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LIVE MARKETS-Loan defaults and junk bonds to rise to GFC levels

* STOXX slightly in the black

* Pharma results boost stocks

* Oil prices edge higher

* Horrid PMIs

* Dire recession warnings from Brussels Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters. You can share your thoughts with Thyagaraju Adinarayan (, Joice Alves ( and Julien Ponthus ( in London and Stefano Rebaudo ( in Milan.


Triggered by the pandemic-induced recession, rating downgrades to junk and defaults for leveraged and high yields loans may rise to the 2008 global financial crisis levels.

Morgan Stanley estimates "volume-weighted euro high yields default rates of around 7% over the next year, above the 2009 peak," while in leveraged loans the default rate will be close to 9%, below the 11% of the GFC.

These numbers are above market expectations. Even in a more optimistic scenario, euro high yields bond markets "are pricing in a default rate just over 6%, while leveraged loan prices imply about 8%," the investment bank says.

Collateralized Loan Obligations (CLO) already saw a rise in junk ratings, but the situation is going to get worse.

The median exposure to CCC ratings is currently at 6%, according to Morgan Stanley and its analysis implies "average CCC buckets going to 10-12% over the next year," with 8% of the CLO collateral ending up in the defaulted bucket.

(Stefano Rebaudo)



The consensual assumption that things will get better when lockdowns are eased and the economy reopens will probably yield some nasty surprises for investors.

There are a few industries in the travel and leisure segment which might actually find it much tougher in the post-lockdown world.

"Once the aviation market reopens, we expect weak businesses, kept alive through the grounding period, may well fail as the cash burn from resuming low level operations under social distancing will be worse than fully grounded", HSBC analysts write in a note about the prospects of European airlines.

At the moment and with planes on the ground, "the survival of the fittest is currently suspended", they believe, adding that a Darwinian struggle through a wave of consolidation awaits airlines once flying resumes.

"As aviation businesses look to repair balance sheets damaged by the grounding, we believe strong businesses will attract investors for rights issues, and weak airlines will struggle", they argue.

State aid distortion between carriers also doesn't make it easy to find who will emerge as winners and losers from the pandemic.

Anyhow, below is how the share price of the main companies have fared through 2020, Wizz at the top and Norwegian at the bottom. There's a good chance that ranking could change quite dramatically three to six months from now!

(Julien Ponthus)



There's no way around it, this morning's macro data is just horrible, from nearly halted euro zone business activity to UK construction crashing to all-time low.

To add to the gloom, the European Commission reckons the euro zone economy will contract by a record 7.7% this year.

There's been no significant market reaction to the macro gloom but when you think of it, rock bottom activity indicators are quite often seen as good buy signals.

"Buying equities when PMIs are bottoming was typically a better strategy than buying them when they are peaking", Barclays analysts write in their European equity strategy note.

"Our work shows that equities were always up on a six-month horizon after PMI fell below 40", they add.

See their table below:

So for those who believe that as far as equity markets are concerned, the bottom was reached in mid-March, there's some light at the end of the tunnel.

But going forward with the PMI trade might involve some adjusting or implementing some portfolio rotation as "cyclicals outperformed defensives once the ISM bottomed out", Barclays adds.

(Julien Ponthus)



It's still not very clear where markets are heading to this morning but what's certain is that pharma stocks are emerging at the session's top players after strong Q1 results.

The sector is up 0.8% while the overall market is flat.

Germany's Fresenius, up 3.8% after its results, is the best performer in the pharma sector while Denmark's Novo Nordisk is also gaining 1.5% after publishing Q1.

By the look of it, the first half hour of trading does have the characteristics of a typical coronavirus risk-off day: Oil and gas, travel and leisure and autos are the top losers, down 1%, 0.8% and 0.6% respectively.

Banks, which also reported a few misses, are just 0.2% down, with Italy's Unicredit down 0.7% after a worse-than-expected result for the first three months of 2020.

(Julien Ponthus)



So, among this morning's deluge of Q1 earnings reports, shall we start with the good news?

The pharma sector is showing once again its resilience in the crisis with Novo Nordisk joining U.S. rival Eli Lilly and other large companies in the sector sticking to or even raising full-year forecasts. The Danish company posted a better-than-expected Q1 and kept its full-year outlook.

German dialysis specialist Fresenius Medical Care also beat net income expectations and said its strong underlying business offset costs related to the coronavirus pandemic.

Positive news for France's BioMerieux which announced the launch of a new product that aims to detect within 30 minutes the presence of antibodies in those exposed to the coronavirus.

Another clear winner so far in the crisis is British online supermarket Ocado with retail revenue up a whopping 40.4% year-on-year. Longer term though, Ocado said that it couldn't offer guidance because of the unknown impact the recession will have on its customers' income.

In another defensive sector, Telefonica Deutschland also stuck to its guidance as it reported an acceleration in Q1 growth and said business had been largely unaffected by the coronavirus pandemic.

Trading updates are, as one would expect, much less rosy in the banking sector, the top loser so far in the coronavirus crisis.

Italy's biggest bank UniCredit posted a worse than expected 2.7 billion euro loss in Q1 after writing down loans in anticipation of the damage caused by the pandemic.

France's Credit Agricole almost tripled the amount of provisions to protect itself from potential loan default and reported a 16.4% decline in quarterly profit.

In Britain, Virgin Money swung to a first-half loss after setting aside 237 million pounds to handle loans likely to go bad.

Blue chips in other sectors also gave a taste of what's to come. BMW forecast a full-year automotive EBIT margin of 0% to 3%, versus the 2% to 4% range estimated before and expects "containment measures to seriously dampen demand across all major markets over the entire year 2020".

ITV, Britain's biggest free-to-air commercial broadcaster reported advertising revenues fell 42% last month and gave no guidance for the rest of the year.

(Julien Ponthus)



European futures are currently cautiously trading in the red but below the -0.5% mark.

There's not much of a trend at the moment with some timid gains overnight in Asia and U.S. futures now in slightly positive territory.

Oil prices are also paring some losses so it might just be that European investors are on their toes after yesterday's gains and ahead of another heavy day of Q1 earnings.

Latest data isn't really encouraging with companies listed on the STOXX 600 now expected to report a 44.9% decline in earnings in Q2, down from a 40.4% drop forecast last week.


Virus-hit corporate profits seen sliding further in Europe

(Julien Ponthus)


(Reporting by Thyagaraju Adinarayan, Joice Alves, Julien Ponthus and Stefano Rebaudo)