European stock markets are firmly in the red this afternoon as the surge in Italian government bond yields has rattled investor confidence. 

Europe

The cost of borrowing for the Italian government has jumped today given policies of the coalition. The administration in Rome has agreed upon a budget deficit of 2.4%, as it wants to raise public spending in a bid to boost the economy. This policy flies in the face of the EU’s 2% budget deficit target. Investors are distancing themselves from Italian bonds and stocks, and risk-off sentiment is spreading across Europe. The severe sell-off in European financial stocks is reminiscent of the eurozone debt crisis.

EasyJet shares are in the red after the company issued a mixed trading update. The firm narrowed its full-year pre-tax profit guidance to between £570 million - £580 million, and the previous guidance was for £530 million - £580 million. Keep in mind last year’s full-year pre-tax profit was £408 million. The airline had an underwhelming third-quarter due to adverse weather and traffic control restrictions, but demand in the fourth-quarter was ‘robust’. The firm has confirmed that operational costs and fuel costs are going to be higher than originally expected. The share price has been in decline since June, and if it remains below its 200-day moving average at 1,600p, its outlook could remain negative.

Serco shares are in demand today after the company said it expects full-year profit to rise by more than 30%. The company cited tighter cost control and an enhanced operational performance for the positive update. The company has been focusing on international contracts to counteract the cooling of UK public outsourcing. The company has endured tough times in recent years, but it expects net debt to be at the lower of expectations. Loans were paid off in order to reduce interest repayments, and this is additional proof that the company is taking measures to turn itself around. The stock has gapped higher this morning, and if it exceeds the 105p mark, it could target the 120p region.

US

Stocks are mixed as trade uncertainties continue. Discussions between the US and Canada haven’t produced a trade deal yet, and 30 September is the deadline for the talks. The US and Mexico have reached their own arrangement, but the Canadian component still remains unresolved. President Trump has been a long critic of NAFTA, and wants to renegotiate it, and dealers might remain cautious until the talks are put to bed.  

The core PCE for August came in at 2%, unchanged on the month, and in line with expectations. While personal income remained at 0.3%, and personal consumption cooled from 0.4% to 0.3%. The figures were respectable, and they will keep the US economy motoring along, and the markets are pricing in a high probability of an interest rate hike in December.  

FX

The US dollar has pushed higher yet again. The solid core PCE report helped the greenback push higher. In light of the update from the Fed on Wednesday, some traders are expecting the US central bank to keep hiking rates in 2019.

EUR/USD is in the red due to the rally in the US dollar, and the uncertainty in Italy. Earlier this morning, Germany confirmed that unemployment fell to an all-time low of 5.1%, but the news had little impact on the currency pair. The cost of living in the eurozone edged up to 2.1%, but the core CPI rate slipped to 1.1% from 1.2%, and that worried investors. The Italian situation could trigger another round of the eurozone debt crisis, and that is why dealers are dumping the euro.

GBP/USD is also lower today due to the firmer US dollar. The greenback’s dominance was clear when the UK released the second-quarter GDP, which came in at 0.4% - meeting forecasts, and the pound didn’t react. 

Commodities

Gold fell to a level not seen since mid-August as the rally in the US dollar hurt the metal. Gold has been sliding since April, and the recent resurgence in the US dollar has put renewed pressure on the metal. While gold remains below its 50-day moving average at $1202, its outlook could remain negative.

Oil remains in demand as traders are still concerned about future supply as the US will impose sanctions on Iran in November. Today week we saw Brent crude oil hit its highest level since late 2014, and the energy is on track to achieve its fifth quarterly advance – that would make it the longest winning streak since June 2008.

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