LIVE MARKETS-Closing snapshot: so is that it for the banking recovery?

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* STOXX 600 down 0.4 pct
* ECB pushes out rate hike, offers cheap cash to banks
* Euro zone banks drop 3.3 pct
* Utilities at 2015 peak as defensive stocks outperform
* Earnings still in focus

March 7 – 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: rm://danilo.masoni.thomsonreuters.com@reuters.net

CLOSING SNAPSHOT: SO IS THAT IT FOR THE BANKING RECOVERY? (1719 GMT)
What a difference a day makes – banking stocks were buoyed yesterday by the mere expectation
that the ECB would give some details of its plans for new cheap bank loans.
But the central bank’s trio of bad news – delaying interest rate hikes until at least 2020,
cutting growth and inflation forecasts and setting less generous terms for its cheap loan
programme than many banks and investors had hoped – has shattered much of that hope.
By the close, investors were struggling to salvage much optimism from the day – the
euro-zone banking sector ended the day down 3.3 percent, for its worst day since Dec.
20.
So is that it for the banking sector’s short-lived day in the sun? Not necessarily. The
sector is still up 11 percent from the lows hit at the end of December, so it’s not all
completely bleak. But it wasn’t a good day for those hoping 2019 would be the year for banks.
Here’s your snapshot of the main bourses:

(Josephine Mason)
*****

TLTRO TERMS UPSET THE MARKET (1528 GMT)
In what HSBC economists see as a concession to the more hawkish ECB members, the cheap bank
loans announced by the central bank have some more stringent strings attached which the market,
having looked at them more closely, has reacted against strongly.
Euro zone banks are now down 4.1 percent, set for their worst day since December, and
Italian banks are set for their worst day since Jan 31.
“The new TLTRO III programme will not be quite as generous as the previous TLTRO II loans
since the interest rate will be linked to the ECB’s main refinancing rate (currently 0.0%) and
not the deposit rate (currently -0.4%),” write HSBC economists.
That means if or when the ECB raises the main rate, the rate on the new TLTROs will rise
too.
Limitations on the amount of TLTROs – 30 percent of total eligible loans – are also
upsetting the market, says Karen Ward, chief market strategist for Europe at JPMorgan Asset
Management.
“It’s not as generous as the last package, it is a shorter horizon and the rate is not as
generous. So they have been pre-emptive but it’s not quite sugar-coated,” she says.
A trader goes even further:
“The ECB has delivered the least it could do. It seems these TLTROs are only aimed at
replacing the previous ones… Not to buy securities or to inject liquidity into the system.”

(Danilo Masoni, Dhara Ranasinghe, Helen Reid)
*****

COUNTER-ORDER COMRADES: SELL BANKS, BUY BOND PROXIES (1417 GMT)
The relief from the TLTRO announcement was short lived for banks and investors are now
focusing on the dark side of the ECB message: the central bank in fact has cut its growth and
inflation forecasts for 2019, 2020 and 2021, acknowledging that Europe’s slowdown is longer and
deeper than earlier thought.
The ECB also pushed out the timing of its first post-crisis rate hike until 2020 and that
clearly isn’t great for banks, whose profitability has been squeezed by years of ultra low
interest rates, and for cyclical stocks in general.
As a results, euro zone banks are now down more than 2 percent, in a sharp reversal from the
initial gains and set for their biggest drop in more than 1 month.
Euro zone utilities instead have hit their highest level in nearly four years, up
1.5 percent as investors pile into so-called bond proxy and defensive stocks that are less
exposed to the economic cycle.

(Danilo Masoni)
*****

ECB ADDS FUEL TO ITALIAN BANKING RALLY (1334 GMT)
The boost to the euro-zone banks from the ECB’s plan to launch a fresh round of cheap bank
loans provided only a temporary respite to the banking sector. It’s all a bit of a mixed
blessing, with the central bank pledging to keep interest rates unchanged until at least the end
of the year.
But the Italian banks, the most in need of the cash injection, are having a nice run-up and
appear to be holding the gains, hitting their highest since Oct. 5 on the news.
Here’s a chart that illustrates how the Italian and the regional banking sector have
outperformed the stock index so far this year, fuelled in large part by hopes of TLTRO.
Italian banks have jumped more than 20 percent so far this year, compared with
the 14.7 percent gains on euro-zone benchmark.

(Josephine Mason)
*****

ECB DELIVERS TLTRO SURPRISE, EURO ZONE BANKS JUMP, A BIT (1309 GMT)
We were expecting some kind of hint on a new round of TLTRO but the ECB has really surprised
markets by already announcing the details of the new refinancing scheme.
“This certainly goes further than most of us thought that the ECB would,” says Aberdeen
Standard Investments Senior Economist Paul Diggle, noting that “all eyes will be on the press
conference to see whether Mr Draghi’s dulcet tones can add any more emphasis to the market
moves”.
Euro zone lenders which were trading down 0.4 percent jumped to positive territory
on the news, now up 0.2 percent – nothing stellar. Same thing for euro zone stocks which have
made just limited gains.
Italian banks, the most direct beneficiaries of the new cheap bank loans, are up
1 percent and the FTSE MIB is leading Europe along with Spain’s IBEX.
If new cheap financing is good news for Italian or Spanish banks, the fact that interest
rates will not – now it’s official- be hiked before 2020 is bad news for French and German banks
which need to higher rates to improve their profitability.
Anyhow this has proven an exciting meeting with the statement changing drastically since the
last one:

(Julien Ponthus, Helen Reid, Karin Strohecker and Ritvik Carvalho)
*****

CONTRACTION PROBABILITY SHOOTS UP (1228 GMT)
“Even we are surprised by this,” write UBS economists after their model showed the largest
one-month jump in U.S. recession risk in 30 years.
Hidden in last week’s stronger than expected GDP data from the U.S. was the “nugget” that
spending on durables including furnishings, household equipment, recreational goods is down the
most since 2009 and spending on services is down the most since 2012.
The jump in UBS’ model (which measures the probability of a recession or a mid-cycle
contraction) reflects those data points, as they say consumer durables are the most helpful in
detecting turning points and predicting contractions.
Weaker spending is a natural consequence of U.S.-China tariffs, which the economists have
said would do more damage than initially expected.
“We remain of the view that the current soft patch will subside fairly quickly, as we
already see some fading impact of the tariffs in the employment data,” they add. “But given its
predictive properties, we should track durables consumption more closely than usual.”

(Helen Reid)
*****

EURO ZONE: A NEW HOPE CALLED M1 (1208 GMT)
Let’s face it, the outlook for growth in the euro zone is grim and we wouldn’t be
speculating about TLTROs if the economy was partying like it was 1999.
So while we wait for the ECB meeting and possibly a lower forecast and stimulus hints from
the governing council, the question is whether the bloc is experiencing a simple slowdown, an
air pocket or has unknowingly hit the highway to recession.
Looking for clues, BNP Paribas’ group economist notices there is some grounds for hope with
the money supply indicator M1. It’s back on a positive trend, which could indicate growth may
follow up soon.
“After having slowed down for several months, real M1 growth has recently stabilised,”
William De Vijlder says in a video on the French bank’s research website https://bit.ly/2EJfmTS.

“This provides some hope for a subsequent stabilisation of Eurozone growth as well,” he
adds, cautioning however that there isn’t yet sufficient evidence to make any hasty conclusions
on where the economy is heading.
This screenshot from the BNP video shows the M1 blue line picking up while the red line of
GDP has yet to change course.

(Julien Ponthus)
*****

DRINKS AND FOOD KEEP YOU HIGH, BUT ONLY IN EUROPE! (1158 GMT)
Europe’s food and beverage index has quietly scored another all-time high this
morning, helped by better-than-expected Q4 numbers from Royal Unibrew which have
pushed shares in the Danish brewery up 3.8 percent to total 16 percent so far this year.
And elsewhere on that index, year-to-date performances are also pretty strong with AB Inbev
, Remy Cointreau, Carlsberg, Heineken, Nestle
and Danone all up between 10 and 25 percent.
Clearly investors are rediscovering their defensive qualities at a time when the economy
offers little to cheer about, but what looks even more interesting is that European food and
beverage stocks are doing better than their American counterparts.
It looks that’s a rare case of Europe beating Wall Street, helped by better earnings
momentum. Why is that? We’ve asked Jérôme Schupp, portfolio manager at Prime Partners in Geneva.
“The sector is able to grow even in a tougher environment and most of the companies were
able to publish better-than-expected figures recently with positive internal growth,” he says.
“This is not the same in the U.S. where most of the food and beverage stocks are struggling
for internal growth which is close to zero if not in negative territory,” he adds.
“U.S. companies are much more focused on their home market and currently the U.S. market is
pretty challenging also because consumers are demanding more healthier food. Probably U.S.
companies understood that later than the Europeans,” he adds.
Europe’s STOXX 600 food and beverage index is up 14 percent so far this year while
the S&P Food, Beverage, and Tobacco index has risen 7.6 percent — 14 percent under
the all-time high it hit in January 2018.
To conclude, Schupp says: “the main problem is that valuations are now pretty high but given
the challenging environment I expect this trend to continue, even though not at the same pace”.
Cheers!

(Danilo Masoni)
*****

A DASH FOR THE BREXIT (1103 GMT)
Evidence is mounting that nervous UK retail investors are scaling back their exposure to
equities ahead of the Brexit deadline at the end of this month.
Data from the Investment Association, the trade body that represents UK asset managers,
released today reveals 870 million pounds ($1.1 billion) of retail cash was pulled from equity
funds in January. That compares with inflows of a whopping 1.4 billion pounds a year earlier.
Numbers also showed net outflows from individual savings accounts (ISAs), a barometer of
retail investment appetite, accelerated, with 506 million pounds pulled in the month. That
compares with 452 million in December and 129 million in January 2018.
“The threat of a no-deal Brexit, euro-zone instability, and international trade tensions,
combined to dampen investor appetite with savers looking towards Mixed Asset funds to spread
their risk,” says Chris Cummings, chief executive of the association.
None of this is particularly surprising, but the data will likely feed concerns that years
of uncertainty about the process and impact of the country’s departure from the bloc are
steadily draining London’s thriving financial services industry.
It’s not all doom and gloom though. Some cash appears to be heading into bonds, considered
havens in times of economic and political strife. The best-selling sectors in the first month of
the year were strategy bonds and mixed investment funds with only a portion of the assets held
in stocks, according to the Investment Association.
Data compiled by Calastone, which operates a global fund transaction network, shows a
similar trend extended into February.
They found investors pulled 215 million pounds out of UK-domiciled equity fund holdings last
month and ploughed 426 million pounds into bonds. Their data is based on the value of buy and
sell orders going through its network.
It’s hard to see that next week’s vote will clear much of the fog for investors – if PM
May’s deal is rejected again, lawmakers will have the chance to vote to delay the departure,
potentially kicking the can down the road.
(Josephine Mason)
*****

SAVING THE UK HIGH STREET, ONE VEGAN SAUSAGE ROLL AT A TIME (1011 GMT)
There’s a real media frenzy out there on how the launch of the now infamous vegan sausage
roll boosted the sales of Greggs and help propel its shares to new record highs.
The hype around the quorn-based delicacy is now seen as a marketing masterpiece which is
fast rebranding Greggs, until very recently seen as a no-frills, resolutely un-hipster
food-to-go chain focusing on hearty and filling, non-dietary snacks.
But beyond the praises received in the likes of PR Week (here’s a link: https://bit.ly/2RuWUGZ)
for its “masterclass in public relations”, the vegan sausage roll may actually offer a glimmer
of hope for the UK high street.
“Greggs is one of those businesses which has shrugged off the doom and gloom currently
engulfing the UK high street,” writes Laith Khalaf, senior analyst at Hargreaves Lansdown.
“We don’t know how many of the vegan rolls the baker is actually selling, but the publicity
is getting customers through the door one way or the other,” he adds, noting that “like WHSmith,
Greggs has been quite canny about where its stores are located, shifting outlets away from
traditional shopping centres towards travel hubs and workplace locations.”
Looking at the share price of Greggs, one has to admit that it looks more like a crypto or a
Canadian cannabis stock than a share in UK high street.

(Julien Ponthus and Helen Reid)
*****

ECB STIMULUS SPECULATION FAILS TO LIFT STOCKS (0854 GMT)
European indexes have opened in the red with losses limited to about 0.5 percent, and it
seems that speculation of a new round of TLTRO isn’t the doing the magic many expected.
Banking stocks in that respect aren’t doing as good as expected and are actually trading in
the red, down 0.4 percent, but the fate of the session still seems linked to the ECB meeting
later today.
Basic materials stocks were the biggest losers, down about 2 percent with coppers prices
dragging the sector.
In terms of individual stocks, German media group Axel Springer made a spectacular fall,
down close to 7 percent.

(Julien Ponthus)
*****

WHAT YOU NEED TO KNOW BEFORE THE OPEN (0741 GMT)
European shares are expected to open lower today ahead of a much anticipated European
Central Bank meeting that is expected to slash growth forecasts and hint at a new round of
ultra-cheap loans for euro zone banks. Futures on main country benchmarks point to losses of
0.3-0.5 percent as a rebound in the region’s stock market stalls near 5-month highs.

Bank stocks have already risen sharply in anticipation of the new loans and investors expect
some profit taking could eventually kick in before the scheme’s details are hammered out.
Italian banks and Spanish ones are the most sensitive to the measure, having taken the bulk
of the previous round of cheap funding from the ECB.
Still in banks, reports said Italy’s biggest retail bank Intesa Sanpaolo is in talks to sell
about 10 billion euros in unlikely-to-pay property loans, signalling more progress in Italian
banks’ effort to clean up their books.
Elsewhere, a number of earning updates especially in Germany could liven up the session.
There is good news for fashion investors after German house Hugo Boss said it expected its
operating profit to rise faster than sales in 2019, sending its shares up more than 2 percent in
pre-market trade.
Deutsche Post is also expected to gain after group said a restructuring programme in its
German post-and-parcel division will help boost profit this year, while publisher Axel Springer
and insurer Hannover RE are both seen falling more than 2 percent following their updates.
And here are some more market-moving headlines from the UK and, as you can see, there are
lots of earnings for investors to digest:
Melrose full-year adjusted pretax profit nearly triples
National Grid to buy U.S-based wind and solar energy developer
Inmarsat’s fourth quarter earnings up 15 pct
UK real estate agent Countrywide sees more headwinds in 2019
UK’s Greggs 2018 profit up 10 pct, “very strong” start to 2019
Aviva FY operating profit up 2 pct after life insurance boost
Cairn Homes FY Rev More Than Doubles, To Pay Dividend
Insurer Admiral warns on economic disruption from a “hard Brexit”
Schroders FY pretax profit down 15 pct on higher costs, fall in assets
(Danilo Masoni)
*****

FORGET STOCKS FUTURES, CHECK OUT ITALIAN YIELDS! (0728 GMT)
The most important indicator for today’s incoming session might not be equity futures –
which are down between 0.3 pct and 0.5 pct – but rather Italian bond yield which are retreating
to seven-month lows for the 2-year.
What does that tell us about the ECB meeting? Mhhh?
Well TLTRO speculation is intensifying. As far as banking stocks are concerned, while an
announcement or even a hint of a new round of ECB cheap loans could help prop up euro zone
lenders, ruling out a new batch of refinancing could on the opposite have a dire impact.
Here’s the Italian 2-year:

(Julien Ponthus and Abhinav Ramnarayan)
*****

ON OUR RADAR: EYES ON INTESA, RESULTS FROM MERCK, D.POST, VONOVIA (0638 GMT)
Turning to the corporate front, the Italian banking sector could be in focus this morning
after a source said the country’s biggest retail bank Intesa Sanpaolo is in talks to
sell 10 billion euro in impaired loans, while Merck, Deutsche Post, Vonovia
and LafargeHolcim are also on the watch list after their earning updates.
Deutsche Telekom is another onte to watch after Bloomberg reported that U.S.
state antitrust enforcers are expressing deep concerns that T-Mobile US’ proposed
takeover of Sprint could raise prices for consumers, signalling they might seek to thwart
the deal.
Here’s your early morning headlines roundup:
Italy’s Intesa in talks to sell 10 bln euros in impaired loans – source
Merck KGaA says currency headwinds quell drug gains in Q4
Deutsche Post sees profit hike in 2019, no sign of slowdown
Acquisitions help Vonovia’s core profit rise 16 pct in 2018
LafargeHolcim expects sales growth of 3 to 5 percent in 2019
GE explores stake sale in Enel renewables joint venture -sources
Rusal posts $17 mln Q4 net loss, sees demand recovery
(Danilo Masoni)
*****

EUROPE SET FOR A WEAKER OPEN AHEAD OF ECB MEETING (0620 GMT)
European shares are expected to open lower today ahead of a much-anticipated European
Central Bank meeting that could announce plans for a new round of ultra-cheap bank loans, as the
outlook for the euro zone economy worsens.
Financial spreadbetters at IG expect Frankfurt’s DAX to open 29 points lower at 11,558,
Paris’ CAC to open 10 points lower at 5,279 and London’s FTSE to open 34 points lower at 7,162.
In the previous session the STOXX 600 regional benchmark hit fresh five month highs before
pulling back and end just below parity.
Over in Asia, shares eased with caution prevailing as investors awaited some kind of
resolution to Sino-U.S. trade negotiations.
(Danilo Masoni)
*****

($1 = 0.7602 pounds)

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