World stocks turn tail as Italy angst grips Europe

London — Stocks fell worldwide and European assets sold off on Tuesday after anti-euro comments from an Italian lawmaker dented the single currency and sent Italy’s bond yields to multi-year highs, despite attempts by the government to backtrack.

A boost to investors’ risk appetite from the new US-Mexico-Canada trade pact proved short-lived with the MSCI world equity index falling back 0.3%.

US futures traded down 0.3% to 0.4% ahead of Wall Street’s open, while PepsiCo gained in pre-market trading after reporting stronger-than-expected profit.

The leading index of eurozone stocks lost 0.7% and the pan-European STOXX 600 fell 0.5% as Italian assets came under renewed pressure, though the sell-off lost steam by midday.

The economics spokesman for Italy’s ruling League party, Claudio Borghi, said in a radio interview that most of the country’s problems could be solved by having its own currency. His comments drove Italian 10-year bond yields to a new four-and-a-half-year high, pushing the spread between Italian and German yields to the widest for more than five years.

Shares in Italian banks, which have large sovereign bond holdings, hit a 19-month low before recovering part of their losses. But Borghi and Italian Prime Minister Giuseppe Conte backed down, calling the euro “unrenounceable”, helping calm markets and erasing losses for Italy’s FTSE MIB.

“While our economists do not expect systemic implications for the global economy, contagion risks have risen,” Goldman Sachs analysts said. “We think European risky assets remain vulnerable and there is potential for negative spillovers to the euro area, given the high trade exposure to Italy.”

The euro fell 0.6% to its lowest since August 21 at $1.1504, then recovered to trade down 0.3% at $1.1542. The single currency has been hurt by concerns that a significant increase in the Italian budget will deepen Italy’s debt and deficit problems and, by extension, the EU’s.

“The history of the eurozone tends to be one of great fudges — think of the case of Greece,” the Saracen global income and growth fund’s manager, David Keir, said. “But I would caution against any wider systemic spreading. The reality is making knee-jerk reactions to big political decisions can very much be the wrong thing to do.” 

Dollar grinds emerging markets down 

Asian stocks were lower as the lift from an agreement that saved the North American free-trade deal faded. China’s financial markets are closed for the week of October 1-5 for national holidays, but data showing weaker factory growth in China also hit Hong Kong stocks.

The US and Canada forged a last-minute deal on Sunday to salvage what used to be the North American Free Trade Agreement (Nafta) as a trilateral pact with Mexico, rescuing a $1.2-trillion open-trade zone that had been about to collapse after nearly a quarter century in operation.