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LIVE MARKETS-Rising rates and the benefits of a zombie apocalypse
RISING RATES AND THE BENEFITS OF A ZOMBIE APOCALYPSE (1505 GMT)
Will monetary nomalisation cause an apocalypse for zombie companies? This might very well be the case and, according to Deutsche Bank research, it might not be such a bad thing either.
"The early data for 2017 show a significant drop in the number of zombie firms. Provisionally, this suggests that the uptick in growth since 2016, which has been accompanied by tighter monetary policy, may be a turning point for zombie firm formation," DB writes.
"If this proves to be a trend, it may give the authorities confidence that continuing to raise rates and pull away from unconventional monetary policy will have some advantages, in sofar as it leads to the reduction of zombie firms and boosts productivity." Companies which barely survive to service their debt are seen as a drag on productivity and on the economic recovery as the resources they consume could, in theory, be better used for investments in fast-growing segments of the economy. This could be of relevance for the #Euroboom theme as Europe is home to the highest proportion of zombie firms.
DB makes the point that low interest rates allowed them to survive by making their debt cheaper to service, though that is not the only reason.
"Low rates also reduce the incentives for banks to pull the plug and call in their loans, because the returns by lending out that money elsewhere would not be much higher. Today, perhaps we are at a turning point."
(Julien Ponthus) *****
EARLY AFTERNOON SNAPSHOT: STOXX OFF LOWS AFTER US DATA (1428 GMT) European shares have managed to come off lows as US stock futures pared losses after data showed consumer spending in January notched its smallest increase in five months and core inflation rose less than expected. The STOXX was last down 0.7 percent, having lost more than 1 percent earlier in the session. In this snapshot how European indexes look like just before Wall Street opens.
Despite the slight rebound from lows, interest rate worries linger. "The latest sell-off was triggered by hawkish comments from the new Fed chief Jerome Powell. He is due to testify again today, but I doubt he’ll say anything new this time," says Fawad Razaqzada, analyst at Forex.com. (Danilo Masoni) *****
KINDLY STEP AWAY FROM THE SECTOR (1337 GMT) In the small- and mid-cap world, strategists at JPM do not advise trying to play a rising rate environment by sector positioning.
"Feedback from 2 weeks of mktg shows that positioning for a rate hiking cycle is front and center in the minds of investors today," say JPM's strategists in a note. "CAUTION! What historically worked in such scenarios may not be advisable this time around as this hiking cycle is starting at a much later stage of the economic cycle and thus may be short-lived," JPM say, adding that sector selection is a macro call which is "unnecessarily risky" in the 10th year of a bull market. Plus they flag that financials haven't been default outperformers during periods of rising interest rates. So what to do then? JPM say they are staying "fully invested" in equities, focusing on stocks with high free cash flow yields, solid balance sheets, and limited downside. They are OW Eurozone vs UK. (Kit Rees) *****
EUROPEAN BANKS' STRESS TESTS: SPOILER ALERT! (1255 GMT)
Investors patiently waiting for November to discover the results of the European Banking Agency's (EBA) stress tests beware!
Moody's published a major spoiler for those who would rather not have any hint of the plot. "The test will show that the banks are more resilient to economic stress," Swen Metzler, Vice President at the rating agency wrote in a note covering the issue. "The tougher economic assumptions this year may lead to a higher overall hit to capital ratios. However, the banks' starting capital is higher this time, giving them greater resilience," he believes. Moody's reminds us that debt investors typically benchmark the banks' performance in the stress tests to price the risk premiums but equity analysts also take a very close look at the resilience of the capital.
As a reminder, the banking sector is still a favourite for 2018. It's currently in third position, up 0.8 percent year-to-date and trailing behind insurers, which are rising 1 percent. Automotives are leading the race up 1.4 percent since the beginning of the year.
Here's a look at how banking sectors from different EU countries compare in terms of capital buffers:
UK RETAIL: NOW IS THE WINTER OF OUR DISCONTENT (1221 GMT) Investors weren't keen on UK domestic firms to begin with, given their reliance on the UK economy and sensitivity to Brexit, and today we've had another casualty -- Carpetright -- which demonstrates how discerning investors need to be when looking for value in this neck of the woods. As you can see from the chart below, Carpetright has been trading at its cheapest since the 2008 financial crisis -- bargain! Or maybe not. This trend is particularly evident among UK retailers - note both Toys 'R' Us and Maplin have gone into administration in the last 24 hours. This just shows what a lack of innovation can lead to in a very competitive market, which is going through a tough time thanks to disruption and weak consumer demand. This isn't limited to smaller retailers either. Laura Foll, a fund manager at Janus Henderson Investors, highlighted stalwart of the UK high street M&S . "What we're finding is that those companies that have a high absolute level of yield are often value traps that don't have much by way of earnings growth," says Henderson's Foll.
Foll points to M&S failing to deliver earnings growth despite offering a yield of around percent and a new chief exec coming in.
(Kit Rees) *****
IT'S NOT YOU, IT'S ME: HOW STOCK MARKETS THREATEN THE GLOBAL ECONOMY (1110 GMT)
What if it's not about how politics or the "real economy " impact markets but the other way round? Is there a case to view the current uncertainty about the resilience of stock markets as a threat to the global economy? Actually there is, says the Economist Intelligence Unit (EIU) in a report where it identifies the top 10 risks to the global economy. Number one are stock markets. "There is a risk that share prices will crash in the US, which would lead to contagion around the world. A prolonged period of decline would pose major risks to our global economic outlook," the EIU writes.
The research and analysis division of The Economist Group argues that the early February correction triggered by fears that faster than expected inflation could lead to interest rates rising more quickly than foreseen, "could be the start of a more pronounced downturn".
The EIU says that company earnings have strongly benefited from ultra-low interest rates and the huge stimulus pumped into the economy by the Fed through quantitative easing (QE).
"The true impact of QE on company valuations will become known over the next two years as the Fed gradually unwinds its QE programme and tightens monetary policy."
How central banks will fine-tune their path to monetary normalisation and how this will impact stock markets is "giving rise to significant uncertainty", the EIU concludes.
If stocks markets currently seem to pose a threat to the world economy, there's also plenty out there for equity investors to be worried about.
Here the EIU's list:
ITALY'S VOTE, THE DAY AFTER: HOW COULD MARKETS REACT? (1028 GMT) A lot has been written about the Italian general election and how markets look quite relaxed about it. To keep it short, here are two nice charts from Natixis summing up what investors will look at on the day after the March 4 vote and how would the bond market react. A "narrow grand coalition government" and a "right-wing government" are the only two market friendly scenarios and their combined probability of happening stands at 40%. Both would trigger a reduction in government bond yields, according to the French bank.
(Danilo Masoni) *****
RESULTS DRAG EUROPEAN SHARES, INVESTORS WARM TO UK DOMESTICS (0852 GMT) We're seeing some big moves early on for European shares, which are down for a third session in a row. And the bulk of these falls are earnings-driven, with updates getting either a hot or cold reception, with no middle ground. WPP , Rentokil , Carrefour and Adecco are all down between a hefty 8 to 12 percent, while equally a slew of UK firms such as Cobham , Merlin and Howden Joinery are dominating the gainers. So are UK domestics finally feeling some love? Here's your early morning snapshot:
(Kit Rees) *****
PRE-OPEN ROUNDUP: TOIL AND TROUBLE IN EUROPEAN RETAIL
Like the weather in the UK, European shares are going to have a frosty start today with stocks futures down around 0.4 percent. The wounds of February are far from healed no matter how much investors want to move on, as equity markets continue to worry about a more hawkish Fed, volatility and rising bond yields. February was the STOXX 600’s worst month since June 2016 (Brexit month!). Today earnings continue to be in focus, in particular in the retail sector after Carrefour yesterday cut its dividend and sounded cautious with its guidance – just shows how much pressure these supermarket giants are under from the likes of Amazon. Also note that the UK's Carpetright is in talks with lenders after its profit warning back in January - another sign of stress in the sector. Automated warehouse equipment-maker Kion might have redeemed itself after meeting analyst expectations thanks to higher sales – last October its shares sunk after cutting 2017 guidance (up until then it had been a popular play on automation + tech). Here are your key headlines from this morning:
AB InBev reaps profit in Brazil, sees strong 2018 growth Peugeot hits new earnings record despite Opel loss British ad group WPP to simplify business after tough 2017 Daimler buys Europcar out of car-sharing venture Adecco gets off to slower start in 2018 after Q4 profit beat Utility Suez to boost cost cuts, signs record 1.2 bln contracts UK's Carpetright in talks with lenders after profit warning Petrofac posts better-than-expected FY core earnings [nL4N1QJ2T2} Beiersdorf gives cautious outlook after strong 2017 New York regulator asks Deutsche, other banks about Kushner loans -source UK's Carpetright in talks with lenders after profit warning UK's Howden Joinery posts 7.4 pct rise in full-year revenue Recruiting firm Robert Walters reports 44 pct annual profit jump Madame Tussauds owner Merlin core earnings rise 9.5 pct UK builder Bovis says volumes will grow in 2018 after profit slump Essilor predicts relatively flat profits ahead of Luxottica deal Kion posts 26 percent rise in operating profit on truck sales (Kit Rees and Tom Pfeiffer) *****
CARREFOUR'S "TOUGH READ" - STILL SOME WAY TO GO? (0726 GMT) Europe's dominant supermarket chain Carrefour's full-year update after yesterday's market close underlines how gloomy it's looking for the sector, hit by heavy price competition and with tech players such as Amazon challenging longstanding business models.
Analysts at Jefferies were prepared to see a "tough read" from Carrefour today, saying "nearer-term competitive and fx conditions remain highly volatile" Interestingly, yesterday it's peer Ahold Delhaize saw its shares bounce 3 percent after reporting results, saying that savings from U.S. tax reforms could instead be invested into its online offering.
The winner techs all in food retail? (Kit Rees) *****
EUROPEAN STOCKS FUTURES FALL, EARNINGS IN FOCUS (0702 GMT) Even if things are set to be muted at the index level, with stocks futures opening around 0.4 percent lower just now, there are plenty of firms giving updates today to keep things interesting - a full list for Europe is below. Of note are full-year figures from Kion, which was hit hard last October when it cut its 2017 profit guidance due to customers delaying investments, so today's release will be closely watched. BMPS.MI Full Year 2017 Banca Monte dei Paschi di Siena SpA Earnings Release KBHL.CO Q4 2017 Copenhagen Airports A/S Earnings Release BTPP.PA Full Year 2017 Affine RE SA Earnings Release APETIT.HE Q4 2017 Apetit Oyj Earnings Release NHBG.MU Q4 2017 Nebelhornbahn AG Earnings Release TTOG.F Q4 2017 TTL Beteiligungs und Grundbesitz AG Earnings Release SPSN.S Full Year 2017 Swiss Prime Site AG Earnings Release AMPF.MI Q4 2017 Amplifon SpA Earnings Release APME.DE Full Year 2017 Ad Pepper Media International NV Earnings Release IMPN.S Full Year 2017 Implenia AG Earnings Release FNTGn.DE Q4 2017 Freenet AG Earnings Release EVRE.L Full Year 2017 EVRAZ plc Earnings Release KGX.DE Q4 2017 Kion Group AG Earnings Release ARGX.BR Full Year 2017 argenx NV Earnings Release & Q4 Business Update FITBIO.HE Q4 2017 FIT Biotech Oy Earnings Release ESSI.PA Full Year 2017 Essilor International SA Earnings Release RTO.L Full Year 2017 Rentokil Initial PLC Earnings Release SDR.L Full Year 2017 Schroders PLC Earnings Release NEX.L Full Year 2017 National Express Group PLC Earnings Release COB.L Full Year 2017 Cobham PLC Earnings Release HWDN.L Full Year 2017 Howden Joinery Group PLC Earnings Release SYNTS.L Full Year 2017 Synthomer PLC Earnings Release (Kit Rees) *****
EUROPEAN SHARES SEEN OPENING LOWER (0648 GMT)
Good morning. Is it going to be a new month and a fresh start? That's looking unlikely. Following on from a weak session in the U.S. as markets continue to digest Fed Chair Powell's testimony, European shares are seen opening lower, according to financial spreadbetters. Britain's FTSE 100 is seen opening 42 points lower, Germany's DAX is expected to fall 87 points and France's CAC is seen 29 points lower. So it looks like it's going to be a muted start to March, following the STOXX's worst month since June 2016. (Kit Rees) <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Snapshot italy bonds italy EIU UK Retail Valuation Discount Stress europe zombie ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)