LIVE MARKETS-So Greek sovereign bonds recovered, are shares next?

* Euro zone shares hit ten year high

* STOXX at 2 1/2 year peak

* Carpetright (Other OTC: CGHXF - news) , Dignity (Other OTC: DGNTY - news) drop after profit warnings

Jan 19 (Reuters) - 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: danilo.masoni.thomsonreuters.com@reuters.net

SO GREEK SOVEREIGN BONDS RECOVERED, ARE SHARES NEXT? (1235 GMT)

Greek sovereigns bonds have made a spectacular come-back these last two years,

with yields falling from over ten percent to below four percent as the country prepares to exit

its bail-out program and finance itself on the markets.

"We think that Greek Equities should be next to outperform," writes Lyxor, which notes that

"the Athens Stock Exchange (ASE) has underperformed the EuroStoxx300 by 80% since the Eurozone

crisis started".

In a nutshell, if Greek shares catch up with their peers the way the country's sovereign

bonds have with Euro zone so-called peripherals, the upside is impressive.

"A recovery of the ASE back to its 2014 highs would grant a lofty 50% price return," Lyxor

adds.

Here's the chart showing the catch-up potential:

(Julien Ponthus)

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HIGH RISK PREMIA PRESERVE DOMINANCE OF STOCKS OVER BONDS (1208 GMT)

With (Other OTC: WWTH - news) everyone asking themselves how long this New Year's bull run can continue without a

significant hiccough, Citi's global strategy team reminds us why stocks remain popular from a

cross-asset point of view: a high equity risk premium (ERP).

"Risk premia across global equities still look attractive compared to those in fixed

income," Citi's Robert Buckland and team write.

The high ERP has been part of what's helped stock markets stay relatively unscathed by moves

in bond yields. This buffer is "not exhausted yet", they reckon, but it is shrinking (see the

chart courtesy of Citi below).

The ERP remains the highest in Europe where bond yields remain very low, while it is lower

in Japan and the U.S. - a divergence Citi strategists recommend playing by going overweight

European equities (ex-UK).

A falling ERP favours cyclicals, which usually outperform defensives in this environment.

"Financials seem to be the most consistent beneficiary," say Buckland and co. Flows data

certainly reflects this: financials drew the largest inflows ($1.6 bln) this week, according to

EPFR.

(Helen Reid)

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SEARCHING FOR VALUE IN CONSUMER STAPLES (1135 GMT)

There's been a lot of buzz around cyclicals in 2018, but what about European defensives?

Given that defensives aren't cheap and are facing the threat of rising bond yields, analysts

at Liberum prefer consumer staples stocks which offer value, FCF yield and self-help stories.

"While Consumer Staples companies still present relatively resilient, visible earnings

growth, constrained top-line growth, intensely competitive end markets and rising inflation

provide headwinds to EPS growth. Weak sales growth is forcing companies to drive earnings via

aggressive margin expansion," Liberum analysts say in a note.

Liberum add that they expect the sector to perform in line with the broader market. Their

top picks for 2018 include Reckitt Benckiser (Xetra: A0M1W6 - news) , Heineken (LSE: 0O26.L - news) , Danone (LSE: 0KFX.L - news) and

Tate & Lyle (LSE: TATE.L - news) .

(Kit Rees)

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STOXX 600 - ENJOY THE MOMENTUM WHILE YOU CAN (1121 GMT)

The economic momentum which has driven the STOXX 600 up to 400 points is set to fade in the

next couple of months, meaning the pan-European index should settle on a downward path, Deutsche

Bank reckons.

"Accelerating growth momentum has done wonders for European asset prices over the past 18

months, but we expect this acceleration to start reversing over the coming months," Sebastian

Raedler, head of European equity strategy at Deutsche Bank (IOB: 0H7D.IL - news) just told us.

"We project the fair-value level for the Stoxx 600 declining from around 410 at the moment

to around 370 by mid-year", he said.

With December's euro zone manufacturing Purchasing Managers' Index (PMI) at 60.6, the

highest since the survey began in June 1997, there isn't much room left for the pace to improve

further and DB expects it to decline this month.

"When the Euro area PMI is above 56, PMI momentum is rarely positive over the following six

months", Raedler said, explaining that "it's not the level of growth that matters for equities,

but the rate of change of growth, i.e. whether growth is accelerating or decelerating".

Based on this model, Deutsche has been "tactically neutral" on the STOXX 600 since September

while most of its peers generally take a more optimistic view.

Here's their chart :

(Julien Ponthus)

*****

EURO ZONE STOCKS LOOK PAST FX STRENGTH, HITTING 10-YEAR HIGH (1015 GMT)

Deutsche Bank may be bearish on euro zone stocks because of the single currency's strength

but the market appears to be going in another direction: the euro zone's STOXX

benchmark index has just risen to its highest level in 10 years.

A number of analysts and fund managers are very upbeat on euro zone equities because of

their cheap valuations relative to the U.S., an economic recovery that gets stronger and

stronger and the underlying quality of company earnings.

That is boosting confidence euro zone stocks could outperform Wall Street in 2018 and catch

up with stellar gains seen across the pond. Strength in the euro could surely reduce

competitiveness in the region but at the same time it also reduces its import costs.

(Danilo Masoni)

*****

SEMIS: IN CHIP SHAPE (0951 GMT)

You'd think European semiconductor stocks wouldn't have much impetus for going higher given

the gains we saw last year: ASML (Milan: ASML.MI - news) , AMS (IOB: 0QWC.IL - news) , Infineon (Xetra: 623100 - news) and STMicro

rose between 36 and 208 percent in 2017.

But the tech sector is once again outstripping the STOXX even this early in the

year, while this week's results from ASML and subsequent 5 percent rise in its shares

plus broker upgrades suggest that there is further strength in these stocks, defying Morgan

Stanley (Shenzhen: 002588.SZ - news) 's view in their November note "Global Technology: Time (Frankfurt: A11312 - news) for a Pause".

Marcus Morris-Eyton, European equities portfolio manager at Allianz (Swiss: ALV-EUR.SW - news) , for whom ASML is a core

holding, said that ASML's results and commentary illustrated the end market demand that semis

are seeing at the moment.

"At the moment, (ASML are) in a beautiful place where their demand is outstripping their

production so they are getting increasing demand from customers to bring forward some of their

equipment," Morris-Eyton said.

"A company like ASML with their EUV technology - that will be the market-leading technology

now for many, many years to come." Extreme Ultra Violet technology aims to make smaller and more

powerful mobile devices.

Morris-Eyton added that while he is confident for tech in 2018 and it remains his biggest

sector, it is unlikely to see the same multiple expansion as in 2017.

Allianz Global Investors are the biggest shareholder in Infineon, one of Morris-Eyton's top

three positions.

As you can see in the chart below, European tech firm valuations are approaching those of

the U.S.:

(Kit Rees)

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FURTHER EURO STRENGTH COULD DENT EARNINGS, SAYS DEUTSCHE (0943 GMT)

With the euro rising again to a new 18-month high against the dollar, Deutsche Bank's

forex strategists up their forecasts for the currency - which they say doesn't bode well for

European earnings and could worsen the region's underperformance relative to the US.

They've raised their year-end prediction for the trade-weighted index by 4 percent, implying

7 percent upside from current levels. Every 10 percent rise in the euro TWI reduces STOXX 600

EPS growth by 5 percentage points, they reckon.

This could bring them closer to increasing their relative underweight Europe vs US equities,

which we mentioned earlier this week.

They see European EPS growing 2 percent this year, already significantly under the 9 percent

consensus estimate.

(Helen Reid)

*****

UK FIRMS UNDER THE COSH ONCE AGAIN (0836 GMT)

It's a familiar story with Carpetright and Dignity (Swiss: OXDTU.SW - news) - big falls after profit

warnings, which has been the case this year with UK firms such as Mothercare (Other OTC: MHCRF - news) , Countrywide (Frankfurt: A1H56R - news) and

Debenhams (Frankfurt: D2T.F - news) .

Inflationary pressures on consumers seem to be to blame, with Dignity caught in a price

battle and forced to cut funeral prices, while Carpetright's sales in the post-Christmas period

missed expectations.

"Again it's the same old story as with other brands that have failed to adapt to changing

consumer trends – lower footfall has left transaction numbers down significantly from last

year," Neil Wilson, senior market analyst at ETX Capital, said in relation to Carpetright.

"We must also consider weaker consumer sentiment for big ticket items as a factor, as well

tougher competition from a more diverse marketplace."

Dignity is also in the top 20 most-shorted stocks in the UK, according to regulatory data.

As you can see from the chart below, shares in both stocks have struggled over the past two

years.

(Kit Rees)

*****

OPENING SNAPSHOT: EUROPEAN SHARES NUDGE HIGHER, PROFIT WARNINGS DOMINATE UK STOCKS (0812

GMT)

It's not a particularly strong open in Europe as gains for basic resources and defensive

stocks only just outweigh losses among financials and energy.

Likewise moves among individual stocks are limited to a range of between +3 to -3 percent on

the STOXX, but elsewhere UK firms Dignity and Carpetright have just opened and slumped 41

percent and 48 percent respectively.

Here's your opening snapshot:

(Kit Rees)

*****

WHAT YOU NEED TO KNOW (0750 GMT)

European shares are expected to open little changed at the end of a directionless week that

has seen the top pan-regional STOXX 600 benchmark steady around a 2 ½ year peak as confidence

over economic and earnings growth helped consolidate a strong start of the year.

In spite of the flat weekly performance EPFR Global said it was a good week for European

equity funds with inflows into Sweden and the UK more than offsetting outflows from France and

Italy. Futures were last up 0.1 percent.

On the corporate front earnings are in focus. In the UK shares in Carpetright and

Dignity could be heavily hit after both groups issued a profit warning, while French

spirits group Remy Cointreau (Swiss: RCO.SW - news) are seen rising after like-for-like sales growth slowed

to 3.2 percent but topped expectations.

For other possible stock movers see the post below on overnight headlines.

(Danilo Masoni)

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OVERNIGHT HEADLINES (0744 GMT)

Nestle (Swiss: NESN.VX - news) nominates three board directors to help advance strategy

Deutsche Bank CEO says overhaul will take time

UK's Carpetright warns on profit after post-Christmas sales fall

Software AG (IOB: 0NJS.IL - news) takes hit on U.S. tax reform

Peugeot CEO: UK plants uncompetitive,open to S.America alliance

British Land (LSE: BLND.L - news) names Simon Carter as next CFO

BASF says 2017 adjusted EBIT up 32 percent on basic chemicals

UK's esure CEO steps down, finance chief at helm in interim

Thyssenkrupp CEO says will sharpen strategy - Handelsblatt

Daimler (IOB: 0NXX.IL - news) , Bosch (BSE: BOSCHLTD.BO - news) hit by walkouts in sector-wide labour dispute

Airbus says supplier bottlenecks easing as deliveries rise

HSBC to pay $100 mln to settle U.S. probe into currency rigging

TF1 (Paris: FR0000054900 - news) announces deal to buy Aufeminin From Springer

Late timing of Chinese New Year weighs on Remy Cointreau Q3

At AstraZeneca, fewer drug projects bring big productivity jump

Italy's Geox (LSE: 0KHH.L - news) to name top Gucci executive as new CEO

(Tom Pfeiffer)

*****

EUROPE'S STOCK FUTURES FLAT (0710 GMT)

Futures have opened with marginal gains in Europe, reversing earlier indications from

spreadbetters for a dip. Both however suggest the market is lacking of clear direction and could

move sideways through the session.

(Danilo Masoni)

*****

"IT WAS A GOOD WEEK FOR EUROPE EQUITY FUNDS" (0640 GMT)

That's what Cameron Brandt, Research Director at EPFR Global, said in his latest weekly

update on fund flows. The positive week came despite the broader European market was little

changed in percentage terms with the STOXX 600 up less than 0.1 percent so far this week.

At the country level there were divergences: "flows into Sweden and UK Equity Funds hit 12

and 39-week highs while France Equity Funds saw their three-week inflow streak snapped and Italy

Equity Funds experienced net redemptions for the 11th time in the past 12 weeks," he added.

On sectors globally, cyclicals dominated. Financials, Industrials and Technology Sector

Funds all took in over $600 million during the week ending Jan. 17 while Real Estate Sector

Funds recorded their biggest outflow since late October, he said.

(Danilo Masoni)

*****

EUROPEAN MORNING CALL: LOWER (0618 GMT)

Good morning and welcome to Live Markets. European shares are set to open lower today at the

end of a directionless week where the pan-regional STOXX 600 has gained less than 0.1

percent so far following two weeks of gains.

Over in Asia, stocks shook off losses on Wall Street and edged up to record highs on Friday

following China's announcement of faster-than-expected fourth quarter growth, while worries over

a possible U.S. government shutdown weighed on the dollar.

Here are your opening calls, courtesy of CMC Markets (LSE: CMCX.L - news) :

FTSE100 is expected to open 6 points lower at 7,694

DAX is expected to open 20 points lower at 13,261

CAC40 is expected to open 9 points lower at 5,486

And here are the weekly moves on the STOXX over the past 3 months.

(Danilo Masoni)

*****

(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)