LIVE MARKETS-Hold the phone: deal talk boosts telecoms

Jan 22 (Reuters) - 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: julien.ponthus.thomsonreuters.com@reuters.net

HOLD THE PHONE: DEAL TALK BOOSTS TELECOMS (1530 GMT)

Top of the sector leaderboard as we head towards the close are telecoms stocks, up

1.6 percent, after a report in Le Monde that Orange (LSE: 0OQV.L - news) and Deutsche Telekom (IOB: 0MPH.IL - news)

held merger talks last year.

"This could boost M&A expectations in Europe," says AFS Group analyst Jauke de Jong in

Amsterdam. "This could be a sign that either Orange or Deutsche Telekom is open for cross border

M&A."

He also notes the report comes after some recent in-country M&A in telecoms with the

Tele2 (LSE: 0QE6.L - news) -Com Hem (LSE: 0QV0.L - news) and Tele2-TMobile NL deals.

"Telco M&A hopes could come back in full swing," says de Jong. It's a much-needed boost for

a sector which has lagged the market for months. Or, as a trader at a European bank bluntly put

it, "Without M&A the sector sucks."

Here's how Orange and Deutsche Telekom shares reacted:

(Danilo Masoni and Helen Reid)

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OCADO: FEELS LIKE A SQUEEZE (1515 GMT)

According to Jefferies, it's unlikely that the surge in Ocado shares is due to the

fundamentals of the Sobey deal, which will allow Canada's second largest food supermarket group

Sobeys to use the UK group's ecommerce platform.

"In reality it will be the ongoing squeeze in the short base (76m shares are still on loan,

from a peak of 124m in July 2017) that will dictate near term outlook for the stock", the

analysts said as Ocado enjoys a 20 percent jump.

This comes roughly two months after a similar deal with France's Casino had pushed the

shares up more than 20 percent.

Ocado was a favoured as a "short" bet amongst hedge funds throughout 2017 partly because of

divergent views among investors over whether the company is a food retailer or a technology

provider able to command a high valuation. Check out our story here:

Have a look here to spot the pattern of short squeezes:

(Julien Ponthus)

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RISING RATES AND UTILITIES, IT'S NOT NECESSARILY ALL THAT BAD (1423 GMT)

You would think that with monetary normalisation on the agenda and rising rates on their

way, there isn't much of a case for investing in European utilities.

Not so fast, UBS (LSE: 0QNR.L - news) analysts say.

"When bond markets fall and power prices are rising, power generators can still strongly

outperform," they argue, naming EDF (Paris: FR0010242511 - news) , RWE (IOB: 0FUZ.IL - news) and Fortum (LSE: 0HAH.L - news) as stocks

likely to outperform this year.

They also cite special situations with Uniper (Swiss: UNIPE.SW - news) (Fortum bid) or Centrica (Amsterdam: CC8.AS - news)

(recovery case).

Overall, out of the 24 European utilities it covers, UBS would only buy half:

(Julien Ponthus)

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AFTERNOON SNAPSHOT: IBEX HITS FIVE-MONTH HIGH (1349 GMT)

European shares have turned slightly higher, pushing the STOXX 600 index back to

its highest point since Aug. 2015 and the euro zone's STOXX to 10-year highs,

milestones already reached on Friday.

Only the IBEX in Madrid is breaking new ground after Fitch upgraded Spain's credit

rating to "A-". The Spanish top share index has just extended its gains to 1.1 percent, hitting

a five-month high and helping it recover from the losses linked to the Catalonia crisis.

(Danilo Masoni)

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IS THE MARKET POSITIONED FOR CROSS-BORDER BANK M&A? (1257 GMT)

Mediobanca Securities analysts don't think so. They see opportunities for stock pickers, but

have a word of caution over the broad benefits of such deals.

"European regulators and governments are getting more and more explicit about their desire

to have in-market and cross border consolidation within the Banking Union. By contrast, both

CEOs and investors seem very cold about it given the limited cost synergies and the higher

execution risk," they say.

"Yet, we see some combinations making sense as they either offer in-market synergies or

material upside from capital arbitrage. None of this is included in current prices... and we

stress it would make sense to gain exposure to attractive stand-alone names also offering free

upside potential from M&A," they add in a note to clients.

Here are their possible M&A picks in the space:

* Bankia (Amsterdam: QU8.AS - news) and Monte dei Paschi (Milan: BMPS.MI - news) among government-owned banks

* Italian mid-cap banks on valuation

* Commerzbank (Xetra: CBK100 - news) as the only entry ticket into the German market or as the way to

create a large German player

(Danilo Masoni)

BOND YIELD REPRICING SHOULDN'T SINK STOCKS (1249 GMT)

The thing keeping most stock investors up at night right now, according to JP Morgan, is the

potential for bond yields to reprice and drive a re-rating of equity P/E.

But JPM analysts reckon equities will be able to absorb a potential repricing in bond yields

as the move up in yields is happening for the 'right reasons', i.e. strong economic growth.

And earnings momentum is more important to valuations staying strong - they see "at worst"

stable P/E multiples ahead.

So far from being a threat to stocks' outperformance, JP Morgan analysts see the potential

repricing in bond yields as a reason to stay constructive on stocks. "If yields move higher we

believe equities could in face benefit from, among other factors, a rotation in investor flows."

Regardless of the impact bond repricing may have on the P/E multiple, JPM recommends hedging

this risk by rotating out of Growth and into Value stocks - a trade which, if it plays out, will

favour the European market which is heavier in Value stocks.

"It is very difficult to see Eurozone underperform the US if the Growth-Value rotation does

materialize this year," says JPM.

(Helen Reid)

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FUEL PRICE SURGE SPELLS TURBULENCE FOR AIRLINES (1225 GMT)

While the New Year surge in oil prices, has buoyed global markets and energy stocks, it

isn't good news for everyone. Airlines are one sector set to suffer from higher cost pressures.

The cost of jet fuel has increased by more than 30 percent in 12 months, Bernstein analysts

write. They forecast fuel costs to rise by 2.4 billion euros this year, or 14 percent.

"Rising costs are increasingly worrying airline executives as the days of cheap fuel appear

to be over," Bernstein analysts say.

And they don't see any chance the airlines can pass on this cost to consumers through higher

fares.

"We see this translating into a very different picture for earnings at individual airlines

as differing hedging policies, profit margins and 'locked in' hedge prices for fuel and currency

create different levels of exposure."

Ryanair's fuel bill is the most sensitive to further changes in oil price, according

to Bernstein, but they reckon rising prices won't dent margins too much because the airline has

hedged its exposure at a low price so far.

Meanwhile Air France-KLM (Shanghai: 600686.SS - news) faces the largest increase in fuel prices in 2018 given

its relatively low hedging amount and after it enjoyed the lowest fuel price across the

analysts' coverage in 2017.

The French airline is already down 3.4 percent today after Davy Research analysts downgraded

the stock to neutral after a strong run.

(Helen Reid)

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A SOBERING VIEW ON FRANCE: STRUCTURAL UNEMPLOYMENT IS A DRAG (1138 GMT)

With (Other OTC: WWTH - news) growing optimism on the health of the Euro zone economy and its equity markets, it's

easy to forget that GDP growth in some countries such as France is somewhat below what one would

expect at this stage in the cycle, with forecasts of under 2 percent for 2017 and 2018.

According to Natixis (LSE: 0IHK.L - news) ' research, structural unemployment and the rise in numbers of young

people with no qualifications are a drag on the Gallic economy and will keep holding it back.

"When the structural unemployment rate is as high as in France currently (more than 9%),

recruitment difficulties will very prematurely stop growth," Patrick Artus, who heads research

at the French bank, says in a note.

"Periods of vigorous growth in France will necessarily be short, since recruitment

difficulties rapidly become severe," he argues, noting how the last ten years have hurt growth

potential:

(Julien Ponthus)

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NO NEED TO BE WORRIED ABOUT U.S. SHUTDOWN (1044 GMT)

That's the view from investment manager Rathbones on the U.S. government shutdown.

"I believe investors shouldn’t get too panicked. It's important to remember that financial

markets barely blinked at the last two shutdowns in 1995/96 and 2013," Ed Smith, head of asset

allocation research at Rathbones, said in a note.

The U.S. Senate is due to vote on a funding bill at 1700 GMT later today.

"Markets do not react because the economic impact is not that large," Smith added.

In Europe markets are still flat, suggesting the focus remains on M&A activity and upcoming

earnings reports.

(Kit Rees)

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BANKS: CAN YOU SEE Q4 THREATS IF YOU TAKE THE HELICOPTER VIEW? (1039 GMT)

As mentioned in the post below, the rotation to banks has been a very popular trade so far

in 2018, seen as a proxy to play the buoyant Euro zone economy and monetary normalisation.

But while this seems to make perfect sense when one takes a helicopter view on the sector,

in the short term, Q4 could be a tricky one, just as UBS seems to show this morning.

Looking at the French banking sector, Deutsche Bank (IOB: 0H7D.IL - news) notes three potential threats to Q4

results:

* Retail banking is still suffering from low interest rates and that's hurting net interest

margins.

* Low volatility is a drag for market activities, and that has been clearly exposed last

week in the results of U.S. investment banks.

* One-offs such as SocGen (Paris: FR0000130809 - news) 's recent tax fight with the French government, are not a thing of

the past.

JP Morgan has made a similar warning to its clients, advising them to be selective in

picking the right banking stock.

Interestingly, DB, like JP Morgan, also recommends favouring Natixis over Societe

Generale and notes its recent underperformance:

(Julien Ponthus)

*****

DOES UBS SHARE DROP SET A PATTERN FOR Q4 BANK RESULTS? (1010 GMT)

UBS kicked off European bank earnings with buybacks and higher dividends despite a U.S.

tax-related writedown, but the shares are down 1.6 percent.

Cyclical stocks like banks have been buoyed the most by the flood of money into equities

since the start of the year and UBS is no exception.

The Swiss bank’s earnings forecasts were in line with consensus, but that was still enough

to trigger some selling, one analyst tells us.

It seems the market was holding out hope for more ambitious targets from UBS given wealth

generation in the world is increasing, new money is growing and markets are strong.

(Tom Pfeiffer)

*****

VIEWS FROM THE STREET: RICHEMONT'S OFFER FOR YNAP (0950 GMT)

Surging up to the top of Italy's stock index is Yoox Net-a-Porter, up 24

percent to a record high after Richemont put in a bid for the remaining shares in YNAP,

at a 26 percent premium to Friday's closing price.

"The deal seems to reflect Richemont's aim to expand but at the same time control its

distribution channels," note Baader Helvea analysts. The deal is in a similar vein to

Richemont's recent move to increase its stake in duty free retail company Dufry (IOB: 0QK3.IL - news) .

"Given the lack of interesting acquisition targets up for sale in their core business of

hard luxury, Richemont has decided to put at work its big cash pile investing into distribution

channels," write Bernstein's Mario Ortelli and team.

Crucially, Bernstein analysts note, Richemont will continue to run YNAP as a separate

business in order to make sure third-party luxury brands continue to see it as a neutral

platform.

The already strong ties between the companies mean analysts don't see counter-bids as

likely.

We're just under the offer price of 38 euros now. Richemont shares meanwhile are down 1

percent as investors digest the bid. "Due to [YNAP's] relatively lower ROIC profile, some

investors may question the group's decision to go back to the lower return e-commerce business

rather than look to expand its existing brand portfolio," says Berenberg.

(Helen Reid)

*****

OPENING SNAPSHOT: STOXX 600 FLAT (0813 GMT)

European shares have opened little changed with the broader pan-regional STOXX 600 stuck at

Friday's level and sectoral indexes also showing small moves.

Germany's DAX is up a little as Chancellor Angela Merkel's conservatives prepare for formal

coalition talks after the centre-left SPD voted narrowly to go ahead following months of

political deadlock.

Below the surface, the price swings are much bigger.

Top 2 movers on the STOXX 600 are Sweden's Orphan Biovitrum, up 15 percent, which

is a partner of haemophilia drug maker Bioverativ that Sanofi (LSE: 0O59.L - news) agreed to buy, and bookie William

Hill, down 14 percent after the Sunday Times reported that Britain will limit gambling

terminal stakes to two pounds.

(Danilo Masoni)

*****

SANOFI'S MOVE BOOSTS BIOTECH M&A PIPELINE (0747 GMT)

Investors betting on a pick of M&A deals in the pharma sector will likely be emboldened by

news that French healthcare group Sanofi has agreed to buy U.S. peer Bioverativ in a

$11.6 billion transaction.

Check out our story here for more details on the cash deal which comes after

Sanofi had failed to land major takeovers in recent years. Separately, Biotest (IOB: 0N6Z.IL - news) said

late on Friday it sold its U.S. operations, allaying U.S. national security concerns and paving

the way for the German blood plasma products maker's sale to a Chinese investor.

Just in recent weeks there has been a flurry of M&A deals in the biotech space worth several

billion dollars. Here's a quick recap of dealmaking that has involved European companies: Novo

Nordisk/Ablynx; Roche/Ignyta; and Takeda/TiGenix

.

(Danilo Masoni)

*****

WHAT YOU NEED TO KNOW (0740 GMT)

It seems to be business as usual so far on European stocks markets with futures indicating

shares to rise slightly, expect in London with the FTSE losing a few points.

That could change however with a prolonged stalemate in Washington but in the meantime, in

Europe, prospects of talks between Merkel allies and the SPD should support sentiment.

Main newsmaker this morning is France's Sanofi, which confirmed a bid for U.S. peer

Bioverativ , another sign that M&A should indeed continue to spice things up.

Switching from spice to sugar, Italian airports and motorway operator Atlantia (LSE: 0I2R.L - news) is open to

sweeten its bid to Abertis (Amsterdam: IF6.AS - news) and other takeover preys, such as Ablynx (LSE: 0HNK.L - news) in Belgium or GKN (Frankfurt: 694194 - news) in the

UK, expect their would-be suitors to cough up more cash to woo investors.

A deal is not always needed though for shareholders to get extra cash: UBS proposed an

increased dividend and new share buyback programme despite a hefty write down from a tax

overhaul in the United States.

Other movers today could include troubled South African retailer Steinhoff which plans to

sell about 7.5 billion rand ($620 million) of shares in investment firm PSG Group (Other OTC: PSSGF - news) it scrambles

to plug a liquidity gap.

Possible impact also of the chief executive of Dixons Carphone (Frankfurt: CWB.F - news) leaving Britain's largest

electricals and mobile phone retailer to run the Boots chain.

Also, platinum miner Lonmin (LSE: LMI.L - news) reported a 65 percent drop in 2017 profit, citing higher costs

and subdued commodity prices but reiterated its 2018 targets

Please have a look below for a summary of our main headlines.

(Julien Ponthus)

*****

MAIN HEADLINES (0740 GMT)

Healthcare (Shanghai: 603313.SS - news) group Sanofi agrees to buy U.S. peer Bioverativ for $11.6 bln

Richemont offers 2.8 bln euros to buy Yoox Net-A-Porter

Steinhoff to place shares in PSG Group worth around $620 million

UBS ups investor returns as US tax overhaul socks bank with quarterly loss

Takeover target GKN raises forecast for electric driveline sales

Dixons Carphone reports 6 percent jump in underlying revenue

Dixons Carphone CEO James quits for job at Boots

TUI (LSE: 0NLA.L - news) sees record sales, earnings in 2018-paper

Atlantia opens door to sweetening Abertis bid

Takeaway.com says merger with Delivery Hero an option –paper

UK Q4 motor insurance premiums fall 1.3 pct-survey

Britain to limit gambling terminal stakes to two pounds-Sunday Times

LVMH hires Hedi Slimane for Celine brand

Engie (LSE: 0LD0.L - news) to keep separate CEO, board chair roles -finance minister

Deutsche Telekom expects steady dividend hikes –paper

Hearing on Vivendi (LSE: 0IIF.L - news) 's appeal against Italian antitrust ruling postponed

Schaeffler CEO says splitting company would be unwise -paper

UK Takeover Panel extends deadline for IWG (LSE: IWG.L - news) bidding

Sika CEO says share price rise could end takeover battle

UK's Computacenter (LSE: CCC.L - news) says to beat 2017 expectations, sees stable 2018

Lonmin reports 65 percent fall in 2017 profit on higher costs

(Tom Pfeiffer)

*****

EUROPE'S STOCK FUTURES SLIGHTLY UP (0705 GMT)

Futures have opened with slight gains overall but London's FTSE 100 is seen, as earlier

indications from spreadbetters showed, opening in negative territory.

(Julien Ponthus)

*****

WHAT TO EXPECT ON MARKETS DURING A U.S. SHUTDOWN? (0645 GMT)

While many see minimal impact on the economy from a short-term government shutdown, analysts

say a prolonged stalemate in Washington could dampen investors' confidence in U.S. assets.

Here's how Nordea sums up what's to be expected based on the previous shutdowns:

(Julien Ponthus)

*****

EUROPEAN MORNING CALL: SHARES SEEN OPENING SIDEWAYS (0625 GMT)

Good morning and welcome to Live Markets. European shares are set to open sideways on Monday

with the U.S. government still shut down but with hopes of an end to the political deadlock in

Germany with German Chancellor Angela Merkel's conservatives getting ready to start formal

coalition talks with the Social Democrats (SPD).

Earlier, U.S. stock futures, Asian equities and the dollar pulled back slightly as the U.S.

government is shut down amid a dispute between President Donald Trump and Democrats over

immigration.

London's FTSE 100 is expected to open 14 points lower, Germany's DAX 31 points higher and

France's CAC 40 up 5 points.

(Julien Ponthus)

*****

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