LIVE MARKETS-Vexed by vol

* European stocks rise

* Utilities rally after RWE (IOB: 0FUZ.IL - news) , E.ON plan Innogy break-up

March 12 (Reuters) - 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

VEXED BY VOL (1307 GMT)

An analysis by JPMorgan (LSE: JPIU.L - news) strategists of February hedge fund data has shown that, perhaps

surprisingly, both short volatility and long volatility hedge funds performed poorly in

February.

JPM say this suggests that short vol funds were underprepared or not adequately protected

for a reversal of the low vol trend, while long vol funds were not leveraged enough to take

advantage of the spike in volatility.

Another observation is that AI funds along with CTAs (commodity trading advisers, or managed

futures) likely played a big role in the correction. Many CTAs generate returns from currencies,

interest rates and equities futures.

"While AI hedge funds had over the previous seven years posted significantly better

performance relative to CTAs or Risk Parity funds both in terms of absolute or risk adjusted

returns, their unprecedented slump in February raises several questions," say JPM's strategists

in a note.

They flag that correlations between CTAs and risk parity funds with AI funds appear to have

risen over the past years.

(Kit Rees)

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GOLDILOCKS, SHEHERAZADE AND CANDIDE: A FAIRY-TALE MONDAY (1148 GMT)

Goldilocks is back! At least as a popular buzzword in our inboxes this morning. The fairy

tale analogy of a not too hot, not too cold pace of inflation-free economic growth is being

widely used to describe the mood markets got into after Friday's U.S. jobs report.

"U.S. markets have sprinted higher in the wake of an NFP report that may be justifiably

described as a ‘Goldilocks’ update," writes IG (Frankfurt: A0EARV - news) 's Chris Beauchamp.

"As far as U.S. investors appear to be concerned the fear and loathing at the beginning of

February almost appears a distant memory," says CMC (BSE: CMC.BO - news) 's Michael Hewson, noting a "Goldilocks U.S.

jobs report".

"Market sentiment was lifted on Friday on the back of a ‘Goldilocks’ U.S. February labour

report," is also Rabobank's analysis.

Another kind of fairy tale, this time from 'One Thousand and One Nights', was used by Wall

Street’s Bond King Jeffrey Gundlach on Friday but in a less optimistic tone:

French asset manager Hervé Goulletquer (LBPAM) chose Voltaire's Candide and the "All is for

the best in the best of all possible worlds" quote to reflect on whether we are back in last

year's favourable macro environment.

"Should one believe in a 'best of all possible worlds' story?", he asks in his daily note.

While markets this morning still seem to be in fairy-tale mood, a reality-check is scheduled

for tomorrow.

"Core CPI on Tuesday is the next major macro test for markets," warns DNB (LSE: 0O84.L - news) .

In the meantime:

(Julien Ponthus)

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GLOBAL CORPORATES: A PICTURE OF HEALTH (1113 GMT)

Corporate confidence among the world's largest companies for the coming year has reached a

five-year high, Fidelity reports from a survey of its 143 investment analysts, based on company

meetings.

While this climate of high global debt and market confidence (bar last month) would usually

lead to higher leverage and rising default expectations, it hasn't thus far, Fidelity's head of

research Marty Dropkin says.

"On the contrary, our survey points to well-funded balance sheets across sectors; stable

financing needs, funding costs, and default rates; and slightly falling leverage over the next

12 months - a reflection of cautious capital use despite years of economic growth.”

Moody's analysis chimes with this. The ratings agency expects the speculative-grade default

rate to fall globally in the next 12 months (to 1.0 percent from 2.8 percent in Europe) although

the squeezed retail and media sectors are still likely to face trouble.

Among last month's defaulters were four companies from the retail sector.

But Sharon Ou, Moody's senior credit officer, says: "We believe that after a particularly

difficult year in 2017, with 13 defaults, the retail sector is now approaching a tipping point

and the number of defaults among retailers will drop significantly this year."

In Europe, the media sector will suffer the most defaults in 2018, Moody's predicts,

followed by retail, and cargo transportation.

(Helen Reid)

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SPOT THE EXTREMES IN EUROPEAN EQUITIES (1056 GMT)

Yep, there's still a few lurking.

Two years on and UBS (LSE: 0QNR.L - news) strategists have reviewed four charts showing "crisis-born" extremes

for European equities.

While we are seeing a turning point in European earnings and the yield gap between the

German bund and European banks is normalising, UBS' other two charts suggest that the hard work

isn't over yet.

For instance, this is the first time since 1973 that Europe has lagged the U.S. coming out

of a recovery rally (see chart below), thanks to tech's larger weighting in the U.S. and recent

U.S. stimulus measures.

Likewise UBS highlights that the profit gap between Europe and the U.S. is on course for a

new crisis high of 68 percent, as a cocktail of tax cuts, increased fiscal spending and weaker

dollar are expected to boost U.S. company profits.

(Kit Rees)

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TARIFF TIT-FOR-TAT (Shenzhen: 002433.SZ - news) : HOW FAR WILL IT GO? (1005 GMT)

We're arguably "back to square one" on globalisation, Bank of America Merrill-Lynch

strategists say, with trade tariffs from the U.S. and the outcome of the Italian elections

throwing doubt over the progress made in 2017.

The U.S. tariffs on steel and aluminium imports will have a very small near-term impact, but

very uncertain ultimate endgame, BAML says, with retaliation likely.

Europe could target a range of U.S. exports including orange juice, cranberries, peanut

butter, tobacco, as well as industrial products.

"If the tariff tit-for-tat ends here, as with the initial tariffs, the macroeconomic impact

is likely to be quite small," BAML writes.

Noting, however, Trump's claim it would counter these tariffs with restrictions on autos,

they add: "This would be the kind of escalation that could seriously damage business

confidence."

Ironic, then, that the pick-up in global growth over the past two years is in part down to a

revival in trade.

(Helen Reid)

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OPENING SNAPSHOT: UTILITIES RALLY (0814 GMT)

Stocks across Europe have opened strongly, with financials giving the biggest boost to the

STOXX 600 as appetite for riskier parts of the market returns.

Utilities are the top-gaining stocks across country benchmarks as news of RWE and

E.ON's break-up of Innogy boosts speculation of deal-making.

Suez (LSE: 0NRV.L - news) , EDP, Veolia, EDF (Paris: FR0010242511 - news) , and Italgas are all climbing on the news. Innogy itself

jumped 15 percent.

(Helen Reid)

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WHAT YOU NEED TO KNOW BEFORE EUROPE OPENS (0745 GMT)

European shares are expected to open higher with futures on main country benchmarks up

0.4-1.1 percent following gains in Asia on the back of Friday's U.S. jobs report.

British engineer GKN (Frankfurt: 694194 - news) will be in focus after it agreed a $6 bln tie-up with Dana to

help fend off Melrose (LSE: 136541.L - news) , which in response submitted an increased and final cash and paper offer

for GKN.

Auto stocks could underperform after US President Donald Trump tweeted that if the

EU retaliates against steel tariffs by placing higher tariffs on American goods, the US would

"tax cars etc. FAIR!" link here: https://goo.gl/oJ2PBs

Also in the spotlight will be German utilities after RWE and rival E.ON

announced plans to break up Innogy. E.On is seen up 6 percent in premarket

trade.

We'll also be watching shares in Glencore (Frankfurt: 8GC.F - news) and Randgold after Congo's

president signed a new mining code on Friday evening.

For other market moving headlines, see two posts below.

(Danilo Masoni)

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FUTURES POINT TO RENEWED RISK APPETITE (0719 GMT)

It's been a strong open for futures across the board, with gains of 0.4 to 0.8 percent - the

DAX is leading the pack. This confirms spreadbetters' indications that Europe should start the

week on the front foot, following the lead of Asian markets which rallied overnight.

(Helen Reid)

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EUROPEAN HEADLINES ROUND-UP (0710 GMT)

GKN agrees $6 bln tie-up with Dana to help fend off Melrose

Melrose makes increased and final offer for GKN

Novartis (IOB: 0QLR.IL - news) says operations head Wyss resigning, names three to executive panel

"No deal" Brexit could cost UK, EU companies 58 bln pounds -report

Facing break up, Innogy unveils further costs cuts

RWE, E.ON reshape German power sector in Innogy asset swap deal

UAE's ADNOC says awards Italy's Eni (LSE: 0N9S.L - news) stakes in new oil concessions

UBS sees "business as normal" as it contests Hong Kong suspension

Polish bank PKO Q4 profit up 38 pct, largely in line with forecast

Dutch wholesaler B&S valued at 1.22 bln-1.49 bln euros in IPO

Deutsche Bank (IOB: 0H7D.IL - news) values asset management at up to 7.2 bln euros in IPO

Prada (HKSE: 1913-OL.HK - news) shares soar 20 pct as firm returns to sales growth

Norway's Hydro says Brazil plant made unauthorised spills

France's Areva (LSE: 0P4A.L - news) to pay $554 million to settle Finnish reactor dispute

Regeneron/Sanofi (LSE: 0O59.L - news) offer new Praluent pricing to break reimbursement logjam

Geely chairman says Daimler (IOB: 0NXX.IL - news) synergies "no precondition" - Bloomberg

MORNING CALL: EUROPEAN SHARES SEEN UP (0630 GMT)

European shares are expected to open higher this morning, tracking gains in Asia overnight.

A relief rally swept across Asian share markets after the latest U.S. jobs report managed to

impress with its strength while also easing fears of inflation and faster rate hikes, a neat

feat that whetted risk appetites globally.

Here are your morning calls, courtesy of CMC Markets (LSE: CMCX.L - news) :

FTSE: 3 points higher

DAX 50 points higher

CAC: 21 points higher

(Danilo Masoni)

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