January 22, 2018 / 3:18 PM / a month ago

LIVE MARKETS-Ocado: Feels like a squeeze

    Jan 22 (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 
    
    OCADO: FEELS LIKE A SQUEEZE (1515 GMT) 
    According to Jefferies, it's unlikely that the surge in Ocado shares is due to the
fundamentals of the Sobey deal, which will allow Canada's second largest food supermarket group
Sobeys to use the UK group's ecommerce platform.
    "In reality it will be the ongoing squeeze in the short base (76m shares are still on loan,
from a peak of 124m in July 2017) that will dictate near term outlook for the stock", the
analysts said as Ocado enjoys a 20 percent jump.
    This comes roughly two months after a similar deal with France's Casino had pushed the
shares up more than 20 percent. 
    Ocado was a favoured as a "short" bet amongst hedge funds throughout 2017 partly because of
divergent views among investors over whether the company is a food retailer or a technology
provider able to command a high valuation. Check out our story here:
    Have a look here to spot the pattern of short squeezes:    
 
    (Julien Ponthus) 
    *****
    
    RISING RATES AND UTILITIES, IT'S NOT NECESSARILY ALL THAT BAD (1423 GMT) 
    You would think that with monetary normalisation on the agenda and rising rates on their
way, there isn't much of a case for investing in European utilities. 
    Not so fast, UBS analysts say.  
    "When bond markets fall and power prices are rising, power generators can still strongly
outperform," they argue, naming EDF, RWE and Fortum as stocks
likely to outperform this year.
    They also cite special situations with Uniper (Fortum bid) or Centrica
(recovery case). 
    Overall, out of the 24 European utilities it covers, UBS would only buy half:   
 
    (Julien Ponthus) 
    *****
    
    AFTERNOON SNAPSHOT: IBEX HITS FIVE-MONTH HIGH (1349 GMT)
    European shares have turned slightly higher, pushing the STOXX 600 index back to
its highest point since Aug. 2015 and the euro zone's STOXX to 10-year highs,
milestones already reached on Friday. 
    Only the IBEX in Madrid is breaking new ground after Fitch upgraded Spain's credit
rating to "A-". The Spanish top share index has just extended its gains to 1.1 percent, hitting
a five-month high and helping it recover from the losses linked to the Catalonia crisis.    
 
    (Danilo Masoni)
    *****
        
    IS THE MARKET POSITIONED FOR CROSS-BORDER BANK M&A? (1257 GMT)
    Mediobanca Securities analysts don't think so. They see opportunities for stock pickers, but
have a word of caution over the broad benefits of such deals. 
    "European regulators and governments are getting more and more explicit about their desire
to have in-market and cross border consolidation within the Banking Union. By contrast, both
CEOs and investors seem very cold about it given the limited cost synergies and the higher
execution risk," they say. 
    "Yet, we see some combinations making sense as they either offer in-market synergies or
material upside from capital arbitrage. None of this is included in current prices... and we
stress it would make sense to gain exposure to attractive stand-alone names also offering free
upside potential from M&A," they add in a note to clients.
    Here are their possible M&A picks in the space:
    * Bankia and Monte dei Paschi among government-owned banks 
    * Italian mid-cap banks on valuation 
    * Commerzbank as the only entry ticket into the German market or as the way to
create a large German player 
    (Danilo Masoni)    
    
    BOND YIELD REPRICING SHOULDN'T SINK STOCKS (1249 GMT)
    The thing keeping most stock investors up at night right now, according to JP Morgan, is the
potential for bond yields to reprice and drive a re-rating of equity P/E. 
    But JPM analysts reckon equities will be able to absorb a potential repricing in bond yields
as the move up in yields is happening for the 'right reasons', i.e. strong economic growth. 
    And earnings momentum is more important to valuations staying strong - they see "at worst"
stable P/E multiples ahead.
    So far from being a threat to stocks' outperformance, JP Morgan analysts see the potential
repricing in bond yields as a reason to stay constructive on stocks. "If yields move higher we
believe equities could in face benefit from, among other factors, a rotation in investor flows."
    Regardless of the impact bond repricing may have on the P/E multiple, JPM recommends hedging
this risk by rotating out of Growth and into Value stocks - a trade which, if it plays out, will
favour the European market which is heavier in Value stocks. 
    "It is very difficult to see Eurozone underperform the US if the Growth-Value rotation does
materialize this year," says JPM.
    (Helen Reid)
    *****
    
    FUEL PRICE SURGE SPELLS TURBULENCE FOR AIRLINES (1225 GMT)
    While the New Year surge in oil prices, has buoyed global markets and energy stocks, it
isn't good news for everyone. Airlines are one sector set to suffer from higher cost pressures.
    The cost of jet fuel has increased by more than 30 percent in 12 months, Bernstein analysts
write. They forecast fuel costs to rise by 2.4 billion euros this year, or 14 percent.
    "Rising costs are increasingly worrying airline executives as the days of cheap fuel appear
to be over," Bernstein analysts say. 
    And they don't see any chance the airlines can pass on this cost to consumers through higher
fares. 
    "We see this translating into a very different picture for earnings at individual airlines
as differing hedging policies, profit margins and 'locked in' hedge prices for fuel and currency
create different levels of exposure."
    Ryanair's fuel bill is the most sensitive to further changes in oil price, according
to Bernstein, but they reckon rising prices won't dent margins too much because the airline has
hedged its exposure at a low price so far. 
    Meanwhile Air France-KLM faces the largest increase in fuel prices in 2018 given
its relatively low hedging amount and after it enjoyed the lowest fuel price across the
analysts' coverage in 2017. 
    The French airline is already down 3.4 percent today after Davy Research analysts downgraded
the stock to neutral after a strong run.
 
    (Helen Reid)
    *****
    
    A SOBERING VIEW ON FRANCE: STRUCTURAL UNEMPLOYMENT IS A DRAG (1138 GMT) 
    With growing optimism on the health of the Euro zone economy and its equity markets, it's
easy to forget that GDP growth in some countries such as France is somewhat below what one would
expect at this stage in the cycle, with forecasts of under 2 percent for 2017 and 2018. 
    According to Natixis' research, structural unemployment and the rise in numbers of young
people with no qualifications are a drag on the Gallic economy and will keep holding it back. 
    "When the structural unemployment rate is as high as in France currently (more than 9%),
recruitment difficulties will very prematurely stop growth," Patrick Artus, who heads research
at the French bank, says in a note.
    "Periods of vigorous growth in France will necessarily be short, since recruitment
difficulties rapidly become severe," he argues, noting how the last ten years have hurt growth
potential:   
 
    (Julien Ponthus) 
    *****
    
    NO NEED TO BE WORRIED ABOUT U.S. SHUTDOWN (1044 GMT)
    That's the view from investment manager Rathbones on the U.S. government shutdown.   
    "I believe investors shouldn’t get too panicked. It's important to remember that financial
markets barely blinked at the last two shutdowns in 1995/96 and 2013," Ed Smith, head of asset
allocation research at Rathbones, said in a note.
    The U.S. Senate is due to vote on a funding bill at 1700 GMT later today.
    "Markets do not react because the economic impact is not that large," Smith added.
    In Europe markets are still flat, suggesting the focus remains on M&A activity and upcoming
earnings reports.
    (Kit Rees)
    *****
    
    BANKS: CAN YOU SEE Q4 THREATS IF YOU TAKE THE HELICOPTER VIEW? (1039 GMT) 
    As mentioned in the post below, the rotation to banks has been a very popular trade so far
in 2018, seen as a proxy to play the buoyant Euro zone economy and monetary normalisation. 
    But while this seems to make perfect sense when one takes a helicopter view on the sector,
in the short term, Q4 could be a tricky one, just as UBS seems to show this morning. 
    Looking at the French banking sector, Deutsche Bank notes three potential threats to Q4
results: 
    * Retail banking is still suffering from low interest rates and that's hurting net interest
margins. 
    * Low volatility is a drag for market activities, and that has been clearly exposed last
week in the results of U.S. investment banks. 
    * One-offs such as SocGen's recent tax fight with the French government, are not a thing of
the past.  
    JP Morgan has made a similar warning to its clients, advising them to be selective in
picking the right banking stock. 
    Interestingly, DB, like JP Morgan, also recommends favouring Natixis over Societe
Generale and notes its recent underperformance: 
 
   (Julien Ponthus) 
    ***** 
    
    DOES UBS SHARE DROP SET A PATTERN FOR Q4 BANK RESULTS? (1010 GMT)
    UBS kicked off European bank earnings with buybacks and higher dividends despite a U.S.
tax-related writedown, but the shares are down 1.6 percent. 
    Cyclical stocks like banks have been buoyed the most by the flood of money into equities
since the start of the year and UBS is no exception. 
    The Swiss bank’s earnings forecasts were in line with consensus, but that was still enough
to trigger some selling, one analyst tells us. 
    It seems the market was holding out hope for more ambitious targets from UBS given wealth
generation in the world is increasing, new money is growing and markets are strong.
    (Tom Pfeiffer)
    *****
    
    VIEWS FROM THE STREET: RICHEMONT'S OFFER FOR YNAP (0950 GMT)
    Surging up to the top of Italy's stock index is Yoox Net-a-Porter, up 24
percent to a record high after Richemont put in a bid for the remaining shares in YNAP,
at a 26 percent premium to Friday's closing price. 
    "The deal seems to reflect Richemont's aim to expand but at the same time control its
distribution channels," note Baader Helvea analysts. The deal is in a similar vein to
Richemont's recent move to increase its stake in duty free retail company Dufry.
    "Given the lack of interesting acquisition targets up for sale in their core business of
hard luxury, Richemont has decided to put at work its big cash pile investing into distribution
channels," write Bernstein's Mario Ortelli and team.
    Crucially, Bernstein analysts note, Richemont will continue to run YNAP as a separate
business in order to make sure third-party luxury brands continue to see it as a neutral
platform. 
    The already strong ties between the companies mean analysts don't see counter-bids as
likely. 
    We're just under the offer price of 38 euros now. Richemont shares meanwhile are down 1
percent as investors digest the bid. "Due to [YNAP's] relatively lower ROIC profile, some
investors may question the group's decision to go back to the lower return e-commerce business
rather than look to expand its existing brand portfolio," says Berenberg.    
 
    (Helen Reid)
    *****
    
    
    OPENING SNAPSHOT: STOXX 600 FLAT (0813 GMT)
    European shares have opened little changed with the broader pan-regional STOXX 600 stuck at
Friday's level and sectoral indexes also showing small moves. 
    Germany's DAX is up a little as Chancellor Angela Merkel's conservatives prepare for formal
coalition talks after the centre-left SPD voted narrowly to go ahead following months of
political deadlock.
    Below the surface, the price swings are much bigger.
    Top 2 movers on the STOXX 600 are Sweden's Orphan Biovitrum, up 15 percent, which
is a partner of haemophilia drug maker Bioverativ that Sanofi agreed to buy, and bookie William
Hill, down 14 percent after the Sunday Times reported that Britain will limit gambling
terminal stakes to two pounds. 
 
 (Danilo Masoni)   
    ***** 
        
    SANOFI'S MOVE BOOSTS BIOTECH M&A PIPELINE (0747 GMT)
    Investors betting on a pick of M&A deals in the pharma sector will likely be emboldened by
news that French healthcare group Sanofi has agreed to buy U.S. peer Bioverativ in a
$11.6 billion transaction.
    Check out our story here for more details on the cash deal which comes after
Sanofi had failed to land major takeovers in recent years. Separately, Biotest said
late on Friday it sold its U.S. operations, allaying U.S. national security concerns and paving
the way for the German blood plasma products maker's sale to a Chinese investor.
    Just in recent weeks there has been a flurry of M&A deals in the biotech space worth several
billion dollars. Here's a quick recap of dealmaking that has involved European companies: Novo
Nordisk/Ablynx; Roche/Ignyta; and Takeda/TiGenix
. 
    (Danilo Masoni)
    *****

    WHAT YOU NEED TO KNOW (0740 GMT) 
    It seems to be business as usual so far on European stocks markets with futures indicating
shares to rise slightly, expect in London with the FTSE losing a few points. 
    That could change however with a prolonged stalemate in Washington but in the meantime, in
Europe, prospects of talks between Merkel allies and the SPD should support  sentiment.
    Main newsmaker this morning is France's Sanofi, which confirmed a bid for U.S. peer
Bioverativ , another sign that M&A should indeed continue to spice things up. 
    Switching from spice to sugar, Italian airports and motorway operator Atlantia is open to
sweeten its bid to Abertis and other takeover preys, such as Ablynx in Belgium or GKN in  the
UK, expect their would-be suitors to cough up more cash to woo investors. 
    A deal is not always needed though for shareholders to get extra cash:  UBS  proposed an
increased dividend and new share buyback programme despite a hefty write down from a tax
overhaul in the United States. 
    Other movers today could include troubled South African retailer Steinhoff which plans to
sell about 7.5 billion rand ($620 million) of shares in investment firm PSG Group it scrambles
to plug a liquidity gap.
    Possible impact also of the chief executive of Dixons Carphone leaving Britain's largest
electricals and mobile phone retailer to run the Boots chain. 
    Also, platinum miner Lonmin reported a 65 percent drop in 2017 profit, citing higher costs
and subdued commodity prices but reiterated its 2018 targets
    Please have a look below for a summary of our main headlines.
    (Julien Ponthus) 
    *****         

    MAIN HEADLINES (0740 GMT) 
    Healthcare group Sanofi agrees to buy U.S. peer Bioverativ for $11.6 bln   
    Richemont offers 2.8 bln euros to buy Yoox Net-A-Porter    
    Steinhoff to place shares in PSG Group worth around $620 million  
    UBS ups investor returns as US tax overhaul socks bank with quarterly loss   
    Takeover target GKN raises forecast for electric driveline sales   
    Dixons Carphone reports 6 percent jump in underlying revenue   
    Dixons Carphone CEO James quits for job at Boots  
    TUI sees record sales, earnings in 2018-paper    
    Atlantia opens door to sweetening Abertis bid    
    Takeaway.com says merger with Delivery Hero an option –paper   
    UK Q4 motor insurance premiums fall 1.3 pct-survey   
    Britain to limit gambling terminal stakes to two pounds-Sunday Times   
    LVMH hires Hedi Slimane for Celine brand    
    Engie to keep separate CEO, board chair roles -finance minister  
    Deutsche Telekom expects steady dividend hikes –paper   
    Hearing on Vivendi's appeal against Italian antitrust ruling postponed     
    Schaeffler CEO says splitting company would be unwise -paper     
    UK Takeover Panel extends deadline for IWG bidding    
    Sika CEO says share price rise could end takeover battle   
    UK's Computacenter says to beat 2017 expectations, sees stable 2018   
    Lonmin reports 65 percent fall in 2017 profit on higher costs   
    (Tom Pfeiffer)
    *****    
    
    EUROPE'S STOCK FUTURES SLIGHTLY UP (0705 GMT)
    Futures have opened with slight gains overall but London's FTSE 100 is seen, as earlier
indications from spreadbetters showed, opening in negative territory.  
 
    (Julien Ponthus) 
    ***** 
    
    WHAT TO EXPECT ON MARKETS DURING A U.S. SHUTDOWN? (0645 GMT) 
    While many see minimal impact on the economy from a short-term government shutdown, analysts
say a prolonged stalemate in Washington could dampen investors' confidence in U.S. assets.
   Here's how Nordea sums up what's to be expected based on the previous shutdowns:     
 
   (Julien Ponthus) 
    *****     
    
    EUROPEAN MORNING CALL: SHARES SEEN OPENING SIDEWAYS (0625 GMT)
    Good morning and welcome to Live Markets. European shares are set to open sideways on Monday
with the U.S. government still shut down but with hopes of an end to the political deadlock in
Germany with German Chancellor Angela Merkel's conservatives getting ready to start formal
coalition talks with the Social Democrats (SPD). 
    Earlier, U.S. stock futures, Asian equities and the dollar pulled back slightly as the U.S.
government is shut down amid a dispute between President Donald Trump and Democrats over
immigration.   
    London's FTSE 100 is expected to open 14 points lower, Germany's DAX 31 points higher and
France's CAC 40 up 5 points. 
    (Julien Ponthus)
    *****

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