market relief

Political turmoil in Italy and Spain has rocked investor sentiment in Europe. 

Europe

Carlo Cotarelli will act as interim Italian prime minister to steady the ship, but we are likely to see a general election at the back end of this year or in early 2019.

Lega Party and Five Star Movement are tipped to gain even more ground according to the latest polls. The rise of anti-euro sentiment in Italy is the driving force behind the sell-off. The yield on the two-year Italian government bond posted its biggest one day move in over 20 years, and Italian stocks are suffering for it.

Spain is going through its own political upheaval, as prime minister Mariano Rajoy faces a vote of no confidence on Friday. There is a possibility we could also see a general election in Spain in the coming months, and traders are using this as an excuse to exit their equity positions.

Dixons Carphone shares slumped after the company issued a profit warning. The retailer revealed that full-year pre-tax profit will fall by 21% to £383 million, and the company announced it expects next year’s profit to be ‘around £300 million’. Falling margins and poor mobile phone sales were blamed for the profit warning. Alex Baldock, who took over as CEO in March, has been changing the management structure in order to cut costs, and there is more restructuring in the pipeline. The share price is down 19% at 188p, and if it falls below 170p, it could pave the way for 150p to be retested.

Shares in Smiths Group hit an all-time high after the company confirmed it is contemplating merging its healthcare division with ICU Medical in the US. With Smiths Group’s healthcare unit worth £2 billion, and ICU Medical’s market capitalisation at £4.2 billion, the new frim would be worth over £6 million should the deal go ahead. If the rally continues the stock could target 1,800p.

US

The Dow Jones and S&P 500 are in the red as the negative sentiment in Europe is weighing on US investor sentiment. Equities are off the lows of the session, mirroring the European equity benchmarks, which are off the day’s lows. Europe seems to be calling the shots today. US government bonds are in high demand as investors seek out safer assets.

The US economy is ticking along nicely as the latest house prices and consumer sentiment data holds steady. The Case Schiller house price index jumped by 6.8% on an annual basis, while economists were anticipating 6.5%. US Conference Board consumer confidence dipped to 128 in May, from 128.7 in April. The consensus estimate was for 128. 

FX

The US dollar index has hit a fresh six-month high as traders seek the safe haven of the greenback, and US government bonds. The yield on the US 10-year yield has dropped to its lowest level since mid-April as investors jump out of stocks and into bonds.

EUR/USD fell to its lowest level since July 2017 as political uncertainty in the eurozone, coupled with a firmer US dollar, hit the single currency. In addition to the political uncertainty, Italy announced some consumer confidence figures that failed to live up to economists’ estimates. The reading fell from 117.1 to 113.7 – while the consensus estimate was for 116.5.

GBP/USD touched a six-month low as the US dollar continues to grind higher. There were no major economic announcements from the UK today, so sterling was at the mercy of the US dollar. The pound has been in a steady downtrend against the US dollar for the past six weeks, and the bearish move has yet to show any signs of letting up.

Commodities

Gold is a touch lower today as the strong US dollar has hurt the price. The metal is being pushed back and forth on account of the inverse relationship with the US dollar, but the flight-to-quality effect is preventing the asset from falling too far. Recently gold has struggled to retake $1,307 – the 200-day moving average, and while it remains below that level its outlook might stay negative.

WTI and Brent Crude are higher on account of short covering and bargain hunting. The energy took a big hit at the end of last week over fears OPEC will increase its output. There is talk Saudi Arabia and Russia will ease up on their output freeze and that trigged a major sell-off in oil. The energy market is creeping higher for now, but as the near-term outlook is bearish, the positive move may not last.

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