EU in flux as US alliance creaks, populists rise in Italy

02 June, 2018, 16:21 | Author: Franklin Nunez
  • Fears over Italy turmoil spread through global markets

European stocks tumbled on Tuesday as investors weighed political uncertainty in Spain and the prospect of fresh elections in Italy, which could serve as a referendum on its membership in the euro. The two-year yield more than doubled, from under 1 percent to 2.2 percent.

Britain's FTSE 100 sank 1.2 percent and the French CAC 40 slumped 1.2 percent.

Japan's Nikkei 225 stock index dropped 1.5 percent to 22,018.52. Those companies depend on strong sales outside the U.S. That could have major implications for the European financial system and its economy. Italian government bonds also sold off sharply, sending yields up to 3.1%, up from 1.8% on May 1, and raising the borrowing costs of the indebted government.

"At these levels, I think the dollar is almost priced to perfection and we think the euro should see a rebound from later this year", said Paul Baird, head of fixed income at Newton Asset Management, a subsidiary of BNY Mellon which manages $49.8 billion in assets globally.

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Elsewhere shares in Deutsche Bank recovered some of the previous session's heavy losses, climbing 2.8 percent higher following Thursday's drop of more than 7 percent in the after a report that the U.S. Federal Reserve past year designated the bank's U.S. operations to be in "troubled condition". Investors are anxious about anti-euro political parties - 5 Star Movement and Northern League - gaining power in Italy, which could potentially lead to that nation's exit from the 19-nation currency union.

CURRENCIES: The dollar rose to 109.53 yen from 108.83 yen.

The euro struggled near a six-and-a-half-month low, and the pound hit a six-month low against a rallying dollar amid signs of panic in European bond markets. South Korea's KOSPI and Australia's S&P/ASX 200 slipped 2.0 percent and 0.5 percent, respectively. Earlier it fell to $1.1510, its lowest level since last July before recovering to trade 0.5 percent down on the day at $1.1565.

The yield on the benchmark 10-year Treasury note broke below 2.8 percent on Tuesday, down from highs above 3.13 percent earlier this month. Most Southeast Asian markets were closed for holidays. By mid-afternoon Asia time it was at 2.81 percent.

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Investors parked money in lower-risk assets like US and German government bonds.

Demand at the ECB's weekly auction, where banks can borrow at zero percent, has also dwindled to next to nothing.

ENERGY: Benchmark U.S. crude fell 1.1 percent to $67.13 a barrel in NY.

Tuesday's sell-off was the third consecutive session of lower closes for the Dow and the S&P 500, both of which suffered their worst day on a percentage basis since April 24. Oil prices have slumped in the last week following reports that OPEC countries and Russian Federation could start pumping more oil soon. Hong Kong's Hang Seng index clawed back losses to gain 0.1 percent, ending at 30,492.91. Brent crude, used to price global oils, rose 0.6 percent to $75.80 per barrel in London.

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