LIVE MARKETS-Investors "too pessimistic" on European banks
* European shares rebound
* May faces Brexit showdown in Parliament
* U.S. futures rise
June 20 - 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
INVESTORS "TOO PESSIMISTIC" ON EUROPEAN BANKS (1517 GMT)
Are banks a value trap or a buying opportunity? HSBC ponders this question, concluding that
it depends on your time frame.
Short-term they seem like a steal, with the sector heavily underweighted and valuations low
- but in the medium term this looks like a false economy. "Rather than offering weak gearing to
economic expansion, banks now offer weak gearing to maturing economic cycles," HSBC analysts
note. They do, however, fear investors have become "too pessimistic" on banks now.
Interestingly, they reckon it's becoming more important to pick stocks wisely in the sector.
Credit Agricole, BBVA, UBS, Unicredit and Barclays are their favourites.
Banks were, for the second month running, seen as the most undervalued sector by European
fund managers in BAML's survey last week, though the percentage saying they were undervalued
fell slightly.
(Helen Reid)
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FOCUS ON CASH FLOW COULD REINVIGORATE FOOD RETAILERS (1312 GMT)
One area of the market that's been quietly gaining on the sidelines of world trade fears in
Europe is the retail sector. It's the third best-performing in the region this year, and has
been pointed to by analysts and strategists recently as a potential protection against trade war
concerns, due to its highly domestic exposure and cheap valuation.
HSBC also argues a heightened focus on free cash flow among some big European food retailers
makes them more attractive.
Strategists at the bank say cashflow-focused investors previously only had Ahold Delhaize
on their radar among retailers, but can now likely consider Tesco and Morrisons
as well.
"Emerging from disasters in 2014 (price wars and accounting scandal), both companies have
become much more cash focused," they argue. "Morrisons is further ahead and, having impressively
deleveraged, is now in a position to return excess cash to shareholders, becoming a yield play
in the process."
Tesco meanwhile could present an opportunity as "perceptions are significantly lagging the
progress made by the management team", according to them.
Overall, analysts have delivered slight upgrades to their estimates for the retail sector's
earnings, after several weeks of downgrades while the stocks rose strongly. While there's still
a lot of disruption on the horizon for retailers, it seems investors are beginning to see a
silver lining.
(Helen Reid)
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MEANWHILE, ITALY BANKS GET NPL BOOST (1138 GMT)
As investors debate whether the unloved banking sector is a buying opportunity or a value
trap, Italian lenders are once again standing out. This time for a good reason.
Their index has risen as much as 2.6 percent this morning and the reason is
hopes the ECB could adopt a softer approach in pressing banks to reduce bad loans.
And - as we know - Italy is particularly sensitive to the issue given its banking system is
the biggest euro zone holder of soured debt, or the so-called non-performing loans (NPLs).
Yesterday afternoon, ECB supervisor Daniele Nouy (pictured below) said the central bank
could ditch a plan to impose new rules on all euro zone banks under its watch to reduce their
bad loans and could instead move towards a "case-by-case approach".
And today traders are sounding pretty upbeat.
"We expect a positive reaction from the banking sector to this newsflow, as the SSM (Single
Supervisory Mechanism) approach suggests the supervisor does not want to take an overly hard
line on NPE stocks for individual banks," a Milan based trader says.
He adds that the main beneficiaries would be Banco BPM and BPER but also
UBI, as well as heavyweights Intesa Sanpaolo and UniCredit.
(Danilo Masoni)
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OPTIONS INDICATE INVESTORS UNDER-PRICING OPEC VOLATILITY (1114 GMT)
In the heady mix of risk events investors have had to keep tabs on in June, it seems like
OPEC has slipped under the radar - at least if option prices on crude and energy equities are
anything to go by.
"Volatility expectations for this week's OPEC meeting are unusually low," note GS
strategists in an analysis of WTI, stock and ETF option prices.
The average U.S. energy stock with liquid options is implying a move of around 2.6 percent
this week, compared to a 2.8 percent average move over the past three years on OPEC day, they
find.
That's despite some concerning noises ahead of the meeting including Iran's oil minister
saying he doesn't expect OPEC to reach a deal on oil output.
Energy equities are still lagging oil and energy credit, GS also notes, though the gap has
narrowed recently (see below).
"We believe the OPEC meeting is a reason for investors to re-focus on the gap, driving
unusually high volatility," they argue.
Despite the potential for the OPEC meeting to send crude prices spiralling, Goldman
recommends buying calls on energy equities, saying these options are attractively priced.
(Helen Reid)
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BREXIT: TWO YEARS AFTER, THE UK IS ALREADY MISSING OUT (1045 GMT)
It didn't take long: two years after the June 23 vote and as Theresa May continues to
strugge to tame Parliament over her Brexit strategy, the UK is already missing out, the chief
economist of France's Ostrum Asset Management argues.
"The most striking impact of Brexit has been the lower growth momentum seen in the UK since
the referendum," Philippe Waechter writes.
To assess by how much, he calculated a GDP growth trend for the Euro zone and the UK based
on the data between 2013 to Q2 2016 and extrapolated it to Q1 2018. He then compared the results
with the actual GDP data.
"In the first quarter of 2018, French GDP is 1.8% above its trend, Germany is +1% and the
Euro Area +1.4% while the UK is 2% below it," he finds, meaning that "the UK has not taken
advantage of the strong growth improvement of the Euro Area in 2017".
For Waechter, things don't look rosy looking forward as "the uncertainty (over Brexit terms)
will remain, implying less capital inflows, people outflows leading to lower human capital and
lower capital expenditures". In these circumstances, monetary normalisation will also probably
have to wait, he says.
You can see on his chart below how the British GDP (purple) has deviated from its prior
robust trend:
And here's our latest on today's action:
Britain's May faces new battle in parliament over Brexit
(Julien Ponthus)
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HOW MUCH OF A TRADE WAR IS THE MARKET PRICING IN? (1012 GMT)
As trade war fears turn from anxiety into reality, the market has turned down significantly
and although it's recovering today, it's worth considering how much more there may be left for
traders and investors to price in.
"The broader sell-off in equities in the last few days is beginning to move the market away
from pricing in a narrow, sector specific impact, to a more significant impact," say UBS
strategists.
The announcement of potentially $200 billion of extra items to be targeted with tariffs has
hit Asian equities particularly hard, with China's Shenzhen suffering its worst fall in 4 1/2
months yesterday.
The danger investors sense, and the reason why the selloff spread to the broad market, is
that tariffs on one industry could snowball onto others connected in the supply chain.
"If our base case plays out and calm is restored, current sentiment is likely pricing in too
harsh an outcome," UBS strategists say, adding, however that "a more negative outcome is far
from being priced in". Cyclicals are the stocks most in the firing line in Asia.
As you can see below, European cyclicals' shares have also been dented by the escalation in
trade tariffs, their performance declining relative to defensives:
(Helen Reid)
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OPENING SNAPSHOT: STOXX SET TO BREAK LOSING STREAK (0715 GMT)
European shares have opened in positive territory as immediate worries over a possible trade
war between the U.S. and China ease, putting the STOXX 600 up 0.6 percent, on course to
snap a three-day losing streak.
The bounce is broad based with all sectors in the black, while top movers on the STOXX
include Colruyt, up 9.5 percent following its full-year results, while Genmab gained
after an upgrade from JP Morgan and VAT group fell following a price target cut at Credit
Suisse.
Here's your snapshot with Europe's main country benchmarks.
(Danilo Masoni)
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MORNING HEADLINE ROUNDUP: DEALMAKING IN FOCUS (0643 GMT)
European shares are expected to open higher but not enough to erase yesterday losses, let
alone the pain suffered since last Friday when the trade dispute between the U.S. and China
intensified. The reassuring news of a Franco-German deal on the future of the Euro zone is
clearly not enough to compensate.
Theresa May’s Brexit showdown in Parliament could also animate the session in the UK with a
possible impact on the pound.
Here are the main headlines that caught our attention this morning and looks there is some
dealmaking activity that could liven up the session:
DSM to target acquisitions for nutritional division
French utility Engie to get 2.6 bln euros from Glow Energy sale
VW, Ford confirm talks on possible commercial vehicle tie-up
Dialog Semiconductor to proceed with due diligence to take over Synaptics
Ferragamo family holding to sell 3.5 percent in Italian luxury group
BHP to sell Chilean copper mine to private equity fund
Basler Kantonalbank Intends To Increase Stake In Bank Cler To 100 Pct
UK builder Berkeley beats profit expectations
Legal & General targets 8-10 percent profit growth with new strategy
U.S. Marines award amphibious vehicle deal to BAE
Maersk family foundation to pump money into hot water heating
Maersk poaches new finance chief from Assa Abloy
Norwegian salmon export price up to NOK 65.00 last week -SSB
Richemont announces delisting of ordinary shares of Yoox Net-A-Porter
Swiss gearmaker Klingelnberg prices IPO at 53 Sfr per share
Caterpillar, Volvo, Komatsu linked to mining abuses in Myanmar - report
(Danilo Masoni)
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EUROPEAN FUTURES RISE AT THE OPEN (0615 GMT)
European futures have opened up but not enough to erase yesterday's losses.
Concerns that the trade dispute between China and the U.S. could yet further escalate is
keeping investors on their toes.
(Julien Ponthus)
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MISERY LOVES COMPANY: DOW JOINS EUROPEAN INDEXES WITH YTD LOSS (0606 GMT)
The pan-European STOXX is no longer standing alone in negative territory for 2018: it has
been joined by the Dow Jones, which is now posting a year-to-date loss of 0.08 percent.
Wall Street closed lower on Tuesday as the escalation in the trade dispute between the
United States and China rattled markets.
One noticeable fact is that tech shares on both sides of the Atlantic remain clear winners
with the Nasdaq and the European tech index comfortably up over 10 percent.
(Julien Ponthus)
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MORNING CALL: POSITIVE OPEN IN SIGHT (0528 GMT)
European shares are expected to open slightly higher this morning. The rise foreseen by
spreadbetters could nevertheless fall short of the kind of rebound one could expect after three
sessions in the red.
In China, the Shanghai Composite Index is back in positive territory, up 0.2 percent in
choppy trade, a day after falling 3.8 percent to a two-year low. MSCI's broadest index of
Asia-Pacific shares outside Japan rose more strongly, over 1 percent.
Financial spreadbetters expect London's FTSE to open 15 points higher, Frankfurt's DAX 5
points up and Paris' CAC to rise 13 points.
(Julien Ponthus)
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