Italian stocks fell Monday as the country faced the prospect of a hung parliament after support for populist parties surged in the country’s general election.
But Italian stocks finished off session lows and the broader European equity market closed broadly higher, finding some relief as the euro stepped lower during the session.
How markets moved
Italy’s FTSE MIB I945, -0.42% fell 0.4% to close at 21,819.91 after opening the session down by 2%. Germany’s DAX 30 index DAX, +1.49% swung higher, ending up 1.5% at 12,090.87, chipping away a portion of the DAX’s drop of 4.6% last week.
France’s CAC 40 PX1, +0.60% rose 0.6% to 5,167.23, and the U.K.’s FTSE 100 UKX, +0.65% ended 0.7% higher at 7,115.98 following Friday’s close at its lowest since December 2016.
The pan-European Stoxx Europe 600 index SXXP, +1.04% notched a 1% gain Monday to close at 370.87. Last week, the benchmark fell 3.7%.
The euro EURUSD, +0.1459% fought off earlier losses to trade at $1.2331, up from $1.2321 late Friday in New York.
What’s driving markets
In Milan, the FTSE MIB fared the worst among European indexes after Sunday’s national elections produced an inconclusive result, with populist parties unexpectedly winning about half of the votes, according to initial projections. The antiestablishment 5 Star Movement and Lega parties received the most votes, preliminary results indicated. But no one party won an outright majority, setting the foundation for political instability in the eurozone’s third-largest economy as politicians try to craft a coalition government.
S&P Global Ratings late Monday said the election outcome shouldn’t have immediate bearing on it’s BBB credit rating for Italy. On Monday, the yield on Italy’s 10-year bond TMBMKIT-10Y, +0.00% rose 5 basis points to 2.087% as bond prices dropped.
The euro during Monday’s trade hit a low of $1.2270, and weakness for the shared currency appeared to prompt investors to snap up shares whose value have been beaten down in recent weeks. A stronger euro can hurt shares of European exporters as euro strength makes it more expensive for overseas clients to buy goods made by European companies, such as auto makers.
In Frankfurt, shares of auto makers fell, but they did close off session lows. That sector was under pressure after U.S. President Donald Trump in tweet Saturday threatened to impose a tax on cars if the EU were to retaliate to his planned tariffs on steel and aluminum imported into the U.S.
Trump’s threat came after the European Union reportedly said it could impose a 25% levy on U.S. imports worth as much as $3.5 billion. That was in response to Trump’s plan to sign orders this week imposing tariffs of 25% on global steel imports, and of 10% on aluminum imports. Trump said that move would provide “protection for a long time” for U.S. steelmakers.
But also aiding stocks Monday as well was political stabilization in Germany, the eurozone’s largest economy. Germany’s Social Democrats on Sunday agreed to join in a ruling coalition with Chancellor Angela Merkel’s conservatives. The vote by two-thirds of the Social Democrats paves the way for Merkel to start her fourth term as Germany’s leader.
Stock movers
German car makers finished off session lows with BMW AG BMW, -0.57% closing down 0.6%. Daimler AG DAI, -0.06% lost 0.1% as did Volkswagen VOW3, -0.14% VLKAY, +0.06%
In Milan, bank stocks lost ground. Banco BPM SpA BAMI, -6.15% slid 6.2%, BPER Banca SpA BPE, -7.62% dropped 7.6% and Intesa Sanpaolo SpA ISP, -1.41% moved 1.4% lower.
AXA SA shares CS, -9.70% sank 9.7% after the French financial services company said it would buy insurer XL Group Ltd. XL, +29.15% for $15.3 billion, creating one of the world’s biggest property and casualty insurers. The deal extends AXA’s plan to cut its exposure to financial markets and focus more on insurance.
What strategists are saying
“Political risk is back roaring. Italy was always going to be the country where some of the eurozone construction issues would be the most acute. Despite the recent toning down of anti-euro rhetoric, this is a blow to the strong consensus that the common currency has been enjoying of late,” said Antoine Lesné, head of EMEA strategy at State Street, in a note.
“It may still be too soon to expand into another full blown eurozone crisis and the market will have to analyze the impact of this election on actual reforms. But the word is out and Italian treasury spreads…will widen from current levels while euro strength could be halted until more clarity comes to light,” said Lesné.
