LIVE MARKETS-European earnings: "still a marginal beat"
* STOXX 600 inches lower
* IWG (LSE: IWG.L - news) rallies after three rival suitors make approaches
* Chinese takeover bid boosts EDP
* Morgan Stanley (Xetra: 885836 - news) upgrades UK equities to "overweight"
* Healthcare (Shanghai: 603313.SS - news) gains as Trump avoids direct measures to cut
prices
May 14 - Welcome to the home for real-time coverage of
European equity markets brought to you by Reuters stocks
reporters and anchored today by Helen Reid. Reach her on
Messenger to share your thoughts on market moves:
helen.reid.thomsonreuters.com@reuters.net
EUROPEAN EARNINGS: "STILL A MARGINAL BEAT" (1515 GMT)
Morgan Stanley has taken a look at European earnings and
with 80 percent of companies having reported so far, overall
first quarter EPS growth is confirmed as a "marginal beat."
"Earnings have tracked 2.8% ahead of consensus with 2% more
beats than misses, slightly softer than Q4. Sales have been in
line. Telecoms, Financials, Materials and Health Care have
delivered the strongest EPS beats," it summarises in a note.
To conclude, analysts at the U.S. bank say that even though
European earnings revisions breadth is slowing again, commodity
upgrades have actually driven 2018 weighted estimates higher.
(Danilo Masoni)
****
INFLATION: THE BIGGEST THREAT OF THEM ALL (1245 GMT)
We just had a meeting with Paul O'Connor, head of
multi-asset at Janus Henderson Investors, and asked him what was
the biggest risk to the assets he manages. His answer was
unequivocal and had little to do with Italian politics, Iran or
Korea.
"I think the biggest threat to our constructive long cycle
view is inflation," he answered.
While he believes the current bull market still has fuel in
its engine, "an inflation shock" would constitute a "game
changer" for multi-asset managers and further accelerate the
repricing of risk experienced since the start of 2018.
It would create a "risk-off" environment which would be hard
to hedge by definition with fixed-income and equities both
suffering, he said.
Investors did get a taste of that during the February
sell-off when U.S. inflation fears hammered both bonds and
stocks in a messy spike in volatility.
O'Connor said he also kept an eye out for a possible
escalation in trade disputes and made an interesting point: one
of the "channels" by which the Iranian crisis could really hit
markets may be through a stand-off between the U.S. and Europe
on the issue, exacerbating the steel and aluminium tariffs
dispute.
(Julien Ponthus and Claire Milhench)
*****
MID-SESSION SNAPSHOT: INCHING LOWER (1219 GMT)
There are no big catalysts around to provide a clear
direction to European share trading and while easing U.S.-China
trade tensions look to be helping Wall Street futures gain, the
broader STOXX 600 pan-regional index is down a touch.
The heavyweight financial sector is the main drag, although
its losses were partly offset by fresh dealmaking activity (IWG,
EDP) and a recovery in healthcare stocks.
Looking at country benchmarks the picture is rather mixed
with political developments in Italy keeping the FTSE MIB
on track to end at a two-week closing low, while gains
among drugmakers are buoying the Swiss index SMI.
(Danilo Masoni)
*****
ITALY: EXPECTANT INVESTORS FRET ABOUT FISCAL POLICY (1144
GMT)
A 5-Star and League government has gone from investors'
worst-case scenario to imminent reality - and although Italian
stocks are down 0.8 percent now, underperforming European peers
today, overall the market's reaction has been very muted, which
analysts agree is surprising.
"Maybe investors think Italy will go the way of Portugal,
where the new government unpicked reforms," offer Societe
Generale analysts.
Investors are certainly concerned, though, particularly
about high levels of government spending.
"If there is one clear agreement between the main parties it
concerns their calls for looser fiscal policy," note Nomura
analysts.
Both parties back a big tax cut, repeal of pension reform
and a basic income, which would increase Italy's debt levels.
"We think the IMF underestimates the level of debt that
Italy will have to sustain in the period ahead," say Nomura.
"A lack of fiscal discipline in combination with some reform
reversals could potentially sow the seeds of a new Italian
crisis once the current cyclical upswing is over," Berenberg
economist Carsten Hesse writes, adding the risks are long-term
rather than "imminent" (which might explain the market's
sanguine reaction).
The two parties are likely to pick a consensual figure as
Prime Minister, and are going to the presidential palace to
present their candidate later this afternoon. If the President
is satisfied with their choice, Italy could have a government in
place by the end of the week.
(Helen Reid)
*****
"STILL TOO EARLY" TO GO DEFENSIVE (1042 GMT)
That's what analysts from both Citi and JP Morgan think, as
some investors have been turning more bearish on
growth-sensitive cyclicals and advocating a turn into the safer,
defensive part of the market.
The main bear argument, that a rollover in macroeconomic
momentum is likely to derail cyclicals, isn't convincing, they
reckon.
"The activity momentum has peaked, but that is behind us and
the 'new news' is a likely stabilisation in growth momentum into
summer," argue analysts at JP Morgan.
"When Eurozone CESI (Citi Economic Surprise Index) hits -90,
cyclicals tended to strongly outperform defensives over the next
6-12 months," they write (see chart below).
And the drivers needed to support defensives aren't quite
there yet.
"Equity fund managers should continue to steer clear of
Defensives despite sharp underperformance and de-rating since
mid-2016," say Citi analysts. "Defensive sectors score at the
bottom of our 8-factor fundamental model and need a macro regime
change to outperform."
Key for the cyclicals/defensives trade is, of course, the
direction of bond yields - and in the Euro zone especially
analysts say they are far from peaking.
JPM remains underweight most defensives including staples,
pharma, real estate and U.S. and UK utilities. The only
defensive they like is continental non-regulated utilities.
(Helen Reid)
*****
HEALTHCARE RECOVERS (0946 GMT)
Turning to sectors, the outstanding gainer today in Europe
is healthcare and its gains look ultimately linked to U.S.
President Donald Trump's latest announcement on Friday on drug
pricing.
Although he blasted drugmakers and healthcare "middlemen"
for making prescription medicines unaffordable for Americans,
his administration stopped short of aggressive direct measures
to cut prices.
That drove U.S.-listed drugmakers higher on Friday and the
good mood has spilled over to Europe this morning.
"(It's a) sentiment story...," says a Frankfurt-based
trader.
Meanwhile, the STOXX 600 Healthcare index is up 0.8
percent, rising back near 3-month highs and leading sectoral
gainers, adding the most points to the STOXX 600.
(Danilo Masoni)
*****
M&A DRIVES THE DAY WHILE MORGAN STANLEY JUMPS ON UK EQUITIES
BANDWAGON (0928 GMT)
Once again, it's all about dealmaking today with IWG
and EDP leading the STOXX after takeover offers.
Portuguese energy firm EDP is an interesting one because
it's risen well above the offer price, and JP Morgan analysts
reckon management could ask for China Three Gorges to better its
bid. The deal is also likely to face regulatory obstacles as it
has to be cleared by the U.S., Poland, France, Romania, Brazil
and Canada.
European leaders have been growing more tetchy about Chinese
acquisitions of European strategic businesses like utilities,
with Macron in January pressing the EU for a united front on
foreign takeovers.
Generally this year is shaping up to be one of the strongest
for global M&A volumes.
"With (Other OTC: WWTH - news) strong earnings growth companies are looking to expand
their revenues via acquisitions," says Edward Park, investment
director at Brooks Macdonald (LSE: BRK.L - news) .
"The low cost of financing also plays a part, with a
relatively low hurdle in terms of additional profit required
from synergies to justify a bolt-on acquisition," he adds.
Meanwhile, M&A is one of the reasons Morgan Stanley cites
for its upgrade of UK equities to "overweight". MS joins a
growing crowd of brokers singing the praises of the UK market
which is, according to them, undervalued (see their chart
below).
"Attractive micro trumps uncertain macro" in the UK, MS
strategists say, and the stock market should benefit from higher
commodity prices and rising corporate activity.
(Helen Reid)
WHAT YOU NEED TO KNOW BEFORE THE OPEN (0649 GMT)
European stock futures are pointing up, tracking Asian
markets higher as U.S.-China tensions show signs of easing ahead
of a second round of trade talks.
Investors were shrugging off the progress in talks between
Italy’s 5-Star Movement and League. SocGen (Paris: FR0000130809 - news) analysts admits this
was their “worst-case scenario” a couple of months ago but now
that it’s materializing, they are focusing on the fact a weaker
government would find it harder to push through fiscal policies
they see as counterproductive. Italy’s FTSE MIB is one of the
best-performing equity indices worldwide year-to-date as the
market focuses on a stronger economy.
Results are still coming in with 75 percent of MSCI Europe
companies having reported first-quarter earnings thus far.
Energy is easily leading the way with 10.5 percent earnings
growth, while overall earnings growth is flat. Revisions for
second-quarter earnings are trending higher, though, an
indication investors think the worst may be over for European
corporates pressured by, among other things, a strong currency.
M&A continues to be a major driver, with China Three Gorges
the latest foreign investor snapping up a European company,
buying up Portuguese energy firm EDP. EDP is set to gain 3 to 10
percent at the open.
British serviced office provider IWG received takeover
approaches from three rival suitors on Friday after the close,
potentially plunging it into a bidding war. Its shares are seen
up 10 to 20 percent today. AccorHotels meanwhile sealed another
deal to buy a foreign hotel chain.
(Helen Reid)
*****
EUROPEAN STOCK FUTURES UP AS ITALY GOVERNMENT TALKS FAIL TO
SHAKE THE MARKET (0614 GMT)
Talks between Italy's anti-establishment 5-Star and the
far-right League to form a government don't seem to have
investors too worried, with futures pointing to gains across
Europe's major benchmarks.
Italy's FTSE MIB has been one of the best-performing equity
indices worldwide this year, Goldman Sachs (NYSE: GS-PB - news) analysts note, while
most of its European counterparts are flat.
"We think it is unlikely that investors will perceive
Italian political developments as a systemic threat to euro area
institutions or growth, in the near term," they write.
Here's your snapshot:
(Helen Reid)
*****
EARLY MORNING EUROPEAN HEADLINE ROUND-UP (0553 GMT)
Analysts are getting their heads round the progress in
Italian government talks. "A Five Star/League coalition
government is taking shape," note SocGen analysts. "This was our
worst-case scenario three months ago. However, this government
is unlikely to have enough political and fiscal room for
manoeuvre to deliver a large fiscal slippage, as indicated in
the two platforms."
But there's also plenty of results and other company news to
keep traders and investors busy today.
In what could be a big step for the nascent technology
underlying cryptocurrencies, banks HSBC and ING say they've
performed the world's first trade finance transaction using
blockchain.
In other news, results and M&A - both inbound and outbound:
France's AccorHotels strikes deal to buy Chile (Stuttgart: 704599.SG - news) hotel group
Atton
ABN Amro Q1 profit falls 3 pct on loan impairments
Innogy's Npower grows operating profit in Q1
K+S Q1 core profit rises 7 pct on rising volumes
HelloFresh Raises 2018 Revenue Growth Outlook
Bayer CFO sees lower Monsanto (Hamburg: 1132157.HM - news) synergies after divestments
-Boersen-Zeitung
Ryanair target Laudamotion dumps Zurich flights due to plane
shortage
China Three Gorges launches $10.8 bln bid for Portuguese
power firm EDP
(Helen Reid)
*****
MORNING CALL: EUROPEAN STOCKS TO RISE ON FADING TRADE
TENSIONS (0536 GMT)
European stocks are set to follow the Asian trend up this
morning after last week ended on a high. Progress in talks
between Italy's Five Star and League towards forming a
government don't seem to have overly shaken the market, with the
euro hardly moved.
Asian shares rose to near two-month highs on hopes
U.S.-China trade tensions were thawing after Trump pledged to
help ZTE Corp (Xetra: A0M4ZP - news) "get back into business, fast" ahead of a second
round of trade talks between officials this week.
Italy's 5-Star Movement and far-right League called the head
of state on Sunday to report on their progress towards naming a
prime minister. The two have been trying to find an independent
figure without allegiance to either party to rule the
government.
Germany's DAX - which is very exposed to China and trade -
is called up 29 points at 13,030, the CAC 40 is seen opening 10
points higher at 5,552, and the FTSE 100 is expected to open 1
point lower at 7,723 points.
(Helen Reid)
*****
(Reporting by Helen Reid, Danilo Masoni, Julien Ponthus and Kit
Rees)