Italian stocks slide as the dollar powers on to new 2018 high
London — Italian stocks slid on Wednesday after reports that the two parties seeking to form Italy’s next government might seek debt forgiveness, while the dollar ignored a pull-back in US bond yields and rallied to a new 2018 high.
Asian markets had earlier dipped after Pyongyang abruptly called off talks with Seoul, throwing a US-North Korean summit into doubt, but this failed to rattle European stocks.
Markets were also unfazed by Italian politics with the bigger focus being a rocketing dollar and rising US borrowing costs, which have spooked investors in recent weeks and intensified concern about damage to global demand, squeezing emerging markets.
The dollar resumed its rally in European trading and reached a high for the year. This gain left the euro below $1.18, its lowest since December 19. However, with 10-year US treasury yields slipping back below seven-year highs reached earlier this week, most European stock markets traded close to flat.
The exception was Italy. Reports suggested the Five Star and League parties, trying to form a government after inconclusive March 4 elections, had written a draft coalition deal asking for debt forgiveness from the European Central Bank (ECB), frightening investors in the eurozone’s third-largest economy.
"The proposal is surreal. Pretending the unilateral cancellation of €250bn of debt bought by the ECB as part of the quantitative easing programme ... would be absurd," Anthilia Capital Partners fund manager Giuseppe Sersale said. "Even if unfeasible, the tone of the debate bolsters expectations there will be a stormy relationship with Europe and a further relaxation of financial discipline."
Italian stocks fell more than 1.5% while the pan-European STOXX 600 slipped 0.12%. Eurozone banks slid an even bigger 1.71%, extending losses despite a League spokesperson saying the request for cancellation of the debt was not in the official draft of the government programme.
The difference in Italian 10-year government borrowing costs over German rose sharply to the highest since late March.
The MSCI world equity index, which tracks shares in 47 countries, slipped into negative territory. US stock futures traded down 1.25%.
Treasury yields pause
North Korea’s possible cancellation of a June 12 summit in Singapore added to geopolitical worries for financial markets, given it could see tensions on the Korean peninsula flare up again and damage US-China efforts to resolve an ongoing trade dispute.
"This will weigh on the Korean reconstruction beneficiaries that have had a strong run on peace and even re-unification hopes, recently," JPMorgan analysts wrote in a note. "The broader risk for the region if talks do break down is that [US President Donald] Trump no longer feels the need to keep China on side and could escalate trade tensions again."
Elsewhere, the 10-year yield slipped to 3.057%. Strong US retail sales and factory data on Tuesday pushed the US 10-year yield as high as 3.095%, its highest since July 2011, raising worries about higher borrowing costs for companies worldwide.
The dollar has enjoyed a blistering rally in recent weeks as investors focus on the US Federal Reserve raising interest rates while central banks elsewhere push back policy tightening.
Rising US borrowing costs and a stronger dollar hit hardest in emerging markets, where investors are withdrawing money — particularly from countries with large deficits and big dollar funding needs. Argentina and Turkey have been at the centre of the sell-off, their weakness compounded by political frictions.
The Turkish lira had been testing record lows against both the dollar and the euro but clawed higher after officials from the central bank said they would be prepared to act to halt the rout. President Recep Tayyip Erdogan’s comments that he plans to take greater control of the economy have hammered the lira this week.
The Indonesian rupiah hit a two-and-a-half-year low while the Malaysian ringgit touched a four-month low overnight.
In commodities markets, gold rebounded slightly after hitting a four-and-a-half-month low the previous day on a strong dollar.
Crude oil prices declined but remained near recent highs amid concerns that US sanctions on Iran may restrict crude exports from a major producer.