* European shares dip slightly
* Geopolitical jitters keep investors cautious
* U.S. futures trade higher

April 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

REASONS TO RELAX ABOUT A FED “POLICY MISTAKE” (FOR NOW) (1343 GMT)
The Fed’s tightening course to monetary normalisation and the possibility of a “policy
mistake” have been key areas of concern among investors since last summer but according to JP
Morgan Cazenove, we shouldn’t worry just yet.
“In at least the last 60 years, we never had a recession starting with real rates in
outright negative territory,” the bank’s strategists write, arguing that the Fed still has ample
room for manoeuvre to tighten rates without rocking the boat.
“We note that real rates at -0.6% currently provide ample cushion when considering that none
of the last eight recessions started with real yields below 1.8%,” the analysts found.

Another reassuring argument given by JP Morgan’s strategists is that a flattening U.S. yield
curve is to be expected during a tightening cycle and should not be seen as a red flag as long
as it doesn’t invert.

(Julien Ponthus)
*****

EUROPEAN EARNINGS TO DIVERGE WIDELY (1230 GMT)
Goldman Sachs analysts expect an “in-line” earnings season to kick off next week, though
they say stock-pickers should benefit as there’s likely to be much more dispersion between
stocks.
Economic growth momentum in Europe has fallen over the quarter, but the level of survey data
remains strong, they note, while the stronger euro could weigh.
Among sectors who are the winners and losers of this season likely to be? Some nuggets from
GS:
– Commodity-related sectors have seen 2018 EPS estimates upgraded by 9 percent year-to-date
– Telecoms and healthcare have seen the sharpest negative EPS revisions in Q1
– U.S. exposed companies’ estimated 2018 EPS has fallen as the EUR/USD exchange rate rose
Goldman has an overweight on autos, banks, basic resources, oil & gas, tech, utilities,
while underweights include food & beverage, personal & household goods, retail, and travel &
leisure.
Here’s the bank’s chart showing how earnings estimates have developed across sectors:

(Helen Reid)
*****

GET USED TO RISK AVERSION! (1203 GMT)
Among other things, 2018 has seen a reawakening of risk aversion in financial markets and
for Patrick Artus, chief economist at French bank Natixis, it’s here to stay.
This means investors may have to recalibrate their forecasts across asset classes.
“It is unlikely that the level of risk aversion will decline in the future, and there is,
therefore, a need to revise forecasts for share prices (downward), credit spreads (upward),
long-term interest rates on government bonds (downward) and oil prices (upward),” he writes.
Until early 2018, risk aversion was abnormally low, he says, and while this “normalisation”
process is good news, what’s not so good is what’s causing it: the policies implemented or
announced by U.S. President Donald Trump’s administration.

Here’s a recap of those policies:
* Expansionary fiscal policies at full employment
* Likely banking deregulation
* Protectionism
* Now, criticism of Amazon
* Tensions in international relations with Iran, China and Russia

(Danilo Masoni)
*****

A CASE FOR CYCLICALS (1144 GMT)
At the beginning of this year it was all about capitalising on the global upswing by buying
into cyclical names. While the sell-off in February may have hit some of these cyclical sectors,
lower valuations are a tempting prospect now.
Graham Campbell and David Keir, co-managers of the TB Saracen Global Income and Growth Fund,
say they are continuing to find value in more cyclical industrial sectors, such as oil & gas,
resources and industrials, as well as in pharma and financials.
In a note, Keir points to stocks like HeidelbergCement which he says has robust
earnings momentum and is in a good position to benefit from global growth. They have added to
their holdings in the stock as they reckon its valuation is attractive.
Keir also sees “interesting opportunities” in Europe more broadly, with the region
accounting for more than 40 percent of their portfolio by domicile.
“The stock market is trading below its long term average and the average dividend yield of
3.9 percent compares very favourably with other global markets,” said Saracen’s Keir.
(Kit Rees)
*****

MID-SESSION SNAPSHOT: EUROPEAN SHARES LAG U.S. FUTURES (1119 GMT)
Caution is definitely on in Europe as investors seem to have not yet decided whether they
should fear further escalation between the U.S. and Russia.
The STOXX 600 is currently down 0.2 percent but there seems to be quite a bit more optimism
on the other side of the pond with Wall Street futures up about 0.6 percent for the three main
indexes.
Most European bourses are in moderately negative territory except Milan which is flat and
continuing its baffling outperformance despite the country’s political deadlock.

(Julien Ponthus)
*****

RUSSIA RISK ON ANALYSTS’ RADARS (1036 GMT)
European stocks with Russia exposure are still getting special attention from analysts, and
there’s some evidence in price action today of concerns weighing as the U.S. is expected to
announce new economic sanctions, aimed at companies “dealing with equipment” related to Syria’s
alleged chemical weapons use.
Polymetal, a gold and silver miner with operations across Russia, is down 6.6
percent, bottom of the STOXX 600, and Austria’s Raiffeisen Bank, which has significant
exposure to Russian businesses and retail clients, is down 2.3 percent, the worst-performing of
the banking sector.
Raiffeisen Bank has been one of the worst-hit European stocks in the context of sanctions –
it’s down 14.8 percent since the day before sanctions were announced.
Austrian central bank governor Ewald Nowotny last week told us he’s certain the sanctions
will have only a negligible impact on Raiffeisen.
But Barclays analysts today say they see earnings risks due to a weaker rouble and
potentially slower Russian GDP growth. Raiffeisen’s direct group exposure to sanctioned
companies was 0.1 percent of total assets in 2017, Barclays says.
In the oil and gas sector analysts are also working out where the vulnerabilities may lie.
“European majors with the most exposure to Russia include BP (via Rosneft), Total
(via Novatek and Yamal LNG) and OMV (through its strategic partnership with
Gazprom),” note Credit Suisse analysts.
“We do not like to second guess what’s next but like to point out some facts,” they add.
(Helen Reid)
*****

IS AN ABE RESIGNATION OVERLOOKED OR SIMPLY IRRELEVANT? (1012 GMT)
“Why are markets not worried about an Abe exit?” is a question keeping us busy this morning
– and that’s despite there being no shortage of geopolitical news!
The Nikkei closed up 0.26 percent and the dollar eased against the yen as Former
leader Junichiro Koizumi said the Japanese Prime Minister, plagued by suspected cronyism
scandals and falling ratings, will likely step down in June.
“We are a bit surprised that the news about Abe is not getting more play in the currency
markets”, says Neil Mellor, senior FX strategist at BNY Mellon.
As further escalation between the U.S. and Russia over Syria remains likely, the fate of the
Yen, a traditional safe-heaven, should be on many investors’ minds.
“It’s a brave move to bet against the JPY in a world of Trumpian uncertainties,” ING
analysts note, adding they “remain wary that we’re one move (or tweet) away from any escalation
that could bring about a broader flight-to-safety”.
One school of thought would be that markets have little means to hedge or play an Abe
resignation but the consensual view seems to be that there is simply not much at stake.
“A change in leadership may matter if the next prime minister has a radically different
agenda. But were Abe to resign that of itself would not necessarily change existing policy,”
says Paul Donovan, global chief economist at UBS Wealth Management.
“Change may not be that market threatening were it to occur”, he adds.

(Julien Ponthus, Ritvik Carvalho, Saikat Chatterjee and Alasdair Pal)
*****

ON THE HUNT FOR EQUITY RISK PREMIA IN EUROPE (0900 GMT)
As is clear in trading thus far today, equity investors are pretty un-fussed about the
U.S.-led strikes on Syria over the weekend. UBS analysts this morning echo the view of many
investors we’ve been speaking to, saying:
“Underneath an often sweeping discourse on political and trade-related risks, investors have
not paid enough attention to a strong and – near term – binding macro backdrop.”
Strong macro growth provides a cushion for equities especially in Europe, they say, pointing
to still handsome equity risk premia.
Euro zone stocks’ equity risk premium is on average higher than the U.S., as you can see
below – as the post-crisis recovery has been slower with niggling issues with banks and balance
sheets. But it’s been falling back as these issues fade, helped by the better economic backdrop.
“We believe there is space for risk premia to decline further,” says UBS. To harvest higher
premia “investors need only go out the risk spectrum,” they say, recommending long positions in
Greek bonds and Italian banks.

(Helen Reid)
*****

OPENING SNAPSHOT: CAUTION PREVAILING (0743 GMT)
European shares are only cautious up this morning as traders fear the missile strikes in
Syria could lead to a further escalation of tensions between of the U.S. and Russia.
There is however some relief that the well-telegraphed attack on Syria had been limited in
scale and Wall Street futures are trading in positive territory.

(Julien Ponthus)
*****

EUROPEAN STOCK FUTURES EDGE UP (0602 GMT)
European shares are set to open up slightly with stock index futures on main regional
benchmarks trading up 0.1-0.3 percent. The pan-European STOXX 600 index ended on Friday at a
4-week high, up 0.1 percent.

(Danilo Masoni)
*****

EARLY MORNING HEADLINE ROUNDUP (0556 GMT)
WPP embarks on new journey without Sorrell at the helm
ECB asks Deutsche Bank to gauge investment banking exit costs -source
Activist Elliott now largest shareholder in Whitbread
Adecco to buy U.S.-based General Assembly in deal valued at $412.5 mln
Software AG raises FY industrial internet sales outlook
Unilever remuneration under fire from investor advisory firms
Sulzer gets second licence unblocking assets frozen by U.S. sanctions
Spain’s ACS to help build and maintain Toronto light railway
Activist fund SVM takes stake in Italy’s TIM, backs Elliott
Major Hammerson shareholder to vote against Intu acquisition
German minister to carmakers: Invest in electric cars or lose out
VW’s new CEO may become Audi chairman in May -sources
Rolls-Royce to bid for engines for China-Russia wide body jet -China Daily
French spirits maker Marie Brizard warns of deeper loss in 2017
(Danilo Masoni)
*****

MORNING CALL: EUROPEAN SHARES SEEN CAUTIOUSLY HIGHER (0530 GMT)
European shares are seen opening higher although caution will dominate after the U.S.,
France and Britain launched missiles targeting what the Pentagon said were chemical weapons
facilities in Syria in retaliation for a suspected poison gas attack in Douma this month.
“The firing of over 100 cruise missiles over the weekend on various targets, with little in
the way of casualties, appears to be tempered with relief that while it may reduce the risk of
an escalation in the short term, it in no way means that we might not get a counter response
further down the line,” said Michael Hewson, Chief Market Analyst at CMC Markets.
Financial spreadbetters expect London’s FTSE to open 12 points higher at 7,276, Frankfurt’s
DAX to open 72 points higher at 12,514 and Paris’ CAC to open 22 points higher at 5,337.
Over in Asia, shares were mixed as relief U.S.-led strikes on Syria looked unlikely to
escalate was tempered by concerns at Russia’s potential reaction to new sanctions from
Washington.
Russian President Vladimir Putin warned on Sunday that further Western attacks on Syria
would bring chaos to world affairs, as Washington prepared to increase pressure on Russia with
new economic sanctions.
(Danilo Masoni)
*****

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