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While you were sleeping: Italian turmoil hits European stocks, euro

Tuesday 29th May 2018

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European stocks and the euro moved lower amid concern new elections in Italy might spark fresh debate about a break-up of the region’s single currency, while oil extended its slide amid signs OPEC and its partners are planning to lift production.

Europe’s Stoxx 600 Index finished the day with a 0.3 percent fall from the previous close. Germany’s DAX Index ended the day with a 0.6 percent slide from the previous close, while France’s CAC 40 Index also declined 0.6 percent.

Fresh Italian elections might happen as early as the fall after President Sergio Mattarella ended a bid by two populist parties to nominate a euro-sceptic as the nation’s finance minster, which prompted the collapse of efforts to form a government. On Monday Mattarella named Carlo Cottarelli, a former International Monetary Fund official, as interim prime minister to set up a technocratic cabinet. 

“The election is going to resemble a referendum, de facto, on the European Union and the euro,” Francesco Galietti, head of political risk consultancy Policy Sonar in Rome, told Reuters. “It’s an existential threat for the entire euro zone.”

Italy’s MIB Index slid 2.1 percent. Government bonds plunged, boosting yields on Italy’s 10-year note 22 basis points higher to 2.68 percent, the highest in almost four years, according to Bloomberg.

UK markets were closed on Monday for the Late May Bank Bank holiday.

Oil dropped, extending Friday’s slide and erasing May’s gains, amid concern Saudi Arabia and Russia are planning to lift output.

“The market is now pricing in the possibility that OPEC is going to raise production,” Phil Flynn, an analyst at Price Futures Group in Chicago, told Bloomberg. An 800,000 to 1 million barrel a day increase would “barely” offset the expected loss from Iran and Venezuela but “the market is taking that as a big increase.”

To be sure, Goldman Sachs Group says the outlook for oil remains bullish, Bloomberg reported. 

Even if Saudi Arabia and Russia were to boost output by 1 million barrels a day, that would only offset involuntary production declines, analysts including Damien Courvalin wrote in a report, according to Bloomberg. 

In the US, financial markets were closed on Monday for the Memorial Day holiday. 

Investors will scrutinise the latest US jobs data this week, with the ADP employment report set for release on Wednesday, followed by weekly jobless claims on Thursday and the government's nonfarm payrolls data on Friday. 

The Federal Reserve is widely expected to lift its key interest rate at its next meeting in June.


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