This week we saw challenging times for Italian banks, interest-rate hikes for the U.S. and a forest of festive trees… in a pub.
A creditable performance
The attention of European investors was again focused on Italy’s troubled banks. But for once there was some reason for cheer. Unicredit, Italy’s biggest bank, announced a radical restructuring plan to help shore up its finances, which included a €13 billion (US$13.6 billion) share issue to mop up bad debts.
Investors took further encouragement from news that Paolo Gentiloni has been appointed as the country’s interim prime minister. Bringing a reputation as something of a technocrat, there are hopes he might put in place solutions to the country’s current political crisis.
Italy faces several further hurdles on the road to recovery. Other banks such as Monte dei Paschi di Siena are still teetering on the brink, and the country goes back to the polls for elections early next year. But this sliver of good news was enough to propel European indices higher.
Over the four days to the close of trade on Thursday, the FTSE Europe (ex-UK) Index was up 1.29%, compared to a rise of 0.64% for the FTSE 100 and a gain of just 0.11% for the S&P 500 Index.
Notes of interest
For only the second time in a decade, the U.S. Federal Reserve (Fed) raised U.S. interest rates by 0.25%. The move had been widely expected following firm evidence the U.S. economy is on the road to recovery.
This was the Fed’s final meeting before President-elect Donald Trump’s inauguration. Following his numerous campaign-trail promises of tax cuts and infrastructure spending, members of the Fed’s interest-rate setting committee may have been wary of the potential for such policies to further fan the flames of inflation.
Bond investors clearly expect interest rates to continue on an upward trajectory next year. The yield on two-year Treasuries, which are particularly sensitive to changes in interest rates, jumped to its highest level since 2009 as investors sold bonds.
Stocks suffer “miner” correction
The rise in U.S. borrowing costs also hit shares in mining and commodities companies. Gold miners suffered particularly heavy losses. Rising interest rates are generally bad for gold, which becomes relatively less attractive when savings rates are rising.
Elsewhere in the commodities sector, energy stocks were affected by a sharp drop in U.S. crude oil prices. Despite a recent agreement by the Organization of the Petroleum Exporting Countries (OPEC) to limit production, there were renewed concerns about over-supply in the market following a rise in the amount of oil held in storage in the U.S.
A pub in London has claimed this year’s unofficial record as the UK’s most festive hostelry. Over the last two weeks, Gerry O’Brien, landlord of the Churchill pub in the Kensington district of the capital, has certainly spruced up the neighbourhood. He has installed a total of 90 trees, holding 21,000 lights, both outside and in the pub. Passers-by have been dazzled by Mr. O’Brien’s tree-mendous efforts. However, the amount of decorations doesn’t leave much room at the inn for the Churchill’s regulars, who by all accounts have been left feeling somewhat Claus-trophic.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Companies mentioned in this article are for illustrative purposes only.