Market buzz: Italy eyes July/August elections, Dixons profits slump 'fixable'

1700:Close Some investors took profits - albeit moderately - in stocks, even as others headed for the relative safety of Gilts in the wake of the latest political news out of Italy.

Indeed, traders pared their bets for policy tightening by the Bank of England as the odds of fresh elections in the euro area's third-largest economy climbed rapidly higher.

The pound was also on the back foot, with a report that the EU was mulling issuing a stronger worder warning of the real (and possibly growing) risk of Britain crashing out of the bloc without a transition period.

Possibly weighing on sentiment as well were reports that, for now at least, the White House was continuing to move ahead with its plans for tariffs on Chinese goods.

FTSE 100 down 97.64 points at 7,632.64.

1551: According to broadcaster La7 TV, Italy's political parties are mulling elections for 29 July or 5 August.

1540: Ocado has been downgraded by Morgan Stanley to 'equal-weight' from 'overweight' with an 870p target. Analysts taking the view that after the big deal with US grocer Kroger there are only nine more developed countries where Ocado’s delivery solution might make sense, with a lack of contract news flow to drive the stock as the recent Swedish deal barely moved the share price.

1448: US 10-year note yield down five basis points at 2.88%. Euro area periphery jitters are a factor, naturally.

However, last Friday one analyst on Bloomberg TV was pointing out record short speculative positions in Treasuries as one reason to expect a move lower in yields.

Back in the UK, the pound is failing to capitalise on losses in the euro. On that note, the 200-week moving average for euro/dollar is now at 1.1430 (the pair is currently at 1.15803).

“The Italian house is on fire, and it will spread if someone doesn’t pull out the fire extinguisher soon,” strategists at Swedbank are saying in a dramatic note. “Italy may become severely injured, but the EMU may die.”

1441: Wall Street opened lower as the global selloff spreads. The Dow Jones dropped 0.8% to below 24,550, while the S&P 500 and the Nasdaq both stumbled 0.5% before coming back.

1358: As an aside, Dax and Euro Stoxx 50 futures are now both at their 200-day moving averages (200 week MA comes in well below for the latter).

Leaving Italy aside for a moment, in Spain, daily El Pais is criticising Socialist leader Pedro Sanchez for pursuing politics in a 'the end justifies the means' fashion. In its opinion, Sanchez should not be insisting on being named President himself in exchange for other parties' support to oust Rajoy.

Meanwhile, a source close to PM Mariano Rajoy tells another daily, ABC: "It is a situation of great concern. The no confidence vote might succeed, we know it and are focused on fighting to avoid it. "

1244: Italian president Sergio Mattarella has called prime-minister designate Carlo Cottarelli to the Quirinale to present his list of ministers and launch his stopgap government, ahead of a expected-to-be-doomed confidence vote in parliament in the coming days.

Cottarelli said on Monday that his government will rule until the end of the year if it wins parliament's confidence, with its key task being the approval of the 2019 budget law.

He said fresh elections will take place after August if the government does not win a confidence vote. Analysts have also suggested September or October for an election date.

1213: The London midday market report sees stocks down further as the UK market plays catch-up with Europe, with the FTSE 100 down 1.3% to 7,626.82.

Joshua Mahony, market analyst at IG, reckons any future election drive further gains for the Five-star and League parties, thus heightening the chance of a more radical upheaval, which means it comes as no surprise that we are seeing Italian markets suffer heavily, with the FTSE MIB hitting a 10-month low, and the two-year bond yield topping 2% for the first time since 2013.

1211: RBS has overcome its troubled legacy and the market undervalues its £5bn of excess capital, Berenberg analysts reckon as they increased their medium-term target for the share price.

1158: Any chance that Pret A Manger could be turned into Bereit zu Essen? Probably not, but owner Bridgepoint Capital has agreed to sell the fast food chain to German investor JAB Holdings, owner of Krispy Kreme donuts, Douwe Egberts coffee and Keurig Green Mountain, in a £1.5bn deal.

1149: There's a positive reaction to the new Tate & Lyle CEO Nick Hampton’s strategy from Berenberg and the market, as the shares are up nearly 10% since the full-year results last Thursday.

The numbers came in 2% ahead of consensus EPS and guidance for the new financial year implied mid-single digit upgrades. But analysts at the German bank said the more important sentiment driver was Hampton's strategic outlook, including Tate’s go-to-market approach, cost efficiencies and M&A.

"While signs are there that recent investments and restructuring is bearing fruit, it remains early days and the strategy lacks detail on the magnitude of mid-term volume growth, margin expansion and EPS growth. The outcome of NAFTA discussions remain an uncertainty."

A valuation of 13 times forward EPS is appealing, but the analysts fell "for a high beta stock we believe it is too early to be certain that the tide has turned" but the target price was lifted to 730p from 655p.

1146: Ahead of the US open after their own long weekend, TD Securities said the Conference Board consumer confidence will be the main data focus today.

Scanning the wider markets, analysts note that core bond markets have rallied strongly with 10y Treasury yields down 7bps and 10y Bunds down 5bps. Eurozone peripherals all weaker with Italy's 10y BTPs up 41bps amid the political deadlock.

Tokyo's Nikkei closed down 0.55% and Shanghai down 0.47%, while Germany's Dax is down 1.5%.

1103: April’s euro-zone money and lending data provide further evidence that economic growth has peaked, says Capital Economics. "While households’ and firms’ demand for loans is still fairly strong, the deteriorating situation in Italy is a key risk to the outlook."

Annual growth in broad money, 'M3', picked up from 3.7% in March to 3.9% in April, while narrow money, or 'M1', slowed again to 7.0% from 7.5%, which "on past form suggests that annual household spending growth will weaken this year".

European lending growth edged back up in April, remaining healthy, with annual growth in private sector lending rising to 3.1% from 3.0%, with a marginal increase in lending to non-financial firms offsetting a decrease in lending to households.

Lending growth remained strongest in the core economies, with business lending up 5.8% in Germany and 5.5% in France, but down 2.1% in Spain and 2.2% in Italy, though Italy’s data was made to look worse by banks offloading problem loans.

1047: The biggest faller this morning is RBS, with reports that the government could be set to reduce its stake in the bank as early as next week seeing some investors heading for the exit. The sale could target a reduction by around 10% of the 70% stake, which given current market prices would deliver proceeds in excess of £3bn for the state.

1002: Italian bond yields have risen sharply and spreads are widening with Bunds. The Italian 2-year yield has leapt above 2% and some, approaching the 2.4% level last seen in 2012's sovereign debt crisis. Spreads with 10-year Bunds are now at the widest since 2013 and the market is moving fast.

"Eurozone breakup risks are higher, although they remain small overall," says Neil Wilson at Markets.com, "unless you take the long term view that every empire falls at some point and the EU is no different.

"If snap elections produce a clearer mandate for the populists and they succeed again in forming a government, Italy heads for a collision for the EU shortly after. EU and Eurozone rules are far too inflexible to handle radical domestic policy shifts of this kind and based on experience of Brexit negotiations, Italy could not hope for the EU rule makers to back down. A disorderly Italexit would be nasty enough but as a founding member of the club it would be a moment that the bloc would not recover from.

"The chief risk is that the developments over the last week lead to a snap election that becomes in effect a referendum on membership of the euro. The two main populist parties may well step up their anti-euro, and anti-EU positions.

Further to Italy, political risk in Spain is adding to the pressure on the euro, which is clinging to support above 1.15. A move to below this level could see a sharp retreat back to 1.12.

0919: Tesco's target price has been lifted by Deutsche Bank's analysts to 270p from 240p after "the theme of the week, indeed the year, is capacity withdrawal from a challenging UK retail backdrop".

On this morning's news from Smiths over reports in both the Sunday FT and Sky News that it is in early stage discussions with $5.6bn US-listed group ICU Medical about a potential merger of their respective medical device businesses. DB says: "Talks are at an early stage and no deal is certain but the articles suggest that the structure of the deal could involve Smiths Medical being injected into ICU Medical with Smiths Group retaining a stake in the new enlarged entity."

0906: Reports say ITV is mulling entering into a £1bn joint venture with the BBC to buy half of UKTV.

The move aims to fortify British television against the increasing power of US tech giants, the Telegraph says, redrawing battle lines and accelerating attempts to create a homegrown competitor to Netflix.

In the Guardian, there's news that the planned North Korea-USA summit is going ahead, with reports from a Japanese broadcaster that a top aide to Kim Jong-un arrived in Singapore overnight.

0858: Tuesday's London opening market report sees the FTSE 100 has started lower, down 0.9% to 7,664.66 a moment ago, with sentiment wobbly ahead of likely fresh elections in Italy and as Spanish premier Mariano Rajoy faces a vote of confidence in his leadership at the end of week.

The euro's trading at a six-and-a-half month low against the dollar, down 0.4% at 1.1576.

In Spain, the opposition parties have called for PM Mariano Rajoy to face a vote of confidence in his leadership at the end of week, following a court ruling on a corruption case involving members of his ruling Popular party.

"The confidence vote and the political turmoil that this could create in Spain adds fuel to the political fire burning in Italy at present, the prospect of which in combination with concerns as regards the stability of Spanish politics will continue to apply pressure to peripheral debt markets and likely support the ongoing bid for core govvies already in motion," Rabobank analysts say.

0849: Could Italy trigger a new euro crisis, wonder economists at Berenberg, as Italy’s radicals strive to frame likely new elections in autumn 2018 or early 2019 as a de facto referendum on the rules of the EU and the euro.

"Probably not," writes Holger Schmieding, but a radical government in Rome - or the fear of one ahead of new elections - "could plunge Italy into a deep crisis with significant financial and economic spillovers to its neighbours. Although countries with close links to Italy would be severely affected for a while, it would still be an Italian rather than a 'euro' crisis."

He said it was an "unlikely" worst-case scenario that Italy may go bankrupt, leave the euro and face a prolonged period of chaos. "Beyond losing big Italy, the euro itself would not be at risk, though. Just like Brexit strengthened pro-EU sentiment across the EU-27, a hypothetical messy Italexit would likely make other countries more rather than less eager to stay in the euro."

0846: A summary of the Italian situation: the prospective Prime Minister of a coalition government between Lega and the Five Star Movement has handed back the mandate to form a government to the president, Sergio Mattarella, who is today meeting with Carlo Cottarelli, former head of the Fiscal Affairs Department at the IMF, to grant him a mandate to form a caretaker government.

"We expect that a caretaker government would not win a confidence vote in Parliament and that new elections could take place as early as October," says Goldman Sachs.

"We believe political uncertainty will remain elevated. On the one hand, a government that could have been perceived by financial markets as calling into question the participation of Italy in the European Union and its membership in the Euro area has not been formed. On the other hand, potential new elections, most likely in October, would unlikely be seen as a positive development for the Italian economy either, in our view."

Latest polls show since March's general election, Lega has continued to gain support and the Five Star Movement continues to poll at around 32%, together polling at around 55% -- a large distance ahead of other parties. It has been suggested Lega may decide to form an electoral alliance with Sergio Berlusconi’s Forza Italia or with Five Star Movement, or could try to run as a single party.

0832: In other company news, Smiths Group confirms it is in very early stage talks about its medical arm, Vedanta has been ordered to permanently close its Tuticorin copper smelter in India after anti-expansion protestors were killed by police earlier in May, while Standard Life Aberdeen plans to return £1.75bn to shareholders.

0826: Dixons Carphone lost more than a quarter of its value in early trading, but has come back a bit.

New CEO Alex Baldock issued a profit warning as his first trading update, saying PBT will fall at least 20% in the coming year, when it had been expected to be flat. "I've found exceptional strengths, and though there's plenty to fix, it's all fixable," he said.

Market analyst Neil Wilson at Markets.com said it could only be described as a "nasty little profits warning" but was confident that while Dixons "looks a bit flabby and the market is just as soft", there should be some easy wins in terms of making it leaner, especially around store closures.