European stocks ended mostly higher Monday, as choppy political waters in Spain and Italy calmed and as traders took heart from news of potential corporate mergers and acquisitions.
Shares of French bank Société Générale SA and air carrier Air France-KLM rose on reports of M&A deals in the cards.
How markets performed
The Stoxx Europe 600 Index SXXP, +0.24% closed up 0.3% at 388.11, its best finish in a week, as utility stocks led advancers while the oil and gas and health care groups fell. On Friday, the benchmark rose 1%, trimming the loss for last week to 1.1%.
Spain’s IBEX 35 IBEX, +0.20% was Monday’s best performer of the major bourses, up by 1.2% to 9,750.30, as a new government took over in Madrid.
But Italy’s FTSE MIB index I945, -0.12% lost steam to fall 0.5% to 22,009.95. The index jumped 1.5% on Friday, when a populist coalition was sworn-in.
Germany’s DAX 30 index DAX, +0.86% on Monday trimmed its gain to 0.2% to 12,749.45, and France’s CAC 40 index PX1, +0.48% was up 0.4% to 5,486.78. In London, the FTSE 100 UKX, -0.55% rose 0.9% to 7,768.22.
The euro EURUSD, -0.0769% moved up to $1.1727 from $1.1659 late Friday in New York.
What’s driving markets
Deal talk swayed market action as the first full trading week in June got under way. Shares of Italian bank UniCredit SpA and French lender Société Générale SA were on the move after a Financial Times report that the companies are in early-stage talks about a possible merger. UniCredit Chief Executive Jean-Pierre Mustier, a former SocGen executive, has been working on the plan for months, the FT reported.
A measure of calm was returning to European financial markets as political uncertainty swirled around Spain and Italy. Spain’s Socialist Party leader Pedro Sánchez was sworn in as prime minister on Saturday after Mariano Rajoy was ousted in a parliamentary vote of no confidence on Friday. At the same time, Madrid ended direct rule in Catalonia, letting go of controls put in to resist a push for the region to self-govern.
In Italy, a political crisis that rocked global markets was resolved on Friday with the swearing-in of a new government as populist parties the 5 Star Movement and the League formed a coalition administration. While Italian stocks had climbed during Monday’s session, the country’s blue-chips benchmark turned lower.
“The 5 Star Movement and League Party may have agreed to compromise on certain issues, but they remain antiestablishment, and might clash with Brussels down the line,” wrote CMC Markets analyst David Madden.
In the fixed-income market, Italy’s 2-year bond yield TMBMKIT-02Y, +20.44% fell 32 basis points to 0.67% on Monday, according to Tradeweb. Yields fall as bond prices rise. Last week, Italian bond yields shot higher as investors ditched the country’s debt.
Investors may turn their focus back to trade tensions after weekend trade talks between the U.S. and China ended with little sign of progress. The world’s two largest economies moved closer to imposing tit-for-tat tariffs on one another.
In addition, six of the Group of Seven industrialized nations have issued a rare condemnation of the seventh member, the U.S., over its trade policy. President Donald Trump’s administration has imposed steel and aluminum import levies on some of the U.S.’s biggest allies, including the European Union, Mexico and Canada.
Officials from the G-7 are scheduled to meet in Quebec later this week.
What strategists are saying
“Despite threats and recriminations from China and other global leaders, investors are actively choosing to ignore the trade tariff tensions, with global equity markets rising,” said Rebecca O’Keeffe, head of investment at Interactive Investors.
“The G-7 meeting…is now expected to be the main showdown for the issue, with investors hoping that the U.S. administration will backtrack on their current stance — but they might be disappointed,” she said.
Stock movers
Air France-KLM AF, -3.99% jumped 5.5% after AccorHotels said it’s considering purchasing a minority stake in the French-Dutch air carrier. Accor AC, +2.12% shares slumped 7%.
Société Générale GLE, +0.07% shares moved up 0.7% after the Financial Times report of merger talks. UniCredit UCG, -0.63% gave up earlier gains and fell 0.8%. Separately, Société Générale said it’s reached agreements in principle with U.S. and French authorities related to its alleged manipulation of Libor rates and transactions involving Libyan counterparts. Société Générale in March said it made provisions of about 1 billion euros ($1.2 billion) for the litigation.
Off the Stoxx 600, Spain’s Papeles y Cartones de Europa SA PAC, +0.24% known as Europac, rallied 8.2% after packaging producer DS Smith PLC’s deal to buy the company for about 1.67 billion euros ($1.95 billion). DS Smith shares SMDS, -0.03% a FTSE 100 and Stoxx 600 component, bulked up 3% and hit an all-time high of £5.83 each.
Economic data
Expectations for the eurozone economy in June sank to their lowest since October 2016, research group Sentix said Monday, noting its overall index for the euro area came in at 9.3. That’s a slide from 19.2 in May, marking a fifth straight decline.
“It appears that investors still hope that the world’s trade dispute with the U.S. will not get out of control. Investors, on the other hand, are far less lenient with developments within the eurozone. The new government in Rome is very skeptical,” said Sentix in a statement. “This is so strong that economic expectations in the eurozone are downright tilting.”
Producer prices in the eurozone held steady in April compared with March when prices rose 0.1%, according to Eurostat. Analysts polled by FactSet had expected an April reading of 0.3%.
