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LIVE MARKETS-Turning more constructive on Italy

* European stocks rally on comforting political news * STOXX 600 rises 0.8%; HK-exposed names top gainers * HK cancels proposed extradition bill * UK may avert no-deal Brexit, German shares rally (+1%) * Italian banks gains after 5-Star/PD on track to form new govt 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://thyagaraju.adinarayan.thomsonreuters.com@reuters.net TURNING MORE CONSTRUCTIVE ON ITALY (1115 GMT) Italy is one of the key ingredients of today's return of risk appetite with the Milan bourse standing out among European benchmarks. The prospect of a coalition government between the anti-establishment 5-Star Movement and the centre-left Democratic Party (PD) taking office is a relief but, more broadly, the question is whether this will be enough to change the view on a country plagued by sluggish growth, structural problems and a huge pile of debt that strongly limits its fiscal leeway. UBS says recent developments make it "more constructive" on Italian assets, although challenges remain. "Political instability could resurface as the framework remains complex and against this backdrop, a new coalition government might only hold a slim majority," a team of analyst and strategists at the Swiss bank says. "Any further challenges to the political framework would likely heighten investor concerns, especially as long as polls continue to show strong support for the Eurosceptic parties," they add. That being said, UBS believes "political prospects appear to have shifted markedly" and says the sovereign spread may tighten further, also possibly helped by more fiscal flexibility from Brussels and a dovish ECB. In the very short term, investors will concentrate on the list of ministers that PM-designate Giuseppe Conte will propose to the head of state, even today. Roberto Gualtieri, chairman of the EU Parliament's economic affairs commission, has been presented as possible economy minister. "Markets should welcome his appointment," says a trader. Italy's FTSE MIB is the leading gainer in Europe, up 1.6%, boosted by a rally in bank stocks. (Danilo Masoni) ***** KILL BILL: LUXURY GOODS AND ASIA-FOCUSED FINANCIALS RALLY (0845 GMT) European luxury goods stocks and Asia-focused financials are rallying this morning after reports Hong Kong leader Carrie Lam will announce plans to officially withdraw the extradition bill that triggered months of protests and thrown the Chinese-controlled city into its worst crisis in decades. A government source confirmed the planned announcement on Wednesday, which comes just two days after Reuters revealed that Lam told business leaders last week she had caused "unforgivable havoc" by introducing the bill. The relief is clear. Prudential is leading the FTSE 100 and is among the biggest risers on the STOXX 600 , rising 6.4% and set for its best day in years on the report. It hit its lowest in nearly three years at the end of August as the protests showed no signs of ending. Richemont and Swatch, the other hardest hit stocks, are each up 3.9% and other luxury goods companies, Gucci-owner Kering, LVMH and Hermes, are following suit. The chart below shows the damage to the sector inflicted by the protests since mid-July. Now all investors have to worry about is that rather protracted trade spat between China and the United States, something Carrie Lam can't fix. (Josephine Mason) ***** OPENING SNAPSHOT: HK-EXPOSED NAMES, ITALIAN BANKS TOP RISERS (0732 GMT) It's all risk on in Europe as some soothing political news from Hong Kong, the UK and Italy are driving stocks sharply higher. Hong Kong leader Carrie Lam is likely to announce later on Wednesday the formal withdrawal of the proposed extradition bill that's triggered major protests this summer and HK-exposed luxury, banking and insurance stocks are among the top gainers across Europe today. Luxury stocks are rising 3%-5%, while London-listed shares of Standard Chartered and HSBC are up 2.5%. The rally today is also fuelled by fading no-deal Brexit worries as British lawmakers take control of parliamentary business and seek to pass a law forcing PM Johnson to ask the EU to delay Brexit. The move is supporting shares of some UK housebuilder and retailers. Germany whose car stocks are vulnerable to the vagaries of the UK's choatic exit from the European Union, is also enjoying a rally with autos leading the gains. Italian banks are rallying 2% after a political crisis comes to an end with 5-Star members overwhelmingly supporting the new coalition with the Democratic Party (PD). In single stocks, Thales is up 6% as profit and order intake beats estimates; Delivery Hero up 6% to 1-year highs after it raised outlook. It's a sea of green: (Thyagaraju Adinarayan) ***** SOLID GAINS ON CALMING NO-DEAL BREXIT FEARS (0654 GMT) Politics is taking centre stage today driving gains across Europe with British lawmakers strongly opposing a no-deal Brexit and Italy on track to form a new government in the next few days as 5-Star members overwhelmingly supported the new coalition with the Democratic Party (PD). European stocks point to more than 1% gains with Germany's DAX in driving seat as calming no-deal Brexit fears is giving some comfort to the export-heavy nation amid which is likely to tip into a recession. UK's FTSE 100 futures are up 0.6% as steadying pound is capping major gains. A London-based trader says abating no-deal Brexit fears and a bit of bargain hunting in Asia are feeding through to Europe. Asia-exposed UK banks Standard Chartered and HSBC are seen rising 2% on Chinese media report Hong Kong leader Carrie Lam is expected to announce later on Wednesday the formal withdrawal of the proposed extradition bill that's triggered major protests this summer, according to one dealer. The luxury sector could also get a boost from that report which will quell concerns that the violence would hurt business. Dealers see shares rising 2%-3%. In corporate news, strong numbers and an upbeat outlook from Delivery Hero are fuelling its shares 1.5% higher in premarket trade, while UK rival Just Eat shares are seen up 2% amid hopes it may attract a fresh round of suitors after a top-10 shareholder said yesterday it would vote against a proposed 9 billion pound ($11 billion) merger with Takeaway.com, saying the deal undervalued Just Eat. RBS shares is seen down 1%-2% after it set aside another 600-900 million pounds for PPI claims. Thales shares are seen up 2-4% after in-line H1 results, even after saying its FY organic sales would be in the lower end of previous guidance. Key corporate headlines: RBS makes fresh 600-900 mln stg provision for PPI claims Diageo Scottish union reveals strike action dates Barratt Developments reports higher annual profit Dunelm annual profit jumps, still cautious about FY outlook Insurer Just Group posts 27% drop in H1 operating profit, pays no dividend Premier Asset Management merges with Miton to form group with 11.5bln stg AUM (Thyagaraju Adinarayan) ***** UK WARMS UP TO MORE DRAMA; ITALY CALMS (0606 GMT) European stock futures point to a strong open as no-deal Brexit fears abate with FTSE futures rising 0.6% and Euro STOXX futures up 0.8%. Gains however are likely to be limited as UK PM Johnson's call for snap election brings fresh uncertainty. Italian stocks are likely to climb as 5-Star members overwhelmingly backed a proposed coalition with the Democratic Party (PD), opening the way for a new government to take office. It's going to be another eventful day in British politics as British lawmakers take control of parliamentary business and will seek to pass a law forcing Johnson to ask the EU to delay Brexit - for a third time - until Jan. 31 unless he has a deal approved by parliament beforehand. In corporate news, Delivery Hero shares rise 1.7% in premarket trade on upbeat full-year outlook. France's Thales could come under pressure after the French defence electronics group toned down sales growth outlook. (Thyagaraju Adinarayan) ***** TENTATIVE GAINS AS NO-DEAL BREXIT FEARS FADE; SNAP ELECTION LIKELY (0532 GMT) Tentative gains in Europe as British lawmakers defeated PM Johnson in parliament, potentially averting a no-deal Brexit for now, but calls for snap election adds back uncertainty keeping investors away from UK assets. "We think Parliament will now likely legislate to prevent no deal over the coming days if immediate dissolution is avoided," Citi strategists and economists say. Financial spreadbetters IG expect London's FTSE to open 16 points higher at 7,284, Frankfurt's DAX to open 46 points higher at 11,957, and Paris' CAC to open 13 points higher at 5,479. Meanwhile in Italy, 5-Star Movement members overwhelmingly backed a proposed coalition with the Democratic Party (PD), opening the way for a new government to take office in the coming days. Johnson at the House of Commons (Thyagaraju Adinarayan) ***** (Reporting by Danilo Masoni, Josephine Mason and Thyagaraju Adinarayan)