LIVE MARKETS-Trade war fatigue (part two)

* European rebound from 1-week low

* Miners and banks lead sectoral gainers

* Euronext (Euronext: ENX.LS - news) raises bid for Oslo Bors

* Smith & Nephew (Frankfurt: 502816 - news) drops on talk of U.S. deal

* China shares rise

Welcome to the home for real-time coverage of European equity markets brought to you by Reuters

stocks reporters and anchored today by Danilo Masoni. Reach him on Messenger to share your

thoughts on market moves: danilo.masoni.thomsonreuters.com@reuters.net

TRADE WAR FATIGUE (PART TWO) (1610 GMT)

Readers would have every excuse to feel somewhat annoyed, fatigued or confused by the daily

headlines on the market's mood swings concerning the perceived state of the Sino (Dusseldorf: 1205802.DU - news) -U.S. trade

talks.

But there it is, trade talks are left, front and centre for market sentiment even if the

resulting narrative often needs a pinch of salt.

Like today's upbeat mood, according to David Madden from CMC (BSE: CMC.BO - news) : "The optimism is baseless, as

we have haven’t heard anything about the state of US-China trade relations recently, but dealers

are viewing the fact that they are taking place as a positive sign".

Fiona Cincotta from City Index also had a word of caution for investors: "As US–Sino trade

talks begin in Beijing, we are once again seeing the markets adopt an all too familiar

optimistic stance regarding the US–Sino trade developments".

Another amusing way to look at it was tweeted by Zero Hedge today:

(Julien Ponthus)

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TRADE WAR FATIGUE (1603 GMT)

China and the trade war are among the hottest issues most likely to move markets, but Credit

Suisse's Andrew Garthwaite and global equity strategy team suggest fatigue may be setting in.

In a note published today following a recent round of marketing, they say clients have

stopped asking about tariffs and are assuming there will be enough policy flexibility in Beijing

to turn growth in the world's No. 2 economy around by the middle of the year.

That's even though the Swiss bank says it hasn't yet seen the appropriate credit or fiscal

stimulus to achieve this.

With (Other OTC: WWTH - news) the March 2 deadline for the U.S. to increase tariffs on imports worth billions of

dollars fast approaching and the next round of U.S.-China talks taking place in Beijing,

weariness around the trade spat is perhaps surprising.

General confidence about China and trade is reflected in flows - on a tactical basis, the

bank's clients are the most optimistic on emerging markets on record.

But the Credit Suisse (IOB: 0QP5.IL - news) team suggests investors may be a little bit too relaxed about what are

after all some the biggest issues that could determine the health of the global economy.

The client flows into EM "is worrisome given the record decoupling between GEM (Shenzhen: 002340.SZ - news) and China

PMIs and their sanguine view on trade negotiations," the team writes.

(Josephine Mason)

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BEARS, AN ENDANGERED SPECIES (1445 GMT)

The last remaining bear of our interactive "Rolling bear market" (find it here https://tmsnrt.rs/2QCzyvm)

chart seems about to disappear from our screens.

As you can see below, only China is in a bear market, while when we introduced the chart in

November, Hong Kong, South Korea and the MSCI Emerging Markets were also below their 20 percent

peak. One thing to note however is that the number of individual stocks in the bear zone is

still quite heavy.

Here's how it looks today:

And here's how it looked in November:

(Julien Ponthus)

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WHERE TO WEATHER THE NEXT STORM (1325 GMT)

Investors have piled into emerging markets since the start of the year - the most recent

BAML data released on Friday showed record volumes of cash went into EM equities.

The MSCI EM index index rose 8.7 percent in January, its best monthly performance since

March 2016 and earlier this month hit its highest since early September.

But Capital Economics' market economist Simona Gambarini doesn't reckon that this will last

as investors fretting about the slowing global economy will sell out again this year. She (Munich: SOQ.MU - news)

expects the index to end the year significantly below its current levels.

So where do you go if you're looking for a place to weather another equities storm?

Gambarini reckons within the realm of defensives, healthcare and consumer staples are your best

bet.

In the past 15 episodes since 1997 when the MSCI EM index has fallen more than 10 percent,

those two were the only two sectors whose performance was not as bad as that of the overall

market.

And those with a higher proportion of equities in those sectors - Mexico, Malaysia, Thailand

- are your best bet.

Here's a look at the exposure to consumer staples and healthcare by country and the

performance by sector since the past 15 major routs:

(Josephine Mason)

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IS ONE EUROPEAN'S PAY RISE ANOTHER'S EARNINGS CUT? (1304 GMT)

A lot behind last February's panic was due to wages rising faster than anticipated and

analysts scrambling to reassess equity risk premia in a volatility spike that was quite messy

business.

Headlines at the time were all about how Wall Street hated Main Street's pay rise.

While no one seriously expects inflation to spike anytime soon in Europe, there could be

still be similar headlines soon if wages, which are strongly on the rise, start to dent

corporate profits.

According to UBS (LSE: 0QNR.L - news) , we're not quite there yet even if a squeeze on margins is a key theme for

2019 with the growing gap between revenue beats and earnings misses.

"We expect European companies to deliver sufficient top-line growth to weather the higher

input costs," they write.

"If we take the 2019 forecast nominal GDP growth by region and weight it by the geographic

sales exposure of European companies, then this points to c.5% growth – well above Europe's c.

2¼% wage growth".

Here's their chart showing how revenues beats don't translate in earnings beats:

(Julien Ponthus)

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EUROPE VS WALL STREET: IT'S ALL ABOUT EARNINGS, BANKS AND ITALY (1109 GMT)

JP Morgan is among the few with a positive view on stocks and even though it expects all

regions to take part in the rebound this year, it says Wall Street looks set to leave European

equities behind once again.

Why? It's mostly about earnings delivery, but also about banks and Italy's worrisome

political outlook.

"US growth is likely to be slower in 2019 compared to the stimulus assisted 2018, but US

activity and topline is still expected to beat Europe handily. Buybacks are likely to remain

robust in the US, and significantly above Europe," strategists led by Mislav Matejka say.

Then they add: "Eurozone doesn't usually outperform the US unless Eurozone Banks are in the

lead, and importantly, unless Eurozone Banks beat both the US Banks and Tech. We do not expect

the sector switch anytime soon," they say.

So what could make them turn more upbeat? Here is where they add Italy in the mix.

"Some evidence that Eurozone activity can beat global, and if Eurozone Banks can start

leading. The potential new Italian elections in 2H of the year might end up being a catalyst to

turn more positive on the region," they say.

(Danilo Masoni)

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UK GDP CONTRACTION: BIG NEWS, SMALL MOVE? (1050 GMT)

Looking at the FTSE 250, which is a better barometer of the UK economy than its blue chip

cousin, you wouldn't guess that we've just been served with a GDP shocker this morning.

The British economy actually contracted in December, the biggest fall since March 2016 and

the FTSE 250 is unimpressed, steadily rising 0.6 percent.

Sure, the overall data (Q4 growth at its weakest in six years) was expected but doesn't the

lack of a stronger reaction somewhat echo the indifference or even the complacency that recently

followed GDP contractions in Germany or Italy?

Anyhow, British blue chips are also a tad higher but they're getting a little help from a

slight fall in the pound.

Brexit, is of course the designated culprit for the poor data, and the poor visibility on

that front isn't helping.

"The UK economy is clearly being hampered by Brexit uncertainty, although some Brexiteers

may point to slowing activity in our major trading partners as the explanatory factor, said

Helal Miah, investment research analyst at The Share Centre.

"However, we feel that assurances over the political environment is needed sooner rather

than later for businesses to release pent up investment funds, but the next few weeks/months

will probably continue to see the malaise lead to reduced economic activity", he added.

Here's another quote from UBS WM chief economist prior to the data release which puts things

into perspective:

"Overall consumers are resilient in the face of political nonsense, by taking the sensible

approach of not caring. Companies are, however, inclined to delay investment", Paul Donovan

wrote.

Here's the stiff upper lip FTSE 250 this morning:

(Julien Ponthus)

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OPENING SNAPSHOT: RECOVERY MODE (0834 GMT)

European shares are higher this morning, with the STOXX 600 up 0.5 percent, in a tentative

recovery from Friday's sell-off. Dealmaking in everything from healthcare, food delivery

services and telecoms have dominated the headlines.

Investors are shunning Smith & Nephew, with the shares down 3 percent (if they keep this up,

it'll be their worst day since October), after the FT reported the company is in talks to buy

U.S. medical equipment maker NuVasive (Frankfurt: A0CAYR - news) in a deal that would be worth more than $3 billion.

On the FTSE small caps, KCOM (LSE: KCOM.L - news) is up 12 percent after a report Virgin Media is mulling a

takeover bid, while Just Eat (Frankfurt: A1100K - news) is up 1.8 percent after shareholder CatRock called for the company

to hold merger discussions.

Italian banks are among the top gainers with Banco BPM up 3.7 percent, BPER Banca up 3.5

percent and UBI Banca (Amsterdam: UF8.AS - news) up 2.9 percent. Banco BPM and UBI (Taiwan OTC: 6562.TWO - news) disclosed this morning the capital

requirements set by the ECB.

Here's your snapshot:

(Josephine Mason)

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WHAT WE'RE WATCHING BEFORE THE OPEN (0756 GMT)

European shares are expected to open slightly higher, recovering from one-week lows hit on

Friday, supported by some M&A activity and as a new round of trade talks begins today in China.

Futures on main euro-zone benchmarks were trading up around 0.5 percent, while FTSE futures

were also rising ahead of data on preliminary Q4 GDP, business investment and industrial

production later this morning.

On the corporate front, there are some dealmaking headlines that could liven up the session:

Euronext has raised its offer for Oslo Bors, intensifying a bid battle with Nasdaq (Frankfurt: 813516 - news) for the

Norwegian stock market operator, while in the UK, Just Eat shareholder Cat Rock has urged the

takeaway ordering website to start merger discussions. In premarket trading Oslo Bors is up 2

percent, while Just Eat is gaining 1-2 percent.

London-listed miners such as Rio and BHP are also rising 1-2 percent on the back of a surge

in Chinese iron ore prices, while Italian banks could also be in focus as they disclose capital

requirements levels set by the ECB.

Here are some more headlines:

MEDIA-Iceland Foods weighs moves for Sainsbury (Amsterdam: SJ6.AS - news) 's, Asda stores - FT

Smiths News seals new Daily Mirror contract

Fastjet Says Application Made For Admission On AIM For 9 New Shrs Of 1P Each In Co

Goldman Sachs (NYSE: GS-PB - news) has sounded out Panalpina investors about what price they would be prepared to

accept to tender shares - FuW Praktikus column

Acacia Mining (Frankfurt: 33A.F - news) sees 2019 production of 500,000-550,000 ounces

Germany is set to grant Deutsche Post (IOB: 0H3Q.IL - news) a higher-than-expected increase in postage for letters

from the summer - FAZ

(Danilo Masoni)

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EARLY MORNING HEADLINES ROUNDUP: DEALMAKING IN FOCUS (0648 GMT)

Turning to the corporate front, it looks there are some dealmaking headlines that could draw

investors' attention this morning.

Euronext has raised its offer for Oslo Bors, intensifying a bid battle with Nasdaq for the

Norwegian stock market operator, while in the UK, Just Eat shareholder Cat Rock has urged the

takeaway ordering website to start merger discussions, while - according to the FT - Smith &

Nephew has held talks to buy U.S. medical equipment maker NuVasive.

Here's your early morning headlines roundup:

Euronext hikes bid for Norway's Oslo Bors

Just Eat shareholder Cat Rock calls for merger talks

Smith & Nephew in talks to buy NuVasive for over $3 bln - FT

Sports Direct drops Patisserie Valerie offer - FT

Chairman of Imperial Brands (LSE: IMB.L - news) to quit amid board reform - The Times

Democrat Schiff questions if Mueller probing Trump-Deutsche Bank (IOB: 0H7D.IL - news) link

Credit Suisse investment bank won't shrink more - chairman

U.S. hedge fund Hound Partners discloses 5 pct stake in UK's Metro Bank (Frankfurt: 6MB.F - news)

Ryanair CEO's new share option scheme targets doubling profit in 5 years

Leonteq CEO sticks to operating income goal - FuW

UBS CEO Ermotti could switch to supervisory board -SonntagsZeitung

(Danilo Masoni)

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EUROPEAN SHARES SEEN EDGING HIGHER (0618 GMT)

Stocks in Europe are expected to open slightly higher today, recovering part of the heavy

losses suffered last week which sent the pan-regional STOXX 600 benchmark index

tumbling to 1-week lows.

Financial spreadbetters at IG (Frankfurt: A0EARV - news) expect London's FTSE to open 29 points higher at 7,100,

Frankfurt's DAX to open 35 points higher at 10,941 and Paris' CAC to open 18 points higher at

4,980.

Over in Asia, Chinese stocks rose after they resumed trading following a week-long Lunar New

Year holiday, as U.S. and Chinese trade negotiators geared up for a fresh round of discussions

this week.

(Danilo Masoni)

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