LIVE MARKETS-Macro and trade fears kill five week winning streak
Feb 8 - Welcome to the home for real-time coverage of European equity markets brought to you
by Reuters stocks reporters and anchored today by Helen Reid. Reach her on Messenger to share
your thoughts on market moves: helen.reid.thomsonreuters.com@reuters.net
MACRO AND TRADE FEARS KILL FIVE WEEK WINNING STREAK (1710 GMT)
Is it the end of the rally?
Macro (Shenzhen: 000533.SZ - news) gloom, fresh trade war fears and disappointing earnings just killed European shares' 5
weeks winning streak. That's bound to further put into doubt the longevity of the rally which
has since until very recently lifted markets from their Christmas lows.
Instead of a closing snapshot, here's look at the last 12 months and how this last week
doesn't necessarily look promising:
(Julien Ponthus)
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RENEWABLE ENERGY (Frankfurt: A1JS5R - news) "SLOWLY CHIPPING AWAY" AT ASSET ALLOCATION (1536 GMT)
While chemicals firm Umicore (Hamburg: 3771399.HM - news) - a favourite of investors looking to get exposure to batteries
used in electric vehicles - disappointed today and is falling 6.5 percent, developments in
alternative energy remain front and centre for investors particularly as ESG considerations
become more important.
Looking at the STOXX energy index there's ample evidence of the changes the energy sector is
going through, and oil analysts at Redburn have crunched some numbers that show this:
Non-oil-related companies have increased their influence in the index eight-fold in five
years - with wind turbine makers Vestas and Siemens Gamesa the main players.
"The overriding theme is one of renewable energy slowly but steadily chipping away at asset
allocation towards mega-cap oil," Redburn's oil & gas team writes.
Overall the number of components in the energy sector has declined steadily, falling 40
percent over the past decade to just 23 today, they note, as better performance from other
sectors has edged energy gradually out of the STOXX.
As you can see below, on a global level as well energy has shrunk in terms of relative
market cap, a reflection of the boom in tech stocks and commodity price shocks:
(Helen Reid)
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A NEW NARRATIVE? (1447 GMT)
Now (Frankfurt: 11N.F - news) the global panic about Fed rate policy that dominated the second half of last year has
subsided after the central bank's shift to a more dovish tone, ushering in a big flow of cash
into equities, what's the new narrative that will drive markets?
Steen Jakobsen, chief economist and CIO at Denmark's Saxo Bank notes January saw a market
return in excess of the weighted yearly return normally expected for an entire year, but
highights two areas of concern:
* There is zero confidence in the real economy - not among consumers and not among banks
* Banks' willingness to lend to consumers is falling while real personal consumption
expenditure is rising
While the U.S.-China trade war isn't necessarily going away, he says there's no need to
panic.
"The illusion of an incoming trade deal and incoming inflation will largely remain just
that," he writes.
So with all that in mind, he recommends investors start offloading their risk-on positions
for a more balanced view.
Sell calls on upside equity risk, particularly in the U.S. which he says is extremely
expensive again, increase cash or buy protection in both equities and high-risk currencies
(pound, Aussie dollar, or Korean won vs Swiss franc, Japanese yen or Danish krone).
After all, the trade deal narrative could wind up being a very "buy the rumour, sell the
fact" affair, he says.
(Josephine Mason)
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EMERGING MARKETS: WHAT COULD GO WELL? (1445 GMT)
This week's Flow Show demonstrated that EM is definitely back in style with investors
pumping record high volumes of money into both emerging shares and bonds.
There are quite a few reasons why things could go wrong, notably the intriguing recovery of
the dollar despite the dovish tone of the Fed.
Lukman Otunuga, an analyst at FXTM, says he believes fresh trade war fears and the economic
and political worries in the UK and the euro zone could be the drivers.
Anyhow, in a note published on Wednesday, Vincent Deluard, a strategist for INTL FCStone (Frankfurt: I4F.F - news)
wrote up quite a long list of reasons why EM might a good bet in 2019.
Here's a snapshot of the key points:
Another interesting theme is the concept of "slowbalisation" recently popularised by the
Economist.
Mature economies such as Germany have a greater need to "hack" foreign growth through
exports given their slow demographics and slowing productivity, and hence a slowdown in trade
might affect them most.
Meanwhile there are multiple reserves of growth in EM markets that can be unleashed with far
less capital than in mature economies.
"Raising the literacy rate in India is easier than expanding the supply of STEM grads in
Japan," is how Deluard puts it.
Here's how the MSCI (Frankfurt: 3HM.F - news) index for emerging markets has staged a comeback from last year's low:
(Julien Ponthus)
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ALL BETS ARE OFF FOR UK HORSE RACING (1229 GMT)
British authorities have suspended horse racing until the middle of next week as they rush
to contain an outbreak of equine influenza, disrupting one of the nation's favourite sports and
pressuring bookmakers' shares this morning.
GVC's down 1.6 percent, William Hill (Frankfurt: 633847 - news) 's down 1.9 percent and Paddy Power (EUREX: 27913021.EX - news) is down 0.1 percent.
There's a lot at stake - the gee gees, the second-most attended sport in the country,
account for half of over-the-counter wagers and a quarter of online sports bets in Britain,
according to Numis Securities analyst Richard Stuber.
That equates to up to £4 million per week in revenue for William Hill (0.2 percent of group
revenue) and GVC, he estimates.
And the timing couldn't be worse. A severe outbreak and prolonged shutdown could disrupt
some of the biggest (and lucrative) events in the racing calendar - the prestigious Cheltenham
Festival is just over a month away and the Grand National is on April 6.
Cheltenham has been cancelled only twice, during a foot and mouth disease outbreak in 2001
and during the World War Two.
So what are the chances of a worst-case scenario? Well, who better to ask but the bookmakers
themselves.
According to gambling odds aggregator Oddschecker, the bookies currently have 'before Feb.
18' as their most likely outcome with odds of 1/5, while the possibility of the suspension
lasting until March 1 and beyond is priced at 5/1.
Here's a Reuters photo of the Grand National 2018 - which only 12 horses of 38 starters were
able to finish.
(Josephine Mason)
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BULL, BEAR, OR PIG? CHINA SENDING MIXED SIGNALS (1141 GMT)
As the Chinese year of the pig begins, European investors trying to figure out whether to be
China bulls or bears are not having the easiest time of it.
Despite widespread pessimism about a slowdown in the world's second-biggest economy,
companies such as LVMH, and L'Oreal and Hermes today, are reporting resilient demand for
consumer goods, boosting their shares.
According to BAML, since the start of the earnings season some 22 companies have mentioned
China as a positive factor (not including today's results), while 18 have cited it as a
negative.
That puts China far below Brexit, which 33 companies said had a negative impact, as you can
see below.
Besides the surprisingly positive take on China overall, there's an interesting divergence
in the types of companies reporting China pressure.
The most bearish on China are mostly in Industrials and Materials, while the most bullish
are mostly Consumer Discretionary, Healthcare (Shanghai: 603313.SS - news) and Staples (NasdaqGS: SPLS - news) , BAML strategists say, a trend which
reflects an ongoing structural shift in the Chinese economy.
A consequence of this is that the CAC 40 - where some of Europe's biggest consumer companies
are listed - is doing much better than the industrial and autos-heavy DAX.
"I am quite encouraged to see that consumer companies are doing OK in China," says Manish
Kabra, head of European equity and quant strategy at BAML. "That's really the crux at the
moment. If China has really shifted its outlook and they want more consumption-oriented growth,
then French stocks are your place to be within European stocks."
Indeed, it's not only today that the CAC 40 is outperforming the DAX. The French index's
relative performance over Germany is at its highest in nearly three years, as you can see below,
as industrials and autos are hit by growth fears while consumer stocks are more resilient.
(Helen Reid)
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OPENING SNAPSHOT: BECAUSE YOU'RE WORTH IT (0851 GMT)
The power of skincare and handbags is on display this morning, with upbeat results and
outlooks on China from Hermes and L'Oreal helping lift French luxury stocks from LVMH to Hermes
and Gucci owner Kering (LSE: 0IIH.L - news) , and the broader Paris bourse.
That's helping dispel some of the lingering worries about slowing middle-class spending on
designer handbags and accessories in China as the world's No. 2 economy slows. L'Oreal's gains
didn't last long though as investors took profits after the skincare company's Q4 sales beat.
The shares hit record highs this week.
They're helping give the broader European market a boost. European markets opened lower, as
expected, but managed a swift turnaround into positive territory. For now, they're helping
offset worries about the U.S.-China trade tensions that sapped investor confidence overnight.
Milan is up 0.5 pct, with BPER Banca leading the gains as investors welcome news the company
will buy Unipol (Dusseldorf: 18319160.DU - news) 's banking unit for 220 million euros in cash.
In contrast to the upbeat tone among luxury goods companies though, a warning about slumping
sales in China, the world's top car market, from Jaguar Land Rover's owner Tata Motors (BSE: TATAMOTORS.BO - news) served as
a reminder that things are not all rosy in the Middle Kingdom. The sector is down 0.7 percent.
Among individual moves, Swedish builder Skanska (LSE: 0HBT.L - news) is down 7.8 percent after its Q4 results
missed expectations and the company proposed cutting its dividend, Rockwool is the biggest STOXX
600 faller after its weaker-than-expected results and Umicore is down 4.8 percent after the
cobalt refiner warning of slowing 2019 earnings growth due to subdued car and consumer
electronics demand. Dometic Group (LSE: 0RCO.L - news) is rallying 15 percent after its Q4 results.
(Josephine Mason)
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WHAT'S ON THE RADAR: L'OREAL, HERMES, UMICORE, AND EARTHPORT BIDDING WAR (0744 GMT)
After European stocks’ worst day in six weeks, the market is set for a faltering start with
futures down 0.1-0.2 percent for the FTSE 100, DAX and Eurostoxx 50 while CAC 40 futures inched
up 0.1 percent.
Earnings will drive the day with strong numbers from L’Oreal, Ceconomy, Hermes, and Aker (Stockholm: AKERO.ST - news)
Solutions, while Umicore gave a weak outlook and SSE (LSE: SSE.L - news) cut its profit outlook.
Cosmetics giant L'Oreal is expected to rise 1-2 percent after it said strong demand for
luxury skin creams helped it beat Q4 sales forecasts - another company reporting better than
feared demand from China after LVMH last week.
Luxury handbag maker Hermes also said sales momentum in its Chinese stores stayed strong,
boosting its shares up 1-2 percent in premarket too.
Strong results from Ceconomy are boosting the shares up 5.9 percent in early Frankfurt
trade.
In other good numbers, Norwegian oil services firm Aker Solutions (Stockholm: AKSOO.ST - news) delivered better than
expected order intake.
On the flipside, Belgian's Umicore, a battery producer which has been a favourite of
investors looking to play the electric vehicle trade, said it expected 2019 growth to be hit by
subdued demand in the car and consumer electronics sectors, and R&D costs.
More negative news for autos from Tata Motors’ results, warning that Jaguar Land Rover which
brings in most of its revenue would swing to a loss due to weak sales. That could drag European
autos stocks further down after the sector suffered its worst day since the Brexit aftermath on
Thursday.
In the UK, Visa (Xetra: A0NC7B - news) sweetened its offer to $320 million in an ongoing bidding war for UK payment
company Earthport (Frankfurt: EAPA.F - news) , topping rival Mastercard’s bid.
Healthcare facilities provider Caretech could get a boost after the UK regulator approved
its acquisition of Cambian.
Energy utility SSE was expected to fall 2-3 percent after it cut its profit outlook, hurt by
the suspension of payments from a back-up power scheme to energy suppliers.
Amid the fallout from Renault’s Ghosn scandal, France's finance ministry denied on Thursday
a Nikkei report that the French government had informed Tokyo it was open to considering
reducing Renault (LSE: 0NQF.L - news) 's stake in Nissan Motor.
And Europe’s chipmaker stocks might be hit by weaker results from U.S. semiconductor maker
Qorvo (Frankfurt: 2QO.F - news) , traders say.
(Helen Reid)
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FUTURES POINT TO TEPID START TO TRADING (0714 GMT)
It's a tepid open for futures with the trade-sensitive DAX seeing the biggest falls, down
0.2 percent, while CAC 40 futures are up 0.2 percent.
Things could, of course, deteriorate during the day as they did yesterday.
But meanwhile individual stocks are likely to drive the session. A rundown of European
earnings is in the previous blog.
From the UK, we've got bellwether mortgage lender Nationwide Building Society (LSE: NBS.L - news) reporting
profits fell 21 percent after ramping up investment in digital banking, and energy utility SSE (Amsterdam: UW8.AS - news)
cutting its full-year profit forecast.
Nationwide profits fall 21 pct on further digital spend
SSE cuts annual profit outlook
(Helen Reid)
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STRONG RESULTS FROM L'OREAL, CECONOMY, WHILE UMICORE WARNS OF AUTO SLOWDOWN (0657 GMT)
While the lack of positive progress towards a U.S.-China trade deal is likely to keep
European markets tepid today, earnings on the whole look slightly healthier than yesterday.
Cosmetics giant L'Oreal said strong demand for luxury skin creams helped it beat Q4 sales
forecasts - another company reporting better than feared demand from China after LVMH last week.
Results from Ceconomy, Europe's biggest consumer electronics retailer, should deliver some
relief to the retail sector: the company's sales beat expectations thanks to Black Friday
discounts, and it maintained its profit guidance.
In other strong results, Norwegian oil services firm Aker Solutions delivered better than
expected order intake.
On the flipside, Belgian's Umicore, a battery producer which has been a favourite of
investors looking to play the electric vehicle trade, said it expected 2019 growth to be hit by
subdued demand in the car and consumer electronics sectors, and R&D costs.
Swedish builder Skanska reported a Q4 profit which lagged expectations.
In M&A news, Italian insurer Unipol agreed to sell its banking unit to BPER Banca for 220
million euros.
Here are the headlines so far:
Chinese demand boosts L'Oreal cosmetics sales
Belgium's Umicore expects subdued auto demand, startup costs to weigh on 2019 earnings
Aker Solutions eyes oil service recovery as order intake beats forecast
Ceconomy maintains profit guidance after better first quarter
Skanska Q4 operating profit, 2018 dividend lag expectations
Fiat Chrysler paid $77 mln in U.S. fuel economy penalties in 2018
Italy's Unipol to sell banking unit to BPER Banca for 220 mln euros
Air France KLM January passenger numbers rise 1.5 pct on year
France probes Danske Bank (LSE: 0NVC.L - news) over money laundering allegations
Swiss raise 380 mln Sfr from 5G mobile spectrum auction
(Helen Reid)
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EUROPEAN STOCKS TO FALTER AFTER WORST DAY IN SIX WEEKS (0629 GMT)
Yesterday's selloff is expected to extend into the end of the trading week with
spreadbetters pointing to slight falls for the DAX and CAC.
The sharp drop yesterday in the STOXX - its worst day in six weeks - came after European
shares reached 12-week highs, and was likely driven by some profit-taking as well as the angst
triggered by U.S. President Trump saying he was not likely to meet China's Xi before a March 1
tariff deadline, dousing markets' hopes of an imminent trade deal.
Downgrades to euro area and UK growth certainly didn't help either.
Asian stocks lost ground on Friday as investors worried about a broadening global economic
slowdown, with sentiment not helped by the absence of any positive signs for a resolution in the
U.S.-China trade row.
Financial spreadbetters at IG (Frankfurt: A0EARV - news) expect London's FTSE to open 6 points higher at 7,100,
Frankfurt's DAX to open 9 points lower at 11,013 and Paris' CAC to open 2 points lower at 4,984.
(Helen Reid)
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(Reporting by Helen Reid, Danilo Masoni, Julien Ponthus, and Josephine Mason)