European Shares feel the heat as political temperatures rise

Yesterday, European Shares fell for a fourth consecutive day and the Euro was battling to avoid the same fate, as the prospect of early Italian elections and Greece’s ongoing struggles nudged up the political temperature gauge.

The Deutsche Bank cut the sector to ‘underweight’, while Sterling rebounded from having been knocked recently by signs that next week’s UK election is set to be closer than originally expected. All this drove the traditional safe-haven assets of Gold and Japanese Yen higher and briefly pushed Yields low-risk German government Bonds to their lowest in more than a month.

Low inflation readings out of Spain and Germany, as well as European Central Bank chief Mario Draghi’s commitment to continued stimulus in a speech on Monday, helped keep the Euro subdued at $1.116. At the heart of the moves, however, were signs that elections in Italy may now come as early September, after the 5-Star Movement became the fourth big party to back a switch to a proportional electoral system. Italian Shares remained flat having slumped 2% on Monday and southern Euro zone Bonds were also pushed into the red again.

In spite of the weakness seen in the last couple of weeks, the pan-European STOXX 600 index is still set to end May in positive territory and near a 2-year high.