LONDON: A deepening political crisis in Italy provoked a second day of heavy selling on European financial markets, with the euro cut to a 6-1/2 month low, stocks punished and short-term borrowing costs surging for the government in Rome.
Investors fear that repeat elections — which now seem inevitable in the euro zone’s third largest economy — may become a de facto referendum on Italian membership of the currency bloc and the country’s role in the European Union.
Short-dated Italian bond yields — one of the most sensitive gauges of political risk — soared as much as 80 basis points to their highest since late 2013 as investors’ anxiety deepened.
The euro dropped below the $1.16 line for the first time in 6-1/2 months, down 0.3 per cent on the day. Against the Swiss franc, it fell by a similar margin at 1.1528 francs.
Stocks in Milan slid 2.6 per cent on the main index after a 2.1 per cent fall on Monday. Bank shares slumped another 5 per cent, having lost 4 per cent in the previous session, bruised by the sell-off in government bonds, a core part of Italian banks’ portfolios.
“It is just a slide and as the slide continues, you ask where is the end,” said Saxo Bank’s head of FX strategy John Hardy. He added that there was a risk of global contagion, with the benchmark US S&P 500 stocks index also close to breaching some key support levels.
Hardy recalled a promise made in 2012 by European Central Bank 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.
Adding to the uncertainty, Spanish Prime Minister Mariano Rajoy will face a vote of confidence in his leadership on Friday.
Spain’s bond-yield spread with Germany was also at its widest in seven months at 122 bps. Madrid’s IBEX bourse was down almost 2 per cent. Asia flinched too. Japan’s Nikkei slipped 0.6 per cent. Chinese shares were in the red, too, with the blue-chip index down 0.6 per cent and Hong Kong’s Hang Seng index off 0.7 per cent.
E-Mini futures for the S&P500 ESc1 also gave up early gains to be down 0.5 per cent. Meanwhile, the dollar was up against almost all major currencies except the safe-haven Japanese yen.
The US currency is heading for its best month in 1-1/2 years — a move that is hurting many emerging market countries that borrow in dollars.
“This should keep the risk trades pressured to the downside,” Nick Twidale, Sydney-based analyst at Rakuten Securities Australia.
In another sign that investors were flocking to safer bets, the euro hit a 11-month low versus the yen and fresh 6-1/2 low against the Swiss franc.
Elsewhere in bonds, US 10-year Treasury yields were at six-week lows at 2.883 per cent after a US holiday on Monday. Yields move inversely to price.
Analysts are awaiting US inflation data later in the week which could provide clues to future interest rate rises ahead of the Federal Reserve policy meeting next month. — Reuters
Oman Observer is now on the WhatsApp channel. Click here
