European shares slip due to worries over Italian banks

Stock markets in Europe slipped back on Monday, led by losses for embattled Italian financials, on concern about potential contagion spreading from the sector into the euro zone financial system after Italy’s reform referendum.

Meanwhile the run higher for the dollar and Wall Street is cooling. The index tracking the world’s reserve currency against six of its rivals is down slightly, but holding the 101-point mark at 101.510. The S&P 500 has slipped back 0.3 per cent, easing down from Friday’s record.

Oil is likely to loom large over the week before Wednesday’s Opec meeting in Vienna, at which the producers’ organisation will consider cutting production. Brent crude has been volatile already, tracking sentiment toward the prospects of an agreement. The international oil marker has been either side of the flatline and is up 2.2 per cent at $48.29 a barrel in mid-morning New York trade on Monday. Nymex WTI is up 2.5 per cent at $47.23.

Oil prices had been buoyed in the first half of last week by hopes that Opec members would use Wednesday’s meeting to agree to production cuts that would help address global oversupply.

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Oil prices static on uncertainty over planned production cut

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European shares steady as metal prices rise

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However, with negotiations in the run-up to the meeting going down to the wire, nervousness has returned to the market. In Friday’s half-session following the US Thanksgiving holiday, oil prices fell more than 3 per cent.

Pressure

Euro zone financial stocks – especially in Italy – are back in the spotlight in the run-up to next weekend’s Italian constitutional referendum. Up to eight of the country’s banks could face pressure if prime minister Matteo Renzi steps down from office should he lose the vote.

Mr Renzi, who has said he will resign under those circumstances, has advocated a market solution to address the problems of Italy’s banking system. The political situation is being closely followed by financiers and policymakers across Europe and beyond, who worry about the implications of more wide-ranging problems in the Italian financial sector for sentiment toward wider euro zone banks.

In afternoon trade on Monday, Unicredit shares fell 4.1 per cent in Milan, one of the biggest single falls on top-tier stock indices in the region. Intesa Sanpaolo fell 3.1 per cent. Generali, the insurer, fell 2.5 per cent.

Meanwhile the euro is up 0.2 per cent against the dollar at $1.0603, while the pound is 0.4 per cent weaker at $1.2421. The yen is also rebounding, strengthening by 0.7 per cent, with Y112.27 required for a dollar.

Equities

European equities slipped back in opening trade on Monday, with London’s FTSE 100 down 0.6 per cent and the Xetra Dax in Frankfurt 0.9 per cent weaker. The pan-regional Euro Stoxx 600 was down 0.7 per cent.

The Euro Stoxx sub-index tracking banks was down 1.8 per cent, while the FTSE MIB in Milan was down 1.5 per cent.

Wall Street’s four main equities gauges staged a “grand slam” and closed at record highs in a half-day of trading on Friday. However, the positive mood did not spill over into Asia on Monday.

The stronger yen has helped push Japanese stocks into negative territory, taking it down 0.1 per cent by the close.

Hong Kong’s Hang Seng rose 0.5 per cent, as did China’s Shanghai Composite. After market close on Friday, regulators announced a trading link between Hong Kong and China’s tech-focused Shenzhen Composite would go live on December 5th. The index was up 0.1 per cent on Monday.

Yields

The yields on benchmark government debt fell across the board as investors bought back into sovereign bonds after the recent sell-off eased. The yield on German 10-year Bunds, which falls when prices rise, was down 3 basis points at 0.21 per cent. The US 10-year Treasury yield was down 4 basis points at 2.32 per cent.

Japan's government bond market snapped back on Monday alongside the stronger yen. The yield on 10-year JGBs was down 2.4 basis points at 0.008 per cent, the biggest move since September 20th and the lowest level for the yield since the middle of this month. – Copyright The Financial Times Limited 2016