LONDON (Reuters) – European stocks, core bond yields and the euro fell on Tuesday as concerns about Italy’s budget overshadowed talks of a Fiat-Chrysler and Renault merger and the muted showing of nationalists in European Union parliamentary elections.
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, May 27, 2019. REUTERS/Staff
After gains in Asia, hopes that European stocks would open higher were dashed, with Italian shares falling more than half a percent, unwinding early gains in both the pan-regional STOXX 600 and Germany’s DAX. The U.S. was also set for a weak open with U.S. 500 e-mini futures down almost 0.14% while 1YMc1 was flat on the day.
Markets had been cheered by limited gains for nationalists in the EU elections, though wins for euroskeptic parties in Italy, France, Poland and would-be ex-member Britain, as well as snap elections in Greece and political turmoil in Austria, curbed risk appetite.
However, Italy’s dispute with the European Commission emerged to dominate European trading as markets opened. The Commission could fine Italy 3 billion euros for accumulating debt and deficits that break EU rules, Italian Deputy Prime Minister Matteo Salvini said on Tuesday.
“It reopens the whole agenda of whether Salvini wants to be part of the euro or not,” said Colin Harte, portfolio manager and strategist at BNP Paribas Asset Management.
“The danger is that the (dispute between Salvini and the EU) turns out to be more aggressive on both sides, then you will see people switch out of positions],” Harte said.
The spread of Italian 10-year debt over top-rated Germany reached around 100 basis points between mid-October and mid-March, but has since blown out to 285 basis points.
German government bond yields, deemed the region’s safest asset, fell four basis points to a two-and-a-half-year low, though pulled back to -0.147%. The euro slipped 0.1% to $1.1179, but remains above two-year lows of $1.1105 hit last week.
Other high-grade euro zone bond yields were also lower across the board in a risk-off environment, with the ousting of Austrian Chancellor Sebastian Kurz adding to the nerves.
U.S. yields were also lower. Benchmark 10-year Treasury notes yielded 2.27%, down five basis points.
Trade worries remained high. U.S. President Donald Trump said on Monday that Washington was not ready to make a deal with China, but he expected one in the future. At the same time, he pressed Japanese Prime Minister Shinzo Abe to reduce Japan’s trade imbalance with the United States.
Hope for a U.S.-China trade agreement still underpins optimism in global markets.
“Markets are holding their nerve and will start to attach great hope to the meeting between Presidents Xi and Trump in June,” said BNP Paribas’s Harte. “But I’m not as convinced that Trump wants a deal.
“The big risk is that the U.S. starts being disruptive to supply chains … and the big problem is we don’t really understand how much damage this will do.”
Asian shares rose, lifted by advances in China and gains by auto firms after Fiat Chrysler FCHA.MI made a “transformative merger” proposal to French peer Renault.
Auto stocks rose globally after Fiat Chrysler confirmed it had made proposed a merger with Renault, a deal that would create the world’s third-biggest carmaker. The rally spilled into Asia with Mitsubishi Motors Corp 7211.T in Japan adding 5.95% and Nissan Motor Co 7201.T gaining 2.31%.
A planned increase in the weighting of Chinese A-shares in MSCI indexes after the market closes on Tuesday also boosted shares.
The dollar index .DXY, which tracks the U.S. currency against a basket of six other major currencies, rose 0.17% higher at 97.782.
In commodity markets, oil prices extended gains after rising more than 1% on Monday. Prices rose on tensions in the Middle East and continuing Russian supply disruptions after a contamination problem discovered last month.
Brent crude was 0.31% higher at $70.33 per barrel, having earlier dipped below the $70 mark. U.S. West Texas Intermediate crude gained 1.16% to $59.31 per barrel.
Reporting by Virginia Furness; additional reporting by Silvia Aloisi in Rome, editing by Ed Osmond