Presidential Press Office via Reuters
European stocks finished sharply lower Tuesday, led by a selloff in Italian equities. Investors were assessing the prospect of new elections in Italy, which could effectively serve as a referendum on the euro.
Meanwhile, political uncertainty in Spain hit Madrid-traded stocks, as Prime Minister Mariano Rajoy’s struggle to stay in power raised fears of new elections.
What markets are doing
Italy’s FTSE MIB index /zigman2/quotes/210598024/delayed IT:I945 +1.40% tumbled 2.7% to end at 21,350.88. Investors also fled Italian debt, with the 2-year bond yield /zigman2/quotes/211347219/realtime BX:TMBMKIT-02Y -8.11% recently surging to 2.42%, as prices sank. Bond prices move in the opposite direction of yields.
In Spain, the IBEX-35 index /zigman2/quotes/210597995/delayed XX:IBEX +0.69% gave up 2.5% to close at 9,521.30, as traders fretted about the future of Rajoy’s government.
France’s CAC 40 /zigman2/quotes/210597958/delayed FR:PX1 +0.97% fell 1.3% to end at 5,438.06, and Germany’s DAX 30 index /zigman2/quotes/210597999/delayed DX:DAX +1.50% sank 1.5% to 12,666.51. In London, the FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX +1.25% moved down 1.3% to finish at 7,632.64.
Those broad losses led to a 1.4% fall for the Stoxx Europe 600 Index /zigman2/quotes/210599654/delayed XX:SXXP +1.09% , to 384.47. That adds to a 0.3% decline on Monday, when Italian stocks also suffered.
The euro /zigman2/quotes/210561242/realtime/sampled EURUSD -0.2442% recently traded at $1.1547 from $1.1625 on Monday, moving below $1.16 for the first time since November.
What’s driving markets
Worries grew that Italy will be forced to hold a new general election. The country’s president, Sergio Mattarella, on Monday blocked two antiestablishment parties from taking power by rejecting their euroskeptic candidate for economy minister. Mattarella then asked Carlo Cottarelli, a former International Monetary Fund official, to try to form a new government.
The populist 5 Star Movement and League parties are now calling for new elections. The two had agreed to form a coalition government after the general election in March — then seen as the “worst-case scenario” by financial strategists.
The result of any new ballot would be seen as a referendum on the feelings of Italians about the euro and membership of the European Union, some market observers said. Overall, the events in Italy are reviving worries about the stability of the eurozone.
In Spain, Rajoy will face a no-confidence vote in parliament on Friday, which could lead to the ouster of his minority center-right government and its replacement by the Socialist Party. The center-left opposition party called for the vote after a corruption case ended in convictions for senior members of Rajoy’s People’s Party.
The prospect of a sudden and unexpected change in Spain’s government caught many investors unaware on Friday, sending Spanish stocks sharply down and bond yields up. But those jitters have abated somewhat since, as a lack of coordination among opposition parties became clear. However, the Socialist Party has reportedly pledged to hold new elections if it is successful in its bid to remove Rajoy.
What are strategists saying?
“The recent weakness of [the euro] is likely to remain, as the Italian situation could turn into a political crisis in a country where the president does not have sufficient power to make changes,” said analysts at FxPro in a note.
“Italian bonds in May displayed the highest growth yields since the end of 2011 — levels not seen since the Greek debt crisis. Sustained growth in bond yields in Europe may cause the ECB to leave rates low in the region for much longer, which could lead to a serious depreciation in [the euro],” they said.
Italian bank stocks were battered, with Intesa Sanpaolo SpA /zigman2/quotes/206161760/delayed IT:ISP +1.06% off 4.1%, Unione di Banche Italiane SpA /zigman2/quotes/200732627/delayed IT:UBI +0.50% down 4.9%, and UniCredit SpA /zigman2/quotes/200769686/delayed IT:UCG +0.27% lower by 5.6%.
Among Spanish bank shares, Banco Santander SA /zigman2/quotes/205677933/delayed ES:SAN -0.17% /zigman2/quotes/202859081/composite SAN -1.64% slumped 5.4%, and BBVA SA /zigman2/quotes/204078760/composite BBVA -1.34% /zigman2/quotes/209653399/delayed ES:BBVA -0.24% gave up 4.2%.
Dixons Carphone PLC tumbled 21% after the British electronics and phones retailer issued a pretax profit warning for fiscal 2019.