Spiraling Italian crisis sees global stock market sell-off and a slump in the euro

New York — A spiraling Italian political crisis provoked a global stock market sell-off on Tuesday, cut the euro to an 11-month low, and spiked short-term borrowing costs for the government in Rome.

Investors fear that repeat elections — which now seem inevitable in the eurozone’s third-largest economy — may become a de facto referendum on Italian membership of the currency bloc and the country’s role in the EU.

Safe-haven US treasury bonds rallied, as did the yen and the dollar, but gold was nearly unchanged with spot prices at $1,301.94 an ounce early in US trading after earlier gains.

“As the slide continues, you ask ‘where is the end’,” said Saxo Bank’s head of FX strategy, John Hardy. Global contagion is a risk, he said, with the benchmark US S&P 500 stocks index breaching key “technical” support levels.

Hardy recalled a promise made in 2012 by European Central Bank (ECB) president Mario Draghi to keep the euro intact. “If this continues for another couple of sessions, I think you will have to see some official [European] response. A ‘whatever it takes’ kind of moment,” he said.

The Dow Jones Industrial Average fell 276.17 points, or 1.12%, to 24,476.92, the S&P 500 lost 22.03 points, or 0.81%, to 2,699.3 and the Nasdaq Composite dropped 18.84 points, or 0.25%, to 7,415.02.

Short-dated Italian bond yields — a sensitive gauge of political risk — soared as much as 150 basis points to their highest since 2013 in their biggest move in 26 years.

The euro dropped towards $1.15 for the first time this year, down 0.8% on the day. Against the Swiss franc, it fell to 1.15 francs.

Stocks in Milan slid 2.3% on the main index after a 2.1% fall on Monday. Bank shares slumped more than 4% after losing the same amount in the previous session, bruised by the sell-off in government bonds, a core part of bank portfolios.

Adding to the uncertainty in Europe, Spanish Prime Minister Mariano Rajoy will face a vote of no confidence in his leadership on Friday.

Spain’s bond-yield spread with Germany also went to its widest this year at 132 basis points. Madrid’s IBEX bourse was down 2.2%.

Asia flinched, too. Japan’s Nikkei slipped 0.6%. Chinese and Hong Kong shares ended 0.6% to 0.7% in the red. The dollar was up against almost all major currencies except the safe-haven yen. The US currency is heading for its best month since late 2015 — a move that is hurting many emerging-market countries that borrow in dollars.

“The biggest contributor is fear of a eurozone crisis, and the spillover from that into demand for safe-haven currencies,” said Koon Chow, an FX strategist at UBP.

Playing it safe

Away from Europe, the focus was on the on-again, off-again US-North Korean summit and the US-China trade relationship. An aide to North Korean leader Kim Jong-un arrived in Singapore on Monday, Japanese public broadcaster NHK reported, and the White House said a “pre-advance” team was travelling to the city to meet the North Koreans.

The reports indicate that planning for the summit, initially scheduled for June 12, is moving ahead even though US President Donald Trump called it off last week. A day later, Trump said he had reconsidered, and officials from both countries were meeting to work out details.

Italian Prime Minister-designate Carlo Cottarelli will see President Sergio Mattarella at 2.30pm GMT, the president’s office said in a statement. Mattarella effectively vetoed a coalition government of the anti-establishment Five Star Movement and League party at the weekend. He has asked Cottarelli to form a stop-gap government to lead the country to early elections instead. Cottarelli is expected to announce his cabinet after the meeting.

Oil under pressure

Oil struggled to rebound to the near-four-year highs it set earlier in the month. Crude is under pressure from expectations that Saudi Arabia and Russia would pump more oil, even as US output rises. This has pushed the spread between Brent and US crude to nearly $9 a barrel, its widest since March 2015 because of the depressed price of US crude compared with Brent.

US crude fell 1.87% to $66.61 a barrel and Brent was last at $75.42, up 0.13% on the day.

Reuters