LIVE MARKETS-Volatility sellers are "out of runway"

* European stocks steady

* Italian shares back at one-week low

LONDON, June 6 (Reuters) - Welcome to the home for real-time coverage of European equity

markets brought to you by Reuters stocks reporters and anchored today by Kit Rees. Reach her on

Messenger to share your thoughts on market moves: kit.rees.thomsonreuters.com@reuters.net

VOLATILITY SELLERS ARE "OUT OF RUNWAY" (1515 GMT)

Morgan Stanley (Xetra: 885836 - news) reckons it's the end of the road for volatility selling.

Cross-asset strategists at the U.S. bank turned buyers of volatility in mid-May, and argue

several factors are conspiring against the vol selling strategy which many espoused before

February's volatility blow-up, and some are still in now. Here are their reasons to avoid the

short-vol trade:

- implied volatility levels are too low

- carry from selling vol isn't adequate to build a cushion

- the cycle is far too advanced to give vol sellers enough time to be able to withstand mean

reversion

The biggest concern is what they call "gap risk" - the idea that a rushed exit from crowded

positions racked up over several years can trigger substantial moves.

"Even (Taiwan OTC: 6436.TWO - news) when the absolute move is not that extreme in other asset classes, the low volatility

environment we have been in means that positioning unwinds can still feel very painful," the MS

strategists write.

"We find that equity, credit, G10 FX and rates need two quarters of current carry levels to

be protected from mean-reversion in implied volatilities. Vol sellers are out of runway".

A return to the 12-year average for the VIX from current levels, for example, would be a

whopping 56 percent jump (see chart below).

(Helen Reid)

*****

VOLATILITY, SO CLOSE YET SO FAR (1309 GMT)

Volatility's 2018 comeback seems short-lived: the Vix is at its lowest close since Jan 26,

which is quite a recovery since the explosion of the February sell-off.

But while volatility is hardly palpable on traders' screens, it is still widely expected to

jump out of its box and once again bite those who have been selling it short or just turning a

blind eye.

"We expect cross-asset volatility to continue to increase – especially equity volatility –

as the increasing cost of debt coupled with a peaking global economy should feed through to

wider corporate bond spreads," SocGen (Paris: FR0000130809 - news) writes in a cross asset research note.

"When debt fears rise, equity volatility tends to increase, providing an incentive to reduce

equity exposure in global portfolios," the French bank's analysts add, arguing that "raising

exposure to the 'value style' should offer a reasonably good expected return with structurally

lower risk content at this stage of the cycle".

It's also worth noting that Pictet Asset Management's chief strategist, Luca Paolini, has

flagged volatility as an area of concern for emerging market investors.

"What seems likely across the board is that higher volatility will become the norm, with

lower returns, creating a challenging environment for investors in this asset class".

Here's the VIX over the last year:

(Julien Ponthus)

*****

LOOKING FOR THE RIGHT TIME TO BUY BACK INTO ITALY (1225 GMT)

On Italy, many investors applied the 'sell in May and go away' adage. Not so for Amundi (Berlin: 350155.BE - news) ,

whose strategists are looking for a window to venture back into the market during the summer

months.

"It is too soon to step in but we will clearly look for the right time over the course of

the summer to enter the market," writes Eric Brard, head of fixed income at Amundi.

On their radar is data on debt and the economy, investors' attitude, and liquidity

conditions - which they say exacerbated market moves last week.

"The positive fundamentals in the euro zone could soon pave the way for interesting

opportunities going forward," Brard adds.

(Helen Reid)

*****

MID-SESSION UPDATE: A TALE OF TWO PERIPHERIES (1204 GMT)

European stocks are hovering flat as periphery markets Spain and Italy diverge and sector

moves pull in opposite directions.

Commodities stocks are by far the leaders today, up 1.2 percent on strong copper prices,

while with the dollar at a two-week low, big international consumer staples stocks are suffering

- the usual suspects Nestle (Swiss: NESN.VX - news) , Unilever (NYSE: UL - news) , British American Tobacco (Kuala Lumpur: 4162.KL - news) and ABInBev are weighing the

STOXX down.

Meanwhile it's a tale of two peripheries with Spain's IBEX up 1 percent, boosted by bank

stocks, while Italian stocks are down 0.4 percent as its financials drag. A reflection perhaps

of investors' diverging views on the countries' respective new governments.

As you can see below, Spanish stocks have actually underperformed the market quite

substantially over the past year, making them a relatively cheap periphery play especially now

that investors are unwinding money from the Italian market.

(Helen Reid)

*****

A VIEW FROM THE US: "GETTING EXCITED ABOUT EURO ZONE STOCKS" (1040 GMT)

A string of economic data missing expectations has contributed to a challenging start of the

year for European shares and while recent weakness in the euro was a relief, political turmoil

in Italy has further put off investors.

Some long-term investors in the U.S. however still appear to be very upbeat about prospects

for euro zone stocks and despite the political noise they see the macro disappointments as a

bullish contrarian signal.

Among them is Talley Leger, equity strategist at Oppenheimer Funds.

"We should be buying things when they look the worst and that really kind of gets me really

excited about euro zone stocks," he says, referring to how negative the economic data has been

relative to expectations (see chart below).

"You've got relatively attractive valuations compared to the US and you've got solid

economic growth prospects. You have seen a bit of a cooling recently but the uptrend in leading

indicators of business activity that we've seen roughly since 2012 remains intact," he adds.

Moreover turmoil in Italy could prevent the ECB from "lifting off too soon", extending the

economic cycle in Europe, he notes.

Leger anticipates double-digit forward returns from buying euro zone stocks on weakness.

(Danilo Masoni)

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ITALY'S NEW REGIME: VIEWS FROM THE STREET (1002 GMT)

Italian stocks are far underperforming the region today as investors continue to get their

heads around a new regime which spells fiscal easing and political divergence. Here are some

views from the street on the developing government.

"Even under very favourable assumptions the fiscal picture is likely to worsen

substantially," says UBS (LSE: 0QNR.L - news) .

Goldman says one aspect which could be particularly under strain is the Bank of Italy's

Target 2 liabilities - the net debt the country's central bank owes to the ECB's Target 2 system

which settles cross-border payments.

"Market participants we speak to have expressed concerns over whether the already

historically high level of the Banca d'Italia's TARGET 2 liabilities vis-à-vis the rest of the

Eurosystem (amounting to 426 billion euros at the end of April) will rise further. We take the

view that such an increase is likely," GS analysts write.

A further rise could add to political tensions between Italy and the rest of the euro zone,

they reckon.

Investors have also been focusing on how Italian uncertainty may impact the ECB's wind-down

of QE. This morning money market pricing showed investors expect an ECB rate hike by July 2019 -

a change from last week when market stress caused them to scale back expectations to October

2019.

"Political uncertainties in Italy may delay the ECB's plans to exit QE but not outright

cancel them in our view," say Societe Generale (Swiss: 519928.SW - news) multi-asset strategists.

Italy's FTSE MIB is back at a one-week low, down 0.6 percent.

(Helen Reid)

*****

OPENING SNAPSHOT: EUROPE EDGES UP, ITALY STRUGGLES (0718 GMT)

European shares have opened slightly up, while the more volatile Italian stocks

have now turned lower, extending yesterday's sell-off and following a sudden drop this

morning in government bond prices, as ECB policymakers Praet and Weidmann speak.

Among single stocks, top gainers are SCHIBSTED (LSE: 0MHM.L - news) , up 6.4 percent following an

upgrade by JPMorgan (LSE: JPIU.L - news) , and WH SMITH (LSE: SMWH.L - news) , up 4.2 percent following a well received trading

update. On the downside RPC GROUP (LSE: RPC.L - news) is down 8 percent after disappointing results, while

AXEL SPRINGER (Swiss: SPR.SW - news) is down 2.7 percent after a JPMorgan downgrade.

Here's your snapshot:

(Danilo Masoni)

*****

WHAT WE'RE WATCHING AHEAD OF THE EUROPEAN OPEN (0645 GMT)

European stocks are seen opening higher, though trading is likely to remain volatile as

demonstrated by yesterday's slide into negative territory on the back of remarks from Italy's

new prime minister promising radical change and increased spending.

Global trade is another source of worry for the market ahead of the G7 summit set to begin

on Friday, though the EU isn't expecting a breakthrough on U.S. steel and aluminium tariffs.

Aside from these pressure points which are longer-running issues, global growth is ticking

along just fine in the background and should underpin equities going forward. Yesterday the

Nasdaq (Frankfurt: 813516 - news) ended at another record close and tech stocks in Asia and Europe have also rallied.

Among stocks, paper M&A has been in focus recently with Smurfit Kappa (Frankfurt: SK3.F - news) expected to recover

some of yesterday's losses after International Paper confirmed that it will not make an offer

for the Irish packaging company.

Here's a round-up of European company headlines this morning:

International Paper to drop bid for Smurfit Kappa

Voestalpine (IOB: 0MKX.IL - news) 's full-year operating profit rises 43 pct

French group Thales (LSE: 0IW5.L - news) targets more sales and profit growth for 2018-2021

Credit Suisse (IOB: 0QP5.IL - news) to pay $47 mln to resolve hiring practices probe

Italy's Eni (LSE: 0N9S.L - news) says it has no material exposure to Iran

Spain's Repsol (Amsterdam: RP6.AS - news) says to boost production, hike dividend in 2020

UK's RPC (NYSE: RES - news) seeks to sell non-core assets, FY profit up 36 pct

UK's Carpetright (Other OTC: CGHXF - news) secures 60 mln stg lifeline in equity raise

Finance watchdog to investigate British bank TSB over IT outage

Eletrobras and EDF (Paris: FR0010242511 - news) to study French-Brazilian nuclear cooperation

(Kit Rees)

*****

STOCKS FUTURES ON THE RISE (0605 GMT)

European stocks futures have opened higher, pointing to a positive start later on for

equities as the market regains its composure over Italy, with investors focusing instead on the

backdrop of global economic growth which has carried tech stocks to record highs.

Here's your futures snapshot:

(Kit Rees)

*****

MORNING CALL: EUROPEAN SHARES SEEN OPENING HIGHER (0532 GMT)

Good morning. European stocks are seen opening broadly higher, according to financial

spreadbetters, shaking off concerns over Italian debt as tech stocks globally continue to steam

ahead.

Spreadbetters see Britain's FTSE opening 0.1 percent higher, Germany's DAX gaining 0.2

percent and France's CAC up 0.3 percent.

It's been a little mixed overnight in Asia, with tech firms leading Hong Kong shares higher,

while China stocks slipped. Wall Street saw the Nasdaq end at a record close.

In the previous session, European stocks slid into negative territory following remarks from

Italy's new prime minister promising radical change, with Italian government bonds also selling

off.

Even though the market is evidently jumpy around Italy, investors do not see a risk of

contagion to other regions, at least for now.

"Despite the ongoing uncertainties in Italy, we see limited systemic risks and maintain our

positive view on global financial stocks, which are more attractively valued after the recent

share price retreat," analysts at Credit Suisse Wealth Management said in a note, adding that

they preferred U.S. financials.

"EU financial stocks may face some headwinds if Italian government bond volatility persists.

Nevertheless, EU banks’ robust balance sheets should continue to support our positive view on

their subordinated credits," Credit Suisse WM's analysts said.

(Kit Rees)

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