LIVE MARKETS-Falling angels and rising debt

* European stocks tumble

* ASOS (LSE: ASC.L - news) plunges after profit warning

* Retail sector tumbles on latest sign of strife

* Wall Street opens in the red

Dec (Shanghai: 600875.SS - news) 17 - 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

FALLING ANGELS AND RISING DEBT (1543 GMT)

In an environment of rising stress about high debt levels, JP Morgan strategist Nikolaos

Panigirtzoglou and team argue corporates are currently "much more vulnerable" to a decline in

incomes and rising interest rates than in the previous two cycles, due to their debt levels.

We could be in for many more "fallen angels" - defined as bonds initially given an

investment grade rating but since reduced to junk bond status due to the weakening financial

condition of the issuer - as the market hasn't started pricing in this greater indebtedness yet.

"The number of fallen angels in our high yield index still stands at very low levels

typically seen at the beginning of a credit cycle," writes Panigirtzoglou. As you can see below,

the number of fallen angels is indeed relatively low currently.

And that's out of whack with the debt profile of many companies.

"At face value, from a net-debt-to-EBITDA ratio point of view, more than half of BBB

companies in the U.S. and Europe look more like high yield than high grade," he writes. "This

suggests that the downgrade and fallen angel risks look pretty elevated at the moment for both

U.S. and European high grade corporates."

(Helen Reid)

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RETAIL GLOOM: YELLOW DOESN'T BRIGHTEN THINGS UP (1502 GMT)

There's no shortage of gloom in the retail space today with the sector losing 3 percent, far

more than any other, with tech down 2.1 percent.

ASOS' sudden profit warning is having a clear spillover effect on retailers, online and

bricks-and-mortar alike. AJ Bell notes that "it is not just that we’ve stopped shopping on the

high street, it is that we’re spending less overall."

Bad news is adding up for traditional retailers: Moody's has just issued a note in which it

details how the "gilets jaunes" (yellow vests) protests in France are hurting the likes of

Carrefour (LSE: 0NPH.L - news) , Fnac and Casino in France.

"Although the impact of the protests will mostly be felt in 2018 results, it has probably

accelerated the rise in online sales, a credit negative for many retailers, with the notable

exception of Amazon.com (NasdaqGS: AMZN - news) ," Moody's writes.

AS BNP Paribas noted in its Eco Flash, "the impact of the 'yellow vest' protests on France’s

Q4 growth is likely to be significant but temporary".

On the bright side, fiscal measures granted by Macron's government should allow households

to increase spending next year.

Meanwhile for Britain, among the latest macro data are these not so comforting facts:

* Households’ confidence in their finances hit a six-month low in December, as their

earnings from employment rose more slowly while living costs increased.

* More than 1,000 restaurants went bust in Britain in the year through September, a 24

percent rise on the previous 12 months as the industry grapples with overcapacity as consumer

spending slows.

(Julien Ponthus)

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"OVERSEAS CAPITAL EARMARKED FOR BLIGHTY" (1447 GMT)

"British assets are figuratively on sale," writes Jim Wood-Smith, head of research at

Hawksmoor Investment Management. Indeed, valuations of the FTSE All-Share (LSE: SHRE.L - news) are at a

9-year low relative to the FTSE world index on a price to earnings basis.

Being a value-focused investor, Wood-Smith says Hawksmoor is looking out for opportunities:

"We have our buying boots on," he says, as "a good number of equities are already offering the

best value we have seen since the early years of the bull market".

And they're surely not the only ones.

"We should all be sure that there is a very large amount of overseas capital that is

earmarked for Blighty," says Wood-Smith. "Some may wait until the path of certain negotiations

become clearer, some may start to dip their toes into UK waters ahead of that."

(Blighty is an affectionate term for Great Britain, which became widely-used during the

First World War https://bit.ly/2CfOURK)

If that's true, it could mean a big bounce ahead - if Brexit uncertainty clears...

(Helen Reid)

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MIDDAY SNAPSHOT: SINKING LOWER AS U.S. FUTURES TUMBLE (1357 GMT)

Past the halfway point of the day's trading and the selloff is deepening across European

indices. The STOXX 600 is down 0.9 percent now, with consumer and financial stocks the biggest

drag.

U.S. futures are down 0.4 to 0.7 percent, likely being pushed down further by the latest

Twitter (Frankfurt: A1W6XZ - news) tirade by Trump railing against the Fed for "even considering" another rate hike.

The retail selloff is deepening with the sector index down 2.5 percent and ASOS down 38.7

percent. N Brown Group is down 12.7 percent and Debenhams (Frankfurt: D2T.F - news) is down 7.6 percent on the UK

small-caps index, while Next (Frankfurt: 779551 - news) and Marks & Spencer (Frankfurt: 534418 - news) - down 5 percent and 4.1 percent - are among

the biggest fallers on the FTSE 100.

(Helen Reid)

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STAY BEARISH ON MINERS, BUT WATCH OUT FOR CHINA STIMULUS (1244 GMT)

Miners are the strongest gainers in a falling European equity market today as hopes of

fiscal and monetary support from top metals consumer China resurface. Despite the 1.2 percent

bounce, the sector remains among the worst performers year-to-date, down 15 percent as 2018

draws to its close and prospects for next year aren't looking that bright either.

Among the bears is Credit Suisse (IOB: 0QP5.IL - news) which sees danger signals into early 2019.

"While valuations are generally undemanding (and this may present some downside cushioning),

we believe that amid declining earnings and poor short-term macro sentiment, the sector will

trade well below fundamental long-term value during the early stages of 2019," Samuel Catalano

and other analysts at the Swiss investment bank say in a note.

"This is particularly the case for stocks with greater exposure to the Chinese construction

cycle," they add, noting that in past cyclical downturns, some stocks have traded at less than

50 percent of their net present value for short periods.

That being said, they acknowledge a key risk for their bearish call: a significant Chinese

demand stimulus.

Any clues on further stimulus may come from President Xi Jinping's (pictured below) speech

on Tuesday to mark the 40th anniversary of China's reform and opening. Also closely watched will

be this week's Central Economic Work Conference, where key growth targets and policy goals for

2019 will be discussed.

(Danilo Masoni)

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SMALL & MID CAP MANAGERS SMASHED (1223 GMT)

This year hasn't been good for very many investors, but it seems like small & mid-cap

focused managers in Europe have been particularly badly hit, JP Morgan figures show.

Of the 816 actively managed European small & mid cap funds sampled in their analysis, 57

percent underperformed their benchmark year-to-date, despite more than half having generated

alpha over the last decade.

As you can see below, volatility for small & mid-cap stocks has also picked up - only two of

the last 20 years saw more monthly return volatility in the MSCI (Frankfurt: 3HM.F - news) small-cap Europe than 2018.

This year saw as much volatility as 2008 and 2009 in the depths of the crisis.

"Fundamental PMs have faced a trial by fire over the last decade," writes JP Morgan's head

of small and mid-cap Eduardo Lecubarri.

What's interesting is that small and mid-caps' price performance belies the fundamentally

sound underlying performance: this year was one of just five over the last 23 in which Europe's

small and mid-caps delivered negative returns despite achieving double-digit earnings growth,

according to JPM.

"Such a discrepancy between growth and performance was partly driven by the macro-heavy

newsflow that struck the equity market throughout the year," says Lecubarri.

(Helen Reid)

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MAKE YOUR PEACE WITH 2018 (1149 GMT)

With (Other OTC: WWTH - news) less than 10 trading days left before year-end, there's little hope of a change of

trends on equity markets but some investors are struggling to make their peace with the fact

that 2018 could just very well be a bad vintage and not only for European stocks.

"Investors on Wall Street must be frantically writing and posting letters to Santa Claus,

asking him to bring them a traditional end-of-year rally", writes Rabobank.

"If Santa Claus doesn’t turn up very soon, US stocks may end this year in negative

territory", it adds, as the Nasdaq (Frankfurt: 813516 - news) remains the only big index in the black so far with the Dow

and the S&P down between 2 and 3 percent.

But for Russ Mould, investment director at AJ Bell, some have given up on 2018.

"It seems investors are increasingly losing hope of a stock market rally going into

Christmas. They simply want the final run of trading sessions to be over, so they can put their

feet up in front of the fire with a mince pie and not think about the damage to their investment

portfolio until the festive season is over".

Same take from Lyxor: "expectations of a year-end rally in risk assets have faded, as

concerns over Brexit remain acute and the probability of a recession in the U.S. keeps rising

(although it stands at low levels)".

But it doesn't mean that the last few days will necessarily be dull.

"Heading into the festive period, trading volumes are expected to be significantly lower

which could make things a lot more interesting as it’s unlikely to be the uneventful end to the

year that we often see", notes Oanda's Craig Erlam for whom Brexit could lead "be a source of

potentially extreme volatility for the pound".

(Julien Ponthus)

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OUTFLOWS TRIGGER "BUY" SIGNALS (1103 GMT)

Investors have been pulling record amounts of money out of stock markets, so much so that

it's triggered "buy" signals for Bernstein's quantitative research team.

Last week saw the largest weekly outflow in dollar terms in the history of Bernstein's

weekly dataset, the broker's quantitative research team says, citing EPFR data which showed a

record weekly outflow of $39 billion.

This has sent Bernstein's flow indicator sharply into "buy" territory while its composite

sentiment indicator is at -0.93 standard deviations - what they call a "weak buy" signal but

close to the -1.0 standard deviations classified a strong buy.

An important caveat they add to the EPFR data is that half of this was payouts of dividends,

e.g. from income funds. Minus that dividend amount, the outflow would not be a record,

Bernstein's Inigo Fraser-Jenkins and team highlight. BUT even taking half the outflows would

push the flow indicator into "buy" territory, they note.

"Our outlook is still for range-bound but volatile markets in 2019. That is unchanged, but

within that tactical opportunities can present themselves," they write.

Fund flow signals were neutral at the start of December, but are now "supportive", they add.

Bernstein has some interesting insight from clients, however, which acts as a reminder not

to get overly enthusiastic too early: "Some investors whom we have spoken to had positioned

themselves for a December rally and the path has been painful."

(Helen Reid)

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OPENING SNAPSHOT: ASOS CASTS GLOOM ACROSS EUROPEAN SHARES (0831 GMT)

ASOS' profit warning this morning has cast gloom across European bourses at the open, with

online retailers and high street chains all being sold off heavily. ASOS is down almost 40

percent already, rival Zalando (Swiss: OXZALG.SW - news) off 16 percent at its lowest in four years and Next, which has

shops and a catalogue business, is down 4.4 percent.

(Josephine Mason)

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WHAT'S ON THE RADAR: ASOS AND RETAIL PAIN, SSE (LSE: SSE.L - news) /INNOGY, ABB (0751 GMT)

European stocks were set for modest gains on Monday, though how long those will stay is

anyone's guess as a busy week of central bank decisions looms. Single-stock moves were likely to

be the main focus after yet another retailer profit warning and some dealmaking news from ABB

and Uniper (Swiss: UNIPE.SW - news) .

Europe’s STOXX, euro zone STOXXE, and Britain’s FTSE 100 were all on track for their biggest

quarterly loss since 2011, but gains this week may change that if a “Santa rally” finally

materializes.

A profit warning from British online fashion retailer Asos comes hot on the heels of poor

trading updates from Sports Direct, Dixons Carphone (Frankfurt: CWB.F - news) , and Bonmarche and confirms that November

was a tough month across the retail industry, even in the online offerings often seen as immune

to the high street’s woes. November was “significantly behind expectations,” the retailer said

in its trading update, downgrading its annual forecasts.

Traders saw Asos shares falling 15 to 20 percent – though some said they could sink even

more – with negative readacross likely to Boohoo and Zalando.

Also in Britain, shares in holiday and tour operators On the Beach (Other OTC: OOBHF - news) and TUI (LSE: 0NLA.L - news) were seen falling

3 to 5 percent after a Sunday Times report that the government’s no-deal contingency planning

includes a warning to families not to book holidays for after March 29. https://bit.ly/2S6awps

Windows and doors retailer Safestyle also forecast a bigger loss for the year.

SSE shares were seen falling after it scrapped its deal with Innogy that would have created

the UK’s no.2 retail power provider, saying the deal was not in the best interests of its

shareholders or customers.

Swedish retailer H&M reported sales in-line with expectations for Q4, but its shares were

seen falling 1 to 2 percent.

Dealmaking was a driver once more with Swiss industrials firm ABB (LSE: 0NX2.L - news) seen rising 2 to 5 percent

after it sold its Power Grids division to Hitachi for $11 billion. Uniper also said it entered

agreements on LNG with Japan’s Mitsui OSK and Hungary’s MOL.

(Helen Reid)

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FUTURES RISE AS HEADLINES STREAM IN: DEALMAKING AND ANOTHER RETAIL PROFIT WARNING (0716 GMT)

Futures have opened up, an encouraging sign for the European market as investors eye a busy

week which could deliver more market stress with liquidity likely to be modestly lower as some

in Europe and the U.S. take off for holidays.

Dealmaking is again a main focus today with Switzerland's ABB selling its Power Grids

division to Hitachi in a mammoth $11 billion deal. Energy group Uniper, meanwhile, entered

agreements with Japanese shipping group Mitsui OSK Lines (Frankfurt: 862503 - news) and Hungarian oil and gas group MOL in

LNG.

A profit warning from British online fashion retailer ASOS comes hot on the heels of poor

trading updates from Sports Direct, Dixons Carphone, and Bonmarche and confirms that November

was a tough month across the retail industry even with Black Friday.

ASOS downgrades annual forecasts after tough November

Qatar considering increasing its stake in Deutsche Bank (IOB: 0H7D.IL - news) -Handelsblatt

ABB to sell Power Grids division to Hitachi in $11 bln deal

Nissan board aims to boost governance post-Ghosn at Monday's meeting-sources

Just Eat (Frankfurt: A1100K - news) shareholder calls for asset sale, new targets

Nicox (LSE: 0RCQ.L - news) teams up with Chinese firm to develop and sell glaucoma drug

Uniper intensifies LNG plans with Japan's Mitsui OSK, Hungary's MOL

Taisho said to near $1.6 bln deal for Bristol-Myers's UPSA- Bloomberg

(Helen Reid)

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CENTRAL BANK BONANZA: WHAT TO EXPECT (0653 GMT)

It's a busy week for monetary policy watchers with the Fed decision on Wednesday and the

Bank of England on Thursday, as well as potential for Chinese policymakers to tweak guidance at

the Central Economic Work Conference. Japan, Indonesia and Taiwan (Taiwan OTC: 6549.TWO - news) central banks will also make

policy decisions on Thursday along with Sweden's Riksbank.

"Although the Fed will almost certainly hike again, it may signal just two hikes in 2019 -

one fewer than previously," write Societe Generale (Swiss: 519928.SW - news) analysts.

"We expect a dovish tilt to the proceedings," write Goldman Sachs (NYSE: GS-PB - news) analysts. They expect the

growth characterisation to be downgraded to "solid" from "strong" and the funds rate guidance to

be tweaked to something more non-committal - "some further increases" instead of "further

gradual increases".

For the Bank of England, Brexit remains a key hurdle, and SocGen (Paris: FR0000130809 - news) says the market remains

unconvinced the Bank will raise rates unless Britain can get the deal through Parliament. "The

market sees a low probability of a near-term rate rise, pricing just a 75 percent chance of a

25bp hike over the whole of 2019."

(Helen Reid)

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EUROPEAN SHARES DIRECTIONLESS AS GROWTH WORRIES GIVE INVESTORS PAUSE (0628 GMT)

Spreadbetters' indications see European shares floundering at the open after a weaker

session in Asia where Chinese and Hong Kong shares tumbled. The S&P 500 marked its lowest close

since April 2 on Friday, banishing once and for all any hopes of a Santa rally.

Any gains this week will likely be capped with all eyes on the Fed and other central bank

decisions. "This week is full of central bank meetings, but a majority of them will probably

deliver no change," write Societe Generale analysts.

Asian share markets began the week on a cautious note after soft economic data from China

and Europe added to evidence of cooling global growth and reinforced anxiety over the broadening

impact of international trade frictions.

Financial spreadbetters at IG (Frankfurt: A0EARV - news) expect London's FTSE to open 3 points lower at 6842,

Frankfurt's DAX to open 20 points higher at 10886 and Paris' CAC to open flat at 4,854.

(Helen Reid)

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(Reporting by Helen Reid, Danilo Masoni, Julien Ponthus)