Shares in Asia fell sharply and the euro sank to a 10-month low against the US dollar as concern about the political turmoil in Italy spread through international financial markets on Wednesday, The Guardian reports.
Renewed fears of a trade war between the United States and China also contributed to the negative mood after Donald Trump announced $50bn worth of tariffs on Chinese goods just days after his treasury secretary said the trade war was “on hold”.
The failure of Italy’s populist parties to form a government in recent days is likely to mean fresh elections, possibly as early as July. Investors fear they could become a referendum on Italy’s future in the single currency.
As a result, Asian share markets all plunged into the red on Wednesday. Tokyo was down 1.5%, Hong Kong lost 1.5% and Shanghai was 1.7% lower. Sydney gave up 0.6% and the Kospi in Seoul was down 2.1%.
The single currency also remained under pressure in the Asian trading session on Wednesday, sinking to a 10-month low of $1.153 to the US dollar. It also slipped against the pound.
“As the third biggest economy in the EU, as a heavily indebted one, and with Eurosceptics seemingly in the ascendancy markets have worried that the EU again faces an existential crisis,” Greg McKenna, chief market strategist at AxiTrader, said.
Michael Hewson at CMC Markets in London noted that Italian bond yields were much lower than the 7% mark they reached in 2012, prompting European Central Bank chief Mario Draghi to pledge to “do whatever it takes” to preserve the bloc.
But he added: “This pledge marked a high water mark for Italian borrowing costs. It remains to be seen if he will be able to perform the same trick twice, with the hope that he won’t have to.”
The turmoil has also sent Italy’s 10-year bond yields more than 300 basis points above Germany’s – the so-called yield spread and a key indicator of investor concerns.
On Tuesday, US treasury yields fell as money poured into assets considered safe – yields go down the more the bonds are in demand – while the yen, a go-to unit in times of turmoil, also rallied. Falling US bond yields pushed bank shares lower, causing the Dow Jones average to fall nearly 400 points, or 1.58%, on Tuesday.
Italy was plunged into crisis when the country’s president, Sergio Mattarella, at the weekend vetoed the nomination of a fierce eurosceptic as economy minister, leading the prime minister-designate to step down and upending a bid by the anti-establishment Five Star Movement and the far-right League to form a government.