LIVE MARKETS-Flat curves? Go defensive but not at any price!

In this article:

* European stocks fall sharply, STOXX at 2-year low

* Huawei founder's daughter arrested on U.S. request

* Arrest stirs worries about U.S.-China trade tensions

* Huawei rival Ericsson (Hanover: ERCB.HA - news) boosted, chipmakers under pressure

* U.S. stock futures slide

Dec (Shanghai: 600875.SS - news) 6 - Welcome to the home for real-time coverage of European equity markets brought to you

by Reuters stocks reporters and anchored today by Danilo Masoni. Reach him on Messenger to share

your thoughts on market moves: rm://danilo.masoni.thomsonreuters.com@reuters.net

FLAT CURVES? GO DEFENSIVE BUT NOT AT ANY PRICE! (1537 GMT)

The sell-off we're seeing is broad-based, no doubt about it but defensives are doing

relatively better. The outperformance of bond-proxy stocks and sectors such as utilities and

telecoms has been quite clear in this first week of December when the U.S. bond market sent

signals of a slowdown in the world's largest economy.

Bernstein quant strategist Inigo Fraser-Jenkins and team have weighed in and even though

they do not think investors should pay up for defensiveness at any price, they're clearly taking

a more defensive tilt.

"With (Other OTC: WWTH - news) our outlook this week we put on two new trades: going long low volatility stocks

globally and shorting high momentum stocks in the US," they say in a note.

"Our outlook for a range-bound but more volatile market in 2019 favours the factor and the

flattening of the curve in recent days has given the factor considerable support."

On the other hand, they're surprised that momentum has held up so well, although that could

change: "We think that if this flat curve is maintained then it could be a catalyst to drive

further underperformance of momentum, supported by the factor being unusually expensive, crowded

and internally very correlated," they add.

In the snapshot you can see how even though utilities and telecoms have

fallen over the last five days, their losses are at least half as big as the 3.6 percent fall

suffered by the broader STOXX 600.

(Danilo Masoni)

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THE OLDEST BREXIT TRICKS IN THE TRADING BOOK (1524 GMT)

The oldest trick in the trading book for the three years or so that Brexit's been a concern

has been to seek refuge in internationally exposed UK stocks and beware the domestic exposure of

smaller caps.

Guess what? It works.

"Through Dec. 3, 2018, UK companies with primarily foreign revenue exposure had gained 14%

since the Brexit referendum, while UK companies with primarily domestic revenue exposure had

lost 21% (35% return spread)," writes S&P Dow Jones Indices.

So that worked very well for miners too with the Materials sector up 76% since the

referendum.

(Julien Ponthus)

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IF YESTERDAY'S PMIS DIDN'T SPOOK YOU, HERE'S WHAT TO DO (1436 GMT)

Euro zone and UK PMIs were brutal yesterday and as Jennifer McKeown at Capital Economics

said, begged the question whether "we are looking at a moderate slowdown or something more

sinister".

Deutsche Bank (IOB: 0H7D.IL - news) strategists however expect Euro area PMI momentum to turn positive, which

opens up a few options for investors who share their optimism.

Being overweight small caps versus large caps for instance makes sense, they write, as the

former "are more sensitive to swings in the cycle than large caps and, hence, tend to benefit in

periods of improving Euro area PMI momentum."

Another option would be to go for banks which should no longer underperform due to falling

PMIs and should largely benefit from rising German 10-year bond yields.

"Our bund yield model implies upside for yields to 0.9 percent by early Q2, as we expect

Euro area PMI momentum to turn positive," the DB strategists write.

Among DB's list of beneficiaries from rising bond yields are names such as BNP Paribas (LSE: 0HB5.L - news) and

ING.

(Julien Ponthus)

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HUAWEI HIT: WHAT POTENTIAL IMPACT ON SEMICONDUCTOR SUPPLY CHAINS? (1336 GMT)

The shock to global markets from the Huawei CFO's arrest could seem like an overreaction,

but once one begins to consider the consequences of potential sanctions on the Chinese mobile

giant for chipmakers in its supply chain, the selloff starts to make more sense.

"An embargo on Huawei, should it happen, could halt operations and result in significant

supply chain disruptions in the near term," write Bernstein analysts.

"As the largest mobile infrastructure equipment company (28% share in 2017) and the second

largest smartphone supplier (14% year-to-date), Huawei is one of the largest buyers of

semiconductors," they explain, saying Huawei spent around $15 billion in buying semiconductors

in 2017.

But, Bernstein adds, markets may be getting ahead of themselves. While analysts are looking

at worst-case scenarios, Huawei, U.S. and possibly Chinese government "will certainly" try to

negotiate a deal, Bernstein reckons. And the long-term impact on chipmakers shouldn't be too

negative as Huawei's rivals gain market share and suppliers adjust.

As you can see below, chipmakers are hardest hit today among European tech stocks. AMS

shares have hit their lowest since July 2016, down as much as 8.4 percent, while

Siltronic (IOB: 0R8P.IL - news) , STMicro, ASM International (LSE: 0NX3.L - news) , ASML (Milan: ASML.MI - news) , and Infineon (Xetra: 623100 - news) are all also sliding. Ericsson is up

1.5 percent as investors see its chances of competitive advantage in the mobile equipment arena

boosted.

(Helen Reid)

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CAUGHT IN THE DIP'S HEADLIGHTS (1217 GMT)

For any investors waiting for a dip, the market action this morning could seem heaven-sent

with European benchmarks knocked down to two-year lows.

But, as noted by AJ Bell investment director Russ Mould, the question for the FTSE and other

indexes is whether these new rock-bottom levels constitute "a value trap or a screaming buy"?

For British blue chips, price/earnings ratios are at a bargain level of only 11.3 and the

dividend yield is at 4.9 percent, which clearly seems easy money in comparison with the interest

served in a typical savings account...

But for UK stocks, "even if they are unloved, have underperformed and could be undervalued,

you could have said the same a year ago, to no particular effect, as it turned out."

Optimism is in limited supply these days and there is clearly no "irrational exuberance" in

the 2019 outlooks that are piling up in our inboxes.

"Will financial assets rebound strongly in 2019? We do not believe so," Barclays (LSE: BARC.L - news) analysts

write, even if they believe that "2019 returns are unlikely to be as bad as 2018."

Unigestion says today that "expected returns from stocks and risky assets overall will

remain positive, though at lower levels".

Credit Suisse (IOB: 0QP5.IL - news) , in its Investment Committee report, has also kept its enthusiasm in check and

believes "Eurozone stocks still exhibit technical vulnerabilities".

(Julien Ponthus)

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HEAVY ETF OWNERSHIP AMPLIFIES SWINGS IN SOME EUROPEAN STOCKS (1139 GMT)

Today's selloff is broad-based and will be bruising both passive and active investors - but

Citi strategists have unearthed some fascinating stats that suggest stocks with high ETF

ownership usually see bigger moves.

Stocks with high levels of ETF ownership have overreacted in both up and down markets, Citi

finds. As you can see below, the top stocks most heavily owned in index-tracking funds have

outperformed and underperformed much more than the overall index.

As Citi's Jonathan Stubbs and team put it, "Heavily owned names trade like the market (on

steroids)," they write.

And this is increasingly relevant for Europe where the ETF market is growing. ETFs (Shenzhen: 395013.SZ - news) now own

approximately 3.5 percent of the average STOXX 600 stock, up from less than 0.5 percent in 2005,

they note.

These figures suggest on days like today it's better to have your money in smaller, less

popular stocks, than big stocks which will drag more than the market.

"The implication for active managers is to focus stock picking expertise on names less owned

by ETFs, which offer better opportunities for idiosyncratic alpha generation," write Citi.

(Helen Reid)

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"IT'S NOT ABOUT TRADE - IT'S ABOUT TECH" (1100 GMT)

The arrest of Huawei's CFO - and the founder's daughter' Meng Wanzhouof - in Canada on

request from the U.S. has reignited anxiety in world markets today as investors price in a

significant worsening in relations between the world's biggest economies, with technology thrown

into the spotlight as a central battlefield.

Norman Villamin, chief investment officer at Switzerland's Union Bancaire Privée, just told

us he sees the U.S.-China clash as representing much more than a trade tussle.

"I do believe people are thinking about the U.S. China trade dynamic too narrowly," Villamin

says. "It's not about trade - it's about who is going to be the economic and political leader of

the world in 10-20 years from now. It's about tech, and who is going to dominate that

landscape."

Villamin compared the current conflict between the U.S. and China to the 1970s power

struggle between the U.S. and Russia, saying "this is a new risk that five years ago we didn't

have to think about".

Germany's DAX - the European market most exposed to China - has dropped to under 11,000

points for the first time in two years, as you can see below. Europe's tech sector is on

track for its worst quarter since 2011.

"This is going to be the epicentre of a bloody IP war," writes a trader in a note on the

Huawei arrest.

Stay tuned...

(Helen Reid)

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OPENING SNAPSHOT: EUROPEAN SHARES SINK; HUAWEI ARREST RENEWS WORRIES ABOUT TRADE TENSIONS

(0834 GMT)

It's another very weak open for Europe, with all the major bourses down more than 1 percent

in early deals. The pan-European stocks index STOXX 600 is close to testing its late October

lows. If it breaches 348.44, it'll be its lowest since Dec. 8 2016.

Carmakers and auto suppliers, battered this year by concerns about the impact of the

U.S.-China trade war, are leading the fallers, hitting the sector's lowest level since August

2016, while technology shares, particularly the chipmakers, are being pressured by worries about

the fallout from the arrest of Huawei founder's daughter in Canada.

Shares (Berlin: DI6.BE - news) in Ericsson, telecoms network maker and Huawei rival, were up 1.4 percent.

(Josephine Mason)

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WHAT WE'RE WATCHING BEFORE THE OPEN: ERICSSON, NOKIA (Milan: 23568.MI - news) , STM (Shenzhen: 000892.SZ - news) , AUTOS (0757 GMT)

European shares are expected to fall sharply as the arrest of Huawei's CFO is feeding

worries over a fresh escalation in the Sino (Dusseldorf: 1205802.DU - news) -U.S. trade war. Futures are pointing to losses of

around 1 percent, a drop that would push the pan-regional STOXX 600 benchmark back towards its

lowest levels since December 2016.

Telecom equipment suppliers Ericsson and Nokia will be in focus as the arrest of the Huawei

executive piles up the pressure on their biggest rival and 5G powerhouse. Both stocks were

indicated up 2-3 percent in premarket trade. The Helsinki stock exchange is closed today but

Nokia is also traded in Paris.

However the fresh worries over trade tensions could hit further the export-oriented auto

sector, seen down around 2 percent, while also putting pressure on companies supplying chips to

the Chinese tech giant. Shares in STMicro are seen down 2-3 percent.

Other stock movers: Ted Baker (Other OTC: TBAKF - news) revenue hit by lower wholesale sales; DS Smith (Frankfurt: 877238 - news) 's H1 profit

jumps, looks to sell plastics division; Vonovia (Milan: VNA.MI - news) to cut back on modernisation projects as core

profit jumps 13 pct; Nestle (Swiss: NESN.VX - news) recalls batch of Alfamino infant formula in Germany

(Danilo Masoni)

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EUROPEAN SHARES HEADING TOWARDS DEC 2016 LOWS (0714 GMT)

European stock futures have opened firmly in the red, falling more than 1 percent, as the

arrest of Huawei's CFO is feeding worries over a fresh escalation in the Sino-U.S. trade war.

A drop of more than 1 percent at the open would push the pan-European STOXX 600

benchmark index towards the lowest levels since December 2016 it hit during the sell-off seen

over the last two months. Here's your snapshot with futures on main European country indexes:

(Danilo Masoni)

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NOKIA AND ERICSSON IN FOCUS AS PRESSURE PILES UP ON HUAWEI (0658 GMT)

The arrest of Huawei's CFO is piling up pressure on the Chinese telecoms equipment

supplier and 5G powerhouse and that will likely put its smaller European rivals Nokia

and Ericsson back in focus this morning, while the broader market is expected to sell

off on worries that the truce in the Sino-U.S. trade war could be at risk.

Below other headlines that have caught our attention this morning:

Nestle recalls batch of Alfamino infant formula in Germany

Vonovia forecasts higher earnings in 2019

Sanofi (LSE: 0O59.L - news) plans 670 job cuts in France by end 2020

Commerzbank (Xetra: CBK100 - news) board members Reuther, Annuscheit to leave in 2019

Fitch Revises BBVA's Outlook to Negative; Affirms at 'A

Mediobanca (Milan: MB.MI - news) main shareholders sign new consultation agreement

Aerospace equipment maker Latecoere cuts 2019 earnings outlook

Germany, France to add Spain to fighter programme - sources

Steinhoff expects to publish 2017, 2018 results in April

Hiscox (Swiss: 27373019.SW - news) and Spirax-Sarco to join FTSE 100, Just Eat (Frankfurt: A1100K - news) and Royal Mail (LSE: RMG.L - news) out

(Danilo Masoni)

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EUROPEAN SHARES SET TO FALL AFTER HUAWEI CFO ARREST (0628 GMT)

The big news overnight was the arrest of Huawei's CFO (and daughter of the Chinese

tech giant's founder) and that has already rocked equities in Asia on fears that tensions in the

trade war between Washington and Beijing could flare up again.

The selling pressure is set to continue in Europe with main stock benchmarks called down

more than 1 percent, while U.S. stock index futures were also lower.

"The timing of the arrest is key here," says Jasper Lawler, Head of Research at London

Capital Group.

"The arrest has the potential to shatter very fragile US – Sino relations which will weigh

further on global trade and growth concerns. It looks as though, despite recent heavy sell-offs,

the bottom is not in sight and the markets have further to fall. The big swings of late are

representative of a very jittery market," he adds.

Here are your opening calls, according to LCG:

FTSE to open 63 points lower at 6858

DAX to open 166 points lower at 11034

CAC to open 71 points lower at 4873

Huawei CFO Meng Wanzhou has been arrested in Canada and is facing extradition to the United (Shenzhen: 000925.SZ - news)

States. From more click here:

(Danilo Masoni)

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