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

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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)