European stocks are under pressure led lower by Italian bank shares

European stocks are under pressure led lower by Italian bank shares
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(February 6, 2017) European stocks markets are mostly moving lower with the Euro Stoxx 50 in the red. The Italian MIB is underperforming and stuck in negative territory as capital raising plans from UniCreditSpA send Italian bank stocks lower. The DAX is posting marginal losses, as car markets are under pressure and a very strong Q4 orders number was counterbalanced by weak machinery orders data and a drop in the Eurozone Sentix Investor confidence reading. The FTSE 100 is up 0.20% amid an empty local data calendar and as markets prepare for this week’s earnings reports and assess the latest U.S. policy moves.

U.S. stock futures are nearly unchanged after a broadly positive session in Asia, where banks rallied fueled by reports that the Trump administration plans to roll back financial regulations. Chinese insurers jumped in Hong Kong, with speculation that Chinese pension funds may be about to enter the stock markets given as one possible explanation for the sudden jump. Oil prices have fallen back from earlier highs above USD 54 per barrel and WTI is unchanged on the day at USD 53.98.

Eurozone spreads continue to widen sharply with the French 10-year particularly in focus as the presidential election campaign looks increasingly unpredictable. The French 10-year is up 2.8 basis points this morning at 1.10% and has risen more than 64 basis points over the past three months, compared to a just 26 basis points rise in the German 10-year, a pick up of around 56 basis points in the Italian 10-year yield. Political uncertainty inside and outside of the Eurozone and the EU as well as growing pressure on Draghi to rethink its QE schedule are to blame for the marked widening of spreads in recent months, which will only add to the ECB’s problems as inflation moves higher and criticism of the weak EUR flare up again.

Eurozone Q1 IFO Climate Index Surged

Eurozone Q1 Ifo climate jumps to highest reading since 2015. The Ifo’s first quarter economic climate index for the Eurozone rose to 17.2, from 8.2 in the previous quarter, as the expectations number jumped to 26.9 from 14.3 and the current conditions indicator improved to 8.0 from 2.3. The numbers are somewhat in contrast to the Sentix Investor confidence reading this morning, which showed a drop in the expectations reading, highlighting the rift between the real economy and investor and market sentiment, which is tainted by rising political risk factors.

Eurozone Sentix investor sentiment drops to 17.4 in February from 18.4 in the previous month. The reading for the current situation still improved, to a strong 20.5 from 16.5 in January, but the forward-looking expectations index slumped to 14.3 from 20.0 last month. Rising political risk factors inside and outside of the Eurozone and doubts about the stability of the European unions seem to be weighing on confidence and are also driving out Eurozone spreads.

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