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Italy Bank Bailouts Send European, Global Stocks Higher; Gold Flash Crashes

S&P futures point to a higher open following gains in Asian markets supported by stronger commodities but mostly European bourses, which are sharply higher following the €17 billion bailout of the two Veneto banks in Italy, the biggest taxpayer funded bank rescue in modern Italian history, as well as Dan Loeb’s activist campaign of the world’s biggest food company, Nestle which sent the stock up 5%, and finally Germany’s Ifo business climate index which hit new all time highs.

Risk sentiment is broadly higher thanks to European equity markets which have rallied strongly from the open led by the Italian banking sector following the Veneto banks resolution. As shown in the chart below, EutoStoxx banks are about 2% higher as markets celebrate the return of taxpayer bailouts and the apparent death of Europe’s bail-in regime.

The bailout capped a weekend in which Italy’s center-right parties were the big winners in mayoral elections on Sunday, in a vote likely to put pressure on the center-left government ahead of national elections due in less than a year. In the most closely watched contest, the northern port city of Genoa – a traditional left-wing stronghold – seemed certain to pass to the center-right for the first time in more than 50 years. The candidate backed by the anti-immigrant Northern League and Silvio Berlusconi’s Forza Italia party will get around 54 percent of the vote, compared with 46 percent for the candidate backed by the ruling Democratic Party (PD), according to final projections based on the vote count.

However Italian BTPs rallied with domestic banks, ignoring mayoral election results, BTP/bund spread tightens 2.0bps and iTraxx Crossover tightens 2.5bps. As a result of Italy’s historic bailouts, default probabilities across virtually all Italian banks tumbled.

The Stoxx Europe 600 Index rallied 0.7% led by food and beverage shares and Nestle SA after hedge fund Third Point announced on Sunday it had amassed a $3.5 billion stake in the region’s biggest company and was going activist. Nestle (25% of SMI) rose ~5% after Third Point took a $3.5b stake, providing further lift to risk sentiment.

The MSCI Asia Pacific Index rose 0.2 percent, with Hon Hai Precision Industry Co. jumping 6.7 percent to lead an advance among technology shares. Taiwan’s Taiex index rallied 1.3 percent to the highest since 1990, while South Korea’s Kospi increased 0.4 percent to a record. Markets in India, Singapore and throughout much of Southeast Asia were closed for a holiday.

Sterling declined as battle lines appeared to harden just a week into Brexit negotiations, and as Theresa May prepared to spell out how EU citizens living in the U.K. will be protected in Brexit.

Large spike lower in spot gold, amid little news, became a market focus with USD rallying in tandem. USD/JPY well supported breaking towards 100DMA at 111.80. USTs consequently pressured lower with Eurodollar curve bear steepening. As noted earlier, the big story in commodities this morning was the larger order in Gold futures going through the CME, with up to 20k contracts hitting the yellow metal USD20.0 lower to hit levels just under USD1240.

The timing of the move created the volatility, as in terms of volume, this was a relatively moderate amount when taking into account daily volumes, and many see this little more than an exercise in tripping stops through some notable levels on the charts. The 200dma circa USD1237.00 held firm though. On the day, we are still down net 1%, as is Silver, with Platinum and Palladium are also lower by a similar amount.

Crude futures hold overnight gain, up 0.8% to trade around $43.35bbl.

In FX, the yen fell 0.4 percent to 111.68 per dollar. The pound increased slipped 0.1 percent to $1.2710. The euro weakened 0.1 percent to $1.1182. The Bloomberg Dollar Spot Index rose 0.1 percent after three days of declines.

In economic news, the German June IFO Business Climate rose to new all time highs, hitting 115.1 vs 114.5 est; Expectations also beat (106.8 vs 106.4 est); as did the Current Assessment  at 124.1 vs 123.2 est.

Over in the UK, a deal between Theresa May and the DUP was finally confirmed according to Bloomberg.  Brexit Minister Davis stated he opposes EU demands that its judges retain ability to safeguard 3.2mln EU nationals living in UK after 2019 Brexit. Davis added that tourists will be guaranteed free health cover when they are on holiday in the EU. UK Press also reports that PM May will ensure that thousands of EU criminals will face deportation after Brexit as a key demand when she publishes a 15 page document detailing how she intends to protect the rights of 3.2mln EU nationals residing in Britain.

ECB’s Weidmann said an extension of QE has not been discussed and that the time may be approaching for the ECB to exit stimulus if the Euro area economy develops as expected.

In rates, the yield on 10-year Treasuries rose one basis point to 2.16 percent. U.K. benchmark yields were little changed at 1.03 percent. Italian yields fell three basis points to 1.88 percent.

Bulletin headline Summary from RanSquawk

  • European equities begin the week on the front foot led by Italian banking names and Nestle
  • GBP has pre-empted source reports suggesting a deal between the Conservatives and the DUP will be announced later today
  • Looking ahead, highlights include German IFO, US Durables and ECB’s Draghi

Market Snapshot

  • S&P 500 futures up 0.2% to 2,440.75
  • STOXX Europe 600 up 0.7% to 390.32
  • MXAP up 0.2% to 155.45
  • MXAPJ up 0.6% to 507.53
  • Nikkei up 0.1% to 20,153.35
  • Topix up 0.05% to 1,612.21
  • Hang Seng Index up 0.8% to 25,871.89
  • Shanghai Composite up 0.9% to 3,185.44
  • Sensex down 0.5% to 31,138.21
  • Australia S&P/ASX 200 up 0.08% to 5,720.16
  • Kospi up 0.4% to 2,388.66
  • German 10Y yield fell 0.3 bps to 0.252%
  • Euro down 0.03% to 1.1191 per US$
  • Brent Futures up 1% to $46.01/bbl
  • Italian 10Y yield rose 1.0 bps to 1.627%
  • Spanish 10Y yield rose 0.4 bps to 1.385%
  • Gold spot down 0.9% to $1,244.94
  • U.S. Dollar Index up 0.08% to 97.34

Top Overnight News

  • Italian banks: govt. commits up to EU17b to clean up failed Veneto banks; will be split into good and bad banks, Intesa Sanpaolo acquires good assets for token amount
  • Italy: Berlusconi party and center right allies perform well in second round of local mayoral elections; of 16 larger cities which had Renzi party-backed mayors, 12 switched to the centre-right
  • German Jun. IFO Business Climate: 115.1 vs 114.5 est; Expectations 106.8 vs 106.4 est; Curr. Assessment 124.1 vs 123.2 est.
  • Fed’s Williams: transitory factors have been pulling inflation lower recently; very strong labor market actually carries with it the risk of the economy overheating
  • ECB’s Weidmann: ECB must resist any outside pressure to continue loose monetary policy longer than needed; council hasn’t discussed possible extension of bond- buying program
  • U.K.: Deal between Conservatives and DUP expected by “lunchtime” today: BBC
  • House Defense Panel Proposes $18.4b Boost to Pentagon Budget
  • Modi Meets Top U.S. CEOs Including Apple’s Cook, Amazon’s Bezos
  • Fed’s Williams Sees Interest Rates Rising as Inflation Moves Up
  • EU Said to Decide on EU1B Fine for Google on Wednesday: FT
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  • Corporate Tax Rate at 28% Seen as More Likely Than Historic Cut
  • McConnell’s Health Bill Gamble Hinges on Converting GOP Holdouts
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  • Enterprise’s Seaway Legacy Crude Pipeline Said to Resume Service
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  • U.S. Asks Supreme Court to Overturn Microsoft Email Ruling
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