* 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
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EUROPE BOUNCES BACK, DEFENSIVES IN DEMAND, INFINEON -8%
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
Infineon, which fell to its lowest since September 2016, was
the biggest faller on the STOXX today.
WHY SPORTING GOODS INVESTORS SHOULD CARE ABOUT TARIFFS (1422
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
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
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
2. Puma: "We view Puma's ability to absorb the
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
3. Nike: "We think that US peers, including Nike,
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
WHAT RABBIT CAN DRAGHI PULL OUT OF THE HAT ON THURSDAY?
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
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
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
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.
"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
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.
TRADE WAR COULD TRIGGER RECESSION IN THREE QUARTERS (0953
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
consequently global trade flows
* In the medium-term, multi-national companies will incur
costs to develop alternative supply sources
* Corporate confidence will take a hit and companies will
back on capex, hitting global growth
* Corporates take additional hit on growth and profitability
"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.
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
1. Pay-out ratios are not extended (57% vs a long run
2. Free cash flow cover is also reasonable at 1.38x for
3. Balance sheets are under-geared with gross cash on the
sheet set to reach c. €900 billion by end-2019
4. Dividends are far less volatile than earnings – the gap
EPS and DPS momentum tracks the PMI where there are signs of
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.
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
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.
OPENING SNAPSHOT: INFINEON SLIDES, OIL STOCKS SKID (0726
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
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
WHAT'S ON THE RADAR: CHIPS, AIRLINES, CASINO STOCKS (0647
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
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
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
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
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
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
Sephora to shut U.S. stores for day of diversity training
after racial incident
EXCLUSIVE-FCA discusses improved Renault merger bid to win
Aluflexpack aims to raise 140 million euros in latest Swiss
Sunrise takeover of Liberty Global unit under review by
Global airlines slash profit forecast on protectionism fears
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
(Reporting by Danilo Masoni, Helen Reid, Josephine Mason and