Europe's real estate faces 50% potential downside - Citi
STOXX 600 up 1.2%
Bank jitters ease
Trial success boosts Novartis
S&P 500 futures up 0.5%
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EUROPE'S REAL ESTATE FACES 50% POTENTIAL DOWNSIDE - CITI (1004 GMT)
The highly leveraged real estate sector is one of the key areas of concern for investors as the spectre of a systemic credit event is now top of mind following bank failures in the United States and Europe.
So what are the prospects for the sector in Europe?
Citi is downbeat and warns the potential downside for real estate stocks in the region could exceed 50%, should the market test 2009 trough price-to-earnings valuations.
"Real estate values are expected to weaken through 2023 and 2024 between 20% and 40%, and with earnings growth slowing into rate and recessionary headwinds, credit markets are therefore set to tighten further," says Citi analyst Aaron Guy.
"... if we test historic trough valuation, real estate stocks face over 50% downside," he adds.
"Reprinted with permission of Citi Research. Not to be reproduced."
BANKS HELP LIFT STOXX 600 (0741 GMT)
European stocks are on the rise with the banking sector leading the gains, bouncing from last week's declines, after a buyer emerged for large parts of Silicon Valley Bank's deposits and loans, which helped ease some of the anxiety across markets.
The STOXX banks index .SX7P rose 2.3% in early trading and was last 1.2% after sinking 3.8% on Friday.
It is largely outperforming the broader stock market, with the pan European STOXX 600 .STOXX index rising 0.8%.
Deutsche Bank shares DBKGn.DE rose 4% after leading declines in the sector on Friday, when cost of insuring the German bank's debt against the risk of default jumped.
Novartis NOVN.S shares are up around 6% to the top of the STOXX 600 after the Swiss drugmaker announced positive results for the phase III of its Kisqali breast cancer drug study.
EUROPEAN FUTURES RISE ON HOPES THAT BANKING TROUBLES EASE (0744 GMT)
European futures are sharply higher, pointing to a rebound for stocks as investors assessed moves made by authorities and regulators to rein in worries over the global banking system.
Stocks tumbled on Friday, dragged down by turmoil in the European banking sector. But helping soothe some nerves on Monday were reports First Citizens BancShares Inc FCNCA.O was in advanced talks to acquire Silicon Valley Bank (SVB) SIVB.O from the Federal Deposit Insurance Corp.
European Union leaders and the European Central Bank sought to calm market jitters by presenting a united front on the banking sector on Friday, saying EU lenders are well capitalised and liquid thanks to lessons drawn after the 2008 Lehman Brothers collapse.
The U.S. Financial Stability Oversight Council said on Friday the U.S. banking system was "sound and resilient" despite stress on some institutions. Investors, though, remain wary.
Global banking stocks have been battered through the month in the wake of the sudden collapse of U.S. lender SVB and the rescue of Switzerland's Credit Suisse CSGN.S.
The STOXX 600 index fell 1.4% on Friday, with a rout in Deutsche Bank shares leading declines, as the cost of insuring its bonds against the risk of default jumped sharply.
BANKS ARE LEAKING MONEY (0615 GMT)
It's been a quiet Monday so far with Asian share markets mixed but U.S. and European stock futures higher, perhaps because they got through a weekend without another bank collapsing.
There is some relief that First Citizens BancShares Inc FCNCA.O is in advanced talks to acquire Silicon Valley Bank SIVB.O. There was also some talk the Federal Reserve could expand its new lending programme for banks as another step to reassuring depositors.
Money is clearly flowing out of smaller banks toward their bigger siblings and to money market funds, which have seen an inflow of more than $300 billion in the past month to a record $5.1 trillion. BofA notes the prior two events like this in 2008 and 2020 were followed by Fed rate cuts.
Fund futures now show an 88% chance the Fed stands pat in May, while a July cut is priced at better than 90%.
Deposits at small banks fell by $120 billion in the week to March 15, while borrowing jumped $253 billion and presumably much of that was from the Fed.
Capital Economics points out that deposits across all the banks have fallen by $663 billion in the past year as customers search for higher yield.
"Unless banks are willing to jack up their deposit rates to prevent that flight, they will eventually have to rein in the size of their loan portfolios, with the resulting squeeze on economic activity another reason to expect a recession is coming soon," they warn.
European banks face similar strains, with the added speculative stress on Deutsche Bank DBKGn.DE and a general jump in the cost of credit default swaps. Deutsche Bank's five-year CDS hit 222 bps on Friday, the highest since late 2018, while UBS CDS shot up to 139 bps.
Credit Suisse CSGN.CS had to tap the Swiss National Bank for "a large multi-billion amount" to secure its liquidity. Not only were customers withdrawing money but counterparties were demanding guarantees to keep doing business, hardly an encouraging sign when interbank lending relies so much on trust.
Key developments that could influence markets on Monday:
- German IFO survey for March is seen around 91.0
- Bank of Spain´s Governor Pablo Hernandez de Cos delivers speech on economy. ECB Board members Frank Elderson and Isabel Schnabel speak, as does Andrew Bailey Governor of the Bank of England
-Federal Reserve Board Governor Philip Jefferson speaks on "Implementation and Transmission of Monetary Policy"
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