Global markets fall as Italy's political crisis threatens eurozone

Stocks and bond prices around the globe tumbled as the political crisis in Italy spread contagion through the markets.

On Wall Street, the Dow Jones Industrial Average lost nearly 2% in mid-afternoon trading while Treasury bond yields posted their largest daily decline in nearly two years. The Stoxx Europe 600 closed 1.4% lower.

The S&P 500's financial sector slid 3.4%, as bank shares tumbled. JPMorgan Chase, the biggest US bank by assets, fell 4.3%, while Morgan Stanley, the smallest of the big banks, lost 5.8%.

The selloff was reminiscent of the eurozone crisis six years ago when public debt in Greece and other Mediterranean countries shattered investor confidence. Instead, investors sought the safety of the US dollar and the Japanese yen, which rallied sharply.

The Dow clawed back some losses, closing 391.23 points down, or 1.6%, at 24.361.86. The Standard & Poor’s 500 dropped 1.2% to 2689.87, while the Nasdaq Composite lost 0.5% to 7396.59.

Italian bond yields soar
The Italian government’s borrowing costs skyrocketed. An auction of six-month Italian debt, which sold for a negative yield as recently as April, drew a yield of 1.213%.

The two-year bond, which offered a negative yield as recently as two weeks ago, reached as high as 2.69%.

“There’s an existential threat hanging over the single currency [euro] if we head into more elections this summer," says Société Générale chief foreign exchange strategist Kit Juckes, referring to the prospect of Italian voters returning to the polls as early as September.

“I don’t know how we get away from that now, given the scale of the financial implications.”

The previous election in March gave the biggest support to two anti-eurozone parties of the left and right.

Eurozone exit fears
Italian President Sergio Mattarella on Sunday blocked the 5 Star Movement and the League from forming a coalition government because of the threat of a financial collapse. 

The proposed government had drafted plans to exit the euro, reviving echoes of the 2011-12 sovereign debt crisis.

This sparked investor fears that an exit by the bloc’s third-largest economy could force others out.

The key indicator is the spread between Germany’s 10-year government bonds yields and those of the weaker economies. For Spain, these spreads widened to their widest levels in a year while for Portugal it was the widest since September.

“We must never forget that we are only ever a few short steps away from the very serious risk of losing the irreplaceable asset of trust,” Bank of Italy governor Ignazio Visco said in a speech.

Currency impact
The euro dropped to its lowest level against the US dollar since July 2017, falling 0.7% to $US1.1541. The Japanese yen rose to ¥108 versus the US dollar from ¥110 last week. 

In New York, yields on 10-year treasuries fell to 2.772% from 2.931% at the end of last week the largest one-day yield decline since June 2016.

The banking sector is seen as especially vulnerable to write-offs in its large holdings of government debt.

Shares of Italy’s UniCredit and BPER Banca dropped more than 5% while Société Générale and Deutsche Bank fell 2.9% and 4.6% respectively. The KBW Bank index declined 3.5%.

France’s CAC 40 fell 1.3%, Germany’s DAX 1.5% and the UK’s FTSE 100 1.3%.

In commodities, oil prices extended their recent declines. US crude futures fell 2.5% to $US66.15 a barrel from last week. Brent crude, the global benchmark, was steady at $US75.32.