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Europe close: Stocks forfeit early gains, some analysts hopeful

By Alexander Bueso

Date: Monday 22 Oct 2018

Europe close: Stocks forfeit early gains, some analysts hopeful

(Sharecast News) - Stocks on the Continent finished with across-the-board losses on Monday, as Italian bonds fully reversed an early strong rally and investors continued to debate the likely direction of the next move for stocks on Wall Street.
"European markets are still being left out of sustained rallies, and it is no surprise to see Italy and Spain near the bottom of the table for the day, indeed for the month. Faced with rumblings in the southern Eurozone, investors are staying away, keeping a nervous eye on the spat between Brussels and Rome," said Chris Beauchamp at IG.

"[...] There are plenty of reasons to be worried at present, which continue to trump the cheaper valuations on offer in US markets. But in time the usual seasonal factors will prevail, and it is to the likes of the Nasdaq and US small caps that traders will turn to when a momentum-driven recovery becomes apparent."

Shares had run higher out of the gate, with sentiment boosted by ratings agency Moody's decision last Friday not to keep its outlook on Italy's sovereign debt at 'negative', pushing back the risk that a downgrade into 'junk' might be lurking just around the corner.

Also helping investor sentiment a tad, on Monday morning Italian Premier, Giuseppe Conte, said Rome was open to dialogue with Brussels, with the latter holding out the possibility that Italy might be willing to revise down its public deficit target for 2019 down from 2.4%-worth of GDP.

Yet by the end of trading, the benchmark Stoxx 600 was down by 0.42% or 1.50 points at 359.74, alongside a retreat of 0.60% or 113.94 points to 18,966.22 for Milan's FTSE Mibtel.

Germany's Dax meanwhile was off by 0.26% or 29.49 points at 11,524.34.

Analysts at Morgan Stanley appeared to be of a broadly similar view to Beauchamp, telling clients that recent price moves across asset classes remained consistent will a 'bull market correction' rather than the start of a 'bear market'

But on a more cautious note, they added: "we have less confidence than in February that the latest price action is not the start of a full-blown bear market."

Spain's Ibex 35 underperformed, skidding 0.96% or 85.60 points to 8,806.50, weighed down by another wave of selling in the country's lenders after the Supreme Court said it would announce its final decision on whether they - as opposed to mortgage owners - were liable for the stamp duty on mortgages.

Banco Sabadell fared worst among the country's lenders, with its shares slipping by 5.36%.

Meanwhile, the yield on the benchmark 10-year Italian Treasury note was up by one basis points at 3.49%, having hit an intra-day low, earlier during the session, at 3.30%. On Friday, yields on 10-year BTPs fell 20 basis points.

To take note of, over the weekend some well-regarded analysts expressed surprise over the sizeable rally in Italian bonds during the previous session, given the relative dearth of news.

On Friday, debt rating agency Moody's cut its rating on Italy's long-term debt by one notch to Baa3, but raised the outlook for the same from 'negative' to 'stable'.

Moody's said that Rome's new deficit targets meant there were risks that its debt pile might rise further still and drew attention to the freeze on plans for structural reforms.

Nevertheless, the country retained "important credit strengths", Moody's said, including households' "high wealth levels, an important buffer against future shocks and also a potentially substantial source of funding for the government."

In corporate news, shares in Royal Philips tumbled after the health technology firm posted a 7% rise in third quarter operating profits to €568m, falling short of analysts' estimates.

Going the other way, stock in carmaker Fiat managed to hold ontomost of their gains after unveiling a deal to sell autoparts manufacturer, Magneti Marelli, to KKR&Co's Calsonic Kansei for €6.2bn.

Salvatore Ferragamo shares were also wanted after the widow of the luxury shoemaker's founder, Wanda Ferragamo, passed away at the weekend, prompting speculation of a possible take-over.

Shares in Spanish grocer Dia on the other hand continued to reel after the company restated and lowered its previously published profit figures for 2017.

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