London — Italy’s political crisis and renewed trade war fears sent world stocks lower for the sixth consecutive day, although the hope that Italy could avoid a new election helped European markets stage a mini-bounce from one of their worst sell-offs in years.
Investors have in recent days scurried for assets such as US and German bonds or the Japanese yen, spooked by the possibility that Italy, the third-biggest eurozone economy, could deliver a bigger boost to eurosceptic parties in a snap election that sources said could be held by end-July.
An election at this point would also be a de facto referendum on Italy’s euro membership, evoking memories of the 2011-12 euro debt crisis and carrying huge implications for the single currency, whatever its outcome.
However, reports that the two anti-establishment parties were again renewing efforts to form a government rather than force the country back to the polls, helped Milan-listed equities snap a five-day losing streak.
Similarly, short-dated Italian bond yields — a sensitive gauge of political risk — fell almost 0.5% from half-decade highs after suffering their worst day in nearly 26 years on Tuesday.
A pan-European equity index was flat on the day after falling almost 4% in the past five days.
Barclays investment strategist Hao Ran Wee said that while risks from Italy for world markets had certainly risen, there were significant hurdles for the country to sharply increase spending or exit the euro zone.
“It’s questionable how credible Italy’s threat of leaving the EU actually is, if push comes to shove … As a result, we think the repeat of a 2012-style euro crisis remains a small possibility,” Wee said.
He remained optimistic on eurozone economic growth and regional equity markets.
Japan’s biggest private life insurance firm, Nippon Life, which holds about ¥4.8-trillion ($44.21bn) worth of eurozone bonds, also said it had no plans for now to buy or sell its Italian debt holdings.
Equity futures signalled a stronger open on Wall Street, after Tuesday’s harsh session which saw all three US indices lose between 0.5%-1.2%, led by financial sector stocks.
Asian markets, however, remained under pressure, with an index of non-Japanese Asian stocks, hurt also by news that the US was pressing ahead with tariffs and restrictions on investments by Chinese companies. Beijing meanwhile said it was ready to fight back if Washington ignited a trade war.
Japan’s Nikkei sold off 1.5% to a six-week low while Shanghai shares also dropped 1.4%. Trade-sensitive emerging equities fell 1.2% to five–and-a-half-month lows.
“Overall, this [US] move puts a trade war scenario back on the agenda,” Rabobank analysts told clients.
Emerging markets are also suffering from the dollar’s renewed surge since mid-April, with Indonesia raising interest rates for the second time in two weeks to support the rupiah currency.
The politics and fears of an economic hit across the eurozone has driven investors into US treasuries and German bunds pushing yields 15-20 basis points lower They have also fuelled a sharp rise in the yen and Swiss franc, especially against the euro.
The euro attempted to bounce off 10-month lows against the dollar rising 0.5% to $1.160, while against the Swiss franc and yen it firmed around 0.3%.
“The risk to the euro is predominantly political in the near term,” Alvin Tan, a currency strategist at Société Générale, said. The euro was likely to stay capped at $1.15 or $1.16 until the Italian political crisis was resolved, he said.
US 10-year treasury yields rose 6.5 basis points to 2.83 percent while German yields rose about five basis points Oil prices meanwhile struggled as the expectation grew 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.
Brent futures traded around $75.50 a barrel, well off recent three-and-a-half-year highs above $80.