* European shares fall
* Italy stocks hit lowest level since July 2017
* Dixons plummets on profit warning
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DARK POOL BLOCK TRADING FELL BACK LAST WEEK (1534 GMT)
Turning away from Italy for just a second, some interesting data today from Fidessa shows
that block trading - as a proportion of total trades done in dark pools - fell back slightly
Part of the aim of MiFID II, implemented nearly five months ago, was to force investors to
use dark pools mainly for larger blocks of shares, keeping smaller trades in transparent venues.
From more than 50 percent of dark pool trading, block trades fell back to 47.1 percent
-suggesting there may be an upper limit to the proportion of trades investors can bundle into
Also interestingly, the greatest value traded in a single stock was in Italian bank Intesa
Sanpaolo last week. It saw a total of 124 million euros traded.
ITALIAN EXPORTERS PROVIDE SILVER LINING (1440 GMT)
and sold the index en masse today.
But what about those, like Italy-focused fund managers and specialised investors, who can't
exit Italy entirely? They're likely part of the flows pushing up prices of international
Italy-listed stocks as they rush into names that offer more exposure to global growth, and less
to domestic turmoil and the Italian bond sell-off.
FTSE MIB in or near positive territory.
Philip Smeaton, chief investment officer at Sanlam UK, says global companies like Luxottica
have been relatively insulated from the broader sell-off, while Italian banks, which are highly
dependent on domestic growth and BTP yields, have been bruised.
"The market has taken the view that now what's on the agenda is Italy leaving the EU. And
that does seem quite drastic," he says.
investors' views as the market moderates its earlier falls somewhat.
"The other banks falling in sympathy makes a lot of sense but I would say, if there was a
bank that I liked that was falling, it may be a good opportunity to top up that position," says
IS THE SELL-OFF OVERDONE? (1328 GMT)
Italian assets (both bonds and stocks) have come off lows and some less pessimistic views
have started to circulate. Here's a couple:
* UBS Global Wealth Management's Chief Investment Office: "The sell-off in Italian assets
overdone. The spike in two-year yields is dislocated from actual default risk and plausibly can
only be explained by fears of an Italian exit from the euro. Yet on TV Monday night the leaders
of both M5S and Lega confirmed they want the country to stay in the euro. An exit was not part
of their respective or joint policy programs"
* Berenberg economist Holger Schmieding: "It will probably take some clarity on the outlook
Italy or, more importantly, a realisation of investors that we are facing an Italian but not a
general “euro” crisis to correct those market moves for non-Italian assets which currently seem
overdone. Of course, the way crises go, markets may well overshoot further first"
Italy's FTSE MIB index is still down sharply, but it has risen as much as 2.1 percent from
its lowest point today. What's sure is that today is shaping up as another roller-coaster
session and further volatility ahead cannot be ruled out.
INVESTORS GO TO ITALY... IN SHORTS (1235 GMT)
As newsflow from the would-be anti-establishment coalition has amplified over the past few
weeks, investors have ramped up their short positions in the FTSE MIB index, while short
interest has decreased for the Eurostoxx 50, JP Morgan analysts say.
The proportion of shares on loan for the Italian index has risen sharply over the past
"Not only does this suggest that leveraged equity investors have turned very negative on
Italian equities in recent weeks, but that they also see Italy more as an idiosyncratic story
and (are) thus reluctant to increase their short interest on European equities," they argue.
Retail investors have also been expressing their alarm about the Italian situation, by
pulling money from Italy ETFs.
percent of AUM, JPM notes. "This suggests retail investors have amplified the recent correction
in Italian equities."
A short FTSE MIB ETF by Lyxor, which offers double inverse exposure to the Italian index
, is surging today, having hit a record low just three weeks ago when Italian markets
were rallying. The sister product, offering investors double the FTSE MIB, is,
The sharp rise in short interest in the market, with no clear news catalyst ahead, means we
could be in for a sizeable reversal soon if shorts suddenly unwind, JPM reckons. "The absence of
any negative news creates the risk of a sharp near-term price reversal."
In a nutshell, "it's a market that is totally in panic", said Giuseppe Sersale, a fund
manager at Anthilia Capital Partners, who notes the danger posed by the surge in short term
yields and "a total lack of confidence in the outlook for Italian public finances".
The Milan bourse is down over 3 percent, close to its biggest fall since Brexit but the pain
is well spread across Europe and asset classes, with some investors reminiscing about the
sovereign crisis of 2012.
Italian bonds are suffering their worst day in more than 25 years with short-term Italian
bond yields set for their biggest one-day jump since 1992.
Rating agency Moody's said Italy is likely to be downgraded if the next government pursues
"insufficient" fiscal policies and the number of investors expecting the euro zone to lose at
least one member state in coming months has increased due to the political crisis, a survey just
The cost of insuring exposure to Italy's sovereign debt soared to a 4-1/2 year high but also
rose for euro zone periphery sovereigns like Spain and the Greek Foreign Minister said he was
worried that financial instability in Italy could cause problems for Greece too.
With a fall nearly 6 percent, the Italian banking sector is handsomely exposing the market
stress surrounding political risk in Italy but the whole Euro zone sector is under attack with a
fall close to 4 percent.
While credit default swaps for Italian are surging to their highest in more than a year,
More broadly, the stress is also visible on the euro which is close to a year low with
hedging costs spiking.
As the market stress increases, expectations of monetary normalisation from the ECB fade:
money markets now price just a 30 percent chance of a 10 basis point rate rise in June 2019.
Here's the surge in Italy's CDS:
(Julien Ponthus and Danilo Masoni)
EURO ZONE GROWTH SEEN EASING IF ITALY WOES INTENSIFY (1106 GMT)
Berenberg's chief economist Holger Schmieding says that Italy has been their top political
risk in Europe since former Prime Minister Matteo Renzi saw his support start to wane in the
middle of 2016, and an escalation of the crisis could have a knock-on impact on euro zone
"Responding to mounting political tensions in Italy and a higher oil price, we reduced our
GDP calls for the Eurozone last Friday from 0.5 percent qoq to 0.4 percent qoq for Q2 2018 and
from 0.6 percent to 0.4 percent qoq for Q3," says Schmieding.
While Schmieding writes that they do not see the Italian crisis getting out of hand in the
coming months, he says the risk that Italy could decide to leave the euro in the future is "not
As you can see from the chart below, euro zone GDP took a hit during the 2007-2008 financial
crisis, and later during the sovereign debt crisis of 2010-2012.
But, at least for now, some investors are in wait-and-see mode regarding Italian stocks.
"But when there will be more clarity from politics, Italian banks could rebound thanks to
their cheap valuation," they add.
(Kit Rees and Helen Reid)
"SOME HEDGING OF EQUITY POSITIONS COULD BE ADVISABLE" (1020 GMT)
With the current sell-off on European bourses this could be seen as a piece of advice from
"Captain Obvious" but this caveat from BNP Paribas' research and strategy team is not directly
related to Italy: it's simply based on experience.
"Since 1992, June and September have been the worst performing months, suggesting that some
hedging of equity positions could be advisable over the summer months," the French bank said in
its Q3 2018 Global Outlook.
Just looking at the last ten years for the STOXX 600, the month of June has always returned
a loss for investors, with the exception of 2012:
the French bank's analysts believe equities are still a promising asset class.
"We remain unashamedly optimistic over the prospects for global equities, in particular for
the unfashionable French CAC 40 and UK FTSE 100 country indices, given our preference for
commodity-exposed sectors and the potential for fundamental reforms to bear fruit in the form of
higher productivity and hence profitability," they write.
Among the things that could go wrong, BNP Paribas analysts note "political tensions,
intensified trade disputes, higher oil prices and a strong USD" and obviously Italy.
"Italy risk remains the one key headwind for financials – as well as for Italian stocks,"
STAY UNDERWEIGHT ITALIAN EQUITIES (0940 GMT)
Those who hadn't ridden the strong rally in Italian stocks this year are likely feeling
pretty pleased with themselves today as the selloff deepens with investors faced with a
constitutional crisis as well as a period of at least four months of further uncertainty until
"With Italy in political gridlock, we stick to our underweight stance on Italian equities
What happened to buying the dip in markets? They say we should still stay away, for the
- a lack of marginal buyers, with international investors likely to stay on the sidelines
until political upheaval calms
- more downside than upside potential after a dizzy rise in the first quarter of the year
- higher cost of debt for Italian corporates, with a credit rating downgrade from Moody's
in the next few weeks," they write. A sovereign downgrade could trigger downgrades of some
SocGen also note the FTSE MIB is already the weakest in terms of rating with 14% of the
index high-yield and 69% BBB-rated.
Ditching Italian stocks, investors should turn to Germany for safety, they argue. Pressure
on the euro is a boon for the country's exporter-heavy stock market, German bunds are rallying,
and the DAX is relatively insulated from fears around European banks - with just 2.8 percent of
the index in bank stocks.
As you can see below, the CAC 40 has stolen the top spot from Italy's FTSE MIB in
OPENING SNAPSHOT: ITALY'S SELL-OFF DEEPENS, DRAGGING EUROPE DOWN (0730 GMT)
Worries that a snap election in Italy could become a referendum on the country's membership
in the euro, further strengthening the grip of anti-establishment parties, are hitting markets
today. And understandably the sell-off on Italy's stock benchmark has deepened.
The index touched its lowest since August 2017 before paring some losses and is now still
down 1.6, while the broader European STOXX 600 benchmark is down 0.9 percent. Among single
WHAT'S ON OUR RADAR FOR THE EUROPEAN OPEN (0648 GMT)
After a rollercoaster session with Italian stocks, and particularly bank stocks, plunging on
investors’ fears a snap election could turn into a referendum on Italy’s place in Europe,
futures point to further falls across European benchmarks and the UK today, with the FTSE 100
catching up on Monday’s action after a bank holiday.
Futures have extended losses, now down 0.8 to 1.2 percent across the major benchmarks.
Turning from politics to corporate news, British retailer Dixons Carphone is likely to
suffer a sharp fall after a profit warning, with one indication for a 25 percent drop.
its copper smelters after 13 protesters demanding its shutdown were killed last week. Vedanta's
Mumbai-listed shares fell sharply on the news, and the London-listed shares are indicated to
fall 2 percent.
M&A moves are also still front and centre with UK firms at the heart of the action.
Foreign companies are also snapping up European corporates, with a Chinese firm in talks to
SLA to return up to 1.75 billion pounds to shareholders
Dixons Carphone warns on profit, to close stores
UK's Safestyle chairman resigns a month after assuming the role
Prime Opportunities Investment says IWG rejects offer approach
EUROPEAN STOCK FUTURES POINT SOUTH (0608 GMT)
It's looking like another day of losses for European stocks, with futures trading down 0.1
to 0.5 percent. The FTSE 100 is set to fall the furthest as it catches up with yesterday's
action. With Italy's FTSE MIB ending the day at its lowest level in nearly three months, it'll
be interesting to see if it declines further from here.
Italian banks lost 4.1 percent yesterday, hurt by their holdings of sovereign bonds which
sold off violently. The next few months could be volatile for them as campaigning kicks off
ahead of the election.
Here's your snapshot:
EARLY MORNING HEADLINE ROUND-UP (0553 GMT)
Quite a lot of company news on the slate today, with M&A moves still front and centre. ITV
was reportedly thinking about buying half of UKTV in a deal with the BBC, while a Chinese firm
is in talks to take over German car supplier Grammer. The FT is also reporting Pret a Manger,
the food-to-go retailer ubiquitous in London, could be snapped up by JAB for $2 billion.
Outside M&A land, there are positive results from lung cancer trials for Roche's Tecentriq
and India has permanently closed a copper smelter controlled by Vedanta Resources after 13
protesters demanding its shutdown were killed last week. Vedanta's India-listed shares
fell sharply on the news, so the London listing is likely to follow suit today.
US and EU again at odds over Airbus subsidies at WTO
ITV mulls buying half of UKTV in deal with BBC -Telegraph
Japanese, U.S., German, Australian team targets big battery projects in Asia-Pacific
JAB set to buy Pret a Manger for $2 bln - FT
Roche's Tecentriq meets targets in lung cancer trial
VW expects to beat electric car sales goal on China, Europe demand
India closes Vedanta copper smelter permanently after bloody protest
New EU bank capital rules favourable for cross-border mergers
POLITICAL RISK TO WEIGH ON EUROPE AGAIN (0530 GMT)
With the FTSE 100 and U.S. markets set to rejoin trading today, spreadbetters' indications
are pointing to a weaker start as turmoil in Italy continues to dent investors' appetite for
Overnight, Asian shares fell and the euro hovered near 6-1/2 month lows as early elections
loomed in Italy, but a revival in diplomatic talks with North Korea and a retreat in oil prices
from recent highs supported sentiment.
Here's our latest story from Italy on the snap poll, set to be held between September and
early next year, for which the once competing parties League and 5-Star are considering joining
And our analysis of the risk the election will become a referendum on the euro - a key
reason why Italian bonds, stocks and banks, slumped yesterday along with the single currency.
Spreadbetters call the DAX 28 points lower at 12,835, the CAC 40 down 12 points at 5,497,
and the FTSE 100 36 points lower at 7,695.
(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)