Global stocks, bonds recover as Italian political impasse fears ebb

Stocks on Wall Street and in Europe recovered most of their Tuesday losses as investors reversed gear over the selloff triggered by Italy’s political impasse.

Investors were worried that turmoil in Italian markets could spread after President Sergio Mattarella blocked the formation of a eurosceptic governing coalition.

Mr Mattarella has since searched for a new option that would stave off the need for fresh elections.

That could strengthen the hand of anti-euro forces and disrupt financial markets, Globalt Investments senior portfolio manager Thomas Martin says.

“There’s a lot that has to happen for that scenario to play out,” he says. “[Tuesday] didn’t feel like a panic. It felt as though people wanted to make sure they weren’t positioned incorrectly.”

On Wall Street, the Dow Jones Industrial Average started in positive territory and added 306.33 points, or 1.3%, to 24,667.78 by the close,

The S&P 500 climbed 1.3%. to 2724.01. Both indexes had their worst day in more than a month on Tuesday and closed at their lowest level in three weeks.

The Nasdaq Composite added 0.9% to 7462.45.

In Europe, the Stoxx Europe 600 edged up 0.3% while Italy’s FTSE MIB Index erased some of its recent declines and climbed 2.1%. France’s CAC 40 eased 0.2%, Germany’s DAX gained 0.9% and the UK’s FTSE 100 rose 0.75%.

US bank stocks bounced back after being hard-hit by worries about debt-heavy governments like Italy’s. The S&P 500 financial sector rose 2.1%.

Bond yields rise
The yield on the benchmark 10-year US Treasury note also rebounded after its largest one-day decline in nearly two years.

The yield finished at 2.855%, up from 2.772% on Tuesday. Higher yields tend to boost banks’ lending profitability.

In Europe, two-year bond yields fell to 1.661% from about 2.1%. A regular bond auction in Italy recorded the highest five-year funding costs in more than four years, with a yield of 2.32%. As recently as April 27, five-year bonds were auctioned with yields of 0.56%.

The rapid repricing of southern European government bonds has tempted some buyers.

“I was neutral on BTPs [Italian government bonds] going into the election, and I’m now tentatively looking at this as an opportunity to buy the dip,” Trium Capital macro rates fund manager David Slater says.

“You look at the Spanish situation, the economy is quite strong despite the political backdrop, so you’d think any significant pickup on the Spanish spread would be a buying opportunity.”

The Spanish parliament will decide on Friday whether to oust Prime Minister Mariano Rajoy and replace his centre-right government with one led by the Socialist Party,

Trade talks stall, oil glut ends
Elsewhere, trade news was negative with reports that negotiations between the US and China could be derailed by the US moving forward with tariffs on $US50 billion in imports.

In corporate news, HP raised its profit forecast for the year as sales of personal computers and printers topped expectations in the most recent quarter. The shares added 3.8%.

Cloud software firm Salesforce rose 2.4% after reporting record quarterly revenue.

US stocks also got a boost from a rebound in oil prices, with S&P 500 energy firms climbing 3.3% as crude futures ended a five-session losing streak.

Light, sweet crude for July delivery rose 0.8% to $US67.26 a barrel. Brent, the global benchmark, rose 1.3% to $US76.40.

The International Energy Agency Commercial says oil stocks in industrialised economies have fallen to their lowest level in three years.

It’s the latest sign that the global supply glut has been mopped up in the Opec production cutbacks.

Opec output fell month on month in April by 130,000 barrels a day to 31.65 million barrels a day, mainly as a result of production outages in Venezuela.

However, the IEA lowered its global oil-demand growth forecast for this year to 1.4 million barrels a day from a previous estimate of 1.5 million barrels, meaning world oil demand should average 99.2 million barrels a day in 2018.

All content copyright NBR. Do not reproduce in any form without permission, even if you have a paid subscription.