Originally published by CMC Markets
Continued concerns about the political situation in Italy, and the relatively high yields on US government bonds, and the strained global trading relations have all contributed to the decline in European stocks.
Europe
Matteo Salvini, the joint Deputy Prime Minister of Italy claimed he is ‘absolutely’ sure’ the spread between Italian and German bond yields won’t reach 400 basis points. Mr Salvini is clearly sticking to his guns, and wants to pursue his policy of raising the budget deficit to 2.4%, in a bid to boost economic activity. The US and China are no closer to improving trading relations, and investors are also worried about the relatively high yields on US government bonds.
Patisserie Valerie shares are suspended today after the company confirmed an investigation into a ‘significant, and potentially fraudulent accounting irregularities’. It could cost the company up to £20 million, and considering the company reported first-half profit of £11.1 million in May, it could be wipe out profits for the entire year. Chris March, the finance director, has been suspended, and the company isn’t accusing him of wrongdoing, but management are looking into how long this situation has been ongoing.
Telford Homes (LON:TELF) shares sold off heavily after the company warned that negative sentiment surrounding Brexit is hurting their business. The house builder said that potential buyers are in ‘wait-and-see’ mode due to the political and economic uncertainty surrounding the UK’s exit from the EU. The group is focused on the London market, and according to some surveys, prices in the capital are falling. The firm announced that sentiment is ‘not expected to get any easier in the short term’ and that prompted investors to dump the stock. The share price has been in decline since May, and today it gapped lower, and if the negative move continues it could retest the 335p area.
US
Stocks have sold-off severely amid relatively high government bond yields. The 2-year yield hit its highest level since 2008, and keep in mind the 10-year yield hit a seven year high yesterday. The jump in yields reflects a fear that interest rates are going to continue to push higher, and this is making traders jump out of stocks.
The EU have proposed a new tax on technology giants, and the EU commission believe it could raise £4.4 billion a year. Brussels are hoping to have the tax implemented by Christmas, but in light of Brexit, it could be the end of 2019 before it comes to fruition.
The PPI reports were mixed, as headline PPI slipped to 2.6% from 2.8%, but the core PPI report ticked up to 2.5% from 2.3%.
FX
GBP/USD is higher on the day on account of the robust UK GDP numbers and the pullback in the greenback. In the three months until August, the UK economy grew by 0.7%, which topped economists’ forecasts of 0.6% and the report for the three months until July was revised higher to 0.7%, from 0.6%. Following several months of decline, the pound started to bounce back in August, and while it holds above the 1.3000 mark, its outlook could remain positive.
EUR/USD has been helped by the drop in the US dollar. It was a quiet day in terms of economic announcements from the eruozone. French industrial output increased by 0.3%, and the consensus estimate was 0.1%. The potential political battle between Rome and the EU is also hanging over the single currency too.
Commodities
Gold is lower today despite the soft US dollar. Recently there has been a strong inverse relationship between gold and the greenback, and the fact the metal couldn’t muster a rally even though the US dollar has dipped suggests the market is a little weak. The metal has been in decline since April, and while it holds below the $1,200, its outlook could remain bearish.
Oil is in the red after it was reported that Saudi Arabia will supply India with 4 million barrels of oil in November, and this could be a short-term solution to the Iranian issue. There was talk that a couple of big importers were planning on purchasing oil from Saudi Arabia in November – when the US sanctions will be implemented. Traders will be keeping an eye on Hurricane Michael, the category four storm that is heading for the coast of the US.