February 5, 2018 / 12:03 PM / 9 months ago

LIVE MARKETS-Yields are just "catching up with reality"

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    Feb 5 (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
 
    
    YIELDS ARE JUST "CATCHING UP WITH REALITY" (1203 GMT)
    That's the view from analysts at TS Lombard, who believe that yields are catching up with
reality as factors such as ECB QE, which has been a weight over the past few years, approach
their end.
    TS Lombard analysts add that technicals, not just yields, are also to blame for the equity
market sell-off.
    "All the market needed to correct was an excuse – and surging yields provided it," TS
Lombard analysts say in a note.
    "We believe that the recent surge in yields will not derail the current equity bull market
and that, after a relatively brief pause, prices should resume their climb. The rate of increase
in stock prices in the first four weeks of the year was never going to be sustainable," they
add.
    (Kit Rees)
    *****
    
    DON'T PANIC ABOUT RETURN OF THE VIX (1118 GMT)
    The VIX index of S&P 500 volatility has hit its highest level in more than a year,
but UBS CIO Mark Haefele says these sharp market moves should be put into context.
    With a historic normalisation of monetary policy beginning, it's to be expected that
volatility normalises as well after a period of abnormal calm, he says, pointing out: "It has
been more than 400 trading days since a greater than 5 percent drawdown, the longest run since
the 1950s." 
    "As long as the recent rise in bond yields moderates, we are confident that market
conditions will remain orderly," says Haefele, arguing now is not the time to reduce exposure to
stocks.
    For those keen to diversify out of bond and equity markets in order to avoid the
synchronised sell-off, UBS recommends exposure to hedge funds.
    JP Morgan strategists echo Haefele's sanguine attitude.
    "We do not believe the current pullback will become sustained," JPM's Mislav Matejka writes,
adding it should be seen as another opportunity to add equity exposure, based on a strong
earnings backdrop and huge equity inflows.
     They stick with their preference for financials as a hedge against rising yields.
 
 
 (Helen Reid)
    *****
    
    "WE'RE NOT AT THE ALARM BELLS PHASE YET" (1051 GMT)
    Evidently volatility and equity market moves lower are at the forefront of investors' minds,
but Melissa Brown, managing director of applied research at Axioma, believes we're not at the
alarm bells phase yet.
    "For all of 2017 we saw markets going up and volatility coming down, so you have this very
slow ratcheting up of stock prices, and that will tend to lead to lower volatility, but that's
actually reversed this year," says Brown.
    "What we've seen in the past is when you get volatility rising sharply while markets are
staying strong, that usually ends badly," she adds.
    Brown points to new money flowing into the market at the beginning of the year as driving
some of the 'melt-up' as people didn't want to miss out on the rally.
    "If you put money in today, and the market goes down by a fair amount tomorrow, particularly
if you haven't been in the market, I think that's very disconcerting," Brown says.
    (Kit Rees)
    *****
    
    EARNINGS SEASON SO FAR: EPS MISS BUT SALES BEAT (1016 GMT)
    Though Europe's earnings season is still in its early days, Morgan Stanley strategists pick
out some interesting trends. 
    Of the 62 companies whose results they've tracked so far, 8 percent more have missed
earnings consensus than beat. If this trend continues it would be the first quarter in three
years where Europe has seen more misses than beats. 
    Price reaction to results has also been clearly negatively skewed - indicating investors are
in a punishing mood.
    Sales so far have however been much better than earnings, a turnaround from the trend seen
in third-quarter results, strategists said. 
    And while earnings revisions on average have come down slightly, they flag a sharp
divergence between sectors: commodities stocks are seeing very strong EPS upgrades while
defensives have suffered further earnings downgrades. 
 
 (Helen Reid)
    *****
    
    
    TECH TAKES A TUMBLE (0849 GMT)
    Tech stocks feature prominently among the biggest movers today - with the highly-valued
chipmakers the worst-performing. Siltronic, AMS, Dialog Semiconductor
 and BE Semiconductor are falling 2.3 to 4 percent as the 2018 stocks
'melt-up' evaporates.
    A trader points to continued negative newsflow around Apple's iPhone X
weighing on chipmakers, and adds: "on top of that, some of these names have had a stonking
run..." 
    AMS shares more than tripled in 2017. 
 
 
 
    (Helen Reid)
    *****
    
    PUFF GOES THE 2018 RALLY, EXCEPT FOR ITALY (0836 GMT)
    The strength of the sell-off we're seeing has wiped off 2018 gains for all major indexes in
Europe. An exception is Italy's FTSE MIB, which remains up nearly 5 percent, while UK
midcaps have fared the worst year-to-date.    
 
    (Tom Pfeiffer)
    *****
    
    EUROPE FLASHING RED (0813 GMT)
    All main country benchmarks in Europe are losing ground in early deals today and it's hard
to find any positive signs around. 588 stocks out of the 600 that are listed on the pan-regional
STOXX are falling and no sub-sector is moving in positive territory.  
    Here's your snapshot:  
 
    (Danilo Masoni)
    *****        
    
    IT'S A "HEALTHY CORRECTION", CS RECKONS (0756 GMT)
    Europe is most likely set to join the sharp equity sell-off today but the global investment
committee of Credit Suisse keeps a cool mind and sees opportunities.
    "The continuing rise in bond yields seems to have put the brakes on stock gains. Our global
Investment Committee takes the solid economic and earnings growth into consideration and sees
the latest development as a healthy correction that offers good buying opportunities in
equities," the Swiss bank says in its investment daily.
    (Danilo Masoni)
    *****
    
    WHAT'S ON THE RADAR FOR THE EUROPEAN OPEN (0751 GMT)
    A sharp sell-off in Asian trading is set to spread to Europe on Monday with stock futures
down 0.7 to 1 percent as rising bond yields continue to take their toll on stock markets near
record highs. 
    Euro area PMIs at 0900 GMT will give a read on whether the region is keeping up its
blistering pace of growth, but SocGen analysts warned a strong reading could spell further
turbulence for stocks if it drives yields higher. 
    On a slightly calmer day for earnings, notable companies reporting include budget airline
Ryanair, engineering group Sandvik and miner Randgold Resources. 
    Ryanair shares are indicated down 2 to 3 percent in pre-market after the company struck a
cautious tone on fares, while Sandvik is seen gaining 2 percent at the open after fourth-quarter
profit topped forecasts. 
    Fiat Chrysler shares are also seen down 3 to 5 percent after sources said the U.S.
Justice Department is seeking 'substantial' fines in the emissions case. Fiat's U.S. shares
ended down 7.2 percent on Friday.
    (Helen Reid)
    *****
    
    EARLY MORNING EUROPEAN HEADLINE ROUND-UP (0740 GMT)
    There are some earnings updates to focus on today including from Ryanair, Sandvik and
Randgold. Below a summary of the headlines we're looking at:
    
Lloyds Bank to ban credit card owners from buying cryptocurrencies 
Ryanair CEO warns of strikes, says some pilot demands 'laughable' 
Lufthansa aims to replace top management at Brussels Airlines 
Merck's consumer health sale at risk as Nestle bows out - sources 
Infineon CEO sees no spin-offs, IPOs for units -Euro am Sonntag 
Italian shipbuilder Fincantieri takes control of STX France 
Activist investor Elliott sheds most of Dufry stake 
MEDIA-iPhone X owners report problems with incoming calls- FT 
Heathrow terminals should be opened up to competition says IAG
Broadcom to raise Qualcomm bid in push for talks, sources say 
Daily Mirror owner to clinch takeover of rival titles this week -Sky 
Engie board puts four candidates forward for chairman role -report 
Daimler, Bosch to test self-driving cars soon - Automobilwoche
Schaeffler has e-mobility orders worth $1.25 bln -Automobilwoche 
MEDIA-SAP sees good chance for 30 pct margin in 2019 -Euro am Sonntag
Fitch: Unilever's Strong 2017 Results Do Not Rule Out Downgrade
Tesco ‍says Booker's Wilson to be UK and Ireland boss after takeover
Engineering group Sandvik Q4 operating profit tops forecast
VW seeks delay in U.S. trial after lawyer references monkey testing, 
EXCLUSIVE-Merck's consumer health sale at risk as Nestle bows out - sources 
Randgold 2017 profit up 14 pct, doubles dividend
BRIEF-lastminute.com Expects For 2017 Net Loss Of EUR 8-9 Mln
German coalition negotiators may drop proposal to abolish air transport tax
ANALYSIS-Deutsche Bank gambles German goodwill with bonus bonanza
    (Tom Pfeiffer and Danilo Masoni)
    *****
        
    FUTURES POINT TO SHARP SELL-OFF IN EUROPEAN STOCKS AS YIELDS RISE (0721 GMT)
    Futures have opened sharply lower across the main benchmarks, with drops of 0.7 to 1.1
percent. Meanwhile Germany's 10-year government bond yield has risen to its highest level since
September 2015 - so the yield pressure looks like it's here to stay today as well. 
 
 
 (Helen Reid)
    *****
    
    EURO AREA PMIS COULD PUSH YIELDS HIGHER (0653 GMT)
    Euro area PMIs today at 0900 GMT will provide a read on growth in the region, but economists
at Societe Generale reckon stocks may not take the data well even if it points to strong
activity.
    "These have the potential to maintain upward pressure on yields if they suggest strong
underlying growth momentum. Strong growth will provide little solace for equities or commodities
if it pushes bond yields higher," write SocGen analysts.
    They add that the sell-off in bonds has been more aggressive than they had anticipated. The
past week was "a tough one for asset markets" and this one could be more of the same.
    
    (Helen Reid)
    *****
    
    
    "EXTREMELY WELCOME NEWS FOR ACTIVE" (0638 GMT)
    Bernstein's global quantitative analysis team finds a pick-up in performance for active
managers and signs they could continue to do well this year, a godsend after years of
disappointing returns for the industry. 
    European portfolio managers and global quantitative managers beat benchmarks by 3.3% and
1.9% on average in 2017, Bernstein finds, and this strong performance has continued into 2018.
    Stock and factor correlations at multiyear lows create optimal conditions for active
management and stock picking. "Even if are unlikely to go lower from here, the
current levels suggest a rich opportunity set for stock pickers for the next 12 months," write
Alla Harmsworth and team. 
    Intra-sector correlations are at 20-year lows on both sides of the Atlantic, and valuation
spreads are wider than usual across the whole market and within sectors, they note. 
    "This suggests a heightened potential ability to identify idiosyncratic 'winners' even
amongst peers within narrow market segments," says Harmsworth.
    It'll be interesting to see whether this low correlation environment continues even if the
stocks rally starts to peter out.
    
    (Helen Reid)
    *****
    
    MORNING CALL: SELL-OFF TO SPREAD TO EUROPE (0618 GMT)
    Good morning and welcome to Live Markets. 
    European stocks are in for a turbulent start to the week after a sharp sell-off in Asian
shares overnight, with fears of resurgent inflation taking their toll on markets near record
high levels.
    Asian shares fell the most in more than a year, tracking a much weaker Wall Street session
after Friday's U.S. payrolls report showed wages growing at their fastest pace in more than 8
years.
    Spreadbetters call the DAX 153 points lower at 12,632.4, the CAC 40 down 64 points at
5,300.7, and the FTSE down 79 points at 7,364.
    (Helen Reid)
    *****

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