Stocks Drop as Italy’s Political Anxiety Spills Across Its Borders

https://www.nytimes.com/2018/05/29/business/italy-markets-stocks-bonds.html

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Stock markets in the United States dropped Tuesday amid concerns that growing political uncertainty in Italy and simmering tensions over Chinese trade could weigh on global economic growth.

The Standard & Poor’s 500-stock index fell 1.2 percent, marking the its third straight decline. Financial shares were among the worst performers, as developments in the European markets seemed to reawaken fears of a debt crisis among investors.

Italy — Europe’s fourth-largest economy and a founding member of the eurozone — has not had a new government since it held elections in March. But in the past week, the country’s politics took on a new level of unpredictability. A populist coalition that had been set to form a government nominated a skeptic of the European Union to be the economy minister, but the proposal was vetoed by Italy’s president, who subsequently named a technocrat to temporarily take charge instead.

Amid that uncertainty — which has left open the prospect of early elections and the formation of another populist alliance — investors have suddenly shifted away from riskier investments like stocks and commodities and taken refuge in the relative safety of German and American government bonds, the United States dollar and the Japanese yen.

Italy’s benchmark stock index fell nearly 2.7 percent, and worried investors sold off government bonds, sending prices down and yields up. The yield on Italy’s main 10-year bond rose to its highest level in more than four years, spiking by more than a half percentage point to roughly 3.20 percent, according to data from Tradeweb, a bond trading platform.

The euro fell to its weakest value against the dollar in nearly a year, and prices for government bonds issued by other heavily indebted European countries like Spain and Portugal also tumbled on Tuesday, pushing their yields up as well.

The so-called spread between yields on debt from such countries and debt from Germany — Europe’s biggest economy, which is seen as having the region’s safest government bonds — widened sharply. That dynamic recalled the worst days of the European debt crisis that began in 2010, when investors first began to consider the risk that Greece may default on its debt, and then cast a worried eye at countries including Ireland, Portugal and Spain. Since then, European policymakers have been able to ease investor concerns, in part through a European Central Bank policy of effectively printing money in order to push interest rates down and speed economic growth.

But the uncertainty in Italy reverberated across the continent on Tuesday. The main stock indexes in London, Frankfurt and Paris dropped. In a sign that investors were looking for safer assets, the yields on 10-year bonds from Britain, France and Germany all fell.

In the United States, the yield on the 10-year Treasury note also fell to 2.80 percent as investors flocked to the safety of American sovereign debt. Yields on those notes had topped 3 percent in recent weeks on optimism about American economic growth and expectations of ongoing rate increases from the Federal Reserve.

The decline in Treasury bond yields — which serve as benchmarks for private lending rates — weighed on shares of financial institutions. The financial sector was the worst performing part of the S.&P. 500-stock index, dropping by more than 3 percent, as falling long-term bond yields fanned concerns about crimped bank profitability.

In a note to clients, bond market analysts from BMO Capital Markets thought that the shift toward investor demand for safety would probably last.

“The cracks that we’ve seen in risk appetite are only likely to widen,” they wrote.

Industrial stocks also dragged on markets in the United States, as trade tensions with China continue to create ongoing uncertainties for manufacturers.

The Trump administration said on Tuesday that it would go forward with punitive trade-related measures on China in the next month, including levying a tariff of 25 percent on $50 billion of goods imported from China.