LIVE MARKETS-Explosive Friday: A look into Brexit shocks in stock markets

* European stocks hand back some of Friday's gains * STOXX 600 -0.6%, FTSE 100 -0.5% * Stocks weighed down by report China wants more talks before signing deal * Doubts on Brexit deal also dampens mood * Sophos soars 36% after PE takeover approach Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Julien Ponthus. Reach him on Messenger to share your thoughts on market moves: rm://julien.ponthus.thomsonreuters.com@reuters.net EXPLOSIVE FRIDAY: A LOOK INTO BREXIT SHOCKS IN STOCK MARKETS (1356 GMT) A post-mortem of Friday's massive rally in UK domestic stocks shows the very stocks that got repeatedly battered on negative Brexit noise rallied hard. Those explosive moves on Friday are perhaps a simulation of how stocks would potentially react when we have a real Brexit deal. (Thyagaraju Adinarayan) ***** POSITIVE SIGNALS IN STERLING OPTIONS MARKET (1309 GMT) Domestically focused UK stocks and sterling had a wild rally on Friday, for one of the market's most explosive sessions since the Brexit referendum, after upbeat comments on Thursday night about progress between British PM Boris Johnson and his counterpart. Investors are also pointing to another gauge of short-term sentiment - one-month risk reversals in sterling - as a sign of how much the mood improved last week. The reading moved above zero for the first time since May, one of only a handful of times it's been positive since the Brexit referendum, and at one point hit its highest since 2012. Risk reversals are contracts using calls or puts to hedge a position, essentially options that confer the right to buy or sell at a pre-set price and a positive signal means the premium for calls is greater than puts. "The fact that currency markets are positively positioned on a one-month perspective tells you concerns (about a no-deal Hallowe'en Brexit) have now been banished," says Paul O'Connor who runs Janus Henderson's UK-based multi-asset team. (Josephine Mason) ***** BREXIT SHARING AND CARING PART 2: EURO ZONE LOVE (1247 GMT) As written below, there would be many ways to share the love, should the EU and the UK strike a sweetheart divorce deal. Outside from the pound and the FTSE 250 (see below), euro zone equities would also most likely be sent in a sweet spot. "Another key beneficiary from increased Brexit clarity is the Eurozone", wrote JP Morgan Cazenove analysts, who already upgraded equities from the currency bloc two weeks ago, arguing they were underowned. "Global investors have been consistently highlighting Brexit fear to us as one of the big reasons to be out of the region", they noted, adding that recovering PMIs could provide a boost to shares. "In a nutshell, they (euro zone equities) will be a great way to position for a benign Brexit outcome, in our view". Here's a link to the Sept 30 story about JPM's euro zone equities upgrade: Anyhow, for what it's worth our latest story suggests betting on a Hollywood ending for the Brexit saga could be slightly premature. See: Brexit hangs in the balance as EU doubts a deal this week And talking about love: (Julien Ponthus) ***** HEADLINE TRADING IS HERE TO STAY (1118 GMT) Shares here in Europe are having a decent pull-back this morning as initial euphoria from Friday's partial trade deal and hopes the UK will avoid a no-deal Brexit has quickly evaporated, giving the way to doubts and uncertainty over what lies head in talks between Washington and Beijing. Take Mark Haefele, CIO at UBS Global Wealth Management: "We are not absolutely certain that this marks the start of a clear de-escalation of the trade dispute". Or Paul O'Connor, head of the multi-asset team at Janus Henderson, who says the situation is still potentially prone to reversals: "We welcome it, but it's a very fragile truce. The fact that it wasn't written down is the most important thing." It really looks that investors will remain jittery until any firmer deal is reached, meaning that headline trading is here to stay, as negotiations will likely take new developments. And speaking about headlines, this one -- "CHINA WANTS MORE TALKS BEFORE SIGNING TRUMP’S ‘PHASE ONE’ DEAL - BLOOMBERG" -- sent this morning the trade-sensitive DAX index and pan European STOXX 600 falling further to a session low, as you see in the snapshot. (Danilo Masoni and Josephine Mason) ***** WHAT IF BRITAIN HAD VOTED TO STAY IN EU? (0953 GMT) Too late now to reconsider that decision, isn't it? But still it's worth looking into the magnitude of investment slowdown post referendum. Though the UK economy has showed resilience amid the ongoing Brexit worries and is potentially going to avoid a pre-Brexit recession, Citi economists assess the level of growth UK would've seen without Brexit. Though saying the economy would've fared much better if Britain had not voted to leave the EU in 2016 would be stating the obvious, the scale of the growth the UK is missing out on is what is staggering. Citi strategists believe the country has seen 15%-20% lower business than its normal and some of the sectors below were hit the most: 1) transport equipment 2) non-residential buildings 3) machinery and equipment The deal is coming at some point, but is that the inflection point for the economy, not quite. "In most Brexit scenarios, we expect the investment gap to persist for the foreseeable future," Citi says. Here's a Citi chart with pre-referendum trend in business investments: (Thyagaraju Adinarayan) ***** SHARING IS CARING: 1% FOR £ = 1% FOR UK DOMESTICS (0928 GMT) You don't need to be Warren Buffett to figure out that a Brexit deal will boost the pound and Britain Plc equities. Question is however, if you're ready to take such a risky bet, what's your upside for stocks if white smoke comes out of the EU council and UK Parliament later this week? Well according to Goldman Sachs it's quite simple: "We find that each 1 pp upside move in sterling translates into about 1pp outperformance of UK domestic stocks vs. FTSE 100", in a strategy note published on Monday. There could also be more upside down to the road, Goldman Sachs analysts argue. "A successful pass of a deal would likely be followed by an election and, in all likelihood, a boost in confidence as well as a fiscal easing package. This would be seen as an additional support for the domestic part of the UK market. Anyhow, here's quite a self-explanatory chart on sectors most sensitive to wide sterling move. (Julien Ponthus and Tom Arnold) ***** OPENING SNAPSHOT: OOPS, THAT WENT DOWN QUICKLY! (0741 GMT) European stocks were expected to take a gentle breather after Friday's fun but it was obvious very quickly that it was not meant to be. Instead, the market went down much more than anticipated in what now looks like a clear risk-off Monday. Brexit it seems is back on everyone's mind and not in a good way: the Irish benchmark ISEQ is down 1.1%, the FTSE 250, a gauge of Britain Plc, is falling 1.1 percent and JP Morgan's UK domestically focused stocks index slides 2%, reversing some of the spectacular gains on Friday. The mood is roughly the same on the FX front with sterling falling after the EU and Britain said over the weekend that a lot more work would be needed to secure an agreement on Britain's divorce with the bloc. The share price of Sophos skyrocketting (+37%) after a bid from private equity firm Thoma Bravo ain't changing the big picture for London. It's not only Brexit though with the euro-zone benchmark down 0.6% and all major bourses on the continent in negative territory. Here's the big picture at 0725 GMT: (Julien Ponthus) ***** ON OUR RADAR: A HIT ON BIC, A BOOST FOR SOPHOS (0655 GMT) A major mover this morning should be Sophos: Private equity firm Thoma Bravo said it would take the cybersecurity company private in a deal valuing the company at about $3.8 billion. Fasten your setbelt, the stock is seen jumping over 30%! Another one should be France's BIC which gave a grim trading update on Friday evening and could fall up to 10%. That's another reminder that the very much expected Q3 season which is about to begin in earnest could be a painful reality check for investors. In other corporate news, Sunrise is expected higher after Liberty Global offers to buy 500 million francs of its shares. Roche and Novartis in focus after a media report on Friday that the U.S. is considering imposing tariffs on Swiss pharma companies. Here are other interesting headlines: Liberty Global offers to buy 500 million francs of Sunrise shares French energy giant Total to buy 37.4% stake in India's Adani Gas SocGen scraps plans for securities JV in China in favour of wholly owned business Volkswagen denies plans for sale or stock listing for Lamborghini Italy's CIR calls Carlo De Benedetti's bid for Gedi stake inadequate Nyrstar shareholders to sue commodities trader Trafigura for $1.6 bln UPDATE 1-BIC cuts sales view as U.S. lighter market fails to ignit Daimler recalls hundreds of thousands of Mercedes-Benz diesel vehicles (Julien Ponthus) ***** NOT A HANGOVER, JUST GENTLY SOBERING UP FROM FRIDAY! (0535 GMT) European stock markets are expected to open flat or slightly lower after Friday's burst of optimism towards Brexit and the trade war. The good news is that the vigorous boost which lifted stock markets at the end of last week has not led to a brutal reality check or scary second thoughts. It seems rather that the lemon of good news has been fully squeezed with the first phase of a deal to end the trade war outlined by Trump on Friday and yet ongoing negotiations between the EU and the UK. As noted by LCG's Senior Market Analyst Ipek Ozkardeskaya, the partial trade agreement "didn’t create a feeling of euphoria among global investors". IG financial spreadbetters expect London's FTSE to open 9 points higher, Frankfurt's DAX to shed 16 points and Paris' CAC to edge down 7 points. (Julien Ponthus) ***** (Reporting by Danilo Masoni, Joice Alves, Josephine Mason, Julien Ponthus and Thyagaraju Adinarayan)