Markets withstand initial Italian budget scare
European shares rose slightly yesterday, reversing initial losses, as anxiety over political stability in Italy appeared to ease just hours before a cabinet meeting to set budget targets.
Italian stocks came off lows but remained in negative territory, ending down 0.6%, while the broader pan-European Stoxx-600 index rose 0.4% to a one-month high, having earlier lost up to 0.6%.
A newspaper report that an Italian cabinet meeting on 2019 budget goals would be pushed back a few days raised worries that Italy’s economy minister Giovanni Tria could resign, risking putting Rome on a collision course with the EU.
The prime minister’s office later denied the report and the meeting was finally set for yesterday evening, easing initial worries. A well-bid auction of Italian government bonds also gave support.
“If the results of the Italian debt auction are anything to go by, then the market is confident a crisis can be averted,” said Capital Index Research director Kathleen Brooks.
The Italian banking index more than halved losses, ending down 1.3%. Italian banks are particularly sensitive to political risk due to their big sovereign bond holdings. Eurozone banks fell 0.3%.
Although tensions appeared to ease some, investors remained cautious about the prospects of the eurozone member.
Societe Generale analysts wrote:
Given the amount of dissent between the two parties and the discontent within Five Star itself, it seems quite possible that the coalition could collapse at the time of the budget vote or just afterwards, as the disagreements could intensify once the details of the budget bill are known
Eurozone banks’ earnings forecasts have been revised down consistently over the past months as political risks mounted.
In positive moves, the Swedish fashion retailer H&M jumped 11.1% after reassuring investors it would not need to cut costs further to shift unsold clothing. Stronger-than-expected margin figures helped investors shrug off a one-off hit from logistics problems.
The UK’s top share index eased, weighed down by weaker financials and materials stocks, but strength in oil majors helped contain the losses.
UK stocks outperformed the broader European market, which was dragged into the red by worries that Italy’s government could aim for a larger-than- expected budget deficit, while global equities were hit after the Federal Reserve affirmed plans for policy tightening. Oil and gas stocks led gainers as crude prices were pushed up by the prospect of tighter markets due to US sanctions against major oil exporter Iran.
“Unless the US releases reserves or Opec commits to further output to plug the gap, oil could continue to crank higher from here. Breaking out of multi-year highs leaves Brent facing little resistance on the upside,” said Markets.com analyst Neil Wilson.
Oil majors BP and Shell supported the Ftse, rising 1.1% and 0.6%. Airlines, were hit by the strength in crude prices, with EasyJet down 3.1%. IAG and Ryanair also declined.
US stocks rose, helped by Apple and Amazon, as well as the Federal Reserve’s confidence in the strength of the economy as it raised rates for the third time this year.
