Italy firms as in­vestors bet against snap elec­tion

Kuwait Times - - BUSINESS -

Ital­ian shares rose yes­ter­day as in­vestors bet against an im­me­di­ate snap elec­tion in Italy fol­low­ing Prime Min­is­ter Mat­teo Renzi’s res­ig­na­tion af­ter de­feat in a con­sti­tu­tional re­form ref­er­en­dum. Mar­kets had been jolted by the scale of Renzi’s de­feat which pointed to fur­ther tur­bu­lence and po­lit­i­cal cri­sis in the euro zone’s heav­ily in­debted third­largest econ­omy and par­tic­u­lar un­cer­tainty was fo­cussed on the coun­try’s frag­ile banks.

The euro fell as low as $1.0508 and the Mi­lan bourse shed as much as 2 per­cent at the open­ing, while Ital­ian bond yields spiked sharply higher. But most of these moves quickly re­versed. The euro roared back above $1.06, still down on the day, Ital­ian stocks moved higher, and Ger­many’s DAX and Europe’s FTSEuroFirst in­dex of lead­ing 300 shares both rose 1.5 per­cent.

US fu­tures pointed to a rise of about 0.5 per­cent at the open on Wall Street. “Our base sce­nario is a care­taker govern­ment which could be in place be­fore Christ­mas, and no new elec­tions be­fore 2018,” In­do­suez Wealth Man­age­ment chief econ­o­mist Marie Owens Thom­sen said.

“If in­deed things pan out ac­cord­ing to our base sce­nario, there would be lit­tle rea­son for any broad-based tur­moil. It is still ut­terly un­likely that Italy would leave the EU or the euro,” she said. The ref­er­en­dum out­come was an­tic­i­pated but the mar­gin of Renzi’s de­feat 59 per­cent to 41 per­cent - caused the ini­tial alarm. An­a­lysts say it could still deal a body blow to a bloc al­ready reel­ing un­der anti­estab­lish­ment anger that led to Bri­tain’s shock exit in June. Ital­ian fi­nan­cials rose 0.5 per­cent hav­ing fallen more than 4 per­cent, and shares in the world’s old­est bank, Monte dei Paschi, were flat on the day af­ter be­ing sus­pended at the open­ing.

Bonds re­mained un­der pres­sure though. Italy’s bench­mark 10-year bond yield jumped 11 ba­sis points (bps) to 2.01 per­cent, widen­ing the pre­mium in­vestors de­mand for hold­ing Ital­ian bonds over safer Ger­man bonds to 175 bps, be­fore eas­ing slightly. The strong link be­tween Italy’s bank­ing sec­tor and bond mar­ket is a ma­jor con­cern for in­vestors. Banks have been hit by con­cerns over their huge ex­po­sure to bad loans built up dur­ing years of eco­nomic down­turn. They also hold large amounts of Ital­ian govern­ment debt.

“Bond mar­ket tur­bu­lence could have se­ri­ous im­pli­ca­tions for the fi­nan­cial sys­tem. For­eign in­vestors may be less will­ing to un­der­write cap­i­tal rais­ings of Ital­ian lenders,” JP Mor­gan As­set Man­age­ment global mar­ket strate­gist Maria Paola Toschi said.

Brexit in the dock

Mar­kets had ear­lier taken some en­cour­age­ment when Aus­tria’s far-right pres­i­den­tial can­di­date was soundly de­feated by a pro-Euro­pean con­tender, con­found­ing fore­casts of a tight elec­tion.

The Euro­pean Cen­tral Bank meets Thurs­day amid much spec­u­la­tion it will an­nounce a six-month ex­ten­sion of its as­set buy­ing pro­gram and wi­den the type of bonds it can pur­chase. Ear­lier in Asia, MSCI’s broad­est in­dex of Asia-Pa­cific shares out­side Ja­pan eased 0.4 per­cent and Ja­pan’s Nikkei closed down 0.8 per­cent. China’s CSI 300 in­dex tum­bled 1.7 per­cent. Hong Kong’s Hang Seng in­dex re­treated 0.7 per­cent.

Wall Street ended Fri­day on a cau­tious note, with the Dow off 0.11 per­cent, while the S&P 500 rose 0.04 per­cent and the Nas­daq gained 0.09 per­cent. While the US Novem­ber pay­roll re­port on Fri­day was firm enough to ce­ment ex­pec­ta­tions of a US in­ter­est rate hike by the Fed­eral Re­serve this month, a sur­prise pull­back in wages helped bonds pare a lit­tle of their re­cent losses. New Zealand stocks ended the day 0.7 per­cent lower. Ster­ling could be vul­ner­a­ble to de­vel­op­ments in Bri­tain’s Supreme Court yes­ter­day, as judges hear the govern­ment’s ap­peal against a rul­ing that par­lia­ment must have a vote on Brexit be­fore the process can for­mally be­gin. The pound was last down 0.1 per­cent at $1.2710, hav­ing risen to a mul­ti­mongth high on Thurs­day on indi­ca­tions from a lead­ing govern­ment min­is­ter that a “soft Brexit” might be the out­come rather than a “hard Brexit”.

“If the govern­ment loses its ap­peal, we could see an­other leg higher in ster­ling against the dol­lar,” City In­dex research di­rec­tor Kath­leen Brooks said.

Tokyo stocks closed lower yes­ter­day as Ital­ian Prime Min­is­ter Mat­teo Renzi’s res­ig­na­tion sparked wor­ries about po­lit­i­cal in­sta­bil­ity in the eu­ro­zone and be­yond. The euro briefly dived to 20-month lows against the dol­lar on the news, which also sparked de­mand for the safe-haven yen-a neg­a­tive for Ja­panese shares. In­vestors largely shrugged off data re­leased Fri­day that showed the US un­em­ploy­ment rate at a nine-year low in Novem­ber, vir­tu­ally guar­an­tee­ing a Fed­eral Re­serve in­ter­est rate hike this month. Tokyo’s bench­mark Nikkei 225 in­dex lost 0.82 per­cent, or 151.09 points, to end the day at 18,274.99, while the Topix in­dex of all first-sec­tion is­sues was off 0.75 per­cent, or 11.02 points, at 1,466.96.

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