January 8, 2018 / 6:30 AM / a month ago

LIVE MARKETS-Closing snapshot: Europe holds up as big falls hit UK stocks

    * New year rally gathers pace as autos cement rally
    * STOXX 600 hits highest since August 2015
    * Novo offers to buy Ablynx at 32 pct premium
    * Dialog Semi jumps after Q4 sales beat guidance
    * But weak results weigh on British stocks

    Jan 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 Danilo Masoni. Reach him on
Messenger to share your thoughts on market moves: danilo.masoni.thomsonreuters.com@reuters.net
 
    
    CLOSING SNAPSHOT: EUROPE HOLDS UP AS BIG FALLS HIT UK STOCKS (1653 GMT)
    The session has ended, and while it's been positive for continental European stocks, the UK
has fared less well with some large losses for Micro Focus and Mothercare, among others.
    Is this the beginning of a theme for UK shares? We've got quite a UK-heavy calendar to
navigate this week, with Morrison's and Persimmon due to give updates tomorrow,
Taylor Wimpey and Sainsbury's on Wednesday and Marks & Spencer, Tesco
 and Barratt Developments on Thursday, so hold on to your hats!
    Here's your closing snapshot: 
 
    (Kit Rees)
    
    *****
    
    MOODY'S CUTS DEBENHAMS DEBT TO "JUNK", SHARES RESIST (1620) 
    Moody's has just downgraded Debenhams long-term corporate family rating from Ba3 to B1,
which means it now qualifies as "junk", after a profit warning last week. It seems no one is
shocked: shares in the iconic British department store chain have barely reacted, closing up 3
percent. 
    Debenhams stock is down 15 percent since the start of last week after tumbling 39 percent
last year and 22 percent in 2016.
    (Julien Ponthus) 
    *****
    
    WHAT RUNS QUITE FAST AND IS EUROPE'S 2ND BIGGEST M&A DEAL OF 2018? (1545 GMT)
    It is, according to Thomson Reuters' Deals team, Philippe Coutinho! 
    "His move from Liverpool to Barcelona for a reported £142 million would make the deal the
second largest acquisition by a European company so far in 2018 across all industries when
compared to traditional M&A activity," our colleagues, who have not taken into account Novo's
2.6 billion euro bid for Belgium's Ablynx, say.
    "Globally, it would be the 29th biggest acquisition of 2018", they add.  
 
 (Julien Ponthus) 
    *****
    
    ANOTHER BANK SEES VOLATILITY RISING IN 2018 - CITI (1505 GMT)
    It's not all rainbows and butterflies for markets this year - with risks around politics,
tightening financial conditions, and high asset prices likely to cause disruption.
    "Most markets should begin to see increased volatility," write Citi analysts, in a note
which echoes a similar call by UBS last week. "This is less of a view on volatility and more a
reflection of the extremely low current levels and the strong rally in risk assets in the latter
part of 2017."
    Although the backdrop is still pretty benign and Citi forecasts gains of around 8 percent
for global markets this year, led by Europe and emerging markets, risks are rising. 
    In increasingly mature cycles financial vulnerabilities are rising and pent-up demand is
moderating, making markets less resilient to shocks, the U.S. bank says.
    And interestingly the very fact markets have shrugged off political developments so far
could make them vulnerable. 
    "The current disconnect between the political outlook and economic and financial markets
performance is itself a major risk," notes Citi.
    Here's the VIX from its highs just under ten years ago, to today:
 
 
    (Helen Reid)
    *****
    
    ABLYNX SHARES SURGE TO SLIGHTLY ABOVE NOVO'S OFFER (1442 GMT) 
    Shares in the Belgian group have resumed trading and surged 45 percent to just slightly
above the 30.50 euros per share offer it rejected from Novo Nordisk. 
    Investors are willing to pay above the offer price of the Danish insulin maker to get a
piece of the action, which means a serious M&A battle is expected here.
    Remember that Ablynx had already rejected an offer by the Danish group on Dec. 14.
 
    (Julien Ponthus)
         
    ***** 
        
    TELL-TALE SIGNS OF GREED AND EXCESS IN LATE BULL MARKET (1350 GMT)
    While stock markets continue their dizzying ascent, we are still in the last leg of a bull
market which is developing "in slow motion", Hawksmoor's head of research Jim Wood-Smith writes,
and there are more and more signs of hubris. 
    "This is maybe not so openly apparent in mainstream equities, but it is certainly so with
bitcoin - and other crypto-currencies to boot." Ethereum, for example, extended gains to a new
high today, while bitcoin is still faltering slightly.
    And the crypto obsession is spilling over into some stocks too. "The price changes in
blockchain stocks make the dotcom days look like kindergarten," Wood-Smith adds.
    However these and other "beacons of nauseous wealth and excess" are reassuring in a way as
"they are precisely what should be happening after years of quantitative easing," he said.
    Opportunistic takeovers of stocks trading at depressed levels are also signs of a late bull
market. He cites Hammerson's proposed acquisition of Intu Properties, and the
bid for IWG, for example.    
 
 
    (Helen Reid) 
    
    *****
    
    ABLYNX: IT'S HOSTILE! PITCH OPENS AT 1400 GMT (1311 GMT) 
    The Belgian group just rejected Denmark's Novo Nordisk 2.6 billion euro takeover
offer, saying it undervalues the company. It seems we have a real M&A battle on our hands with
potential white knights and no shortage of drama. 
    The battleground (Euronext Brussels) is set to open at 1400 GMT, the Belgian regulator says.
    (Julien Ponthus) 
    
    *****
       
    UNFORGIVING MARKETS  (1301 GMT)
    The bull market has lifted the global benchmarks to record highs but it can be unforgiving,
especially with those companies that fail the street. 
    We've seen Debenhams plunge over 20 percent last week after the department store
group slashed its annual profit forecast, and baby goods retailer Mothercare wiping out
one third of its market value today on a profit warning. Disappointing numbers are also sinking
tech company Micro Focus and retail firm McBride.
    What does all this mean? 
    We're asking around and here's a quick take from Stephane Ekolo, Global Equity Strategist at
Avalon Capital Markets: "Given the risk-on sentiment prevailing in the market, market
participants are eager to punish companies when they warn or issue disappointing statements.
This is no surprise to me as the same phenomenon occurred  in January 2017, when approaching
earnings season. That being said, we are all too aware that valuations are somewhat stretched
(for some metrics). Therefore (and depending on the reasons for the disappointing statements), I
don't think we can make firm conclusions about the state of those industries."     
 
    (Danilo Masoni)
    *****
    
    A "BUY THE DIP" FEELING (1247 GMT) 
    For those of us lucky enough to still be receiving steady flows of research despite now
living in a post-MiFID II world, there's a strong sense of optimism pouring into our inboxes as
the STOXX cruises just 17 points below its all-time high. 
    "Keep buying any dips", JP Morgan writes in an equity strategy note, which gives you an idea
of the mood, with most brokers sticking to strong "overweights" for Europe. 
    Optimism is also palpable for M&A with notes pointing to sectoral consolidation (see Kit's
post on security firms below) and BNP Paribas arguing the U.S. tax cuts will spice things up but
that our side of the Atlantic is not expected to miss out.  
    "As Europe is lagging in the cycle, its potential for external growth and share buybacks is
at least as good as in the U.S.," the French bank says. 
    Plenty of news in terms of fundamentals to keep spirits up too. Sentix says the eurozone is
in excellent shape" and Fitch Ratings writes that the prospect of ratings upgrades outnumbering
downgrades this year and next is at its highest point since the financial crisis.   
 
   (Julien Ponthus) 
   ******     
        
    FOOD RETAIL: NERVE-WRACKING STOCK PICKING IN THE AGE OF AMAZON AND ALIBABA (1220 GMT)
    Food retail makes for nerve-wracking stock picking at the best of times, Bernstein analysts
highlight - food for thought as investors prepare for updates from Britain's big supermarkets
this week. 
    "At any moment in time the delta between highest and lowest year-on-year stock performance
is 60%," writes Bernstein's Bruno Monteyne.
    And growth is not a given - a market-cap weighted index of the seven pan-European stocks the
broker covers is at the same level it was nearly 20 years ago.
    Added to this is pressure from online marketplaces Amazon and Alibaba
gobbling up market share. This will lower valuations across the board for the foreseeable
future, Monteyne reckons, and e-commerce will make scale the biggest determinant of success.
    But the retail sector's current levels, trading at a 34 percent discount to the valuation
implied by consensus earnings and growth, seems overly bearish, he adds. 
   So overall Bernstein is cautious on the sector, but higher global growth and inflation are
likely to boost food retail. It's not all doom and gloom despite the age of Amazon - and
analysts' earnings revisions also seem to reflect this:
 
 
 (Helen Reid)
    *****
    
    
    UBS MULLS CONSOLIDATION PROSPECTS FOR EUROPEAN SECURITY SERVICES STOCKS (1144 GMT)  
    G4S has crept to the top of STOXX in late morning trading, now up more than 4 percent thanks
to UBS analysts upping their rating on the security firm to 'buy' from 'neutral', bringing their
view in line with consensus (the mean recommendation is a 'buy' according to Eikon data).
    "We ... see an industry that is set to accelerate towards wide-scale consolidation," UBS
analysts say in a note.
    "We see G4S as one of the few sellers in the market (up to c.40% of the business could be
divested), and do not rule out a more radical strategic shift for the future of the cash
business, which could unlock c.50p per share of value," UBS adds.
 
    (Kit Rees)
    *****
    
    MOTHERCARE: ANOTHER UK RETAILER PROFIT WARNING BODES BADLY (1121 GMT)    
    Despite cutting down on store openings and trying to push online sales, Mothercare suffered
a decline in sales over Christmas and slashed its full-year profit guidance to 1 to 5 million
pounds - from the previous estimate of 10 million.
    The second profit warning in a week among UK retailers - after Debenhams last week -
bodes badly for the sector.
    "It highlights the continuing impact of weak footfall across overall retail destinations,
the ongoing disruptive nature of online and discount players and the need for a differentiated
product offering," writes Liberum analyst Adam Tomlinson.
    Badly-timed discounts were Mothercare's downfall, according to Neil Wilson of ETX Capital. 
    "With competitors slashing prices ahead of Christmas amid (justified) fears of a slowdown in
consumer spending, it looks as if the 'conscious decision' to remain at full price prior to
Christmas but to then discount more heavily in the end of season sale was a mistake," he says.
    Today's share price plunge takes the firm's market cap to just 79 million pounds, compared
to a first-half net asset value of 66 million and inventories of 120 million, AJ Bell analysts
point out. 
    "It will therefore be interesting to see if anyone decides there is some value here," they
add. Investors will be treading carefully though, with all eyes on updates from Sainsbury's,
Morrisons, Tesco and M&S later this week.
    Here's a round-up of how British retailers fared over Christmas so far:
 
    (Helen Reid)
    *****
    
    WAITING FOR ABLYNX (1059 GMT) 
    Denmark's Novo Nordisk's 2.6 billion euro bid for Ablynx has most definitely been today's
most exciting corporate news development with expectations of an M&A battle, but something is
missing as we head into midday trading and that's the Belgian biotech group's answer.
    Hostile? Not hostile? 
    Ablynx shares, which are expected to surge, are still suspended pending a statement and
no-one at the company is reachable to give an indication of when the suspense will end.
    To quote Samuel Beckett, "We wait".  
    In the meantime, here's our main story: Novo Nordisk bids $3.1 bln for Belgian biotech group
Ablynx and a Breakingviews column - "Novo can pump its $3.1 bln blood bid even
higher" - is expected shortly.
    
    (Julien Ponthus) 
    *****   
    
    STOCKS HAVE FURTHER TO RUN DESPITE HIGH VALUATIONS (1012 GMT)
    As the new year stocks rally gathers pace, JP Morgan cross-asset strategists say valuations
are "very high on almost every measure", but stay overweight on equities, seeing strong global
growth and U.S. tax cuts as likely to drive further positive returns for equities this year. 
    "Some technicals are looking stretched," they admit, but any pullback is, to them, an
opportunity to get more exposure to stocks. 
    Bond market signals are still supportive as well: "The yield curve is flattening, which has
typically been an important signal to watch, but it is unlikely to invert until at least H2, and
crucially stocks never peaked before the yield curve was outright inverted," strategists write.
    Eventual triggers for a downturn in stocks include: a rapid rise in U.S. inflation; increase
in U.S. wages weighing on profit margins; geopolitics turning the oil price rally into a
disruptive surge; or Chinese policymakers overtightening.
    Valuations of the S&P 500 have risen further as the U.S. index scales new records:
 
    (Helen Reid)
    *****
    
    AUTOS RALLY QUASHES "BIG SHORT" THEORY: SECTOR UP 7 PCT IN FOUR DAYS (0940 GMT)
    As 2018 gets underway brokers are pushing the accelerator on European auto stocks, helping
them emerge as the best sectoral performer with a gain of nearly 7 percent in the first days of
the new year. Analysts see solid volume growth (JPM on Friday:) and dealmaking
(MS on possible Jeep separation from Fiat Chrysler today) injecting
fresh life into the industry, quashing speculation about a possible share price melt-down. 
    Just one month ago Randeep Grewal, portfolio manager of the Trium Opportunistic Equity Fund
highlighted how the leveraged industry was coming under scrutiny from investors looking for the
next "big short" trade. 
    Here's what he said on Dec. 5: "In our view auto finance could well be the next ‘Big Short’,
with a potentially catastrophic subprime lending issue bubbling under the surface. It is not
just select auto manufacturers facing an impending meltdown, there will also be significant
headwinds felt across the entire supply chain – including original equipment manufacturers,
finance companies, auto dealerships, car rental companies, tech firms and energy groups."
    And here's how Europe's auto index has performed so far in 2018 compared with the main
regional benchmark.    
 
    (Danilo Masoni)
    *****
    
    
    MICRO FOCUS SINKS ON WEAKER OUTLOOK (0843 GMT)
    The UK software company is bottom of the FTSE 100 after saying revenues would decline by 2
to 4 percent for the 12 months to the end of October, disappointing investors. The stock's 9.5
percent slide is bigger than pre-markets indicated, and sets Micro up for its worst day in more
than six years.
    "Revenues on the whole look weaker than consensus, both in the legacy business and in HPE,"
say Northern Trust Capital Markets analysts. They add that "tax is the one unequivocal and
meaningful positive - effective rate from FY20 now expected to be 25 percent versus previous
guidance of 33 percent." 
    Investec analysts are also pretty downbeat: "Our main concern is playing out earlier than we
expected, with material top line declines coming through due to the size of the integration
challenge and disruption this may cause to the focus on revenues."
 
    (Helen Reid)    
    *****
    
    MOTHERCARE PLUMMETS AFTER PROFIT WARNING (0818 GMT)
    While European stocks are making gains, boosted by financials and healthcare, the heat is on
the UK market with some impressive moves in the small-cap space and tech firm Micro Focus
.
    Mothercare is sinking 24 percent after the baby goods retailer warned full-year
profit would be much lower than previously expected.
    "Clearly there remains more work to be undertaken to reach sustainable cash flow and profit
growth," say Shore Capital analysts.
    Another small-cap UK retail firm suffering is McBride, down 18 percent after a
trading update revealed declining revenues and Investec cut its target price on the stock.
    Troubled outsourcer Carillion meanwhile is up 11 percent after it said late on
Friday that talks with creditors towards a rescue were progressing.
    And weighing the FTSE 100 down is Micro Focus, tumbling 11.7 percent after first-half
results.
    A pretty weak start for UK stocks, then, with all eyes on retailers as signs of consumer
strain multiply. More on these later.    
    (Helen Reid)
    *****
    
    WHAT YOU NEED TO KNOW (0747 GMT)
    European shares are set to open higher with gains in futures of up to 0.7 percent suggesting
that the pan-European STOXX 600 benchmark index could climb back to its highest level since
August 2015 as it starts the first full trading week of 2018.    
    While scheduled corporate news remains thin, M&A talk could liven up the session for pharma
stocks after Novo Nordisk made a second proposal to buy Belgian biopharma firm Ablynx, offering
a 32 percent premium over Ablynx's closing price on Friday. Investors see pharma as a fertile
ground for dealmaking in 2018. Over in the US, Celgene said it has agreed to acquire Impact
Biomedicines for $7bn. Still in M&A, Handelsblatt reported that Cerberus opposes a merger
between Deutsche Bank and Commerzbank. The U.S. buyout firm holds a stake in both banks.    
    Support may also come from the tech sector after chipmaker Dialog Semiconductor, recently
hit by fears it could lose top customer Apple, reported fourth-quarter sales above its outlook
range announced in September. Its shares are rising in premarket trade by up to 3 percent.
Separately UK software maker Micro Focus posted an 80 percent rise in half year
revenues and lifted its interim dividend by 16.4 percent, although traders said the figures are
a mixed bag. 
    Other stock movers: Nvidia partners with Uber, Volkswagen in self-driving technology; Three
investors place bids for Germany's HSH Nordbank - source; Sanofi to market new
haemophilia drug in deal with Alnylam; Denmark's GN takes aim at Apple with wireless ear
buds; Mothercare's UK sales dip, sees no improvement soon; UK's Carillion to
discuss rescue with creditors on Jan. 10; TP ICAP buys U.S. energy and commodities
broker SCS
    (Danilo Masoni)
    *****
    
    RESPITE FOR DIALOG SEMICONDUCTOR? (0729 GMT)
    The chipmaker just reported preliminary sales above the upper end of its outlook
range, which could deliver some respite as the company is dogged by fears it could lose its
biggest customer Apple. 
    "While the higher sales level is positive news, key for the investment case will be the
business volume with Apple over the coming years," say Baader Helvea analysts.
    The stock is indicated 1 to 2 percent higher in pre-market calls after Dialog reported sales
of $463 million for the fourth quarter.
    Here's Dialog Semi's year - with fears over its relationship to Apple taking the shares down
nearly 50 percent from their 2017 high:    
 
    (Helen Reid)
    *****
    
    FUTURES ON THE UP (0712 GMT)
    Stock futures in the UK and Europe have opened with gains of up to 0.5 percent, suggesting
the STOXX 600 could climb back to its highest levels since August 2015 when it opens in
less than one hour, as buoyant economic growth and a benign monetary policy outlook keeps
appetite for stocks intact.
 
    (Danilo Masoni)        
    *****
    
    M&A WATCH: NOVO NORDISK  (0652 GMT)
    While there is little scheduled corporate news today, investors could focus their attention
on a possible M&A deal in the pharma sector. Danish drugmaker Novo Nordisk has made a
second proposal to buy Belgian biopharma firm Ablynx, offering 28.00 euro per share in
cash, representing a total equity value of about $3.1 billion. That's a 32 percent premium over
Ablynx's closing price on Friday.
    Still on the M&A front but in the banking sector, Reuters reported yesterday that three
private-equity investors have submitted bids for German state-backed HSH Nordbank.
    (Danilo Masoni)    
    *****
    
    MORNING CALL: EUROPEAN SHARES SEEN UP (0628 GMT)
    Good morning and welcome to Live markets. Markets in Europe look set to start the second
week of the year mildly in positive territory with spreadbetters calling for slight gains for
euro zone benchmarks and a steady open for the FTSE.  
    Over in Asia, shares crept toward all-time peaks today after Wall Street boasted its best
start to a year in over a decade. 
    Here are your early calls, courtesy of CMC Markets:    
    DAX is expected to open 63 points higher at 13,382
    CAC40 is expected to open 14 points higher at 5,484
    FTSE100 is expected to open 4 points lower at 7,720
    (Danilo Masoni)
    *****

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