European stocks broke a four-day winning run on Thursday, with Italian shares dragging the benchmark index lower as euroskeptic parties moved closer to form a coalition government.
Several European markets were closed for Ascension Day, including Switzerland, Austria, the Nordics and Greece.
In the U.K., stocks moved higher as the pound dropped after the Bank of England kept rates on hold and lowered its inflation and economic growth forecasts at “Super Thursday.”
What are markets doing?
Italian stocks saw the biggest losses, with the FTSE MIB index
ending down 1% at 24,033.90. The yield on 10-year Italian government bonds
rose 6 basis points to 1.934%, according to Tradeweb. Higher yields can signal investors are becoming more nervous about the country’s finances and therefore demand a higher risk premium to buy the bonds.
Germany’s DAX 30 index
picked up 0.6% to 13,022.87, while France’s CAC 40 index
added 0.2% to 5,545.95. The U.K.’s FTSE 100 index
climbed 0.5% at 7,700.97, ending at its highest level since Jan. 23.
What is driving markets?
Italian stocks underperformed the rest of Europe as leaders of Italy’s far-right League party and populist 5 Star Movement moved closer to forming a new government, potentially ending more than two months of political gridlock. Such a coalition would create one of Europe’s biggest euroskeptic alliances, feared to muddle Italy’s relationship with the European Union and throw the Italian economy into disarray.
In the U.K., the pound fell and stocks rose after the Bank of England kept rates on hold and offered a somewhat confusing forecast for the future of monetary policy. Gov. Mark Carney said the bank still expects to raise its key interest rate in coming years, but that it depends on the how the economy evolves. Carney brushed off concerns about the slowdown in growth in the first quarter, saying it was likely temporary due to harsh weather and probably not as severe as initially estimated.
What are strategists saying?
“Sterling markets have interpreted today’s [BOE] decision and inflation report as moderately dovish with the pound initially falling. In our view, this reaction seems somewhat overdone,” said Dean Turner, U.K. economist at UBS Wealth Management, in a note.
“Undoubtedly, the tone from the bank has shifted from a hawkish stance in February to a more balanced one today, but we don’t see this as outright dovish. We believe the pound should recover some of its losses in the months ahead as the data confirms that the first quarter slowdown was nothing more than a temporary glitch,” he said.
Royal Bank of Scotland Group PLC
jumped 3.8% after news it will pay $4.9 billion in a settlement with the U.S. Department of Justice over its role in the mis-selling of toxic mortgage-backed securities between 2005 and 2007. The settlement was smaller than feared and is seen as clearing the way for the U.K. government to sell its 71% stake it still holds in the lender.
Source : MTV