Italian stocks rallied Wednesday, recovering from a selloff driven by political instability in the country, as the broader European equity market largely found higher footing.
Global markets were rocked Tuesday by worries that Italy could be headed for a general election this summer that could deliver a result threatening the euro.
What markets are doing
Italy’s FTSE MIB index I945, +2.09% climbed 2.1% to close at 21,797.82, coming after Tuesday’s tumble of 2.7%. In the fixed-income market, the country’s 2-year bond yield TMBMKIT-02Y, +0.00% fell 68 basis points to 1.586%, according to Tradeweb. Yields fall as bond prices move higher. On Tuesday, that yield soared 157 basis points, or 1.57 percentage points, to 2.41%.
France’s main index stood out as the only loser among major country-specific benchmarks.The CAC 40 index PX1, -0.20% ended down 0.2% at 5,427.35, with shares of Vivendi SA leading the way lower.
Germany’s DAX 30 index DAX, +0.93% added 0.9% to close at 12,783.76, after dropping 1.5% on Tuesday. In London, the FTSE 100 UKX, +0.75% gained 0.8% to 7,689.57.
Overall, the Stoxx Europe 600 Index SXXP, +0.27% ended 0.3% higher at 385.49 The pan-European benchmark slid 1.4% in the prior session.
The euro EURUSD, +0.0171% moved up to $1.1657, up from $1.1541 late Tuesday in New York. On Tuesday, the shared currency fell below $1.16 for the first time since November.
What’s driving markets
Traders moved in to scoop up Italian equities after the FTSE MIB index slid by the most since January 2017 a day earlier.
Political drama in Italy has revived concerns about the stability of the eurozone, after a March election left two antiestablishment parties — the 5 Star Movement and League — in place to enter government in coalition. But the country’s president effectively blocked the euroskeptic parties from taking power and appointed Carlo Cottarelli as prime minister, asking him to form a government.
But Cottarelli, an International Monetary Fund veteran, does not appear to have gathered the parliamentary support he needs. If he cannot set up a government, that would leave Italy’s president with the choice of bringing in a caretaker cabinet or calling early elections, potentially as early as July.
However, there were reports Wednesday that 5 Star and League may make a new bid to form a coalition government — something seen as potentially lifting some pressure on markets.
Another political showdown of sorts is brewing in Spain, where Prime Minister Mariano Rajoy is expected to face a no-confidence vote in parliament on Friday. That vote could lead to the ouster of Rajoy’s minority center-right government and its replacement by the Socialist Party.
The center-left Socialist Party, the largest opposition party in Spain, called for the vote after a corruption case ended in convictions for senior members of Rajoy’s People’s Party.
What are strategists saying?
“Markets were much calmer today after yesterday’s volatility in response to growing political uncertainty in Italy,” said analysts at Daiwa Capital Markets in a note.
“But yields remain elevated, reflecting the fact that political uncertainty remains high, and is likely to for the foreseeable future… New elections could possibly take place as early as late-July, although September seems a more likely option. As such, debate around Italy’s continued participation in the euro is likely to remain to the fore, not least given that opinion polls suggest that Italians have the lowest support of all the large member states for both the EU and the euro area, something the populist parties may look to exploit in the election campaign,” they added.
Stock movers
Vivendi SA shares VIV, -3.64% dropped 3.6% after the pay-TV broadcaster lost rights to air French Ligue 1 soccer matches after more than three decades. Spain-based Mediapro, which is majority owned by Chinese private-equity fund Orient Hontai, won the rights.
Bayer AG BAYN, +3.49% leapt 3.9% after the German conglomerate’s planned purchase of U.S. chemicals maker Monsanto Co. MON, +0.08% was approved by the U.S. Justice Department. Bayer, as part of the approval, will sell certain agricultural assets to BASF SE BASF, +0.82% . BASF shares rose 0.8%.
Italian bank stocks were higher after Tuesday’s selloff, with UniCredit SpA UCG, +1.43% up by 1.4% and Intesa Sanpaolo SpA ISP, +2.98% gaining 3%.
Economic data
Inflation in Germany jumped to 2.2% from 1.4% in April, led by rising prices for energy and food. The European Central Bank is aiming to keep inflation at just below 2%.
Earlier, data showed Germany’s jobless rate fell to a record low 5.2%, indicating continued strength in the labor market of Europe’s largest economy.
