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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)

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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)