Equity markets are lower this afternoon as traders are worried about the rising tensions between the EU and the Italian government over the size of Rome’s debt position. 

Europe

The Italian government potentially faces a fine of up to €3 billion, as Brussels are not happy with its debt level. The administration in Rome are keen to run a budget deficit to try and simulate the economy, but Brussels wants its fiscal rules to be respected. The news has put pressure on Italian government bond yields, and the fear has rippled out across the eurozone. In London, the FTSE 100 is outperforming thanks to an upward move in commodity related stocks like miners and big oil firms. 

Thomas Cook shares have surged today on the back of a positive ratings change from Berenberg, and the bank altered their outlook for the travel stock from sell to hold. On Friday, the Wall Street titan, Goldman Sachs lifted their rating on the company to buy from neutral. Thomas Cook confirmed a first-half loss of £1.5 billion nearly two weeks ago, and it warned of ‘further headwinds’, and the announcement weighed on the stock, but it appears that some investment banks are more optimistic than others in terms of the outlook for the firm.

Rio Tinto share have hit their highest level since the financial crisis on the back of a rally in Chinese iron ore futures, and a ratings upgrade from Goldman Sachs. A sizeable drop in iron ore stockpiles in China drove the futures contracts to a record-high, and that also helped BHP Billiton. Goldman raised their outlook for Rio Tinto to buy, as they believe margins will improve at the mega minor.

Galliford Try rejected a takeover bid from Bovis Homes for two of its businesses – Linden Homes and the Partnerships & Regeneration division. Galliford knocked back the all-share approach as they felt it didn’t reflect the ‘full value’ of the units. The housing building sector is under pressure from a cooling house prices, and high costs, and it seems that Bovis are interested in expanding in an effort to improve margins via increased bargaining power when it comes to purchasing material. The news might trigger more merger and acquisitions talk in the sector. Galliford shares are up 4.5%, while Bovis Homes shares are up 0.6%.

US

Stocks got off to a slightly positive start even though fears persist about the US-China trade situation. President Trump warned that tariffs on Chinese imports could go up ‘very substantially, very easily’.  The yield on the US 10-year government bond dropped to 2.271% - it’s lowest since September 2017, and that underlines the risk-off attitude of bond traders. Given the moves in the bond market, the price action in the stock market does seem strange.

There were some solid economic reports from the US tody. The Case-Schiller house price report showed that prices grew by 0.7% in March on a monthly basis, which was an improvement on the 0.2% achieved in February, and it topped the forecast of 0.5%. The Conference Board consumer confidence survey jumped to 134.1 from 129.2.

Fiat Chrysler shares jumped today after the company submitted proposals for a merger with Renault. The board of directors for both companies would need to approve the move, but should it go ahead, it is estimated the new group would have annual vehicle sales of 8.7 million. It appears the two car makers are keen to curb costs and pool resources, and given the challenges in the sector, should a move should be beneficial for both firms. 

FX

EUR/USD is in the red thanks to a firmer US dollar, and the respectable US economic reports helped the greenback. The German GfK consumer climate report edged lower to 10.1, from 10.2 in May. The country posted the import price data this morning too, and prices increased by 0.3% in April, which undershot the consensus estimate of 0.5%.

GBP/USD was subdued today as traders shrugged off the major political news of the last few days. The race for the Conservative Party leadership will be the big political focus of the next few weeks, and traders will keeping an eye on the contest.

Commodities

Gold is lower today as the positive move in the greenback hurt the commodity. Gold’s inverse relationship with the US dollar is overriding the flight-to-quality play that is going on also. The metal remains in the down trend that it has been in place since February. 

Oil prices are mixed today as traders don’t know which way to look. The US-China trade standoff has some traders worried about demand levels, while sanctions on Iran and Venezuela are making other dealers concerned for supply levels, and that is why Brent Crude is in the red, while WTI is slightly higher today. 

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