February 16, 2018 / 12:28 PM / in a year

LIVE MARKETS-Make your peace with volatility and the "post new normal"

    * European shares extend bounce
    * Earnings in focus

    Feb 16 (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
    "Market volatility is a fact of life, we've got to live with it". There you go, ECB's Coeure
spelled it out for us.
    But it does seems from all the research coming out this week that one of the key questions
keeping investors on their toes is how to handle the sudden return of volatility and how much of
it to expect.  
    "The question we get most, what investors are most focused on, is the rise in volatility",
Sharon Bell, managing director, equity strategy at Goldman Sachs, told us. 
    "When you have a correction volatility always rises. But once this correction is finished
are we going to be returning to a regime of lower or higher volatility?", she added.
    For Larry Hatheway, chief economist at GAM, "we are entering a new phase that will be
characterised by more volatility and further corrections". He calls this new development: "the
post new normal".
    Unicredit's cross asset strategist Elia Lattuga takes the view that "market perception of
risk is changing and volatility will likely remain high over the coming months, as monetary
stimulus is gradually withdrawn."
    Mike Clements from SYZ asks "how can investors profit from the approaching storm?" and you
can read about one of his answers here: 
    GRAPHIC-Dutch high-frequency trader booms after market wobble
    And for the fun of it, have a look at the VIX
    (Julien Ponthus and Helen Reid) 
    Here's more evidence of the unpopularity of the UK equity market: short sellers now have the
biggest position in UK stocks since Q1 2009, according to research by IHS Markit.
    This is a total of 30.8 billion pounds (around $43.4 billion) in short balances, and the
recent sell-off has only fuelled the rise in short positions in the FTSE 350.
    According to the report, materials, energy, food & staples retailing groups account for 38
percent of UK short balances.
    (Kit Rees)
    One big expectation for European equity markets in 2018 was a pick-up in M&A.
    Well, we're still waiting: according to Thomson Reuters data, M&A activity in Europe is
actually down 40 percent! 
    And it's not like the old continent is following a bigger trend, as global M&A is up 14
percent, and it's up 32 percent in the U.S.
    It certainly could be a concern for investors looking to invest in merger arbitrage
strategies as a way to hedge themselves against the market swings we have just experienced.
    "Merger arbitrage fared very well and matched expectations regarding their ability to
deliver returns uncorrelated with market movements", Lyxor wrote this week, reiterating their
"strong convictions on the strategy". 
    Here's how they make the case for merger arb:   
    (Julien Ponthus)
    With markets rebounding after a sell-off earlier this month, developed market equity funds
tracked by EPFR enjoyed a "smoother ride" during the second week of February, says Cameron
Brandt, Research Director at the fund tracking firm, in his latest update.
    Europe, Japan and Global Equity Funds all took in over $2.5 billion apiece, offsetting
redemptions from U.S. Equity Funds, he says, adding that Germany, France, Spain, Switzerland and
UK equity funds all took in over $200 million. 
    One expectation was Italy, which recorded outflows for the 10th week running, as the March 4
general elecion approaches.
    In the previous week redemptions from EPFR-tracked Europe Equity Funds hit an 80-week high.

    (Danilo Masoni)
    It looks like investors have turned their attention from bond yields and rising inflation to
the strong earnings picture in Europe, as the STOXX 600 powers ahead this morning thanks to a
slew of well-received company results.
    Rounding up a couple of early standout performers, Dutch oil storage company Vopak
, French satellite operator Eutelsat and utility EDF are all up 4 to
12 percent after their updates.
    Swedish defence firm Saab is down around 11 percent, however, after proposing a
lower than expected dividend. Danone's shares are also up only a modest 0.7 percent
following its results for 2017.
    Here's your opening snapshot:
    (Kit Rees)
    European shares are expected to open higher and snap a three-week losing streak on Friday as
volatility calms down and investors put aside worries over inflation that sparked a heavy
sell-off in global equities earlier in the month. 
    Futures on top European country indexes were up 0.4-0.6 percent, while the pan-European
STOXX 600 benchmark was up more than 2 percent so far this week. The STOXX however is
still down around 7 percent from the 2 1/2 year peak hit in January.    
    According to the latest data from Thomson Reuters, European fourth quarter earnings are seen
rising 14.6 percent. That's a big upwards revision from last week's 11 percent growth forecast
and follows 15 weeks marred by a string of downgrades.
    The revision has brought Europe to just below the 14.8 percent growth rate expected for the
S&P 500, although "earnings beats" in the U.S. stand at 78 percent vs 50 percent in Europe.
    For market moving headlines see the couple of posts below.
    (Danilo Masoni)    
    Yesterday we had full-year results from Nestle's, which dropped after forecasting
only modest organic sales growth, whereas Danone has come out today saying that it is
aiming for further sales and profit growth in 2018.
    Analysts are saying that Danone's full-year results have come in slightly ahead of
consensus, but there is still work to be done.
    "FY18 guidance is for DD EPS growth, which implies confidence on margins but not necessarily
on the top line. We see good progress being made here, but ongoing negative momentum in Fresh
Dairy testifies to the continuing challenges ahead," analysts at Jefferies say in a note.
    It has been a little difficult of late separating stock-specific weakness among consumer
staples from the broader concerns around the impact of rising bond yields on the sector, but as
you can see from the chart below their valuation premium has come down somewhat this year.    
    (Kit Rees)
    European stock index futures have opened with gains of around 0.3 percent, confirming
earlier indications from financial spreadbetters.     
    (Danilo Masoni)
    We have earnings from top companies like Allianz, Renault and Eni
 this morning but also some fresh dealmaking activity with Roche agreeing to buy
U.S. cancer data company Flatiron Health for $1.9 billion. Here are your headlines:      
Allianz Q4 net profit down 22 percent on U.S. tax hit, weak dollar
Renault posts record earnings, strengthening Ghosn's hand
ANALYSIS-As mining investors push caution, Glencore differs from rivals
Roche to buy Flatiron Health for $1.9 bln to expand cancer care portfolio
Air France-KLM positive on ticket prices, takes pensions charge
Volatility holds key to bank revenue revival from 2017 slump -survey
Swiss elevator maker Schindler reports in-line 2017 results on stable China demand
BHP Billiton to drill two new deepwater wells in Trion this year
Vopak 2017 earnings fall, but slightly beat expectations
Food group Danone eyes further sales and profit growth for 2018
Lower nuclear output hits EDF 2017 earnings, 2018 rebound seen
Auto parts group Faurecia slightly raises 2018 margin goal as profit climbs
Eni releases Q4 update, confirms dividend for 2017         
China's HNA Group trims stake in Deutsche Bank to around 8.8 pct
Shareholders sell $424 million worth of Scout24 shares
ISS recommends Booker investors vote against Tesco deal   
Portugal regulator to further investigate Altice-Media Capital deal
Bollore FY Revenue Up EUR 18.33‍​ Billion
Vivendi's annual profit rises on strong music revenue   
Italy Antitrust probes telecoms companies for billing practices
    (Danilo Masoni)
    Good morning and welcome to Live Markets. 
    European shares are seen opening higher today following two sessions of gains as worries
over inflation and spiking bond yields that caused a turbulent start of the month ease.  
     Asian shares rose for a fifth straight day as investor confidence slowly returns after a
sharp sell-off earlier in the month, but the dollar continued its descent, hitting a three-year
low against a basket of major currencies.  
    "After two successive weeks of sizeable losses for equity markets there was always the
possibility that we’d see a bit of a rebound this week, and so it has proved, though once again
the extent of the rebound has been led by US markets, while markets in Europe have lagged behind
somewhat," writes Michael Hewson, Chief Market Analyst at CMC Markets UK.
    Here are his opening calls:
    FTSE100  is expected to open 29 points higher at 7,263
    DAX is expected to open 46 points higher at 12,392
    CAC40 is expected to open 13 points higher at 5,235
    (Danilo Masoni)

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