LIVE MARKETS-"Least bad" earnings expectations point to hope for Europe

* STOXX 600 up 0.4%, DAX outperforms up 0.5% * Deutsche Bank rallies after passing U.S. banking stress test * Merlin Entertainment jumps 14% after Blackstone swoop * STOXX 600 had strong June, on track for 3.8% monthly gain June 28 - Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Josephine Mason. Reach her on Messenger to share your thoughts on market moves: josephine.mason.thomsonreuters.com@reuters.net "LEAST BAD" EARNINGS EXPECTATIONS POINT TO HOPE FOR EUROPE (1302 GMT) A result of a long period of downgrades and depressed sentiment for Europe's economy and companies, with the rest of the world now finally catching up? Or a sign European stocks could perform better in the upcoming earnings season? Regardless of the driver, Europe's earnings revisions are holding up better than global peers and Morgan Stanley strategists say there's reason to be hopeful. The 12-months earnings revisions ratio - a measure of earnings expectations - for Europe and the euro zone is still negative, but it's the "least bad" of all major global regions, they note (see Morgan Stanley's chart below). "Given the weak macro backdrop we see little reason why European earnings revisions should improve anytime soon; however relative outperformance could persist as the euro is lower year-to-date and economic disappointment is currently greater elsewhere," writes Graham Secker and team. Indeed, the gap between the U.S. and euro zone economic surprise index (courtesy of Citi) is widening fast as the euro-zone measure nudged above 0 this week for the first time since September last year, while U.S. surprises keep falling (see below). (Helen Reid) ***** CHINA-U.S. TRUCE A DOUBLE-EDGED SWORD FOR EUROPE (1138 GMT) The mood has brightened across Europe this morning, with investors embarking on a touch of window dressing ahead of the month- and quarter-end. We might see some volatility later as we head into the close as investors jockey to position themselves ahead of the weekend talks between Xi and Trump. As Craig Earlam, senior market analyst UK & EMEA at Onanda, puts it: "I guess by market close we'll know just how optimistic investors are because the rest of the weekend may feel like a long time if talks go badly." As many blogs, experts, investors and analysts have said before, it's anyone's guess what the outcome may be. But a lot of commentary has focused on how a possible truce or ceasefire between the world's two economies would likely inject extra fuel into the stellar stock market rally we've seen so far this year. Any kind of rapprochement may be a double-edged sword for European investors though, cautions Edward Park, deputy chief investment officer at Brooks Macdonald in London. "Even if there is a ceasefire, (Trump) won't just stop with China. He's setting up to extend the trade war to Europe," he says. The car industry has spent more than a year fighting to convince Trump not to carry through on a threat to impose up to 25% tariffs on all imported cars and parts on national security grounds. That decision has been delayed to allow for more trade talks with the European Union and Japan. In April, he also threatened to impose tariffs on hundreds of European goods, from cheese to ski suits, worth $11 billion. With a China ceasefire in his rear view mirror, he may renew those threats. As his tweet while flying to Osaka, Japan, for the G20 summit shows trade is very much at the forefront of his agenda. Check out our story from May that outlines in graphics what's at stake for Europe Inc in a trade spat (Josephine Mason) ***** FIRST HALF: WINNERS & LOSERS (1023 GMT) Well that was fast! We're nearing the 2019 half-way mark and boy what a year it's been for markets, with a prolonged trade war, fears of a real war (U.S.-Iran), Brexit, the Italian budget crisis, EU elections and central banks' dovish U-turn. That's quite a long list, isn't it? Perhaps enough to rattle equity markets? Apparently not. That dovish shift from central banks has helped stocks rally. Global markets have gained 14% with the U.S. up 17%, Europe up 13%, Asia Pacific ex-Japan up 11% and Japan up 6%. In Europe, food & beverage and technology are the best-performing sectors so far this year, while telecoms, generally a defensive sector, is the only faller. Among single stocks, French tech consultancy firm Altran Tech wins hands-down by doubling in value after CapGemini offered to buy it earlier this week. Getinge and Greggs jostle for the second spot, rising 82%. Both stocks were bolstered by solid financial results. Among fallers: Ambu (-32%) was hit by poor results, TUI (-31%) had its profits dented by the 737 MAX groundings, and Swedbank (-29%) has been roiled by a money-laundering scandal. (Thyagaraju Adinarayan) ***** FURTHER TRADE ESCALATION WOULD HURT THE U.S. MORE (0955 GMT) It's anyone's guess what the outcome of this weekend's G20 meeting between U.S. President Trump and his Chinese counterpart Xi is going to be. But one reason pundits are saying further escalation could be avoided is that more tariffs would significantly harm the U.S. economy. So far, much of the impact of tariffs on Chinese imports has been offset by either discounting or import substitution - resulting in a negligible impact on U.S. inflation. Chinese suppliers are shouldering some of the cost of U.S. tariffs: some exporters may offer U.S. importers a discount to compensate for the costs of higher U.S. duties. Goldman Sachs finds "roughly half" of the decline in tariff-affected imports from China was offset by a rise in imports of those goods from other countries, particularly Taiwan, Vietnam, and South Korea. Import substitution is less easy for the categories of goods not yet hit by tariffs. GS analysts find it's harder to substitute for goods in which China supplies a large share of total U.S. imports, because production chains may not be in place in other countries. They find a sizeable and statistically significant negative relationship between import diversion and the share of U.S. imports from China. "Further tariffs would be harder to avoid through trade diversion, resulting in either large inflationary effects or a large reduction in imports," they conclude. (Helen Reid) ***** OPENING SNAPSHOT: FRANKFURT AND LONDON SHINE (0745 GMT) Frankfurt and London are leading the European pack on the last trading day of the month and quarter as the mood ahead of much-anticipated U.S.-China talks over trade brightened somewhat. Gains in technology and car stocks, most vulnerable to global trade tensions, and gains in Deutsche Bank after Germany's largest lender passed a key stress test in the United States are lifting the DAX 30. UK housebuilders are rallying and boosting London's blue-chip index after a report that Boris Johnson, frontrunner in the leadership campaign, is considering cuts to property stamp duty if the country crashes out of Europe without a deal. As a result, European stocks are displaying unexpected strength, with the pan European STOXX 600 index up 0.1%. Travel & leisure is up 0.7% after a consortium including Blackstone and the Lego family swooped on Merlin Entertainment. Merlin shares are up 14%, almost matching the premium offered by the suitors, in what would be one of the biggest private equity deals in Europe in years (Josephine Mason) ***** MIXED OUTLOOK AHEAD OF THE OPEN (0651 GMT) European stock futures are indicating a flat to slightly lower start to trading this morning as investors grow nervous about the chances of a truce between Beijing and Washington to end the protracted trade spat at a meeting between Presidents Trump and Xi tomorrow on the sidelines of the G20. It’s a mixed picture at the moment, with the Eurostoxx 50 futures flat as Paris rises slightly and trade-sensitive DAX ekes out gains, lifted in part by Deutsche Bank. But all eyes are on Osaka, and nerves are likely to keep trading subdued while some investors also lock in profits ahead of the month- and quarter-end. The pan European STOXX 600 has so far risen about 3.5% this month and 0.8% for Q2. The main headline this morning is news that a consortium including the investment vehicle of Lego's founding family and private equity firm Blackstone have swooped on Madame Tussauds owner Merlin Entertainments in a deal valuing the company and its debt at nearly 6 billion pounds ($7.6 billion). That's about a 15% premium to yesterday's closing price and dealers say the stock could rise as much as that. The bid will be one of the biggest private equity deals in Europe in recent years, and comes as buyout firms are flush with record amounts of cash to invest. Deutsche Bank shares are up almost 4% in pre-market Frankfurt trade amid relief Germany's top lender passed the latest U.S. banking stress test, while Credit Suisse shares are down slightly after the U.S. central bank placed conditions on its U.S. operations after finding weaknesses in its capital planning processes. In earnings, weaker-than-expected results from Nike, the world's sportswear maker, may pressure European rivals Adidas and Puma and UK sports retailer JD Sports, while Orange shares may rise after France's number one telecoms operator said it plans to sell its entire 2.5% stake worth about 500 million pounds in UK telecoms group BT. (Josephine Mason) ***** EUROPEAN STOCKS FUTURES FALTER (0628 GMT) Rather than an okonomiyaki, perhaps the market will be more like a Japanese dumpling, the gyoza? Spreadbetters had called for a flat market, but Eurostoxx 500 futures are down 0.1% as jitters about The Big Meeting between China and U.S. leaders tomorrow set in and investors adjust their positions in some window dressing on the last trading day of the month and quarter. Frankfurt's DAX, the most sensitive to trade, is outperforming - it's flat -, helped in part by gains in Deutsche Bank after Germany's top lender passed the latest U.S. stress test. Still the pan European STOXX 600 is on track for a rise of about 3.5% this month and 0.8% for the quarter, buoyed in most part by the increasingly dovish stance by the ECB and Fed. (Josephine Mason) ON OUR RADAR: BANKS, TELECOMS AND WAX WORKS (0558 GMT) Banks are likely to take centre stage this morning after the results of the Federal Reserve's latest health check. Deutsche Bank passed the tests that measure banks' ability to weather a major economic downturn. Shares in Germany's top lender are up 4.4% in pre-market trade. But the U.S. central bank placed conditions on Credit Suisse's U.S. operations after finding weaknesses in its capital planning processes, sending its U.S. shares down as much as 3% after the Wall Street close last night. Aside from that, there's the potential 6 billion pound deal in the making for Merlin Entertainments. The FT has reported the owner of Madame Tussauds waxworks exhibits around the world is to be acquired by a group made up of Kirkbi, the investment vehicle of Lego's founding family, private equity firm Blackstone and Canadian pension fund CPPIB. The deal is valued at 460 pence per share, some 16% above yesterday's closing price. In other M&A, Orange, France's number one telecoms operator, plans to sell its entire 2.5% stake worth about 500 million pounds in BT. BT intends to repurchase up to 80 million pounds of shares after Orange said it would offer about 248 million shares in BT to institutional investors by means of an accelerated bookbuild offering, the companies said. The standoff between Switzerland and the European Commission over a stalled partnership treaty have deepened overnight, with the Swiss government triggering measures to counter Brussels' refusal to extend recognition to Swiss stock markets. VW's truck division Traton will debut on the the Frankfurt and Stockholm exchanges, making proceeds for its parent group of a tasty 1.55 billion euros. Here are the top headlines so far: Italy's Atlantia and Rome in open warfare over minister's comments Swiss government triggers countermeasures in EU bourse battle Lego family's Kirkbi and Blackstone to buy Madame Tussauds owner Merlin- FT Deutsche Bank passes Fed stress test in boost for its U.S. operations Italy's Atlantia and Rome in open warfare over minister's comments BMW board to decide on CEO's future at July meeting - Handelsblatt France's Orange to sell entire 2.5% stake in Britain's BT Telecom Italia hopes board member appointment could improve shareholder dialogue VW's Traton IPO priced at 27 euros Swiss government triggers countermeasures in EU bourse battle Italy's Mediaset set to sign champions league deal with sky italia - sources (Josephine Mason) FLAT AS AN OSAKA PANCAKE (0519 GMT) Osaka is where all the action is today and like the delicious savoury pancake Okonomiyaki the Japanese city and host for the G20 summit is famous for, the market will likely be pretty flat today as investors fix on the much-anticipated meeting between Presidents Xi and Trump, expected over the weekend and which could determine the direction of global financial markets. IG financial spreadbetters expect London's FTSE to open 1 point higher at 7,404, Frankfurt's DAX to open 17 points higher at 12,288, and Paris' CAC to open 1 point higher at 5,494. Asian shares stumbled overnight amid rising doubts that the meeting could lead to a rapprochement between the world's two largest economies to end the protracted spat over trade that's raised worries about damage to global growth. To tickle your taste buds, here's a robot in Japan making one of these tasty pancakes. (Josephine Mason) (Reporting by Danilo Masoni, Helen Reid, Josephine Mason and Thyagaraju Adinarayan)