Europe
European equities are in high demand today because the Italian government has decided to bailout two of its struggling banks. Banca Veneto and Banca Popolare di Vicenza are going to be wound up, and the Italian government will cover the cost of their non-performing loans, which could cost the Italian taxpayer €17 billion. Traders jumped at the chance to buy up relatively cheap stocks, especially now that the Italian banking sector received some much needed assistance. The medium-term outlook doesn’t remain great for the Italian banking sector as underperforming loans are a major problem, but in the near-term traders are jumping on the bailout bandwagon.
The Italian market, the FTSE MIB, is up 1.6% and is the standout performer in Europe today.
In London, the FTSE 100 was helped by the announcement that the Tories have come to an agreement with the Democratic Unionist Party (DUP) which strengthens Theresa May’s position, and brings some much needed stability to British politics.
US
The Dow Jones, S&P 500 and Nasdaq 100 all had a strong start to the session but have started to give up their gains. The positive sentiment in Europe has slightly spilled over to the US. The American indices held up relatively well last week, while markets in Europe were being dragged lower by the falling oil price. Investors are keen to pick up blue chip stocks like Goldman Sachs (NYSE:GS), American Express (NYSE:AXP) and WalMart (NYSE:WMT).
John Williams of the Federal Reserve was speaking in Australia, and said the US needs to stick to its plan of increasing interest rates, but dealers are wondering how hawkish will the US central bank actually be? Today’s headline and core durable goods report from the US both came in below expectations. Wage growth in the US has been stagnating and it is starting to trickle down to the consumer sector, and it paints a picture of falling demand. If consumer appetite isn’t there, the Fed may have to hold off on their monetary tightening plan.
Exxon (NYSE:XOM) and Chevron (NYSE:CVX) are the biggest fallers on the Dow Jones today as the weak oil price has hit both stocks.
FX
The GBP/USD is a touch firmer today after the long awaited pact between the Conservatives and the Democratic Unionist Party was announced this morning. The deal will bring political stability to the UK as Theresa May can now count on Northern Irish party for support on big issues. Sterling suffered on account of the Tories losing their majority, but the supply and confidence deal should assist the pound.
The EUR/USD was given two boosts today. The first came from the German Ifo business climate report for June, which came in at 115.1, and traders were expecting a reading of 114.7, and May’s reading was 114.6. The second helping hand to the single currency was from the US, when durable goods dropped by 1.1% in May, and that was below the estimate of a 0.6% drop, and the April report registered a 0.7% fall.
Commodities
Gold sold off sharply this morning as the metal has fallen out of favour with investors. The rise in global equity markets on the back of the Italian bailout encouraged traders to take on more risk. The metal found support at the 200-day moving average at $1237, but dealers are mindful of the hawkish comments that Federal Reserve member John Williams made. Mr Williams was speaking in Sydney, and he stated the US needs to continue its policy of hiking interest rates. The US central bank has a history of giving off a more hawkish stance without fully following through, but traders aren’t taking any chances.
WTI and Brent Crude oil are stuck in Groundhog Day. After a big decline last week, the commodity bounced back in the morning session but it has now turned over on itself. On Friday, the Baker Hughes active oil rig count showed that active rigs increased for the 23rd consecutive week. The concerns about over-supply in the market has been a major factor in the recent fall in price, and it would appear that it is here to stay.
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