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Italian constitutional reform referendum rejected: Prime Minister Matteo Renzi resigns, sovereign bonds retreat
The stock market is on track for a higher open as the S&P 500 futures trade ten points above fair value.
Index futures have held up well even though the results of the Italian constitutional referendum will inject some uncertainty into the future of the eurozone. Italian citizens voted on Sunday against a referendum aimed at reducing the powers of the country's Senate. Prime Minister Matteo Renzi has already offered his resignation, and the focus will now shift to the country's troubled banks after the sector's woes were cast to the backburner until the referendum.
Italy's MIB has given up 1.3% while other European markets trade in the green. European sovereign debt has faced selling pressure with Italy's 10-yr yield rising 13 basis points to 2.03% while Germany's 10-yr yield is up six basis points at 0.35%.
U.S. Treasuries have also retreated, sending the 10-yr yield higher by four basis points to 2.42%.
Today's economic data will be limited to the 10:00 ET release of November ISM Services (Briefing.com consensus 55.6).
The S&P 500 futures trade nine points above fair value.
Equity indices across the Asia-Pacific region ended Monday on a mostly lower note. The Italian referendum took center stage over the weekend, which saw a rejection of constitutional reform proposal, with a decisive 60% "No" vote. Although the "No" Vote was suggested to be priced in, the early calls implied that the margin of victory was not. The uncertainty of fresh elections and what any disruption to the EU would look like seemed to bring jitters into the market. The market reaction was shaky in the early stages of trading, with Asian indices witnessing selling pressure throughout the session.
Major European indices trade mostly higher while Italy's MIB (-1.1%) underperforms. Italian equities have been pressured by bank stocks amid growing worries about the future of the sector in the wake of yesterday's constitutional referendum. The referendum was rejected by a wide margin (59-41) and it led to the resignation of Prime Minister Matteo Renzi. With the country's leadership in limbo, investors are worried the uncertainty could hamper rescue plans for the country's troubled banks. The euro (1.0699) has held up well, rising 0.3% against the dollar.
U.S. equity futures have backed away from their pre-market highs, but they continue holding solid gains with S&P 500 futures trading eight points above fair value.
Yesterday's constitutional referendum in Italy was rejected swiftly, which was in line with expectations. Going into the referendum, it was reported that the European Central Bank will be ready to step up its purchases of Italian bonds in the event of volatility, and the ECB has been tested on its promise. Selling of Italy's debt has its 10-yr yield rising 12 basis points to 2.02% while other European sovereign bonds have also been sold. Germany's 10-yr yield has risen seven basis points to 0.35% while France's 10-yr yield is up six basis points to 0.77%.
The underperformance in Italian bonds has been matched by weakness in the country's stock market, which is facing pressure from banks, including BMPS, which trades down 4.8%.
U.S. equity futures hold solid pre-market gains amid upbeat action overseas. The S&P 500 futures trade nine points above fair value.
Global equity markets saw some weakness during the Asian session after the Italian constitutional reform referendum resulted in a 'no' vote and a subsequent resignation of Prime Minister Matteo Renzi. European markets have held up well, as most indices trade higher while Italy's MIB (-0.8%) underperforms. Italy's 10-yr yield is unchanged at 2.04% while other sovereign bonds have retreated with Germany's 10-yr yield rising six basis points to 0.34%.
U.S. Treasuries hold modest losses with the 10-yr yield up four basis points at 2.42%.
In U.S. corporate news of note:
Reviewing overnight developments:
[BRIEFING.COM] The stock market ended a down week on a flat note. The S&P 500 surrendered a seven-point gain to end just above its flat line. For the week, the S&P 500 lost 1.0%, the Nasdaq fell 2.7%, and the Dow ticked up 0.1%.
Prior to the open, investors received the November Employment Situation report (178,000; Briefing.com consensus 180,000), which essentially matched estimates. It was a bit surprising to see a 0.1% decline in average hourly earnings (Briefing.com consensus 0.2%), but with the year-over-year rate hovering at 2.5%, the market does not expect this report to alter the rate hike picture. In fact, the implied probability of a rate hike, as indicated by the fed funds futures market, increased to 97.2% from yesterday's 92.7%.
Equity indices climbed through the first two hours of action, but relative strength among four of five countercyclical sectors was not enough to offset losses in heavily-weighted groups like consumer discretionary (-0.6%), financials (-0.9%), and industrials (-0.1%).
The financial sector narrowed its weekly gain to 0.9%, responding to some flattening in the yield curve as the 10-yr yield slipped six basis points to 2.39%. Treasuries climbed alongside other sovereign debt, as participants employed caution ahead of a weekend constitutional reform referendum in Italy. Polls conducted before the blackout period pointed to a likely victory for the 'no' camp, which is expected to be met with Prime Minister Matteo Renzi's resignation. It was reported throughout the week that the European Central Bank is ready to step up its purchases of Italian bonds if there is an increase in volatility. This understanding was likely the driving force behind today's strength in Italian debt that sent the country's 10-yr yield lower by 13 basis points to 1.91%.
The consumer discretionary space spent the day in a slow retreat with Starbucks (SBUX 57.21, -1.30) acting as an overhang. The stock settled lower by 2.2% after the company announced that Chief Executive Officer Howard Schultz will be appointed Executive Chairman and a new CEO will be named. Elsewhere in the sector, other quick-service restaurant names and apparel names also struggled while homebuilders outperformed. Chipotle Mexican Grill (CMG 400.03, -2.35), Yum! Brands (YUM 62.42, -0.27) both lost near 0.5% while Gap (GPS 24.30, -0.75) surrendered 3.0% after a disappointing same-store sales report. Homebuilders bucked the trend within the sector with the Dow Jones US Home Construction ETF (ITB 27.04, +0.03) adding 0.1%.
On the upside, rate-sensitive real estate (+1.2%) and utilities (+0.9%) were bolstered by the decline in Treasury yields, while the technology sector (+0.4%) rebounded from yesterday's weakness, but still lost 2.9% for the week. Chipmakers contributed to today's strength in the top-weighted group, sending the PHLX Semiconductor Index higher by 1.3%. The high-beta index narrowed this week's loss to 4.9%. The energy sector (+0.1%) also settled among the outperformers, benefitting from continued strength in crude oil. WTI crude climbed 1.2% to $51.68/bbl, settling just below its 2016 high ($51.93) that was notched in late October.
The energy sector gained 2.6% for the week, ending well ahead of the remaining sectors.
Today's participation was shy of the 200-day average of 926 million as 882 million shares changed hands at the NYSE floor.
Taking another look at the November Employment Situation Report:
Monday's economic data will be limited to the 10:00 ET release of November ISM Services (Briefing.com consensus 55.6).
Week in Review: Win Streak Snapped
The stock market took a breather after three weeks of solid gains. The S&P 500 surrendered 1.0% for the week while the Nasdaq Composite continued its recent underperformance, falling 2.7%. It is worth noting that the blue chip Dow Jones Industrial Average (+0.1%) eked out a slim gain, logging its fourth consecutive weekly advance.
The outperformance of the Dow has been a common theme since the election as market participants piled into stocks of companies that are expected to benefit from increased infrastructure spending. A portion of the gains in growth-sensitive areas has come at the expense of technology stocks, leading to relative weakness in the Nasdaq. In addition, there has been some speculation that the immigration policy of the next administration could make things a bit more difficult for tech employees to obtain work visas in the US.
The trading week was highlighted by OPEC securing an official agreement to lower production to 32.5 million barrels per day after months of speculation about the likelihood of an agreement being struck. Crude oil responded by rallying into the area of its 2016 high (51.93).
With oil returning to its best level of the year, the energy component is now in position to contribute to an uptick in inflation expectations. Those expectations have already seen a notable uptick since the election as participants piled into stocks that should benefit from infrastructure spending. The 10-yr note registered its fourth consecutive weekly loss, driving its yield up to 2.39% after marking a 17-month high at 2.49%.
On Friday, investors received the November Employment Situation report (178,000; Briefing.com consensus 180,000), but the release did little to change rate hike expectations even though average hourly earnings declined 0.1% (Briefing.com consensus 0.2%). The fed funds futures market remains all but convinced (94.9%) that a rate hike will be announced on December 14.