LIVE MARKETS- Italian banks: not a great time to be offloading bad loans

* European stocks hit 8-day low

* Trump cancels summit with North Korea

* Italy still under pressure

* Deutsche Bank (IOB: 0H7D.IL - news) cuts 7.000 jobs, shares down 6 pct

* Top movers: warning sinks baker Azytza

LONDON, May 24 (Reuters) - Welcome to the home for real-time coverage of European equity

markets brought to you by Reuters stocks reporters and anchored today by Kit Rees. Reach her on

Messenger to share your thoughts on market moves: kit.rees.thomsonreuters.com@reuters.net

ITALIAN BANKS: NOT A GREAT TIME TO BE OFFLOADING BAD LOANS (1504 GMT)

Bad timing: just as Italian banks had successfully been offloading non-performing loans and

getting rewarded for that on the stock market, the new stress on Italian sovereign debt means

they might have a harder time pursuing that strategy.

"Our analysis of Italian banks’ business plans shows that many, especially the mid-sized

players, are planning to reduce their NPEs through asset sales. Foreign investors may be less

keen to take on Italian risk given the policy uncertainty", Marco Troiano, executive director

for financial institutions at the rating agency Scope, wrote in a research note.

Troiano also makes a broader point: worries about Italy's incoming anti-establishment

government and its planned spending and borrowing spree will have an impact on lenders's credit

outlook.

"The point of my note is that the risk is there, especially for mid tier players", Troiano

told us.

The fall of Italy's sovereign debt is hitting the value of portfolios held by domestic banks

whose exposure to the asset class is above their core capital buffers.

More than that, higher borrowing costs for the government means higher borrowing costs for

the banks, he said.

"Funding costs for Italian banks are still linked with yields on government debt. The

sovereign spread has already widened, and this may impact funding conditions,” Troiano said.

This comes as new "bail in" debt Italian banks must issue could lift their funding costs and

further dent profits.

Scope has an A rating for Intesa and UniCredit (EUREX: DE000A163206.EX - news) with a "stable outlook".

(Julien Ponthus)

*****

IS THE EUROPEAN CATCH-UP TRADE A RED HERRING? (1454 GMT)

The sell-off in stocks has accelerated since Wall Street opened also lower, with the North

Korea news hitting markets globally.

With (Other OTC: WWTH - news) the earnings season showing a stark divide in performance between the U.S. and Europe,

it bears thinking about those investors still betting on Europe. One of their arguments has been

that Europe, being at an earlier stage of the business cycle than the U.S., has a catch-up

potential which gives its stocks more upside than counterparts across the pond.

But one investor told us yesterday that this is a red herring.

"If they were two entirely separate economies and the cycles weren't connected, we would

agree that Europe has more potential for upside. The problem is they're not separate economies,"

said Donough Kilmurray, EMEA head of the investment strategy group for Goldman Sachs Private

Wealth Management.

"Europe can't exist in a vacuum, so even though we think it’s further behind in the cycle

and therefore has more potential to expand in this cycle, if the US slows down Europe will slow

down too," he added, saying Europe is actually more dependent on global growth than the U.S.,

with a greater proportion of sales derived from outside the region.

If the U.S. cycle had much further to go, they would be more optimistic on Europe's

potential to outperform, but because they are linked this puts a limit on how long the European

cycle can keep going.

Below you can see European stocks' performance relative to the U.S., in local currency

terms, has fallen to an all-time low:

(Helen Reid)

*****

AFTERNOON SNAPSHOT: NEGATIVE NORTH KOREA HEADLINES WEIGH (1421 GMT)

At less than two hours before the close in Europe global markets have taken a negative turn.

The catalyst? News hitting the wires that Trump has called off a planned summit with North

Korean leader Kim Jong Un.

You can read more here in our wrapup from Washington and below you can see the

sudden drop those Korean headlines caused in the STOXX 600, sending the pan-European

benchmark index down 0.5 percent at an eight-day low.

Earlier on in Italy the leader of the far-right League - a key partner in Italy's nascent

coalition government - insisted that eurosceptic economist Paolo Savona should be named economy

minister. That also weighed, as you can see.

In Europe, bank stocks were the main victims of the North Korea summit news, tumbling down

1.6 percent, while South Korea's won also fell 0.6 percent.

(Danilo Masoni)

*****

UK DOMESTICS: IS THE ONLY WAY UP? (1307 GMT)

After nearly two years of underperformance, analysts and investors are warming once again to

the UK market, and UBS (LSE: 0QNR.L - news) in particular argues a recovery could be in store for widely-shunned

domestic stocks.

Their P/E valuation relative to international stocks is at 0.85x - a decade low, analysts at

the Swiss bank find, and historically domestic stocks have risen an average of 14 percent in the

12 months following their hitting such a level.

Among domestically-focused, buy-rated stocks they say investors should hone in on Travis

Perkins, Derwent, Barratt, Capital & Counties and Lloyds (it's interesting how dominant

housebuilders/real estate stocks are in these picks).

Among international stocks, UBS analysts are continuing to look for a Brexit discount and

those that have been undeservedly hit by negative sentiment despite being robust businesses. In

this vein they pick Smith & Nephew (Frankfurt: 502816 - news) , Rolls Royce (LSE: RR.L - news) and WPP (Frankfurt: A1J2BZ - news) .

Overall UK stocks have underperformed Europe and the U.S. by 7 percent and 17 percent

respectively, in dollar terms, since the Brexit referendum - one of the worst performing global

markets. If UBS and a slew of other banks are correct, we could be nearing the end of this lag,

though.

Below you can see the UK's performance relative to Europe in local currency and euro terms

since the referendum - note the slight uptick in the past couple months.

(Helen Reid)

*****

"EVERY FED TIGHTENING CYCLE CREATES A MEANINGFUL CRISIS SOMEWHERE"(1222 GMT)

There was a clear sense of relief yesterday after minutes from the Federal Reserve's latest

meeting suggested higher inflation may not result in faster interest rate hikes.

Looking at the bigger picture however, even if its pace is still unknown, the U.S. interest

rate tightening cycle is on-going, and it usually does not end well, at least not for all.

"A starting point should be that every Fed tightening cycle creates a meaningful crisis

somewhere, often external but usually with some domestic (US) fall out," writes Alan Ruskin, a

macro strategist at Deutsche Bank.

Ruskin compares tightening cycles to the Fed shaking a tree: an "overripe fruit" is likely

to fall, he writes, even if one doesn't know yet what kind of fruit will crash down to the

ground.

"Going back in history, the 2004-6 Fed tightening looked benign but the U.S. housing

collapse set off contagion and a near collapse of the global financial system dwarfing all

post-war crises," he writes.

Ruskin says the late 1990s tightening can be associated with "the Asia crisis, LTCM and

Russia collapse, and when tightening resumed, the pop of the equity bubble." There are other

examples earlier in the 80s and 90s such as the Mexican peso crisis or the Savings (Shenzhen: 300056.SZ - news) and loan

crisis.

So, how does it look now?

"At the moment there are a host of idiosyncratic stories in EM that look to be largely

tangential victims," he says, adding however that the renewed strength in the dollar could

encourage the Fed to slow down.

Here are federal funds target rates since 1970:

(Julien Ponthus)

*****

ITALY, NOW WHAT? WILL IT LAST? WILL THEY DELIVER? (1050 GMT)

Italian markets are seeing some respite today after President Sergio Mattarella gave

political novice Giuseppe Conte a mandate to form a government, but the political situation in

Rome is far from settled and further bouts of selling pressure cannot be ruled out.

Here are a few takes on what to expect next now that the little-known Florence law professor

has been tasked to lead the first Italian government made up of anti-establishment parties.

* Matteo Ramenghi, CIO for Italy, UBS Global Wealth Management: "If Conte wins a confidence

vote

in parliament, M5S-Lega would have a thin majority in the senate; and given the two parties have

very different backgrounds, the government's lifespan would be in question."

* Adrian Hilton, Head of Global Rates and Currency at Columbia Threadneedle Investments:

"Developments in Italy over the past few weeks clearly present a risk for Italian assets and

also possibly for Europe. But the full extent of the damage will become clear only when the

tenuous contract between left-wing and right-wing coalition allies is converted into policy."

* Fabio Fois, European Economist at Barclays (LSE: BARC.L - news) : "We remain of the view it will be difficult

for a

5SM-L led government to approve in full their economic programme.... constraints to the

implementation of the economic programme pledged by 5SM and L could affect the duration and

stability of the legislature, unless 5SM and L do not soften considerably their stance."

And here's what Conte (pictured) told reporters late yesterday after holding two hours of

talks with Mattarella: "I will be the defense lawyer for the Italian people."

(Danilo Masoni)

*****

A CRYSTAL CLEAR CONSENSUS AGAINST EUROPEAN BANKS (1045 GMT)

"Banks remain the biggest underweight of mutual funds and an increasing number of active

managers have reduced further their exposure in this sector", Goldman Sachs (NYSE: GS-PB - news) found after a review

of 780 funds which invest in European Equities.

"Generally, we find that, despite short-term price movements, active managers remain

underweight sectors which have often been considered ‘value traps’ since the Global Financial

Crisis (GFC): Banks, Autos, Utilities and Oil & Gas."

It's true that banks have persistently failed to deliver for those who believed their were

the best way to surf the now fading Euroboom or the ECB's ever-elusive path towards monetary

normalisation.

The woes of the sector are also still in the open with Deutsche Bank cutting more than 7,000

jobs to reduce costs and restore profitability.

Here's Goldman Sachs chart which shows how active managers are clearly staying away from the

sector:

Talking about value traps, here's Euro zone banks versus the broader Euro Stoxx since 2009:

(Julien Ponthus)

*****

OPENING SNAPSHOT: AUTOS SKID, ARYZTA SINKS (0720 GMT)

It's a bad start to the day for autos stocks, with BMW (EUREX: BMWE.EX - news) , Daimler (IOB: 0NXX.IL - news) , and Volkswagen (IOB: 0P6N.IL - news) driving the

DAX down, falling 2 to 2.3 percent after the U.S. launched a probe into autos tariffs and

Beijing replied that it would defend its interests. Renault (LSE: 0NQF.L - news) and Peugeot (Other OTC: PUGOF - news) are also falling around

0.4 percent, and Europe's autos sector is down 1.2 percent.

Not looking good for Swiss specialty baking company Aryzta (IOB: 0MFY.IL - news) either. Its shares are

sinking 25 percent to a new record low, bottom of the STOXX after yet another profit warning.

On the positive side Electrocomponents (LSE: ECM.L - news) is jumping 7.6 percent after it increased its

full-year dividend and announced an acquisition. Tate & Lyle (LSE: TATE.L - news) is another gainer after

results, up 4.3 percent.

And Paddy Power Betfair is feeling the glow after it merged its U.S. business with

Fanduel. The gambling company's shares are up 2.6 percent.

(Helen Reid)

*****

WHAT TO WATCH AHEAD OF THE EUROPEAN OPEN (0649 GMT)

Stocks futures are pointing to another day in negative territory for European equities as

uncertainty over U.S.-China trade talks and concerns over the new coalition’s spending plans in

Italy overshadow the Federal Reserve’s more gradual approach to rate hikes, as per the FOMC

minutes.

Autos stocks are indicated to fall today after the U.S. launched a national security

investigation into car and truck imports – the worry is that this could lead to new U.S. tariffs

and potential pain for German automakers in particular as the United States is its

second-biggest export market after China.

In terms of a U.S.-China trade deal, Trump has said that it would need “a different

structure”, adding more uncertainty.

Among corporate news, Deutsche Bank is shaking things up with plans to cut thousands of

staff to reduce costs and boost profitability. Equities sales and trading is set to see a 25

percent reduction in headcount. All eyes will now be on today’s AGM. DB’s shares are down more

than 31 percent so far this year, so this could be welcome news for frustrated investors.

Stock movers/company news:

Deutsche Bank to cut thousands of staff in investment bank revamp [nL5N1SV0RG

Sales at Britain's Kingfisher (Frankfurt: 812861 - news) mauled by Beast from the East

Paddy Power Betfair (Other OTC: PDYPF - news) merging U.S business with FanDuel

Deutsche Telekom (IOB: 0MPH.IL - news) to tie dividends to growing bottom-line profits

Westfield (Frankfurt: A113BB - news) shareholders approve $16 bln Unibail-Rodamco (Brussels: NL0000288652.BR - news) deal

German carmakers' shares seen down on US auto tariffs probe

Elliott eyes operational improvements after taking Thyssen stake

Novartis (IOB: 0QLR.IL - news) receives EU approval for biosimilar Zessly

British lender Paragon (IOB: 0NFG.IL - news) 's H1 profit up 4.7 pct

Go-Ahead upgrades profit after greater efficiency boosts rail

Aryzta further cuts full-year EBITDA guidance

Payments firm Adyen to list in Amsterdam in June

Vontobel to buy private bank from Raiffeisen for $700 mln

EUROPEAN STOCKS FUTURES DIP SLIGHTLY (0613 GMT)

European stocks futures have opened broadly lower this morning as traders keep an eye on

political developments in Italy and trade talks between the U.S. and China.

Here's your futures snapshot:

(Kit Rees)

*****

WHAT'S ON THE EUROPEAN EARNINGS AGENDA (0555 GMT)

It's pretty light on the corporate earnings side today but we do have a few full-year

updates from the likes of Tate & Lyle, United Utilities (LSE: UU.L - news) and a trading update from Inchcape (Other OTC: IHCPF - news) in

the UK.

Here's a list of European companies reporting results today:

VIEV.VI Q1 2018 Flughafen Wien AG Earnings Release

UNIQ.VI Q1 2018 UNIQA Insurance Group AG Earnings Release

BAVA.CO Q1 2018 Bavarian Nordic A/S Earnings Release

A8AG.DE Q1 2018 JDC Group AG Earnings Release

NETG.TE Q1 2018 Net Gaming Europe AB Earnings Release

PENO.OL Q1 2018 Panoro Energy ASA Earnings Release

KAMUX.HE Q1 2018 Kamux Oyj Earnings Release

TATE.L Full Year 2018 Tate & Lyle PLC Earnings Release

UU.L Full Year 2018 United Utilities Group PLC Earnings Release

ECM.L Full Year 2018 Electrocomponents PLC Earnings Release

INCH.L Q1 2018 Inchcape PLC Trading Statement Release

CLDN.L Full Year 2017 Caledonia Investments PLC Earnings Release

GOG.L Q3 2017 Go-Ahead Group PLC Trading Statement Release

RWI.L Preliminary Q4 2018 Renewi PLC Earnings Release

(Kit Rees)

*****

MORNING CALL: EUROPEAN STOCKS SET FOR STEADY OPEN (0533 GMT)

Good morning. Following on from yesterday's negative session, European stocks are set to

start today's trading flat to slightly lower, according to financial spreadbetters, as markets

continue to mull the implications of the proposed spending spree from Italy's anti-establishment

coalition.

Britain's FTSE 100 is seen opening 5 points lower, Germany's DAX is expected to lose 4

points and France's CAC is seen opening flat, according to financial spreadbetters.

However, there may be some support for equities from the U.S. Federal Reserve's minutes,

which indicated a gradual approach to rate hikes, which boosted Wall Street slightly. China and

Hong Kong stocks were a touch lower as uncertainty over U.S.-China trade talks sparked caution.

(Kit Rees)

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