Global equities rout continues in Asia, as Italian crisis spooks investors

Tokyo — Asian stocks extended a global sell-off on Wednesday as Italy’s political crisis rippled across financial markets, toppling the euro to a 10-month low, pushing up Italian borrowing costs and sending investors rushing to safe-haven assets such as US Treasuries.

MSCI’s broadest index of Asia-Pacific shares outside Japan tumbled 1.5%, while Japan’s Nikkei average fell as much 1.9% to hit a six-week low.

Chinese shares also headed south, with the Shanghai composite index down 1.8%, South Korea’s Kospi off 2% and Australia’s S&P/ASX 200 down 0.6%.

The sharp downturn followed from an equally harsh session on Wall Street on Tuesday, where the Dow Jones industrial average fell 1.6%, the S&P 500 lost 1.2% and the Nasdaq composite dropped 0.5%.

The financial sector took a hard hit.

Investors fear that repeat elections in the eurozone’s third-largest economy — which could come as soon as July — may become a de-facto referendum on Italian membership of the currency bloc and the country’s role in the European Union.

“The way Italy’s short-term debt yields are spiking makes you think default risk is on radar in the market. It shows how grave the situation is,” said Makoto Noji, senior strategist at SMBC Nikko Securities.

“What the markets are starting to factor in is not a default per se but an early election leading to a victory of eurosceptics and an exit from the euro.”

Short-dated Italian bond yields — a sensitive gauge of political risk — soared 1.5 percentage points from Monday to their highest since 2013 in their biggest move in nearly 26 years.

Tradeweb Markets reported average trading volume in the debt is up by more than 60% in May compared with April.

Safe-haven US Treasury bonds and German bunds rallied, as did the yen, the dollar and gold.

The euro fell against the Swiss franc, yen and dollar, nearing $1.15 and touching its lowest point since July.

In Asia, the focus was also on the on-again, off-again US-North Korean summit and the US-China trade relationship.

A top North Korean official was headed to New York on Tuesday for talks with US Secretary of State Mike Pompeo, the latest indication that the summit between President Donald Trump and North Korean leader Kim Jong-un may go ahead next month.

Trump confirmed in a tweet that Kim Yong-chol, a former spy chief and trusted adviser to North Korea’s leader, was on his way for what would be the highest-level meeting in this week’s flurry of diplomatic activity aimed at salvaging the historic summit.

US-China trade tension also added to the sombre mood in markets.

The US said on Tuesday that it would continue pursuing actions on trade with China, prompting Chinese state media to slam the US announcement.

Emerging-market stocks lost 1.2%, marking a new low point for the year, under continued pressure from a rising dollar for countries that often borrow in that currency.

“It’s not surprising that investors fled fragile emerging markets and southern Europe and sought safety in cash,” said Yasuo Sakuma, chief investment officer at Libra Investments.

Oil struggled under pressure from expectation that Saudi Arabia and Russia would pump more oil to counter potential supply shortfalls from Venezuela and Iran, even as US output has surged in recent years.

US crude futures retreated 0.4% to $66.46 a barrel, extended falls after declining for five consecutive sessions.

Reuters