUYER OF EUROPEAN STOCKS? (0813 GMT) Although European stocks have taken a battering over the past month, they're still substantially up this year despite data showing big outflows from equity funds. The question on everybody's lips, as Goldman Sachs puts it, remains: "Markets are up and buyers should in any case be matched with sellers - so who is purchasing European equities?" Cumulative outflows from equity funds year-to-date are larger than in 2016, GS strategists say, citing Morningstar data. But looking at ECB data, which also includes flows into equity from multi-asset funds, mixed or balanced funds, hedge funds, and quantitative funds, they find these other types of funds have been buying equities so far this year. Another purchaser is the corporate sector. With new issuance and rights issues diminishing while buybacks have increased recently, companies have been a net buyer of equity. "This does not represent the full picture... but it does give a more complete view than focusing purely on equity fund flows," they write. (Helen Reid) ***** OPENING SNAPSHOT: INFINEON SLIDES, OIL STOCKS SKID (0726 GMT) European shares are sliding 0.6% as lingering trade war worries keep investors away from risky assets. Goldman Sachs economists say they now see a 60% chance that the U.S. will slap tariffs on the final $300 billion of Chinese imports. Infineon is down 5%, the top faller on the pan-European STOXX 600 index after it agreed to buy Cypress Semiconductor for $10 billion. Chipmakers in the region are falling 2-3%, despite expectations from traders that M&A in the sector could be positive for these stocks. Clearly escalating rhetoric in a global trade war is trumping that - so to speak. Wirecard is a rare riser after its CEO tweeted that the company is steering towards an "outstanding" first-half of 2019. Oil & gas stocks are the worst-performing in Europe as Brent crude falls 1.1% amid stalling demand and as trade wars fan fears of a global economic slowdown. Confirming a risk-off trade, the defensive food & beverage, utilities and telecoms sectors are down 0.1-0.4%, outperforming the market. (Thyagaraju Adinarayan) ***** WHAT'S ON THE RADAR: CHIPS, AIRLINES, CASINO STOCKS (0647 GMT) After the worst monthly performance since January 2016, European stocks are set to start June on the back foot again. Futures point to another weak open with the trade-sensitive German blue-chip index seen 0.6% lower. In corporate news, chip sector M&A is making big headlines after Germany's Infineon agreed to buy Cypress Semiconductor, which makes microchips used in cars and electronic devices, for $10 billion. Infineon shares were last trading down 5.2% in pre-market but traders expect its regional rivals AMS, Dialog Semi and BE Semiconductor to rise on the M&A news. William Hill shares are seen 3% higher by one trader on reports in the Sunday Times and the Telegraph that it had held merger talks with Las Vegas casino giant Caesars Entertainment last year. Traders expect shares of European airlines to come under pressure after IATA slashed profit forecasts due to the ongoing trade war. In the UK, construction company Kier is seen dropping 10-20% after a profit warning. A few other headlines to watch out for: Kier sees 2019 operating profit lower than expected Dignity says welcomes proposals to regulate UK funeral plans Danske Bank to sell Estonian private loans unit to LHV in $458 mln deal (Thyagaraju Adinarayan) ***** NO SIGNS OF RESPITE (0554 GMT) European shares are expected to be under pressure again today and there are no signs of a respite as June begins. "Risk assets are likely to remain highly sensitive to rhetoric around trade, until there are signs of a more constructive approach by both China and the US," Peel Hunt's Ian Williams says. The ongoing trade war is certainly hurting global airlines and IATA says the industry's profits are expected to come down by more than a fifth. In corporate news, M&A is making big headlines today: German chipmaker Infineon to buy Cypress Semiconductors in 9 billion euros deal. One trader however says he struggles to see the deal getting approval, pointing to Infineon's attempt to buy Wolfspeed from Cree, which was blocked by CFIUS. Fiat Chrysler is discussing a Renault special dividend and stronger job guarantees in a bid to persuade the French government to back its proposed merger between the carmakers, sources close to the discussions said. Major corporate headlines: Infineon to buy Cypress Semiconductors in 9 billion euros deal Sephora to shut U.S. stores for day of diversity training after racial incident EXCLUSIVE-FCA discusses improved Renault merger bid to win French backing Aluflexpack aims to raise 140 million euros in latest Swiss IPO Sunrise takeover of Liberty Global unit under review by competition authorities Global airlines slash profit forecast on protectionism fears (Thyagaraju Adinarayan) ***** EUROPE ON THE BACKFOOT AGAIN (0517 GMT) European stocks are expected to open lower again this morning on worries of a prolonged China-U.S. trade war and Washington's new tariff threats against Mexico. The pan-European STOXX 600 index dropped 5.7% in May, its worst monthly performance since January 2016. "For most of this year the assumption had been that, for all the sound and fury around the imposition of tariffs, they wouldn’t last that long and any damage could be easily mitigated. Now it seems that tariffs are likely to last a lot longer and be more wide ranging than originally thought," Michael Hewson at CMC Markets UK says. Financial spreadbetters IG expect London's FTSE to open 31 points lower at 7,131, Frankfurt's DAX to open 69 points lower at 11,658, and Paris' CAC to open 37 points lower at 5,171. In corporate news, German chipmaker Infineon Technologies agreed to buy U.S.-based Cypress Semiconductor for $23.85 per share in cash (enterprise value of 9 billion euros). (Thyagaraju Adinarayan) ***** (Reporting by Danilo Masoni, Helen Reid, Josephine Mason and Thyagaraju Adinarayan)