European shares duck and weave on Italy

Summary

Nimbleness is a good quality for European stock market investors to have on Friday.

Brace for ‘unprecedented’ rejection

A fleeting sweep higher by European and U.S. futures ahead of the open this side of the Atlantic was given short shrift as Italian bond sellers returned. Like earlier in the week, the European Commission tries to wrest back headlines from Rome’s coalition. It appears members are attempting to avoid any surprises whatsoever come Monday, when the official response to the Budget is due. Markets are duly pricing an unprecedented official rejection of an “unprecedented” breach of fiscal rules. BTP spreads over Germany strike new 5½-year wides and yields expand back to May levels against Spanish and Portuguese counterparts too.

The main reason the euro does little that’s eye-catching—down all of two pips toward mid-session—is an almost 1.6% fall in two days on estimates that worsening Italian credit and potential economic consequences could trigger cautious ECB signals next week. Still, the effect of fracturing the ‘doom loop’ to an extent (via its funding currency) helps account for an uncommitted feel to the retreat from risky assets.

U.S. shares, FTSE go the Chinese way

At last look, unlike Europe, U.S. futures had yet to complete a whipsaw. Dow, Nasdaq and S&P mini contracts inch into increasingly comfortable gains echoing rebounds in Shanghai and Shenzhen. There was plenty to worry about in China’s data dump but immediate official reassurances that the weakest growth in 9 years would be met with concerted market, monetary, and insurance industry steps did the trick for the day. The FTSE is among the few large southern hemisphere indices whose heavyweights are attracting buying interest, including almost all miners that count China as large customer.

Verdicts on Italy next week

A safety bid set into Treasurys on Thursday night that dragged the 10-year yield off 8-day highs stretching towards 3.22% is another mild prop for shares. The weakening of that buying is now facing yield resistance at the same 3.187% level that resisted yield rallies throughout this and last week. Yet the dollar found its feet quickly; a rising USD/JPY now joins in with other hints of a return to risk. Under current circumstances, GBP/USD’s rebound on the longer transition “idea” could be classed as one too. U.S. investors will shortly help decide the short-term outcome of push-and-pull sentiment. The European Commission, the European Central Bank, and rating agencies, from whom announcements are due next week, in that order, will be critical for the slightly longer term. Their commentary is as good as published already according to Friday’s Italian market metrics. Severe deterioration relative to current conditions looks unlikely without fresh catalysts.