January 10, 2018 / 6:18 AM / a year ago

LIVE MARKETS-Closing snapshot: Europe pulls back from highs

    * European stocks fall on bond sell-off
    * Defensives under pressure; banks rise
    * Gold jumps, U.S. stocks down

    Jan 10 (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 
 
    
    CLOSING SNAPSHOT: EUROPE PULLS BACK FROM HIGHS (1708 GMT)
    Bond market jitters have weighed on the broader stock market today, leaving rate-sensitive
banks, up 2.1 percent, as the only clear sectoral winner on the day, while bond proxies
like utilities and real estate suffered the most. Overall that resulted in the
STOXX 600 index falling just 0.4 percent after hitting fresh 2-1/2 year highs yesterday, while
the bank-heavy FTSE MIB index managed to post a small gain.
    Here's your closing snapshot:     
 
    (Danilo Masoni)
    ****
        
    EYES ON THE 2.6% LEVEL (1644 GMT)
    Nervousness on the bond market is the flavour of the day and equity investors are also
closely watching U.S. Treasury yield charts for any further spike that could have meaningful
repercussions on the stock market.
    "The 2.6% level on the 10-Year is an important level which if surpassed could be detrimental
for equities," says Stephane Ekolo, Global Equity Strategist at Avalon Capital Markets.
    The yield on 10-year U.S. Treasuries has spiked today to fresh 10-month highs, to within
striking distance from the 2.6% level.
    "US CPI data point (this Friday at 1:30pm UK) should be closely monitored as it may provide
evidence confirming the uptrend on the 10yr yield," adds Ekolo.       
 
    (Danilo Masoni)
    *****
    
    CHRISTMAS CHEER? A MIXED BAG FOR UK RETAILERS (1606 GMT)
    Retailers' Christmas updates so far have been a mixed bag, Liberum analysts say, with
electronics, clothing and fashion the weakest segments, although most warned of tough conditions
going into 2018.
    Company updates and industry data alike paint a picture of weak in-store footfall being
offset by strong online sales.
    "What we're seeing is the disparity between the 'new-world' retailers versus the more
traditional, mid-market players where the consumer proposition and service elements are not
compelling or agile enough, is widening," they note, adding that most retailers highlighted
tough conditions in 2018.
    What to bet on? Strong online players and value propositions, according to them - Liberum's
preferences include ASOS, B&M and Boohoo, while it remains concerned
about M&S, which reports Christmas trading tomorrow. 
    Today we've had some disappointing updates from Superdry and Moss Brothers
sending their shares sliding 8.8 and 16 percent respectively.
    But overall valuations for the UK's general retail sector have ticked up recently as some
Christmas updates beat gloomy expectations.
 
    (Helen Reid)
    *****
    
    HOW DOES IT FEEL BEING A CRYPTO? 267 PCT HIGH THANK YOU! (1545 GMT)    
    Shares of Eastman Kodak Co are up 65 percent today and have surged 267 percent
since the beginning of the year after the one-time leader in photography became the latest
company to jump on the cryptocurrency bandwagon.
    There's really something magical (or not) about crypto : Riot Blockchain shares
have tripled since October when the former biotechnology firm changed its name.
    Same thing for soft drinks maker Long Island Iced Tea which has more than doubled
since it said it was shifting focus to blockchain technology and changed its name to Long
Blockchain.
    Here's crypto magic for you in the form of Kodak shares:  
 
    (Julien Ponthus) 
    *****      
    
    JPM AM STICKS WITH SLIGHT PRO-CYCLICAL TILT IN EUROPE (1510 GMT)
    Stephen Macklow-Smith, head of Europe equity strategy at JPMorgan Asset Management, tells us
that the faster earnings growth he expects to see in Europe is probably going to be in the
financial and cyclical area of the market.
    "If we're seeing higher growth and higher inflation, then yields should be moving higher and
yield curves should be steepening, and that's exactly what we are seeing," Macklow-Smith says.
    "That's normally an environment in which financials and cyclicals outperform defensives and
growth companies."
    Macklow-Smith adds that they are sticking with the "modest pro-cyclical financial tilt to
the portfolio" they have had through most of the time since the yield curve in Europe started to
steepen in the middle of 2016.
    (Kit Rees)
    *****
    
    "NO I DON’T THINK THIS IS THE START": PERMABEAR REBUFFS BOND BEAR CLAIMS (1502 GMT) 
    With bond kings such as Bill Gross claiming the start of a bear market has begun, you would
have thought that SocGen's Albert Edwards, who's been warning for quite some time now about the
possibility of a market collapse, would join in. 
    But no, far from it. 
    "The US 10y can rise all the way to 3% and we will still be in a long-term secular bull
market", he just told us. "My own view is that we could visit 3% before yields crash lower in
the next recession to -1% US10y (yes that is minus 1%)", he added. 
    Just to reassure you guys, he is still a permabear : "Do I think the equity markets could
collapse this year, just like in 1987? Yes I certainly do," he stressed. 
    Here's the chart he used yesterday during a conference in London to make his case: 
 
 
    (Julien Ponthus) 
    *****
    
    IS THIS THE TURNING POINT FOR A SOUR BET ON EUROPEAN BANKS?(1440 GMT) 
    One equity trade of 2017 that has so far failed to pay off was euro zone banks, driven by
the expectation that recovering economies and an eventual pull-back in bond purchasing by the
ECB would finally nudge interest rates higher, firing up bank profits. 
    But a turning point could be ahead with bank stocks shooting up today as bond yields rise. 
    Every market watcher is talking about the interest rate outlook today and how to position in
equities in preparation - with many strongly bullish on bank stocks.
    "Higher rates could be coming in our view, and given the moves can be vicious when they
finally arrive it seems sensible to position for such ahead of the event," write Northern Trust
Capital Markets analysts. 
    They cite valuation discounts, dividend premiums, a peak in regulation as just a few of the
reasons to buy bank stocks.  
    "Clearly banks should win in a rising rate environment; so too should commodities," the
analysts add. 
    Citi analysts also remain overweight financials, saying the sector will be driven higher by
rising bond yields, solid earnings growth, as well as the potential for sector M&A.
    (Helen Reid) 
    *****
        
    AFTERNOON UPDATE: EUROPEAN BANKS SOAR BUT STOXX STILL SOUR (1354 GMT)
    It's just past lunchtime and financials are the one bright spot in an otherwise negative
European stockmarket.
    Over in the U.S. it looks like it's going to be a similar story with Wall St futures
pointing to a muted start to trading following a report that China may slow its purchases of
U.S. bonds.
    Here's your snapshot:  
 
    (Kit Rees)
    *****
    
    SMALL IS BEAUTIFUL IN EUROPEAN EQUITIES (1340 GMT)
    JP Morgan strategists are pouring praise on the small- and mid-cap parts of the market which
they see as safe bets in this late-cycle stock market where valuations are running high.
    Small and mid-caps in Europe continue to offer faster earnings growth than large-caps, at
discounted valuations, and with less leveraged balance sheets, they note.
    JPM believes the next global recession will start in the U.S., and accordingly analyzes the
performance of small and mid-caps around the world during U.S. recession-linked downturns in the
S&P 500. 
    "Our findings suggest that some of the best alpha opportunities in small & mid-caps today
would also be low beta plays when we hit the next economic downturn," they write. 
    Accordingly they're overweight small and mid-caps versus large-caps in the Eurozone, but
have the opposite positioning in the UK.
    Globally they also prefer the smaller side of the market, seeing U.S. stocks in particular
as benefiting from tax reform they see as having a bigger impact than many expect.
    Small and micro-caps have indded strongly outperformed the large-cap market in Europe over
the past five years as the economy recovered:
 
 
    (Helen Reid)
    *****
    
    CONSENSUS BUILDS AROUND EUROPEAN STOCKS (1310 GMT)
    Morgan Stanley has just raised its overweight recommendation on European stocks and trimmed
its US weighting, adding to those expecting European stocks to outperform Wall Street this year.
    "U.S. stocks have outperformed and are now close to our year-end price target with limited
upside, while the backdrop for European stocks outperformance is intact," the U.S. bank's
strategists said in a cross-asset note.
    Earlier on today, Tomas Hildebrandt, senior portfolio manager at Evli, said investors should
favour non-U.S. equities including European ones.
    "Europe and Emerging Markets have the best upside potential in 2018, even though the U.S.
tax resolution boosts US earnings. Both Europe and EM usually perform well in late-cycle
markets. In Europe earnings and margins are still lagging long-term trends, hence a catch-up
with the rest-of-world seems plausible for the region."
    Just yesterday, UBS strategists warned that the temperature in European - and global -
markets is rising, but said EU stocks offered catch-up potential.

    (Helen Reid and Danilo Masoni)
    *****
    
    THAT'S USUALLY NOT A GOOD SIGN RIGHT?  (1209 GMT) 
    Gold has jumped 1 percent during morning trading to its highest in about four months,
usually a clear "risk-off" sign for markets. It has eased off a bit to 0.8 percent. 
    In the U.S. futures are currently pointing to a dip of about 0.5 percent for the Dow and the
S&P and of 0.7 percent for the Nasdaq as reports that China is looking to cut down on U.S. bond
purchases send U.S. yields to fresh highs.     
    Here's the gold report:
    Here are gold prices in the last three days:
 
    (Julien Ponthus) 
    *****
    
    COULD EUROPEAN EQUITIES CATCH UP WITH U.S.? (1144 GMT)
    They would have a long way to go in order to do so...
    Man Group says Europe's political travails have depressed the region's equity valuations
versus U.S. stocks and the spread in price/earnings ratios on either side of the Atlantic is at
its widest since the global financial crisis, according to its latest "Views From The Floor".
    "If 2018 does bring U.S. PE compression and Europe manages to stay on a political even keel
(a big 'if' in our view given the culmination of Brexit negotiations as well as the Italian
elections) then maybe we might start to see this trend reverse."
    Here's that big PE divergence:
 
    And looking at the performance of MSCI Europe versus MSCI World, Man Group concludes
European equities are at their lowest ever versus the U.S.:
 
    (Tom Pfeiffer, Danilo Masoni and Helen Reid)
    *****
    
    CHINA BOND PURCHASES REPORT ACCELERATES SELL-OFF (1117 GMT) 
    A report that China is looking to cut down on U.S. bond purchases sent U.S. yields to fresh
highs and sent the dollar tumbling, accelerating a sell-off in European stock markets as the
euro shot up.
    Bank stocks are the only ones spared as higher bond yields are a blessing for lenders: Euro
zone banks are flying up 1.3 percent while the STOXX 600 banks are up 1 percent.
    Saxo Bank's sales trader Pierre Martin tells Live Markets colleague Julien Ponthus he thinks
it's only a temporary risk-off moment, "a temporary spike in nervousness". But others reckon
this is just the beginning of a market-wide recalibration after Bond king Bill Gross's claim
that a bond bear market has begun.  
    "We look at financial markets and they hugely underestimate the potential for interest rate
rises," says Nick Gartside, of JP Morgan Asset Management, who spoke to our colleague Marc
Jones.
    "The biggest risk is Europe," he adds. "The market is pricing the first ECB rate rise in
2019. That's absurd: -0.4 rates are set from an emergency, is Europe in an emergency? Certainly
not from the data we have just seen."    
    (Helen Reid and Julien Ponthus)
    *****
    
    CORRECTION AHEAD? (1040 GMT)
    Spiking global yields have sparked worries that bonds have entered a bear market, hitting
bond proxy stocks like utilities yesterday and weighing on the broader market today. The
reaction remains contained so far but the "correction" word has resurfaced in market commentary.
   
    "The resilience shown by risky assets (equity, corporate bond spread, emerging markets) is
presumably due to the fact that real rates remain motionless in the current phase. Should this
move continue, and be helped by a limited rise in real rates, stocks and emerging markets would
likely correct (even slightly), if nothing else because of the short-term overbought levels
reached during the euphoric start of 2018," said Alessandro Balsotti, head of asset management
JCI Capital Ltd.
    Just about now the STOXX 600 has hit its day low, falling 0.4 percent, while the 10
year US Treasury yields have spiked to a fresh 10 month high.
    (Danilo Masoni)
    *****
    
    STAY AWAY FROM BITCOIN, WATCHDOG URGES FRENCH TV REALITY STAR (1032 GMT)  
    "Nabilla, bitcoin is very risky! One can lose it all. No such thing as a miracle investment.
Stay away." France's financial watchdog AMF posted this warning on Twitter after a French TV
reality star urged fans to invest in the crypto currency. 
    "Even if you know nothing about it, it allows you to make money without investing much,"
Nabilla Benattia said in a video on a social network, which quickly went viral. 
    I thought this could interest those of you looking for signs that the spread of crypto
currencies into retail investors might, perhaps, be signalling a bubble. 
    Here's Nabilla:     
 
    (Julien Ponthus)      
    *****
    
    FTSE UNMOVED AFTER STRONG UK PRODUCTION (0958 GMT) 
    No drama here: Britain's FTSE stuck to its modest gains in morning trading after data showed
 British industrial output was set to make a strong contribution to economic growth in the final
months of 2017.
    Seems economists polled by Reuters are telling the right story so far: the world's
sixth-largest economy should underperform most of its European peers in 2018 but will do better
than the gloomy predictions made around the shock Brexit vote of 2016.
    The FTSE is cruising up about 0.2 percent on fresh new highs. 
    (Julien Ponthus) 
    *****   
    
    EUROPEAN CONSUMER STAPLES' DIVI YIELD STILL TRUMPS BONDS (0855 GMT)
    While there may be concerns that a rise in bond yields could dent appetite for
dividend-paying sectors such as European consumer staples, which are also richly valued, the
chart below shows that the MSCI European consumer staples index's dividend yield is still more
than the yield on the German 10-year government bond.
    At least for now ...
 
    (Kit Rees)
    *****
    
    OPENING SNAPSHOT: DEFENSIVES DRIVE EUROPEAN STOCKS LOWER (0821 GMT)
    Falls among European pharma firms, utilities and consumer staples are weighing on the
broader market in early deals following a jump in bond yields, while steel producers are the
biggest fallers among basic resources.
    The rise in bond yields is helping banking stocks, however -- the only sector aside
from energy making any notable gains.
    Among individual stocks, Metro Bank is the top gainer after an upgrade from Citi,
while IG Group is the biggest faller on the Stoxx 600 index following
conclusions of a review of the contracts-for-difference market by the UK's FCA. Sainsbury's is
up 0.6 percent. 
    Here's your opening snapshot:  
 
    (Kit Rees)
    *****
        
    TIME TO WORRY ABOUT THE BOND MARKET? (0752 GMT) 
    The recent rise in yields on both side of the Atlantic is making a number of analysts 
wonder where the global macro picture goes from here as the yield on the 10 year U.S. Treasury
goes above 2.55 percent for the first time since March last year. 
    "Have we finally entered a bond bear market?", Rabobank asks this morning while DNB notes
that "yields weigh on dividend sectors".
    Utilities were under heavy pressure during the previous session, a trend which may very well
continue if yields continue to rise.  
 
    (Julien Ponthus) 
    *****
   
    WHAT WE ARE WATCHING (0752 GMT) 
    Futures point to a slightly weaker open than what earlier financial spread betters
suggested. 
    The British economy is at the centre of attention with the BCC’s warning of a
“underwhelming” 2018 and industrial and production data expected at 0930 GMT. 
    It might not be all doom and gloom : Sainsbury's forecast beating sales and Ted Baker’s
performance over Christmas seem to suggest that shorting high street may have been a dangerous
trade after all. 
    In the construction sector things don't seem that bad either with Britain's third-largest
builder Taylor Wimpey saying its results in 2017 will be in line with expectations. Interserve
also forecasts better-than-expected 2018 profit. 
    On a more macro trend, the recent rise in bond yields may put utilities and other dividend
proxies under pressure and tech stocks could suffer too from profit taking in Asia.   
    Other movers in European include Airbus which is waiting for France's Macron to finalise a
macro deal in China, Deutsche Bank, which is testing – again – investors’ patience.
    On the M&A front, Sweden's Tele2 is merging with cable TV firm Com Hem and Spain's Repsol is
reportedly in talks to sell its Gas Natural stake to CVC. 
    (Julien Ponthus) 
    *****   
    
    BRITISH RETAIL: IT'S ALL ABOUT FOOD AND FASHION (0738 GMT)
    It looks like food retailers are coming out on top again after supermarket Sainsbury's
 beat forecasts for its Christmas sales and nudged up its profit guidance.
    Traders are calling the stock 1-2 percent higher.
    And elsewhere Ted Baker also reported a rise in Christmas retail sales. Given that
Next issued an upbeat update earlier this year, perhaps fashion also held up over the
festive period?.
    (Kit Rees)
    *****
    
    STOCKS FUTURES TO A WEAK OPEN (0707 GMT)
    Futures are showing a slightly gloomier picture than early indications from spreadbetters
with most bourses down or flat:    
 
    (Julien Ponthus) 
    *****
        
    UK DATA UNDER SPOTLIGHT AFTER WARNING OF "UNDERWHELMING" 2018 (0650 GMT) 
    "It’s an important day for UK data today", writes CMC Markets' Michael Hewson this morning
as official data for industrial and construction output in November, as well as trade, are due
at 0930 GMT.
    The release of the data comes after the British Chambers of Commerce (BCC) said the country
should brace itself for "an underwhelming" 2018.
    With May's reshuffle dismissed by some of her allies as a failure, any unpleasant surprise
will surely weigh on morale after the BCC's dire warning: 
    "The economy is set to continue on an underwhelming growth trajectory over the near term
with uncertainty over the impact of Brexit coupled with high inflation and weak productivity
likely to dampen overall economic activity". 
    (Julien Ponthus) 
    *****
    
    MORNING CALL: EUROPEAN SHARES SEEN MIXED (0617 GMT)
    Good morning and welcome to Live Markets. Stocks in Europe look set for a mixed open today
with spreadbetters calling for slight losses for the FTSE while on the continent shares are 
expected to edge slightly higher.
    Asian shares flinched from testing their 2007 record peak, as investors booked profits in
high-tech shares while oil prices hit three-year highs due to production cuts and a fall in
inventories.
    Here are your early calls: Frankfurt's DAX is expected to open 5 points higher, Paris'   
CAC 40 by 6 points and London's FTSE 4 points lower. 
    (Julien Ponthus)
    *****

    
 (Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)
  
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