LIVE MARKETS-Yes to cash returns, but bleak outlook for FTSE earnings
LONDON, Feb 28 (Reuters) - 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:
julien.ponthus.thomsonreuters.com@reuters.net
YES TO CASH RETURNS, BUT BLEAK OUTLOOK FOR FTSE EARNINGS (1617 GMT)
Even (Taiwan OTC: 6436.TWO - news) though it can be tricky to assess the UK earnings season given that British firms are
not required to report quarterly figures, UBS WM have taken a look at what we've had so far and
singled out a number of key observations.
Caroline Simmons, deputy head of the UK Chief investment office at UBS Wealth Management,
notes that companies were predicting slightly higher drags from currency effects, and those
firms with U.S. exposure have said that they will reinvest around half of the benefits they
expect to see from tax reforms.
And of course, shareholder-friendly measures got a thumbs up from investors.
"Firms whose share prices have risen most are those that announced higher dividends or share
buybacks. It seems we remain focused on cash returns!" Simmons says in a note.
Looking ahead, while Simmons expects the materials sector to benefit from
higher-than-expected commodities prices, the picture is not as rosy for the wider UK market.
"The UK earnings outlook is not as bright as in other regions, such as the Eurozone or the
global equity market, where the rate of increase is expected to be in double digits," says
Simmons.
"So we anticipate the UK underperforming the Eurozone and global equities over the next six
months."
(Kit Rees)
*****
WHAT TO DO WITH BOND PROXIES? (1552 GMT)
Debate among stock pickers about what to do in a rising rates world looks to be heating up
and sectors that are most sensitive to the direction of bond yields are in the spotlight.
Credit Suisse (IOB: 0QP5.IL - news) 's Andrew Garthwaite has weighed in too, concluding that the relative winners
are financials and tech, while telecoms and consumer staples are the most negatively affected.
But here are some other key takeaways on top market sectors:
1. Since 2010, tech has outperformed 88% of the time when bond yields have risen, twice as
often as
when yields have fallen. The sector's net cash position stands out as the cost of debt rises.
PEs are only middling and thus we stick to our strong overweight (ex semis).
2. Concessionaires have outperformed c.60% of the time when bond yields have risen. With (Other OTC: WWTH - news) a
CPI
link, cyclicality and financial leverage at a decadal low, this should be one of those
occasions. PEs are middling and the sector is a near pure play on the euro area growth story.
Vinci (LSE: 0NQM.L - news) is among our Outperforms.
3. Regulated utilities: This sector has the worst combination of high financial leverage and
low
operational leverage, and hence we stay underweight the UK sector (given the political and
regulatory risk) and the US (disruption risk).
4. REITs: This tends to be the worst performing sector when real (not nominal) bond yields
rise.
Nevertheless, the very attractive fundamentals of German REITs should enable outperformance, we
think, unless Bund yields rise to in excess of 2%. We stay underweight UK REITs.
5. Consumer staples (add to spirits): We stay underweight overall via food and household
products
(which are disrupted, have poor earnings revisions and are still expensive). We take spirits to
benchmark from underweight.
6. Add to underweight of non-financial cyclicals (ex tech): They follow PMIs (which are
peaking),
have discounted a 3.5-4%10Y UST yield, look expensive, have outperformed defensives, and have
extreme positioning, with sector risk appetite in 'euphoria'.
7. Commodities: Materials and gold underperform when real bond yields rise. Gold stocks are
no
longer cheap, and mining is particularly vulnerable to China PMI/US ISM peaking. We are
benchmark mining, underweight gold.
(Danilo Masoni)
*****
RISING RATES, WHEN RESEARCH AND MARKETS BEG TO DISAGREE (1510 GMT)
There is quite a sharp contrast between how analysts believe rising rates will impact shares
- nothing dramatic - and how nervous stock markets are to the prospect of the Fed rising rates
four times instead of three, hardly a game changer for many pundits.
Here's a sarcastic point found on Twitter (Frankfurt: A1W6XZ - news) :
The point most research notes we receive make at the moment is that global growth
translating into corporate earnings is likely to offset rising bond yields, even if portfolios
have to be adjusted and rotation implemented to adjust to this new economic environment.
"Risk assets may wobble while adjusting to a world where yields also rise – but they can
still do well", BlackRock (Sao Paolo: BLAK34.SA - news) said in a note this morning.
"Stronger growth will lift company earnings and help offset a higher discount rate", it also
said adding that "aggressive monetary tightening" could however pose a threat.
DNB (LSE: 0O84.L - news) made the point that "the direction of the US 10-year yield is likely to be the key
catalyst for equities near-term", drafting a Bullish scenario if yields stay below 3 percent and
bearish if they go above.
But even in that case, DNB is fairly optimistic: "Economic growth appears to be strong
enough that even in the bear case scenario, new cycle highs for equities should be achievable
when 10 yields stabilise again".
(Julien Ponthus)
*****
FTSE HITS SESSION HIGH AS STERLING FALLS (1230 GMT)
We're seeing a bit of action on the FTSE as sterling falls on the back of comments from the
EU's chief negotiator Michel Barnier on Brexit, with British blue-chips down just 0.1 percent,
outperforming a more negative European market.
Barnier saying the transition deal is not a given is weighing on the pound.
This brings the possibility of a 'hard Brexit' into the picture.
"It has just become more murky and uncertain with the respective motives behind the
differing approaches riddled with political agendas. That doesn’t usually bode well for domestic
markets," Guy Stephens, technical investment director at Rowan Dartington, said in a note.
"Overseas (Tel Aviv: OVRS.TA - news) opportunities continue to be much easier to identify and sit more comfortably on a
two-year view."
Here's a chart showing the FTSE and sterling's inverse moves:
(Kit Rees)
*****
STOCK PICKS FOR A WORLD OF HIGHER BOND YIELDS (1202 GMT)
As markets are now pricing in the possibility of four rate hikes in the U.S., Deutsche Bank (IOB: 0H7D.IL - news)
just published a timely note about what higher yields mean for stock markets and how to go
beyond the current "bond yields up, stocks down" play.
Companies which are capital intensive and need to borrow a lot in the short term could suffer
but obviously, those facing a debt wall with piles of debt to pay off or refinance are set for a
rough ride.
Here's DB's list:
One other point, which was also highlighted in a Citi note we mentioned earlier on, is that
financial stocks are highly correlated with bond yields. DB finds that "European banks, in
particular, are undervalued given the steeper forward yield curve and low deposit beta in
Europe."
Here's their stocks list and as you can see, they are a few bond proxies on the other side
of that trade. Caution is particularly advised against groups which have financed generous
dividends through debt rather then earnings redistribution.
(Julien Ponthus)
****
BRACE FOR "ABOVE AVERAGE" ITALY STOCKS VOLATILITY AFTER VOTE (1131 GMT)
While government bonds may be somewhat pricing in an uncertain outcome for Italy's general
election, the picture looks quite different when you look at the FTSE MIB: Italy's top
share index has left the STOXX 600 behind year to date with a 3.8 percent surge, mainly driven
by gains among bank and autos.
That could make Italian stocks vulnerable to a spike in volatility when markets open on
Monday, potentially creating some extra trading opportunities.
"Most election outcomes should have a limited impact on Italian equities, although they may
lead to some temporary, above average market volatility," UBS WM strategists say.
According to UBS WM, who are neutral on Italy, MSCI Italy is trading at a 12-month-forward
PE ratio of around 13 times, which is two points above its 10-year average but below the MSCI
EMU P/E of 14.5 times. This 10 percent discount is broadly in line with the 10-year average.
(Danilo Masoni)
*****
BANKS IN "POLE POSITION" FOR DIVIDEND DELIVERY (1040 GMT)
One day after the market read Fed's Powell's remarks as hawkish, banks in Europe are
understandably doing quite well compared to the broader market's weakness.
On top of that there is an upbeat note from Citi analysts, who highlight the sector's
dividend potential, reiterating their overweigh stance.
"Banks sector remains a stand out... and (is)... in pole position for dividends," they
write. They estimate a Compound annual growth rate for European banks of more than 10 percent in
2017-2019.
Here are their top picks that should benefit from the tailwind of higher rates and strong
PMI (Purchasing Managers Index): Credit Suisse, KBC Groep, Societe Generale (Swiss: 519928.SW - news)
, Standard Chartered (BSE: 580001.BO - news) .
Europe's banks are up 1.7 percent year to date, while the STOXX is down 2
percent.
(Danilo Masoni)
*****
OPENING SNAPSHOT: EARNINGS FAIL TO SHAKE WALL STREET GLOOM (0812 GMT)
Most bourses and sectors have opened in negative territory in Europe and it seems the fresh
new batch of corporate results has not changed the negative mood set in Wall Street with fears
of U.S. rates rising faster than expected.
Here's your opening snapshot:
(Julien Ponthus)
****
ON THE RADAR: EARNINGS, LOTS OF THEM! (0752 GMT)
As we said earlier, pushing aside fears that U.S. rates could rise faster than expected,
there is plenty of news to animate the trading session in Europe. Plus, as data showed
yesterday, there isn't currently much of a case for the ECB to accelerate its path to monetary
normalisation.
Anyhow, here are a few stories which could move shares this morning:
Among the blue-chips there is Bayer (IOB: 0P6S.IL - news) with Q4 profit edging lower, Solvay (LSE: 0NZR.L - news) which
sees a slowing of profit growth in 2018 and EFG International (IOB: 0QJX.IL - news) reporting a worse
than expected 2017 loss.
From the Benelux, Bekaert (EUREX: 11962877.EX - news) reports a flat 2018 and supermarket retailer Ahold
confirms Q4 sales.
In the banking sector, Erste Group reported 2017 profits boosted by the economic upswing in
eastern Europe.
Another possible mover is Safran (LSE: 0IU8.L - news) , which according to Reuters sources, is close to an Indian
combat jet engine deal.
On the M&A front, AstraZeneca (NYSE: AZN - news) will spin off its autoimmune drugs into a new biotech company
and Comcast (Swiss: CMCSA.SW - news) 's $31 bln Sky (Frankfurt: 893517 - news) bid is still making front page news.
For more headlines check out:
(Julien Ponthus)
****
NOT SO FAST! A CASE FOR CAUTION ON U.S. RATES (0725 GMT)
While some traders are now betting that the Fed will squeeze in a fourth rate hike this
year, will these expectations really sink in and become the new consensus?
According to CMC Markets (LSE: CMCX.L - news) ' Michael Hewson, there is a case for caution here as the American
economy may not be rising as fast as it currently seems.
"There is an argument that we could be heading for further softness, which might cast doubt
on U.S. rate expectations this year, if sustained", he argues, noting recent "economic data
suggests that the US economy could well be heading for a bit of a soft patch".
An answer might be given this afternoon with U.S. GDP data (1330 GMT).
(Julien Ponthus)
****
EUROPEAN STOCKS FUTURES OPEN LOWER (0703 GMT)
Down it is, but nothing dramatic as the worst losses at the moment (that's the FTSE and
IBEX) are limited to 0.5 percent:
(Julien Ponthus)
****
MORNING CALL: EUROPE SEEN OPENING LOWER AFTER POWELL SPOOKS WALL STREET (0625 GMT)
Good morning from snowy London!
European shares are expected to open lower, following the trend set by U.S. stocks, which
suffered their biggest daily drops since the early February selloff after Fed Chairman Jerome
Powell revived (not necessarily willingly) fears about fast rising interest-rates.
In Asia, shares extended losses and bonds were sold off as weak factory data from China
revived worries about global economic growth.
In Europe, there will be plenty of companies reporting annual results this morning to
animate the session.
Financial spreadbetters expect London's FTSE to open 53 points lower, Frankfurt's DAX to
open down 82 points and Paris' CAC to lose 35 points.
(Julien Ponthus)
****
(Reporting by Kit Rees)