Easing political worries in Europe lift shares, pound jumps

[September 04, 2019]  By Danilo Masoni

MILAN (Reuters) - Britain's pound bounced from three-year lows on Wednesday after a parliamentary vote raised the prospect of another delay to Brexit while an easing of worries about political risk in Italy also helped push world stocks higher.

Global stocks rose 0.4% by 0821 GMT, as Europe rallied 1.1% and after a positive session in Asia following a report showing that growth in China's service sector accelerated despite broader economic headwinds.

Reports that Hong Kong will announce the withdrawal of an extradition bill that triggered months of unrest, throwing the Chinese-ruled city into its worst crisis in decades, also caused relief.

British lawmakers defeated Boris Johnson on Tuesday in a bid to prevent him taking Britain out of the European Union without a divorce agreement, prompting the prime minister to announce that he would immediately push for a snap election.

On Wednesday they will seek to pass a law forcing Johnson to ask the European Union to delay Brexit until Jan. 31 unless he has an exit deal approved by parliament beforehand.

UK developments lifted the pound 0.56% to $1.2155 after sliding on Tuesday to its lowest since October 2016.

"The road from here is likely to be very tricky, especially if PM Boris Johnson takes the path toward a snap election," said Hussein Sayed, Chief Market Strategist at FXTM.

"However, Mr. Johnson needs at least two-thirds of MPs to vote in favor of one, and so far, the Labor party doesn't seem willing to take this risk. If the opposition party manages to get Brexit delayed in the outcome of no deal, we can see sterling recover further from here," he added.

Elsewhere in currency markets, the dollar index against a basket of six major currencies stood at 98.803 after rising overnight to 99.370, its highest level since May 2017.

The index lost ground on Tuesday after data showed the U.S. manufacturing sector contracted in August for the first time since 2016, a reading that in turn has cemented expectations of further policy easing by the Federal Reserve.

The euro rose to $1.0987 after sliding to a 28-month low of $1.0926 overnight as investors braced for a potential interest rate cut by the European Central Bank next week.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, August 30, 2019. REUTERS/Staff

ITALIAN YIELDS AT NEW LOWS

In Italy, members of the anti-establishment 5-Star Movement backed a proposed coalition with the center-left Democratic Party on Tuesday, opening the way for a new government to take office in the coming days.

As a result 10-year Italian government bond yields hit 0.803%, a new record low, while Italian banks, another proxy for political risk in the country, rallied 2%.

"The next hurdle for the government will be the confidence vote in Parliament. But at the moment risks appear limited," said Giuseppe Sersale, fund manager at Anthilia Capital.

Political concerns and expectations of further easing measures by central banks have been squeezing bond yields globally but the return of risk appetite on Wednesday on the back of political developments in Europe and upbeat economic data from China triggered a rebound.

Yields on the safe-haven 10-year German Bund rose to 0.676% after falling to a fresh record low on Tuesday, while the yield on the 10-year U.S. Treasury rose to 1.489% after hitting its lowest since July 2016 in the previous session in light of the weak ISM U.S. factories reading.

In commodities, oil prices recovered some ground, helped by the positive China data and having touched their lowest in close to a month during the previous session on fears over the weakening global economy.

Brent crude was up 22 cents at $58.48 a barrel, while U.S. West Texas Intermediate futures gained 31 cents at $54.25 at barrel.

London copper prices rebounded from a two-year low and gold prices steadied.

(Reporting by Danilo Masoni in MILAN, additional reporting by Shinichi Saoshiro in TOKYO; Editing by Catherine Evans)

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