LIVE MARKETS-Hunt for yield drives investors into real estate stocks

* European shares up 0.1% after hitting new peaks * Euro zone STOXX index briefly reaches 10-month high * Italy outperforms as Brussels drops disciplinary action over budget * M&A action lifts Metso and Osram * Wall Street closed today for independence day July 4 - Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Thyagaraju Adinarayan. Reach him on Messenger to share your thoughts on market moves: rm://thyagaraju.adinarayan.thomsonreuters.com@reuters.net HUNT FOR YIELD DRIVES INVESTORS INTO REAL ESTATE STOCKS (1436 GMT) Christine Lagarde's accession to the ECB throne, and the impact it's having on bond markets, changes the narrative for many parts of the stock market too. Real estate is one of them. Europe's real estate sector was the worst-performing in the second quarter, as you can see below. But it's had a rip-roaring rally since June 27 - up 5% in just five sessions (including today). In large part that's down to expectations of monetary policy easing and low rates for longer, triggering a new hunt for yield - something which property has, in buckets. "An increasingly large portion of government bonds with negative yield should lead to further institutional capital flows into real estate, where yields remain higher even if this comes with a lower degree of certainty to receive par value back at the end of any holding period," write Morgan Stanley analysts. They note, however, that retail worries, a rent freeze in Berlin (which dented German real estate stocks including Vonovia recently), and continued Brexit uncertainty have shrunk the pool of opportunities. "For several years we have been most compelled by stocks exposed to structural growth (logistics and German residential) and the cyclical recovery opportunity in Spain, while we have been hesitant to recommend retail REITs and the UK," the analysts continue, also noting that "low growth does not bode well for demand". In any case the sector's Q2 fall has made it look "oversold", they reckon, in a context of increasing scarcity of yield. A flurry of deals in the UK property sector yesterday - with Telford Homes being offered an 11% premium - also speaks to ongoing investor appetite for property. (Helen Reid) ***** EUROPE INC SET TO OUTGROW AMERICA CORP (1318 GMT) It seems that the formidable boost from Trump's tax cuts are fading now with earnings growth at European companies set to surpass that of U.S. firms in the June-quarter for the first time since 2017. Clearly Wall Street will have to beat much tougher comparatives but it remains a fact that initial estimates point to European companies having posted a decent growth in the second quarter vs. flat performance seen for S&P 500 companies. Earnings growth of STOXX 600 companies is seen at 1.8 percent in Q2, according to the latest estimates from Refinitiv I/B/E/S. Europe Inc will continue to beat America Corp for three more quarters. "The EPS growth differential between US and Europe is expected to narrow from high teens in 2018 to low single digits in 2019," said Barclays strategists in a note this week. Profit revisions for both regions are still trending lower and things might change, but in the last six weeks U.S. earnings have clearly suffered heavier downgrades. European earnings are still expected to grow more than U.S. ones in full-year 2019, as you can see below. (Danilo Masoni) ***** SMOOTH SAILING FOR ECB QE2? (1048 GMT) Christine Lagarde's nomination as ECB President drove a significant rally in European stocks and bonds yesterday, but investors are still divided over whether the policies she's expected to push - monetary policy stimulus and perhaps even a new round of quantitative easing - will be a boon for the euro zone. The "QE2" is ready to set sail, according to BNP Paribas - not the famous cruise ship but the second round of asset purchases. (My personal favourite Lagarde ECB pun doing the rounds yesterday was "Christine and the QEens"...) "By the end of 2019, we expect the ECB to have reintroduced an easing bias into its forward guidance, delivered two 10 basis point cuts to the deposit rate, introduced tiering and announced a resumption of quantitative easing," write BNP Paribas strategists. So what does all this mean for equities? They reckon record-low global bond yields and low cost of borrowing will drive more private equity funds to raise capital and buy out listed companies, thus accelerating the ongoing trend of "de-equitisation" in equity markets. There's certainly enough dry powder in private equity (see our earlier blog). Interestingly, BNP Paribas strategists think this could deliver the boost Value has been waiting for "following recent underperformance". They recommend their Value Europe ETF - but looking at how much investors have been burned in Value over the past decade, it's hard to see many piling in just yet. Fidelity, on the other hand, say the market's got ahead of itself in expecting a huge impact from a new asset purchase programme. Ario Emami Nejad, fixed income portfolio manager, says QE 2.0 will likely be smaller and thus may not be a big market mover. Below you can see the ECB's asset purchase programme over the past five years: (Helen Reid) ***** ITALY TOO JOINS ONE-YEAR-HIGH CLUB (0942 GMT) Italy's FTSE MIB today hit its highest since July 2018, joining Europe's one-year-high club with a little delay. France's CAC 40 hit its highest since May 2018 and Germany's DAX reached its August 2018 high on Monday, while Spain's IBEX and Portugal's PSI still have some way to go. Italy's late catch-up boils down to strength in its battered banks, which are set for a two-day gain of around 8% on relief over budget and ECB appointment that's giving a nice boost to the country's government bonds. Here's a nice summary of the factors driving Italy's outperformance, courtesy of researchers at UniCredit: 1. With the nomination of Lagarde, investors are no longer pricing in the risk of a known hawk becoming the next ECB president 2. The government just recently lowered its deficit target for 2019 from 2.4% of GDP to 2.0% of GDP on better-than-expected revenues 3. Yesterday, the European Commission decided not to pursue the EDP further 4. With more than 60% of the EGB universe hovering in negative yield territory, investors are under pressure to invest in positive-yielding BTPs 5. Investors that had been short recently are increasingly being forced to cover their positions, chasing the market further Still, Italy troubles may resurface later. "The big challenge will be the formulation of the 2020 budget in an environment of continuing weak fundamentals. We expect the budget discussion to begin in earnest after the summer," adds UniCredit. (Danilo Masoni) ***** TRILLIONS OF DOLLARS IN PE DRY POWDER COULD SPUR M&A WAVE (0916 GMT) The recent acquisitions of Osram, Madame Tussauds owner Merlin, car auction group BCA Marketplace and a few others have one thing in common: private equity! There is a record $2.4 trillion of dry powder in private capital, according to Preqin, which provides financial data on the alternative assets market. (see chart below from Preqin) "That's huge, that's massive," Edmund Shing, global head of equity derivatives strategy at BNP Paribas, says about the data. He expects a boom in M&A, especially leveraged buyouts. "We haven't seen an M&A boom at all yet, and I suspect that we could be on the verge of a wave." Shing believes there would be significant interest in Europe, "maybe more in the mid-cap segment" which is more under-valued. (Thyagaraju Adinarayan) ***** FRESH JUNE 2018 PEAK AS TRADE-SENSITIVE STOCKS, ITALY RALLY (0726 GMT) European stocks hit their highest since mid-June last year buoyed by hopes of rate cuts and as U.S. and China are set to resume trade talks next week while optimism in Italy is injecting extra fuel to this week's stellar rally. The pan-European STOXX 600 is now up 0.1% driven by solid gains in trade-sensitive auto stocks and Italian banks. Export-heavy German blue-chips is up 0.3%. M&A is driving gains in single stocks with Metso jumping 6% after its minerals unit is set to merge with rival Outotec and Osram is rising another 4% after confirming a takeover bid by Bain and Carlyle. French car parts maker Valeo is up 2% after winning a 500 million euro ($564 million) order for its 'Lidar' car sensor products. Italian blue-chips continue to stand out making handy gains (+0.5%) again today after EU Commission's decision yesterday to drop its threat of disciplinary action against Rome. Italian banks have jumped 2.4% on top of yesterday's 5% rise and are set for their best 2-day gain since April 2017. UK housebuilders are under pressure as Britain's second-largest homebuilder Persimmon slides 2% after reporting a slowdown in order intake. British Airways-owner IAG and Coca-Cola HBC are top fallers as they go ex-dividend. (Thyagaraju Adinarayan) ***** MORE GAINS? DEUTSCHE BANK, UK HOUSEBUILDERS, VALEO IN FOCUS (0633 GMT) European stock futures indicate a slightly higher open for all major indices as U.S. and China are set to resume trade talks next week after the euro-zone blue chip index and the STOXX 600 closed at one-year highs yesterday. On the corporate news front, German lighting group Osram is set for more big moves after confirming a takeover approach from private equity firms Bain and Carlyle and confirming its supervisory board would meet soon to review the 3.4 billion euros ($3.8 billion) offer. Shares are up 6.6% in early Frankfurt trade. Deutsche Bank's restructuring continues to make news with the German lender preparing to unveil a multi-billion euro overhaul within days that would see the axe fall heaviest on investment bankers, according to sources. Separately, in less comforting news, German prosecutors are escalating a money laundering inquiry involving the bank. Some good news for the troubled autos sector as French car parts maker Valeo has won 500 million euros ($564 million) worth of orders for its 'Lidar' car sensor products. But airlines continue to struggle: Norwegian Air's June traffic figures have come in below analysts' estimates as the airline continues to be hit by the grounding of 18 Boeing 737 Max planes. UK housebuilders are back in focus after Britain's second-largest housebuilder Persimmon reported lower first-half revenue due to slowdown in order intake. More gains in Italy? Italian blue-chip index touched a two-month peak yesterday, helped by a strong rally in banks, after the European Commission dropped its threat of disciplinary action against the country. Major company news headlines: Valeo announces 500 mln euros of orders for its 'Lidar' sensors Deutsche Bank to axe investment bankers in up to $5.6 bln revamp German prosecutors intensify Deutsche Bank client investigation - source Osram to consider $3.8 bln takeover bid from Bain, Carlyle Sweden's EQT targets Asia Pacific as IPO decision looms Asda boss sees possible stock market listing in 2-3 years Energean to buy Edison's oil and natural gas unit for $750 million Housebuilder Persimmon reports lower revenue amid business revamp (Thyagaraju Adinarayan) ***** A SIX-DAY WINNING STREAK? (0529 GMT) After five straight days of gains, European stocks are seen opening flat as the excitement around interest rate cuts and optimism around U.S.-China is likely to fade. Financial spreadbetters IG expect London's FTSE to open flat at 7,609, Frankfurt's DAX to open 14 points higher at 12,630, and Paris' CAC to open 1 point higher at 5,620. Euro-zone stocks hit the highest in more than year yesterday on hopes ECB chief nominee Christine Lagarde will maintain the central bank's dovish stance. On the U.S.-China trade war front, Trump administration officials said top representatives from both the countries are arranging to resume talks next week. Wall Street, which is closed for Independence Day today, ended at record closing highs on Wednesday. Europe's winning streak: (Thyagaraju Adinarayan) ***** (Reporting by Danilo Masoni, Helen Reid, Josephine Mason and Thyagaraju Adinarayan)