LIVE MARKETS-Rotation paused, defensives in demand amid Saudi attack

* European stocks fall amid fresh geopolitical worries * Airlines sink, oil companies bounce after crude surge * Investors fret about WTO ruling on Airbus subsidies * Atlantia falls again after probe into road safety 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 ROTATION PAUSED, DEFENSIVES IN DEMAND AMID SAUDI ATTACK (1027 GMT) There's a bit of shuffle going on in Europe with value/momentum rotation taking a pause, while investors take shelter in bond-proxy sectors such as utilities, healthcare and food & beverage names amid worries about a possible oil crisis. September's star performers, banks and autos, are deep in red this morning as attacks on crude facilities in Saudi Arabia sent oil prices soraing, causing further worries about global economic growth. (Thyagaraju Adinarayan) ***** SOARING OIL: THE LAST THING STRUGGLING AIRLINES NEED (0859 GMT) Europe's airlines have had torrid a few years. Higher fuel costs and stiffer low-cost competition have led to a wave of bankruptcies among smaller European airlines in recent years, including Air Berlin, Germania, British-based Monarch, Latvia's Primera Air and Swiss SkyWork. The remaining players are still struggling with overcapacity, particularly in European short haul and signs of weakness in corporate booking are now stirring worries about long-haul travel. Now crude prices are rallying following the drone attacks that knocked a big portion of Saudi Arabia's output out and triggered a rally in crude prices overnight. Higher fuel prices are pretty much the last thing the sector needs. Bernstein analysts Daniel Roseka and Alex Irving give a rundown on how airlines are hedged - in summary, Norwegian Air Shuttle is the most exposed, while BA is the best positioned. Here are their findings: * British Airways owner IAG is best hedged, therefore least vulnerable to soaring crude prices. At Q2 reporting, the company disclosed a hedge ratio of 95% for Q3, declining to 86%, 78%, 65%, 55% and 46% by Q4 2020. "With relatively high margins, the company is the least sensitive to fuel prices in our coverage. We estimate a 4% EPS sensitivity to fuel over 12m and 9% over 13-24m," they say. * Lufthansa is quite reasonably positioned. At its Q2 reporting, Lufthansa disclosed a hedging level of 79% for Q3 2019 and 78% for Q4. The company utilises a rolling hedge strategy whereby it starts to put hedges on 24 months out, and gradually builds them up over time, targeting 85% hedging 4 months before consumption. The broker estimates a 10% EPS sensitivity to fuel over 12m and 17% over 13-24m. * Air France has higher sensitivity. The company is less hedged this year than the other legacy carriers, disclosing 62% hedging for Q3 and 60% hedging for Q4 at Q2 results. In 2020, the company was 48% hedged at last reporting. Lower net income margins also make the stock more sensitive to movements in fuel prices. Bernstein estimates a 21% EPS sensitivity to fuel over 12m and 24% over 13-24m. * Among the low-cost carriers, Ryanair is significantly hedged over 12m, less so thereafter. At its Q1 reporting (March year end), Ryanair disclosed 90% hedging for the remainder of this fiscal year. This then declines rapidly for FY'21, which was 37% hedged. The company targets 50% hedging 12-18 months out. We estimate a 4% EPS sensitivity to fuel over 12m and 16% over 13-24m. * Norwegian Air Shuttle is by far the most sensitive to fuel prices. From the company's last release, it has hedged 138,500 tons of fuel for Q4 – about 27% of Q4'18 consumption, and with no subsequent hedges. With fuel prices rising, it has the most to lose. We estimate an 84% EPS sensitivity to fuel over 12m and 95% over 13-24m. Here's a chart showing how the airlines' shares have lagged the travel and leisure sector this year: (Josephine Mason) ***** EUROPE'S WINNING STREAK GRINDS TO A HALT (0742 GMT) The drone attacks at the weekend that knocked out a big portion of Saudi Arabia's oil output has brought the stocks rally in Europe to an abrupt halt this morning. The pan European STOXX 600 is down 0.6%. Not surprising, the oil & gas sector is the only one in positive territory, rising 2.6% and hitting its highest since July 31 after the surge in crude prices and the airlines are getting crushed by the prospect of soaring costs. The news has reinvigorated the recently rangebound sector, which is on track for its best day since early January. Also getting crushed are luxury goods and drinks makers after reports Washington is preparing to hit the sector with punitive tariffs after the World Trade Organization ruled in its favour over Airbus subsidies in the first stage of a two-way dispute over aircraft subsidies. The widely expected decision is due to be unveiled in late September, people close to the case have said. Hermes International, Pernod Ricard and Gucci-owner Kering are all down 1-1.9%. Violent protests in Hong Kong has also shaken investor confidence. Airbus is the top faller on Paris' bourse, down 3.7%. Atlantia is down 5.2%, sinking for a second day and hitting February lows, after police investigating the deadly collapse of a bridge in Genoa last year said on Friday they had found evidence that safety reports for some viaducts had been falsified, and placed under house arrest three employees of firms owned by the company. H&M shares are down 2.2% as investors lock in profits following better-than-expected results. (Josephine Mason) ***** FUTURES UNDER PRESSURE (0658 GMT) European stock futures are under pressure, as investors shun riskier assets after drone attacks knocked out half of Saudi Arabia's oil output, renewing geopolitical tensions in the region, while disappointing data from China has underscored worries about the slowdown in the world's No. 2 economy. The losses suggest the region will end its four-day winning streak at the open. The Eurostoxx futures are down 0.7%, with DAX futures down 0.9%, while gains in FTSE futures after the surge in crude prices helped lift its heavyweight oil sector have quickly run out of steam and futures are down 0.4%. Airlines from Lufthansa] to British Airways owner IAG are expected to fall up to 5% after the big surge in oil prices. Airbus is seen falling 2% after a report in Politico citing EU officials said that the United States has won the right to hit the EU with billions of euros in punitive tariffs by winning a dispute over subsidies to the aerospace giant. In earnings news, H&M, the world's second-biggest fashion retailer, has delivered a bigger-than-expected rise in third-quarter net sales and said summer collections had been well-received. One dealer says its shares, which hit their highest since December 2017, may fall as investors book profits after the results, while another sees the stock getting a lift although he notes that the beat was exclusively driven by FX tailwinds. German lighting group Osram has advised its shareholders to accept the takeover bid from AMS and sell their shares to the Austrian sensor specialist, saying the offer was economically attractive. Other headlines: H&M's sales grow 8% in Q3 in local currencies Lundbeck to buy migraine treatment developer Alder BioPharmaceuticals Osram advises investors to sell their stock to AMS Fresenius drops possible sale of blood transfusion unit - spokesman Axel Springer plans layoffs after KKR becomes biggest shareholder - report Wirecard says broadens strategic alliance with UnionPay Advent takeover deal for Cobham backed by most shareholders -FT FirstGroup pursuing potential options for separation of UK bus arm Infrastructure fund consortium bids for stake in UK's nuclear power stations After LSE's sharp rebuff, HKEX begins investor charm offensive U.S and European regulators reviewing safety of heartburn drugs like Zantac Siemens, Orascom sign deal to rebuild Iraq power plant (Josephine Mason) ***** EUROPE ON THE BACKFOOT (0533 GMT) European stocks are expected to start the week on the backfoot as investors seek safety in assets considered safe in times of geopolitical and economic strife after a drone attack on Saudi Arabian oil facilities knocked out half the country's oil output and weaker-than-expected Chinese data. The strikes inflamed fears about Middle East tensions and worsening relations between Iran and the United States, powering safe-haven assets, boosting gold. Energy stocks are likely to get a boost from the soaring crude price overnight, which saw Brent post its biggest intraday percentage gains since the Gulf War in 1991. Data showed the slowdown in China's factory and consumer sectors deepened in August, with industrial production growing at the weakest pace in 17-1/2 years, a sign of increasing weakness in an economy lashed by trade headwinds and soft domestic demand. "Slower production and sales data in China kept the worries of a weaker global demand on the table, despite the short-term supply shortages in oil markets," says Ipek Ozkardeskaya, senior market analyst at London Capital Group. Still, the Chinese numbers underscored hopes of further stimulus from the government. IG financial spreadbetters expect London's FTSE to open 30 points lower at 7,338, Frankfurt's DAX to open 108 points lower at 12,360, and Paris' CAC to open 43 point lower at 5,613. (Josephine Mason) ***** (Reporting by Danilo Masoni, Josephine Mason and Thyagaraju Adinarayan)