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* European shares hit by disappointing U.S. data * U.S. factory activity sinks to 10-year low in September * STOXX 600 posts worst day since mid-August * Wall Street drops sharply * BAML starts coverage of airlines: IAG, Wizz, RyanAir, Air France top picks * Ferguson gains after profit beat, Greggs sinks after update Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Thyagaraju Adinarayan. Reach him on Messenger to share your thoughts on market moves: rm:// RED OCTOBER? (1549 GMT) Granted, October has a bad reputation due to 1929, 1987 and 2008, and today's ISM scare from the U.S. will do little to reassure superstitious traders as the manufacturing data is simply the worst in a decade. "Traders had gotten used to the idea that manufacturing in Europe is weak, but the disappointing U.S. ISM manufacturing report sent the message home it is a worldwide problem", commented David Madden at CMC. Anyhow, the picture at the close in Europe is grim, with very few sectors or bourses keeping their heads above the water. The STOXX 600 posted its worst days since the 14th of August. (Julien Ponthus) WHERE'S SAFETY IN STOCKS? (1527 GMT) Want somewhere to hide during the U.S.-China trade war and Brexit chaos and protect against a global recession as the decade-long bull run draws to a close? Brian O’Reilly, head of investment strategy at Mediolanum, says Tokyo is his pick. "We're of the view that we're firmly in the late cycle and the yield curve inversion in the summer was a ratification of that view," he says. "If we're towards the end of the cycle, we need more defensive positioning." * It's not totally but relatively insulated from the trade war * It's very cheap - price-earnings ratio for the Nikkei 225 is 13, vs above 21 x for the S&P 500 (see chart below) * It's one of the worst performing bourse among developed markets this year (Josephine Mason and Joice Alves) ***** U.S. ISM GLOOM HITS EUROPE HARD: WELCOME TO OCTOBER (1449 GMT) News that U.S. manufacturing contracted to its weakest level in more than a decade hit European markets hard, as if traders were just waiting for the right excuse to execute a late afternoon tactical retreat. "Big burn for the bulls on that ISM print, which showed a 10-year low for US factory activity", wrote Neil Wilson at, adding: "Welcome to October". The STOXX 600 saw its sluggish losses suddenly accelerate to above one percent, making for a dramatic move, just as in New York the Dow Jones, the S&P and the Nasdaq sunk into the red. One key indicator to watch out for going forward is how services are holding up. Brian O'Reilly, head of investment strategy at Mediolanum in Dublin says the big risk is services, which makes up 70% of developed economies. "The key for us is if there's a positive print on services, we're ok." "We know the global economy is in a manufacturing recession, that's been driven by the trade war. (....) If you see services heading low, that's the last shoe to drop." On the bright side, "there was a huge move in 1-month dollar OIS 21 months forward and the treasury yield curve did not flatten which suggests that markets think the ISM will draw the Fed's attention and make the central bank more accomodative," said Arne Petimezas, analyst at AFS in Amsterdam. Here's how the market reaction hit Europe: And here's a closer look to the ISM data: (Josephine Mason, Danilo Masoni, Thyagaraju Adinarayan and Julien Ponthus) ***** BOTTOM UP, NOT BOTTOMS UP! (1357 GMT) Seems the narrative of Europe having reached peak bad macro news is doing the rounds this afternoon with cyclicals such as autos , tech and energy in the black in an otherwise gloomy session. But macro bottoming up doesn't necessarily mean "bottoms up!" and an open bar policy on European cyclicals. There's no lack of sobering notes on the economic state of the old continent or the immediate prospects of its stock markets. "In Europe, the significant underperformance of mid-caps casts doubt over the solidity of the equity rally, all the more so that earnings revisions over the past 3 months have come down whilst equity prices headed north", Ostrum Asset Management warned in a note. "The risk here is that the weakness in the eurozone economy persists", Oxford Economics noted when reviewing the latest inflation data. Caution is also of the essence for sectors seen as good bets during a tentative economic recovery but which face strong issues of their own. Retail for instance is a tricky one as shown today by Greggs shares' abrupt (-10%) fall of grace. Moody's has a negative outlook for the sector for the next 12 to 18 months and warns that online competition will continue to bite and sluggish growth to put pressure on profits. "We expect more than 40% of the retailers we rate to record lower profit this year than in 2017 or 2018, or both", the rating agency says, noting the worsening profit trend. "We now expect weaker performance from higher rated continental retailers including the UK's Kingfisher, M&S, and Next, as well as Germany's Ceconomy and Metro", they added. Here's Moody's profit forecast for some big names: (Julien Ponthus) ***** AS CHINA CELEBRATES 70 YEARS OF COMMUNIST RULE, HK VIOLENCE ROILS MARKETS (1154 GMT) As tanks and troops rolled along Beijing's main thoroughfare for China's National Day military parade extravaganza, the streets of Hong Kong have descended into deeper violence, drawing attention away from celebrations for the 70th anniversary of the founding of the Communist Party, the most important event in the country's 2019 calendar. And investors are increasingly unnerved. Stocks with exposure to Hong Kong and Asia - Standard Chartered, HSBC and luxury goods - have been under pressure since the early summer as pro-democracy protests have stretched into four months, but they took a hard knock midmorning after reports a protestor was hit by a bullet by police. "Looks like this is going to get worse with no solution in sight," says one dealer. StanChart, down 1.6%, is one of the biggest fallers on the FTSE 100, while Burberry and Hermes International are 1.1% lower. HSBC has dropped 0.4% recovering a bit of ground lost in the morning after the South China Morning Post and television reports said at least one person was wounded in the chest by police firing live rounds. The worry is Hong Kong may have a "Tiananmen Square moment" says another, referring to China's crackdown of student-led protesters 30 years ago. The chart below shows HBSC, StanChart and Gucci-owner Kering have been particularly hard hit since June due in large part to their exposure to Hong Kong, as well as worries in general over the slowing Chinese economy. HSBC and StanChart get about a quarter of their revenue from the former British colony. (Josephine Mason and Thyagaraju Adinarayan) ***** DEFENSIVES DOWN, CYCLICALS UP! (1106 GMT) European shares have turned negative after hitting multi-week highs and while there's no clear trigger behind the reversal, internal market dynamics offer a clue of what's going on. Among country indexes Switzerland's SMI is leading losers, down 0.2% while in sectors food & beverage and healthcare are among the top fallers. What do the Swiss index and those two sub-indexes have in common? They're defensive! Meanwhile we're seeing euro-zone banks and autos keeping up with good gains, suggesting that people are once again turning their favour to the value/cyclical part of the market. And rising bond yields, despite the weak inflation, appear to corroborate the move. So what's driving the switch? Traders point their fingers to expectations that the bad macro news in Europe may bottom out with BAML saying European cyclicals should outperform defensives by 5% in the months ahead. Also PMI numbers confirmed that Germany's manufacturing recession deepened in September but the final number of 41.7 was a touch above the flash estimate 41.4. "It's a bit of both," says a London-basd trader, referrring to the BAML view and the better-than-expected PMI as factors driving today's price action. In the chart you can see how Defensives stocks in Europe have started to lose ground against Cyclicals after hitting a relative three-year high at the end of August. (Danilo Masoni) ***** LADIES AND GENTLEMEN, FASTEN YOUR SEAT BELTS (1001 GMT) It's clear skies for airline shares to take off as cloudy macro economic conditions are seen bottoming out in Europe, according to Bank of America Merrill Lynch. BAML analysts turn "overweight" on the sector saying the sector has been priced for an outright Euro area recession, which we think is unlikely. The bank sees 18% outperformance for airlines by year-end, driven by positive Euro area PMI momentum and mildly positive oil price momentum. European airlines trade at a significant discount to other sectors and are sharply in negative territory this year. (see chart below) Inline with the recent growth/value rotation theme, BAML is positive on all the battered European sectors: airlines, mining and banks. In individual airline stocks, BAML has a "buy" rating on easyJet, IAG, Ryanair and Wizz Air as it believes Brexit should not disrupt air traffic rights. The bank has an "underperform" rating on Lufthansa citing a tough domestic market and high pensions. (Thyagaraju Adinarayan) ***** HOT AUTUMN: A WAVE OF 2020 PROFIT DOWNGRADES IN STORE? (0939 GMT) The macro in Europe has been very bad and while 2019 profit forecasts have been downgraded aggressively, 2020 forecasts are largely untouched - pointing to growth of more than 9%. Is that a realistic number? Probably not and a string of warnings from the likes of IAG, Pearson, Imperial Brands, Salzgitter, Dixons, Pendragon and Kier over the last few weeks may be a sign of what's in store. It may be that before taking the axe, analysts are waiting for companies to change their guidance during the upcoming Q3 reporting season. "Analysts are usually slow to adapt forecasts to macroecomic data. They wait for clear signals from management, hence they have barely touched FY20 estimates," says Stephane Ekolo, strategist at Tradition in London. "For the EU space, I believe that the cut should be material. Soft data (PMIs) momentum keeps deteriorating and ... plenty of profit warnings across sectors underline how trading environment is getting more difficult," he adds. In the chart you can see the stark contast between the steadily downgraded 2019 earnings forecasts and 2020's for the STOXX 600 pan-European index. (Danilo Masoni) ***** OPENING SNAPSHOT: RISK ON! (0735 GMT) There are solid gains across indices driven by trade-sensitive autos and tech as investors hope for progress in U.S.-China trade deal when the two countries meet for talks next week. The pan-European STOXX 600 is up 0.4% and is just shy of hitting its highest levels in nearly 1-1/2 years. Tech stocks are mainly boosted by Apple component suppliers after Apple's Tim Cook told a German newspaper that sales of the company's newest iPhones were off to a strong start. STMicro, Dialog Semi, Infineon, AMS and ASML all up 1%-2%. AMS is under particular scrutiny as its near $5 billion takeover offer for German lighting company Osram Licht that trumped one from private equity investors expires today. Airlines are gaining altitude after BAML initiated coverage with a bullish view on British Airways owner IAG, Ryanair, Wizz Air and Air France, saying "Brexit should not disrupt air traffic rights", according to traders. The brokerage started Lufthansa and Norwegian Air with an "underperform" rating. BAML says: "Good time to gain exposure to high-quality airlines with strong balance sheets." In single stocks, Ferguson is the top gainer on the FTSE 100 and STOXX 600 indices after the plumbing parts distributor reported better-than-expected profits. (Thyagaraju Adinarayan) ***** ON OUR RADAR: TECH, GREGGS, DEUTSCHE POST, CREDIT SUISSE (0653 GMT) Stock futures indicate a higher open for Europe as investors back risky assets underpinned by hopes that there would be no further escalation in U.S.-China trade tensions. The world's top two economies will be back at the negotiating table next week to restart talks. European markets are seen up 0.2% to 0.4% buoyed by strong gains in Wall Street and Asia, driven by the tech sector. Shares of European iPhone component suppliers STMicro, Dialog Semi, Infineon, AMS could get a nice boost from Apple's overnight rally after report sales of the company's newest iPhones were off to a strong start. In other company news, British baker and takeaway food group Greggs is seen rising 1%-3% after it reported another strong quarter with company-managed shop like-for-like sales rising 7.4% in the 13 weeks to Sept. 28. Credit Suisse shares are rising 0.4% in premarket trade after CEO Tidjane Thiam gets a clean chit in an internal investigation into the botched surveillance of the bank's former wealth management head Iqbal Khan in a probe that cost Chief Operating Officer Pierre-Olivier Bouee​​​​​​​ his job. DHL owner Deutsche Post set new profit targets and said it would invest heavily in areas like warehouse automation and analytics as it seeks to keep up with fast-growing ecommerce. One dealer says the targets are in-line, "but would have hoped for more ambition". Dealers see the shares coming under a bit of pressure. UK plumbing parts distributor Ferguson seen up 1%-2% after reporting profits slightly ahead and boosting dividend, while shares of upholstery and flooring provider SCS Group are seen down 5% after it said it had a challenging start to the year. The statement may kindle worries about Brexit uncertainty on consumer spending. Swiss chemical company Clariant is likely to move on its updated financial outlook. In broker research, British Airways owner IAG, Air France and Wizz Air could fly higher after Bank of America Merrill Lynch start coverage with a "buy" rating. The bank is bearish on Lufthansa, starting with "underperform". Key headlines: Credit Suisse clears CEO in spying probe, COO Bouee to go Deutsche Post plans new investment as ecommerce booms Thyssenkrupp appoints new CEO in bid to rebuild confidence Mediaset debt rises as pan-European growth kicks in Italy's Generali pulls out from race for bancassurance partnership BBVA - press​​​​​​​ British baker Greggs sees sales growth slow in latest quarter AstraZeneca's combo lung disease therapy falls short of FDA approval (Thyagaraju Adinarayan) ***** MORE GAINS, TECH IN FOCUS (0535 GMT) European stocks are seen opening higher as worries over further escalation in U.S.-China trade tensions abate as the world's top economies are scheduled to restart trade negotiations. Positive vibes from Wall Street's rally overnight is set to fuel gains in the pan-European STOXX 600 index, which ended Monday at its highest closing level since May 2018. U.S. tech sector drove Wall Street higher with record highs now within striking distance. Apple shares were in spotlight after CEO Tim Cook told a German daily that sales of the company's newest iPhones were off to a strong start. Apple suppliers in Europe could potentially rally on the strong iPhone sales report. Financial spreadbetters IG expect London's FTSE to open 19 points higher at 7,427, Frankfurt's DAX to open 55 points higher at 12,483, and Paris' CAC to open 13 points higher at 5,691. Our wrap-up on Q3: Global stocks stalled in Q3 as bonds boom and dollar zooms (Thyagaraju Adinarayan) ***** (Reporting by Danilo Masoni, Joice Alves, Josephine Mason, Julien Ponthus and Thyagaraju Adinarayan)