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Categorized | Currencies, Equities

European stocks hovering under Italian nerves, waning US momentum

Posted on November 29, 2016

Stock markets in Europe are stuck in the mud after Wall Street retreated from record highs as the rally on hopes for a Trump-led US economic boost shows signs of losing momentum.

US index futures suggest the S&P 500 will recover 2 points to 2,204 when trading gets under way later in New York, having retreated 12 points on Monday from its best ever close. The cautious tone sees oil lead industrial commodity prices lower, but encourages buyers of Treasuries, nudging down yields.

European markets remain wary of the Italian constitutional referendum this weekend.

The Euro Stoxx 600 Banking index is down 15 per cent this year, against a 7 per cent decline for the region’s market as a whole. On Tuesday, the FTSE MIB, the Italian equity benchmark is recovering 0.4 per cent, still leaving it down 24 per cent for 2016. The yield on 10-year Italian government bonds is up 2 basis points to 2.08 per cent, meaning investors demand a yield premium of 1.88 percentage points for Italian debt over German yields, around the most since October 2014.

What to watch

Keep an eye on the US dollar for signs that the “Trumpflation trade” may be fading. The dollar index (DXY), which measures the buck against a basket of its peers, towards the end of last week hit a near 14-year high of 102.05 having jumped on expectations president-elect Donald Trump’s mooted spending policies would deliver a stronger US economy and thus tighter monetary policy.

This reasoning has also helped drive gains for growth-focused assets like industrial commodities and equities.

But Tuesday sees the DXY off fractionally to 101.30, in line for a third down day in a row ahead of US third-quarter GDP data, due at 13:30 GMT and a November US consumer confidence report, scheduled for 15:00 GMT.

And traders will also be aware of the US monthly jobs report on Friday. However, the data would have to be particularly poor to dissuade the Federal Reserve from raising interest rates in December, given the market is currently placing a 100 per cent probability on a 25 basis point hike.

The pan-European Stoxx 600 is down 0.3 per cent, with financials striving to recover some poise but energy groups under pressure.

Japanese stocks were lower after the decline in the dollar caused the yen to strengthen overnight. The Topix benchmark dipped 0.1 per cent, ending 12-day’s of gains that were powered by the yen being the main casualty of recent dollar strength. The Nikkei 225 fell 0.3 per cent.

Much of Asia noted the soft lead from Wall Street, causing Australia’s S&P/ASX 200 to ease 0.1 per cent, while Hong Kong’s Hang Seng was down 0.4 per cent. However, China’s Shanghai Composite, bucked the trend, adding 0.2 per cent even though the technology-focused Shenzhen Composite lost 0.7 per cent as investors absorbed news that Beijing is to restrict the flow of outward investment.

The yen is again weakening as European trading gets under way, off 0.3 per cent to ‎¥‎112.30 per dollar. The currency strengthened briefly following the release of retail sales and household spending data that showed a less severe contraction in October.

A notable major Asian currency on Tuesday was China’s renminbi, up by one-third of 1 per cent at Rmb6.892 per dollar as the greenback weakened and the country’s central bank fixed the currency’s trading range with the US dollar stronger.

The South Korean won is 0.2 per cent firmer at 1,169.17 per greenback — and the stock market was flat — after the country’s scandal-mired president offered to stand down.

Oil prices are weaker ahead of Wednesday’s much-anticipated meeting between Opec members that markets hope will result in supply cuts.

Brent crude, the international benchmark, is down 0.9 per cent at $47.82 a barrel, while West Texas Intermediate is slipping by 0.8 per cent to $46.77. Prices jumped 2 per cent on Monday on hopes that the Opec meeting would yield a deal.

Base metals are generally softer after their recent good run, while gold is down $3 to $1,1910 an ounce.

Fixed income
The market’s broadly tentative tone is supporting US bonds, but moves across the spectrum are meagre and mixed.

The 10-year Treasury yield, which moves inversely to the bond price, is down a fraction of a basis point to 2.31 per cent.

The equivalent maturity German Bund yield is adding 1bp to 0.20 per cent and UK gilts are up 1bp to 1.39 per cent