European stocks catch Italian flu

Italy’s decision to approve a lax budget that breaches EU rules has send the local stock market into a downward spiral that is also weighing on other European indices. The FTSE is grappling with its own set of concerns sparked by an unexpected loss from insurer RHA Insurance which dragged down London banking and insurance stocks.

Italy heads for collision with the EU

Milan shares started the day on a weak note and continued to decline, particularly banking stocks, after Italy’s coalition government agreed a budget for next year that will keep the country’s deficit at 2.4% of its GDP and above the 2% level required by the EU. The decision has set Italy on a collision course with the EU: the region’s economy commissioner has already warned the country that it was in breach of EU rules. In theory the EU has the power to reject the country’s budget but Italian politicians seem unperturbed by the possibility. The markets have already voted with their feet with the FTSE MIB falling by over 3.54% towards the close of the day and yields on 10-year Italian bonds rising to 3.25%, the second weakest in the Eurozone after Greece. Italy has the heaviest debt burden among big European Union economies at 130% of its GDP and its position as the third largest economy in Europe makes this a dangerous situation for the Eurozone’s economic health.

UK banking stocks battered after surprise warning

London traders were caught off guard by an unscheduled update from insurer RHA Insurance reporting that the company’s UK underwriting business has suffered a loss of £70m in the third quarter of this financial year. The insurer took a hit over a surprising increase in weather-related claims this year and the company’s shares fell nearly 9%. Standard Life Aberdeen, Prudential, Legal & General and all of the major banks also came under pressure as investors tried to calculate how the unusually cold winter and scorching UK summer will affect their businesses.

Oil prices rise

Both Brent Crude and WTI prices pushed higher today but the day’s rally had more to do with squaring positions on the last trading day of the quarter than the actual underlying fundamentals. Though oil markets remain concerned over the effect the impending Iran sanctions will have on global supply, for the moment a potential shortage is balanced out by higher output from Russia and Saudi Arabia.