Stocks sink on Italian worries

There’s been some notable selling across European stock markets this morning as fears surrounding Italy’s role within the EU continue to rise after last week’s controversial budget announcement. Tensions were ramped up further after comments by a senior official from the ruling party said during a radio interview that the country’s problems would be resolved if it scrapped the Euro and returned to its own currency. The FTSE has fallen back below 7500 to trade down by more 30 points, while the GBPUSD has also felt the impact as a broad based flight-to-quality bid in the USD has pushed cable back below the $1.30 mark to its lowest level in almost a month.

 

Italian impact starting to spillover?

The reaction to the latest developments is most keenly felt in Italian markets, with the 10-year government bond yield at its highest level since 2014 while the FTSE MIB has sunk to an 18 month low. Elsewhere Euro has come under pressure with the single currency falling to its lowest level since mid August against the US dollar and near a 3-month low against the Pound. Stocks on the continent are also coming under pressure with the German benchmark Dax 30 selling off and the broader Eurostoxx 50 falling below last week’s low. Despite this newsflow having a clear negative impact in the short term there remains much to happen before there is any real chance of Italy leaving the single currency.

 

For starters the populist 5 star movement party who are the most likely to push for such a move, don’t control a majority in government and therefore they lack the requisite power to push this through. What is more likely happening here is a flexing of muscles and threats in the hope of pushing the limits of what the EU will allow, and the base case remains that this doesn’t ultimately result in any real change to the present relationship.

 

Royal Mail plummets after posting profit warning  

The worst performing stock on the FTSE for a second day in a row is Royal Mail, with the postal and courier firm seeing its share price fall by a quarter at the start of the week. A profit warning late in Monday’s trading session has clearly made investors skittish, with the firm cautioning that core profits would be lower by a fifth this year. The fall has seen the stock drop back to trade not far from its IPO price of 330p and the resultant decline in the company’s valuation has placed it in danger of being relegated from the FTSE 100 in the December reshuffle. Despite this Royal Mail have said that dividends will be unaffected but this may not be a wise course of action as it  is becoming increasingly apparent that the company keeping the dividend at present levels is detrimental to its future prospects.