February 8, 2018 / 1:07 PM / a year ago

LIVE MARKETS-"An interesting challenge to the conventional economic thinking"

    * European stocks fall
    * BoE rate outlook pushes banks, sterling up
    * M&A in focus as TDC, Swiss Re jump

    Feb 8 (Reuters) - Welcome to the home for real time coverage of European equity markets
brought to you by Reuters stocks reporters and anchored today by Helen Reid. Reach her on
Messenger to share your thoughts on market moves: helen.reid.thomsonreuters.com@reuters.net
    With such a focus on whether equity risk premia actually reflect where U.S. interest rates
are heading, it can be useful to take a step back and look at what the actual economic policy of
the U.S. government is. 
    The bipartisan U.S. budget deal agreed overnight adds some $300 billion of extra government
spending to an economy growing up to three percent and near full-employment and that's even
before Trump's promised $1.5 trillion infrastructure spend.
    For Paul Donovan, global chief economist at UBS wealth management, the U.S. is "showering
money like confetti over the US economy". 
    Here's his take: "It may be worth watching the bond market as the idea of tax cuts and more
spending in an economy that has full employment and a large budget deficit is an interesting
challenge to the conventional economic thinking".
    You can listen to him here: bit.ly/2nRZnuv and hear how he pronounces the word
"interesting". It's interesting.          
    (Julien Ponthus)
    UK banks turned positive and hit a session high after the BoE said interest
rates would probably need to rise sooner and by a bit more than it thought three months ago due
to the strong global recovery. Here's the story: 
    The same can't be said of the FTSE which got a little slap from the rising sterling.  
    (Julien Ponthus and Helen Reid)
    This month's sell-off saw the heaviest volumes traded on the STOXX 600 in more than seven
months, which is important, sure, but nothing serious in comparison to what could be seen on the
other side of the Atlantic.
    As you can seen below, for the Dow (left), the volumes are the biggest ever, but for the
STOXX 600 it seems a mere blip in comparison to the Brexit vote for instance.
    Seems to confirm that whatever happened on the markets didn't have its roots on our side of
the pond.     
    (Julien Ponthus and Helen Reid)
    The death of the conglomerate seems to be building up as a major topic with General Electric
considering breaking up, Siemens listing its healthcare business and now growing speculation
about spin-offs in the German automotive industry. 
    "We are excited about longer term upside opportunities," Barclays analysts say in a note
where they view the potential for break-ups as "a key theme for 2018 given the structural
reviews unveiled by management teams at Daimler, Volkswagen and Continental".
    Rumours that German giants could consider similar deals are definitely food for thought
after the arguably successful spin-off of Ferrari from Fiat Chrysler two years ago. 
    The only thing seriously keeping Barclays' enthusiasm in check (they are neutral on the
sector) is the fact it could take some time given the complexity of the process in Germany. 
    "This is not to say that we don't believe structural changes will happen, just that we urge
investors not to base investment decisions on expectations of a quick turnaround," Barclays
    Here are a couple of recent headlines:
    Continental still has no concrete plans for potential break-up 
    Daimler open to alliances, partial listing of mobility services
    And here is a Ferrari:    
    (Julien Ponthus)
    There's been a lot of talk about how volatility-linked products may have contributed to the
correction seen earlier this week, and Hermes Investment Management is urging investors to
remain cautious about leveraging positions too far.
    “Gearing is fine as long as implied volatility remains low, but given we anticipate further
shocks with sharp surges in volatility, those same investors will be forced to cut their
positions, leading to self-reinforcing position shedding," Eoin Murray, head of investment at
Hermes Investment Management, says in a note.
    Murray also notes that their correlation surprise indicator hit a new high during the last
quarter, adding that investors should be wary about making assumptions as to cross-asset
    "Traditional methods of portfolio diversification that rely principally upon historical
measures of correlation have become less effective," Hermes' Murray says.
    (Kit Rees)
    Opening snapshot: financials help limit STOXX losses (0812 GMT)
    European shares are down in early dealing, with commodity stocks leading losers but M&A
newsflow in the insurance sector and well-received results from some banks are boosting the
financial sector, helping limit the STOXX decline to 0.3 percent. 
    The UK's FTSE is down 0.3 percent ahead of the Bank of England policy meeting. 
    Telecoms are also in the spotlight with TDC up 20 percent after the Danish telecoms
operator turned down an indicative takeover bid from Australia's Macquarie and three pension
    Here's your snapshot:    
    (Danilo Masoni)
    European shares’ recovery rally looks set for an abrupt ending on Thursday with futures
pointing to losses of 0.7 to 0.9 percent after weaker trading on Wall Street and in Asia.
    Earnings, which took a back seat earlier this week amid the global market turmoil, are
coming in thick and fast with several big European banks and industrial firms reporting. 
    Societe Generale and Commerzbank both reported declining profits,
blaming weak markets and restructuring, while Italy's UniCredit swung to a profit in
    Oil major Total, whose shares fell sharply this week as crude prices tumbled,
reported soaring profit, raising its dividend and planning a share buyback.
    And as we detailed just now, some surprising M&A news should liven up the insurance sector. 
    (Helen Reid)
    Insurance stocks are definitely on the watchlist with some interesting M&A newsflow that
could liven up the session with Swiss Re set to lead the dance after surprise news
that Japan's SoftBank is in talks to buy a minority stake in the Swiss reinsurer. 
    "Yesterday’s announcement is totally surprising," says Baader Bank Helvea analyst Daniel
Bischof. "However, given SoftBank’s technology-vision, Swiss Re makes sense as a target given
its extraordinary research & development capabilities which distinguish Swiss Re from
competition and make the company a knowledge powerhouse," he added.
    Swiss Re shares are seen up 5 percent following the news. The deal is reported to be worth
10 billion or more.
    Still in the sector, a source-based Bloomberg report said yesterday that Bermuda-based
insurer XL Group attracting interest from rivals including Allianz SE of Germany. goo.gl/XHHosw
    And there are also some earnings updates. Zurich Insurance reported
better-than-expected earnings as the insurer dealt with a raft of natural catastrophe losses and
a sluggish investment environment.
    (Danilo Masoni)
Oil group Total raises dividend and plans share buyback as 2017 profit soars 
Swiss Re in talks with SoftBank, Japanese firm could take minority stake
Italy's UniCredit swings to 2017 profit 
SocGen quarterly profit plunges although results top expectations 
Commerzbank profit declines in Q4 amid weak markets and restructuring 
Compass Group sees FY organic revenue growth at top end of forecast 
ABB sees brighter outlook after Q4 net profit drops
Digital shake-up drives Publicis to revise down profit target for 2018 
Hermes sales growth slows in Q4, but margins to hit record in 2017 
Akzo Nobel warns of 130 mln euros in 'transformation' costs 
Norway's Yara Q4 lags forecast, proposes smaller dividend
Voestalpine's Q3 net profit boosted by strong steel demand
Pernod Ricard raises profit goal after forecast-beating H1 results 
TalkTalk to raise cash after cutting forecasts​ 
Britain looking closely at Melrose bid for GKN - PM May 
Bayer-Monsanto deal edges closer to Brazil antitrust approval 
Smith & Nephew meets lower end of guidance range for 2017    
U.S. FDA approves Gilead triple HIV drug, GSK venture files lawsuit 
Zurich Insurance beats 2017 profit estimates, raises dividend 
Finland's Solidium sells Telia stake for 5.1 bln SEK
Thomas Cook expands airline business by 10 pct for this summer 
TDC rejects takeover offer from Macquarie, Danish funds
ArcelorMittal to top Brazil's long steel output after Votorantim deal -exec 
Ashmore says H1 assets up 18 pct on inflows, market gains 
Airbus says may increase A400M provision 
France's Vinci optimistic on 2018 prospects 
Stronger sales at European shopping centres help boost Klepierre's cash flow 
Swiss watchdog in touch with Credit Suisse over volatility ETN 
AA sees FY core profit of 390-395 mln stg 
UK's Bellway sees 14 pct rise in first-half housing revenue
Britain's Tate & Lyle quarterly sales volume picks up pace
    (Tom Pfeiffer)
    It certainly looks like a weaker session for European stocks ahead, with futures down 0.5 to
0.8 percent.
    Results from UK companies including Thomas Cook, TalkTalk, DFS Furniture, and Sophos, are
just hitting the wire. 
    M&A activity could also liven up today's session with Swiss Re's shares seen
opening up 5 percent after the reinsurer said it was in talks with SoftBank on a
potential minority stake.
    (Helen Reid)
    Nevertheless there are other events in Europe today which should grab investors' attention,
with results still rolling in from big corporate players.
    Banks are at the forefront today with Societe Generale reporting forecast-beating
results despite quarterly profit plunging on tax-related and restructuring costs.
Commerzbank also flagged a 51 percent decline in Q4 profit, blaming weak
markets and its overhaul.
    Other notable results include truck maker Volvo, which reported record profit,
and Swiss engineering group ABB, which gave a brighter outlook for the year.

    We'll also be closely watching the Bank of England's rate decision and inflation report -
particularly considering the past week's jitters over inflation. 
    SocGen analysts expect the BoE to slightly raise growth and inflation forecasts.
    "The MPC will be happy to see that the money market is now taking seriously its message of
further tightening," they write. "However the market has brought forward the expected timing of
rate increases compared to its view three months ago quite aggressively, and even though we
expect the tone of the report to be slightly more hawkish, we think it might not be enough to
validate the current Overnight Index Swap curve."
    (Helen Reid)
    Good morning and welcome to Live Markets. 
    That was nice while it lasted! European stocks are set to fall back again after a
short-lived recovery bounce yesterday, as Wall Street and Asian markets lost steam overnight.
Looks like those calls for volatility to stay high in the short- to medium-term were prescient.
    Asian shares hovered near six-week lows as U.S. bond yields headed towards four-year highs,
keeping pressure on investors spooked by signs of rising inflation.
    Spreadbetters call the DAX 108 points lower at 12,482, the CAC 40 down 47 points at 5,208.8,
and the FTSE down 56 points at 7,223.2. The damage done in the past fortnight is considerable:
the DAX ended yesterday 7.4 percent down from its record high hit as recently as Jan 23. 
    (Helen Reid)

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