FTSE100 opens lower after bank holiday, as Italian chaos weighs heavy
The FTSE 100 fell nearly 0.8 per cent in early trading as investors reacted to a turbulent weekend in Italy and Spain following yesterday's British bank holiday.
The blue chip index was down 60.84 points, or 0.79 per cent, to 7,669.44 in early trading while the midcap FTSE 250 index also tumbled, down 0.9 per cent to 20,980.94.
However the biggest loser on the FTSE100 had nothing to do with Italy: Dixons Carphone's share price was down 19 per cent on the back of a profits warning.
But banks bore the brunt of speculation that another election in Italy could turn into a referendum on the euro. RBS and Barclays were the biggest fallers – down 3.3 per cent at 280p and 3.2 per cent at 199.46p respectively.
On the continent the pattern was similar, with the Dax and the Cac both down 0.4 per cent.
Meanwhile yields on 10-year Italian bonds rose to 2.842 on Tuesday, taking the gap with German equivalents to the widest since 2013.
Spreads between Italian 10-year government bonds (BTPs) and German Bunds of the same maturity rose to 2.53 percentage points on Tuesday, up from 2.34 the previous day and 1.22 at the end of April.
And UK 10-year government bond yields briefly dropped to their lowest point since September as London traders returned from the bank holiday. The yield on the benchmark 10-year guilt fell as low as 1.108 per cent, after opening at 1.438 per cent. At the time of writing it had rallied to just over 1.24 per cent in volatile trading.
Investors have been rattled by political instability in Italy, after attempts by the two main populist parties to form a government collapsed over the weekend, pushing the country towards crisis.
Spain was also making traders nervous, as its Prime Minister Mariano Rajoy faces a vote of no confidence on Friday, in the wake of corruption scandals and ongoing Catalonian turbulence.
The Spanish parliament will debate whether Rajoy should be replaced by opposition leader Pedro Sanchez on Thursday, with a vote to take place the following day.
While there are clearly concerns about Italy leaving the euro, analysts did not seem to think it was likely.
Naeem Aslam of Think Markets said: "The political situation over in Italy that we have today is an immensely messy situation and the fear of another Brexit is shaking the investor's confidence. Surely, no one wants to see the third biggest economy of the Eurozone becoming another Greece or adopt the stance which the U.K. choose."
Marshall Gittler, chief strategist and head of education at ACLS Global, said: "Personally, I don’t think Italy will leave the euro – in fact, I think there’s almost no chance of that happening. If Greece didn’t leave, then Italy won’t, either. According to the European Commission’s Eurobarometer survey, support for the Euro in Italy has never been below 58 per cent, and most recently was 59 per cent, with only 31 per cent opposed… Nonetheless, currencies have to price in risk, and Italian politics is the big risk nowadays. I think EUR is likely to remain weak until things have settled down there."
Core spreads analyst David Buik added: "Were Italy to contemplate leaving the EU, many believe its banks would be unable to cope with the strain.
"It is fair to say that all the ‘die-hard’ Europhiles, who believe that Brussels is their Valhalla on the way to Heaven, think these issues are a temporary blip and that investors will eventually be sucked in to buying the dip. Many are not that convinced about Italy but understand the rationale behind Spain."