A SPIRALLING Italian political crisis provoked a global stock market sell-off yesterday – sending Irish bank shares lower and plunging the euro to a 10-month low.
Investors fear that repeat Italian elections – which now seem likely in the eurozone’s third-largest economy as soon as July – may become a de-facto referendum on Italian membership of the currency bloc and the country’s role in the European Union.
Safe-haven US Treasury bonds and German bunds rallied, as did the Japanese yen, the US dollar and gold by midday in the US trading day. Oil sank further from the near-four-year highs set earlier in the month. That all weighed on already embattled emerging markets.
Ireland’s government debt significantly outperformed its battered Italian, Greek and Portuguese peers, with the yield or implied interest rate to borrow for 10 years for Ireland closing under 1pc yesterday and tracking closer to safe haven Germany than the so-called euro periphery.
Stocks in Milan slid 2.65pc in a fifth straight day of losses. Italian bank shares dipped 4.73pc, bruised by the sell-off in government bonds, a core part of bank portfolios.
In Dublin, the Iseq was weaker – though by no means as big a margin. Irish banks were hit though, with AIB and Bank of Ireland losing 3.4pc and 2.9pc respectively.
The sell off on markets was global. On Wall Street, the Dow Jones Industrial Average fell 1.99pc and the S&P 500 lost 1.58pc.
“As part of the overall narrative of cautionary situations and risks that the market needs to worry about this could potentially become cause for contagion,” said Wasif Latif, head of global multi-assets for USAA Asset Management.
“What once seemed like a synchronised global economic recovery is now a waning growth story.”
Italy seems likely to repeat elections soon after its prime minister-designate, Carlo Cottarelli, failed to secure any support from major political parties for even a stop-gap government, sources told Reuters yesterday.
Italy has searched for a new government since inconclusive elections in March, and investors fear voters will choose a party hoping to break with the continent’s austere fiscal policy approach and maybe even the multinational euro currency that replaced the lira in 2002.
“As the slide continues, you ask where is the end?” said John Hardy, Saxo Bank’s head of foreign-exchange strategy.
“If this continues for another couple of sessions, I think you will have to see some official response. A ‘whatever it takes’ kind of moment,” he said.
In 2012, facing a sovereign debt crisis, European Central Bank President Mario Draghi promised in a noted speech to do “whatever it takes” to keep the single currency intact.
Short-dated Italian bond yields – a sensitive gauge of political risk – soared 1.5 percentage points from Monday to their highest since 2013 in their biggest move in nearly 26 years.
The spread, or gap, between German and Italian borrowing costs widened dramatically – a good gauge of where investors see the risks in the market.
Adding to the uncertainty in Europe, Spanish Prime Minister Mariano Rajoy will face a vote of confidence in his leadership on Friday.
Spain’s bond-yield spread with Germany also went to its widest this year. (Additional reporting Reuters / Bloomberg)