Fiat Chrysler Emerge Strongly as Italian Stocks and Bonds Struggle

Anthony Gallagher Anthony Gallagher

27 May 2019

Banking stocks fell sharply, and government bond yields rose in Italy today amid news that the European Commission is considering disciplinary action. This action would come as Italy had failed to adequately reduce levels of public debt. The Italian banking index was down 1.3% for the day. Meanwhile, government 10-year bond yields were up to 2.7% at the close of trading in Europe. Bond yields commonly rise as prices fall. Fiat Chrysler meanwhile had a very positive day. This comes with the news of its proposed merger with Renault.

Possible Trouble Ahead for Rome

Reports from other major outlets today said that the European Commission, led by Jean-Claude Juncker will issue its report on Italian public finances on June 5th. If Italy is to avoid penalty under the EUs Structural Deficit Procedure, it would have to dramatically reduce both public debt, and structural deficit. As both of these numbers are in fact rising instead of falling, such a drastic reduction would be seemingly impossible.

This resolution of this situation ultimately lies in the hands of the commission and Juncker. Experts agree it is unlikely that the EU will offer a lenient solution, having already put proposals in place last year, which Italy seems to be flagrantly in violation of. Such a fiscal approach threatens the stability of other European nations. Therefore, it is likely Italy will be subject to disciplinary procedures in June. These could include a fine of as much as $4 billion.

 

Brighter Horizons for Fiat Chrysler

Fiat Chart - May 28th

Fiat Chart – May 28th

Stocks in both Italian car giant Fiat, and Renault made huge gains today on news that a “transformative” merger between the two auto companies has been proposed. Such a merger would create a combined automaker on a 50/50 ownership basis. With it this would mean that the combined company would become one of the world’s largest car makers, with more than 8.5 million sales.

The jump in share prices mean that Fiat closed the day boosted more than 8% in price, with Renault in excess of 12% ahead of its starting price. The fact that no plant closures would result from the merger is also likely to have boosted market sentiment on the deal.

The proposal will now be taken into consideration by the board of Renault, who also have to consider their other partners. Both Nissan and the French government own significant stakes in Renault. Early indications are that the French government is in favor of the merger. They are however seeking more information before reaching a final decision.

Such a move would lead to great savings on technology and the development of electric vehicles and self-driving cars in the fast evolving auto market. New entrants to the sector, including Tesla, are increasing the pressure on existing car makers. This is leading them  to streamline and make their operations more efficient in order to stay competitive. The merger would create the fourth largest company in North America by sales, and the second in Europe.


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