LIVE MARKETS-Turning defensive again

* European stocks fall after positive open * Reported China doubts about trade deal offset Fed rate cut * Fiat climbs to 1-year high, Peugeot drops after announcing 50-50 merger * Eutelsat falls sharply after weak results * Wall Street falls despite strong Apple, Facebook results Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Julien Ponthus. Reach him on Messenger to share your thoughts on market moves: rm://julien.ponthus.thomsonreuters.com@reuters.net TURNING DEFENSIVE AGAIN (1449 GMT) Now that all the good short-term Brexit and trade news has been priced in, sparking a wave of profit taking, it seems we may also see defensives returning back in favour -- prolonging a 12 month battle with cyclicals that so far has see no clear winner. Just take a look at sectoral leadership today: utilities, telecoms, real estate and food and beverage are in the black (albeit slightly) but autos , materials and banks are clearly suffering. Besides the physiological market swings there's also be a more fundamental reason to consider a switch back into the defensive space. "In Europe, defensive sectors have been achieving very strong yearly growth rates during the 3Q19 earnings season so far, and earnings surprises in these sectors are positive," says Christian Stocker, equity strategist at UniCredit in Munich. "This combination of positive earnings surprises and very good growth has made these sectors (particularly Consumer Staples, Health Care and Utilities) very attractive compared to industrials, and we expect a resumption of outperformance to be imminent," he adds. (Danilo Masoni) ***** KNOT'S RANT ON NEGATIVE RATES RAISES UNCOMFORTABLE QUESTIONS (1424 GMT) You could dismiss it as plain and simple hawkish ideology but Klaas Knot's rant against Super Mario's last salvo of monetary stimulus does raise the uncomfortable questions about real estate bubbles spreading through the euro zone. The Dutch central banker and member of the ECB governing council said in September that the new QE program and rate cute were "disproportionate to the present economic conditions" and on October 15 presented a report headlined "Prolonged low interest rates are the main risk to financial stability". Kinda in your face uh? But according to David Owen, Jefferies' Chief European Economist, part of Knot's concerns are due to the adverse effect that bottom-low bond yields is having on Dutch pension funds. "The other concern of the DNB (the Dutch central bank) is that pension funds and life insurers are increasingly being forced out along the risk curve, including investing more in mortgages, corporate bonds and real estate, partly to come anywhere close to meeting in some cases the guarantees they offered, which are now significantly above the risk free rate." For Owen, that raises all sorts of uncomfortable questions which he shared in a note published yesterday: * How exposed are Dutch pension funds or life insurers, for example, to a severe downturn in the Dutch commercial real estate market? * How overvalued is the Dutch commercial real estate market? * How much of this overvaluation is due to foreign buying, based on a search for yield and potential capital gain? * What happens if investors head to the exit at the same time? * How many of the funds are open ended? With that in mind, Owen points out that real estate prices in Amsterdam have risen sharply in the last few years along with other big cities in Europe. "In the current environment of very low/negative rates and a search for yield, the housing markets and commercial real estate markets of some European cities now have more in common with each other than the economies around them", Owen writes. Food for thought! Here's a link to Knot's open letter against the ECB's September 12 measures http://bit.ly/2oxXkzX and another for the DNB's Autumn 2019 Financial Stability Report, http://bit.ly/2Pviry5. Here's the stability report's risk map: (Julien Ponthus) ***** TIME TO TAKE A BREATHER (1220 GMT) It's time for markets to take a breather from the double delight -- trade deal and a Brexit deal -- it was riding on for the past month. Though those deals are seemingly on their way, no breakthroughs have led to sideways movement in global markets. Major banks think its time to pause here or in fact turn defensive until momentum in KPIs such as PMI shows up which most of them expect in Q1. "With some stabilization of growth data and moderation of trade risks, the chances of manufacturing rising to close the gap, rather than consumption falling, have started to look more probable," Goldman Sachs says. BAML sees scope for near-term consolidation in European markets and is double upgrading the food & beverage sector to "overweight" from "underweight", while downgrading banks, autos and capital goods sector by one notch. Banks and auto stocks rallied in the past few weeks on positive noise from U.S.-China on trade war and fading no-deal Brexit fears, but their valuations are from far from being called high. "This suggests that any actual improvement in data may be likely to result in more risk/cyclical outperformance from current levels," Goldman Sachs says. Here's a chart showing value stocks falling out of favour in recent days after a decent start in October: (Thyagaraju Adinarayan) ***** WILL FARAGE MOVE STERLING? ALL EYES ON THE BREXIT PARTY! (1105 GMT) Seriously? Yep, seriously. Even though the Brexit Party is expected to win only a few seats at the December 12 general election, their electoral strategy could actually move the pound tomorrow. The reason forex traders, FTSE 100 and FTSE 250 aficionados will monitor the launch of the campaign of the party, who favour a clean break with the EU, is that their choice of strategy might be one of the keys of the vote. There's speculation that Nigel Farage's party might decide to concentrate its efforts in only a handful of constituencies instead of running in all of the countries' 650. That could be a big relief for Boris Johnson and his Conservative Party which could be threatened by Brexit die-hards in the regions which overwhelmingly voted "Leave" during the 2016 referendum. "If true this would take some of tail risk out of the election and reduce the no-deal risk", reckoned DB's Jim Reid in his morning note. Same analysis for Nomura's Jordan Rochester. "If the Brexit party runs in just a few seats, it’s short term +ve for GBP (...) Any headline suggesting the Brexit party will be more selective will be a short term boost for GBP as it will increase the odds of the Conservatives winning a majority". The Brexit Party campaign launch is scheduled for 10h30 GMT. And here a message from Farage taken from the Brexit Party's website: (Julien Ponthus and Alistair Smout) ***** BARGAIN HUNTING IN LONDON: "TACTICAL PAUSE" (1137 GMT) Credit Suisse strategists led by Andrew Garthwaite say investors in cheap UK stocks could start to worry about a couple of things: 1) election uncertainty (in 2017, the Conservative lead over Labour fell by 15 points over the election campaign compared to a 10% Conservative lead over Labour currently) and 2) the future trading arrangement between the EU and UK (Canada+ would have almost the same economic impact as a no deal Brexit, according to a number of independent studies) This essentially means near-term risks of pull-back and even though they remain overweight over a longer time frame, they advise taking a "tactical pause". That being said, they number 5 reasons to be overweight over a 6 to 12-month view: 65% chance of a Conservative government; Brexit transitional period is likely to be extended significantly beyond December 2020; valuations of UK equities remain at a 20-year low; risk appetite is depressed; fiscal easing of 1.5% of GDP will support UK growth and sterling. (Danilo Masoni) ***** TRADE WAR JITTER KILLS FED CUT FEEL-GOOD VIBES (1014 GMT) Boom! And it's gone! The Fed feel-good vibes which were lifting markets since the cut was announced yesterday are gone, shot down by the news conveyed by this snap: European benchmarks and Wall Street futures fell abruptly as our main competitor reported that Chinese officials have their doubts about a comprehensive long-term trade deal with Trump. Asked to comment on the following drop on the STOXX, Stephane Barbier de la Serre at Makor said he wasn't surprise at all given the current high levels at which markets are trading. "A reality check can come at any time", he said, arguing that while monetary stimulus was keeping markets afloat, there was a structural lack of other good news to justify current valuation levels. In this context, one could argue, any excuse for some profit taking will do. You can see below S&P futures taking a hit: (Julien Ponthus) ***** PSA AND FIAT CHRYSLER STEAL THE SHOW, AGAIN (0757 GMT) Let's get directly to the point, PSA and Fiat Chrysler really stole the limelight this morning at the open with traders operating a spectacular and brutal arbitrage between the bride and groom's respective shares. The French car maker is taking an 8% hit while Fiat Chrysler is surging over 9%. In a nutshell, buy Fiat Chrysler, sell Peugeot. What did look as a classic "buy-the-rumour sell-the-news" seems to a violent adjustment on the terms of the 50-50 share swap merger. As part of the deal, FCA will pay its shareholders a 5.5 billion euro special dividend and hand them shares in its robot-making unit Comau. PSA on its part will distribute its 46% in automotive equipment maker Faurecia to its shareholders. "On balance the terms of the deal favours existing FCA shareholders (who benefit from a cash distribution equivalent to 30% of the market cap), while Groupe PSA shareholders are being asked to remain patient," Citi analysts said. Both companies are selling the deal as a merger of equals but all the grown-ups in the room know that there is no such thing. Thinking about it, it seems the market is actually giving its live version of what "equals" mean: Peugeot down, Fiat up! Very cute to see that the two car makers are nevertheless holding hands among top STOXX 600 movers. You would not guess looking at the main benchmarks, the STOXX 600 is currently flat, but there are a flurry of other very sharp moves. Eutelsat is down 12%, ASM up 8.6%, Air France KLM down 4.5%, all of which after their trading update. (Julien Ponthus) ***** A DECENT BATCH OF EARNINGS ON THE FACE OF IT (0725 GMT) Futures for the main European benchmarks are all trading in positive territory and by the face of it, today's batch of Q3 results turns out to be a decent bag of earnings with quite a few beats. The only big disappointment at the moment looks to be Air France KLM, which is called down 4% by one trader. As a bonus, we have PSA and Fiat Chrysler making it official: they are getting engaged, whether they make it to the actual wedding is another matter. Talking about French M&A, there's a report saying shareholder activist Elliott opposes Capgemini's takeover terms for Altran. Here are this morning's big headlines: BNP Paribas quarterly profit falls less than expected BBVA Q3 net profit down 31% but beats forecasts ING reports 3Q underlying pretax profits of 1.91 bln euros as costs rise Lloyds profits miss expectations after fresh $2.3 bln mis-selling hit Spain's Caixabank Q3 net profit rises 37%, NII flat Zalando reports faster quarterly sales growth France-KLM sees slowing travel demand in tail-end of 2019 Carlsberg agrees to buy out Cambodian brewery, posts upbeat Q3 sales Aerospace supplier Safran maintains full-year outlook as Q3 sales rise Delivery Hero ups 2019 revenue guidance thanks to strong order volumes Oil firm DNO swings to Q3 loss amid writedowns (Julien Ponthus) ***** FED CUTS, S&P SOARS, Q3S MARCH ON, BEWARE THE FOMO (0535 GMT) Even though it was widely expected, the Fed cut sent some feel-good vibes from the U.S. to Asia and there just isn't any reason why Europe shouldn't get its fair share of the love. Except for one thing: we're in the thick of a Q3 earnings season which is stubbornly exposing a clear cut corporate recession. So while Financial spreadbetters expect Frankfurt and Paris to open just slightly higher, there's no ruling out that the mood could sour quickly if today's big earnings batch doesn't meet expectations. Given that the S&P is hitting record highs, it would be perfectly acceptable for European investors to be hit by a gasp of fomo (fear of missing out) if today's results disappoint. Let's see in 90 minutes how it pans out. (Julien Ponthus) ***** (Reporting by Danilo Masoni, Joice Alves, Julien Ponthus and Thyagaraju Adinarayan)