Equities in the red as Italian concerns return; Pound drops as GDP contracts

Summary:

• European stocks drop as Italian coalition on the brink of collapse

• Wall St also lower; Uber swoons

• UK growth unexpectedly contracts

• GBPUSD revisits sub $1.21

Brexit aside, the political backdrop in Europe has been relatively tranquil for quite some time now but that looks set to change with the ruling coalition in Italy on the verge of collapse. What started with a failed attempt by the Five Star Movement to derail plans for a high-speed rail link between Turin and Lyon has revealed an irrevocable rupture within the government and not only does this mean that Italian’s will likely head back to the ballot box it also raises the spectre of broader political disruption throughout the EU.  

The market has already reacted negatively to the news with the FTSE MIB (ITA40 on xStation) down more than 2% and the spread on Italian/German 10 year bonds (a closely watched measure of Italian political risk) has reached its highest level in a couple of months. With the contentious issue of the Italian budget due to be renegotiated next year this could become a bigger theme going forward and something that could impact not only equities and bonds but also the FX market through the Euro.   

The final session of what has been a topsy turvy week for US stock markets could well prove decisive with the price action in the next 4 1/2 hours potentially revealing where the path of least resistance lies going forward. Another solid day of gains would amount to a victory for bulls who would point to a 150+ point bounce off the lows and a large hammer on the weekly chart as proof that the worst of the sell-off is behind us. On the other hand if we get a red session then the past 3 days of gains could be seen to have run their course and this would also see the market chalk up a weekly loss. At the time of writing the bears are on top with all 3 major US indices in the red.

After rival ride-hailing firm Lyft beat the street earlier this week, expectations were raised ahead of Uber’s latest trading update, with the latter gaining as much as 7% when the former announced the news. The figures were always going to face intense scrutiny as the first released since the company went public and unfortunately for investors the results were a disappointment. A loss of $5.2B for the quarter is even worse than expected while the turnover of $.287B was also below consensus forecasts of $3.05B. The stock fell as much as 9% this afternoon. 

The latest look at the UK economy makes for pretty grim viewing with a contraction of 0.2% seen in the second quarter. This marks the first time in over 6 years that we’ve had a quarterly contraction in economic activity and given the growing threat of a no-deal Brexit that looms menacingly overhead, it would not be at all surprising if the current quarter also shows a contraction - therefore meeting the standard definition of a recession with consecutive drops in quarterly GDP.  GBPUSD remains in a narrow range around the $1.21 handle and not far from the lowest level since the 2016 referendum.