January 25, 2018 / 1:28 PM / a year ago

LIVE MARKETS-Equity markets have "breadth and resilience"

    * European shares inch up
    * Draghi in focus as euro hits 3-year high
    * FTSE inches up

    Jan 25 (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 
    Investors may be forgiven some nerves going into next week's Q4 earnings blizzard. After the
biggest wave of results estimate upgrades in many years, companies are taking a beating if their
guidance falls short of the rosiest expectations. 
    Here's perhaps some comfort from Gautam Batra, head of investments at Mediolanum Asset
Management, who believes the rotation observed since December from tech to cyclicals and banks
means stock valuations now sit on more broad-based foundations. 
    The global equity market's advance "has got greater breadth and resilience so if you have
these pockets of disappointment, the market is not being led by one sector", he says. 
    Mediolanum AM is long on riskier assets and credit. 
    "It's difficult to stand in the way of strong growth," says Batra. 
    He's also not overly concerned about the strengthening euro as "the better growth far
outweighs the sensitivity to relatively minor moves higher for the euro against the dollar.”
What is more, "the associated consequences of the weaker dollar include stronger earnings for
the commodity space".
    What gives him pause? If the buoyant U.S. economy brings inflation back, there is the
potential for a more restrictive Fed than currently planned and therefore higher bond yields.
"The impact on the valuation framework of an already extended equity market is the biggest
source of concern". 
    (Tom Pfeiffer)
    The European Central Bank kept its ultra-easy policy firmly on hold, a widely expected
decision that left markets unfazed. 
    "Copy and paste job from the ECB with no change in terms of language or guidance," said Neil
Wilson at ETX Capital.
    "If it had wanted to deliver a hawkish signal and prepare markets for a faster pace of
tightening, it could have tweaked language slightly but this always looked unlikely,
particularly given the recent appreciation in the euro," he added.
    There may be more action when Mario Draghi's press conference starts and where he'll likely
face the difficult task of addressing the euro's potentially damaging surge against the dollar.
    You'll find Mario live here: goo.gl/yte43Q  
    (Danilo Masoni)
    Less than an hour to the ECB's presser and the euro is still trading above 1.24 dollar and
expectations are building for Mario Draghi to find a way to talk the euro down. 
    The term "currency war" has found its way into a number of research notes and they echo
Nixon's treasury secretary John Connally's famous "The dollar is our currency, but it's your
problem". Only today, it's really Mario Draghi's. 
    Here are a few snippets of what's going around the markets. 
    * "Certainly, Mnuchin's comment regarding the USD have raised the odds that Draghi could
fight back today with some cleverly worded EUR dampening rhetoric" - Rabobank.
    * "There is reason to believe that Mario Draghi will choose to find a more dovish tone once
more in an attempt to alleviate the pressure caused by a rising euro" - Joshua Mahony, IG
    * "We may expect Draghi to stress that tightening depends on inflation returning to target
and the current absence of strong inflationary pressures so far. While not explicitly talking
down the euro, it could cool the bulls’ enthusiasm" - Neil Wilson, ETX.
    * "If Draghi sounds too hawkish he could well be sending the euro towards $1.30 (...) Dovish
comments from Draghi over the strength of the euro, could encourage some unwinding of long
positions and potentially end the euro’s recent rally, bringing it back towards $1.23" - Fiona
Cincotta at City Index. 
    * "I wonder how priced in a more hawkish ECB is and whether the lack of a hawkish shift
today may weaken the single currency" - Craig Erlam, Oanda.
    Bonus, ING's ECB cheat sheet: 
    (Julien Ponthus) 
    In an otherwise muted market where FX and the ECB are stealing the spotlight, telecoms are
standing out in Europe today with a gain of 0.8 percent. The unloved sector has recently come
back into focus on fresh talk of potential M&A and with some investors upbeat that telecoms
group could capitalise on big infrastructure investments by selling more data.
    Possible interest in telcos however has still to materialise into market gains and their
sectoral index is flat over the past year. That may suggest investors are seeking more
tangible sings of dealmaking and earnings growth. 
    Just today in a Bloomberg TV interview from Davos Orange CEO Stephane
Richard poured cold water on talk about deals in Europe's telecom industry after reports his
group discussed a potential merger with Deutsche Telekom in 2017.   
    We spoke to an Geneva hedge fund trader on telcos. Here some snippets of the exchange:
    Q: Do you buy into the idea of French telcos M&A at some point? 
    A: "Nope not in France"
    Q: So Richard's comments contain no real news?
    A: "Indeed. Macron wants to lower unemployment and mobile cost to clients... No way he will
allow a merger"
    Q: Any particular reason as to why telco stocks are moving up a touch today?
    A: "Anytime anyone talks about M&A traders get excited..." 
    (Danilo Masoni and Sudip Kar-Gupta)
    This is now a well-established idea across markets participants as the melt up theme grows:
investors are aware that the pace at which markets are rising is unsustainable but Fomo (fears
of missing out-or simply put greed) is preventing any pullback.  
    "Could there be a melt up, like 1999/2000? Well anything is possible and FOMO can be a
powerful driver," BAML's James Barty said, noting that the S&P 500 has enjoyed its
longest period without a 5 percent pullback. 
    His Q&A tells the story: 
    "Can we carry on at 6%+ per month? No. Are markets overbought? Yes. Are our models telling
us it is getting a bit frothy? Yes. Are we finally meeting clients who are more bullish than us?
    His conclusion is that one should consider taking off some risk and that adding some hedges
rather than selling positions could be a good way to do so.  
    (Julien Ponthus)
    We've just had the Ifo survey showing that German business morale improved in January,
despite the lack of a new government.
    So far the macro is pointing to strength in the Euro zone economy, but investors are still
concerned about a rising euro which will likely be a focus of the ECB meeting later on.
    "The ECB does not want a strong Euro as it hurts exports, but more importantly, makes it
difficult for them to achieve the near term inflation targets," Jordan Hiscott, chief trader at
Ayondo Markets, said.
    "In addition, events out of their control, including a notably a weaker US dollar across the
board, means the ECB board face an uphill task.”
    (Kit Rees)
    Ahead of the ECB meeting, European shares have opened slightly lower, while earnings are the
main driver behind early moves. 
    Software AG is down sharply after its results. Swiss chemicals maker Clariant
 is taking a hit after activist White Tale sold its stake of almost 25 percent. White
Tale managed to scupper Clariant's planned merger but failed more recently to secure an
independent strategic review and board seats. 
    Elekta, Elior Group, and STMicro are all gaining ground
following updates. Shares in Diageo have advanced a meagre 0.8 percent after its sales
growth was curbed by forex - is this a taste of things to come on the currency side for big
international firms? Incidentally, Next is up after RBC turned bullish on the stock,
citing a strong pound and improved sales outlook. 
    Here's your opening snapshot:
    (Kit Rees)
    Futures point to a lower European opening after a surging euro and a faltering dollar
rattled European bourses yesterday. The monthly ECB meeting and comments from U.S. officials in
Davos will be under intense scrutiny. 
    There is enough corporate news to animate the market outside of macroeconomic issues - in
tech we had trading updates for SAP and STMicro. Investors are continuously assessing whether
the sector is too expensive given its hefty multiples. 
    Germany's Siemens said it is preparing for an eventual consolidation of platforms competing
to provide businesses with factory software, which might trigger some speculative M&A
    Swedish banking group Nordea raised its dividend marginally more than expected for 2017 even
though profits for the fourth quarter fell short of analyst expectations. Northern European
banks with their strong capital ratios have been investors’ sweethearts for a while but with
confidence rising for southern lenders, it’s interesting to see whether a change of heart could
progressively occur.
    In the realm of “special sits”, activist White Tale is selling its nearly 25 percent stake
in speciality chemicals group Clariant to Saudi Basic Industries. Merger arbs, which are already
quite busy looking into the bids for the likes of Ablynx, GKN, or Sky, will also focus on
Cineworld's attempt to buy U.S. rival Regal Entertainment, dealt a blow after advisory group
Institutional Shareholder Services told investors to oppose the $3.6 billion deal. 
    Here's a round-up of headlines:
    Activist White Tale sells Clariant stake to Saudi's SABIC
    Diageo sales growth curbed by forex
    Anglo American reports 5 pct rise in 2017 output
    European pilot group demands Ryanair meet unions collectively
    Siemens prepares for industrial software consolidation
    Nordea Q4 profit lags estimate, raises dividend 
    UK's Asos beats forecasts for Christmas sales​ 
    STMicro posts surge in year-end results but eyes seasonal Q1 dip 
    Poland's PKN Q4 net profit falls 11 pct, misses forecast 
    Software AG Q4 margins hit record; IoT business may double in 2018 
    ISS advises Cineworld shareholders to oppose Regal deal 
    Block of Steinhoff loans successfully auctioned as lenders sell out
    Engie buys majority in hydrogen-based storage specialist EPS  
    Italy's Tod's sees benefits from new management starting in H2 
    UK's Restaurant Group's 2017 comparable sales down 3 percent
    UK estate agents Foxtons foresees challenging 2018
    BRIEF-Daily Mail group confirms outlook, Q1 ad revenue up 2 pct
    More oil and gas firms expect to hike capital spending in 2018 - survey
    Seadrill postpones restructuring plan hearing until Feb. 7
    Wealth manager St. James's Place Q4 assets up on inflows, market gains 
    Fingerprint Cards says to cut staff after warning of Q4 loss 
    Aryzta's problems deepen as Europe, U.S. weakness leads to profit warning 
    (Julien Ponthus and Tom Pfeiffer) 
    On the theme of if/when we see a market pullback, economists at Oxford Economics say that
short-term risks are broadly balanced between a downward correction and a further 'melt-up'
rally, according to their analysis.
    But a continued 'melt-up' could risk an equity correction of "well over 10%".
    Oxford Economics reckons a stock market correction of 25 percent could cut U.S. growth to
around 1 percent by 2019. 
    (Kit Rees)

    Earlier financial spreadbetters' indications made it hard to call in what direction European
markets would open but futures now seem to point downward.     
    (Julien Ponthus) 
    Just spotted an interesting quote in Chuck Mikolajczak's Wall Street report
which highlights the fact that the continuous rise of markets is actually making some investors
so nervous that a slight correction would be greeted with relief. 
    "The trend is higher and it is so universally, and with such conviction believed that any
meaningful pullback is going to be aborted because investors simply don’t want to miss out,"
said Peter Kenny, senior market strategist at Global Markets Advisory Group in New York.
    "So we are not seeing that healthy pullback that most investors would actually welcome."
    (Julien Ponthus) 
    Good morning and welcome to Live Markets. No clear direction is emerging yet for European
shares ahead of the ECB's governing council meeting later today, which will be under intense
scrutiny after a rapidly strengthening euro versus a faltering dollar rattled the continent's
bourses during the previous session. 
     Financial spreadbetters expect London's FTSE to open 2 points lower at 7641.6 points,
Frankfurt's DAX to open 16 points higher at 13430.5 point and Paris' CAC to open 1 point higher
at 5496 points.
    (Julien Ponthus)

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