Dow drops more than 200 points as Italy worries unsettle eurozone

U.S. stocks dropped sharply Tuesday as political turmoil in Italy and Spain added to investors' worries and sent the euro falling to its lowest level against the dollar in 2018.

The Dow Jones industrial average fell 150 points amid losses in Goldman Sachs, J.P. Morgan Chase, IBM. The S&P 500 fell 0.7 percent as falling interest rates undermined financial stocks, and the Nasdaq composite fell 0.3 percent thanks to losses in Apple and Amazon.

The Cboe Volatility Index (VIX) — the best measure of market anxiety — hit 15.98, its highest level since May 4. U.S. stock markets were closed Monday for Memorial Day.

The moves in the U.S. came amid turbulence for European markets and politics alike.

The Stoxx Europe 600 fell 1.2 percent, weighed down by a 2.1 percent drop in Italy's FTSE MIB and a 2.4 percent decline in Spain's IBEX 35. In Asia, stocks finished the session in the red, as the eurozone's political turmoil depressed markets worldwide.

The euro fell 0.4 percent to $1.158 — its lowest level this year against the greenback — as Italian debt rates continued to rise.

Over the weekend, Italy's prime minister appointed former International Monetary Fund official Carlo Cottarelli as interim prime minister to form a new government and restore political order within the country.

The euro zone's third-largest economy has been struggling to establish a government since inconclusive elections in March, with anti-establishment forces abandoning their effort to form a ruling coalition over the weekend.

"In Italy, in the short-run, the status quo prevails, [but] if elections strengthen the hand of populist parties on the left or the right, there's danger of a more radical response," said David Kelly, chief global strategist at JPMorgan Funds. That could be "fiscally dangerous, given how much debt Italy already has."

The latest developments have spurred previously dormant fears concerning the stability of the eurozone and default risk concerning Italy's €2.3 trillion ($2.68 trillion). The 10-year Italian bond yield jumped above 3 percent early Tuesday, more than 2.5 percentage points above the German 10-year bond rate. Yields move inversely to prices.

"I think default risk, however, is still extremely low," Kelly added. "Italy could not possibly default on their debt without an entire collapse of their economy. They would really be defaulting on their own citizens and I don't think it's likely to happen."

Meanwhile, the risk-off attitude fueled demand for safer asset classes, including U.S. and German Treasurys. The rate on the U.S. 10-year note fell to 2.86 percent Tuesday, down from highs above 3 percent in recent weeks; the German 10-year rate hovered at 0.319 percent.

Falling yields added to pressure on both U.S. and European bank shares, as lower rates tend to shrink lending and profits. Big banks like Citigroup, Morgan Stanley and Bank of America all fell roughly 2 percent Tuesday, while the Euro Stoxx Banks index fell 4.2 percent.

European worries extended to Spain, where the country's parliament is set to vote whether to oust Prime Minister Mariano Rajoy and his center-right party this Friday.

In other markets, oil prices showed a mixed picture, with Brent posting minor gains, while U.S. crude futures posted solid losses, as concerns over increased crude output lingered. West Texas Intermediate (WTI) crude futures are down more than 8 percent over the last five days and were last seen down 86 cents at $67.02.

Investors are likely to remain on edge in the U.S., as the future of talks between North Korea and the U.S. keeps investors on their toes. Last week, President Donald Trump made the decision to cancel a key nuclear summit between himself and North Korea's Kim Jong Un.

On Friday, however, Trump said that the U.S. administration had restarted its dialogue with the Asian country, and suggested that a meeting could still take place.

North Korea has sent some of its top officials to Singapore and the U.S., Reuters reported Tuesday citing Asian media outlets, suggesting that the on-again-off-again summit between the two countries could still happen.

The Walt Disney Company fell 0.9 percent Tuesday after its latest "Star Wars" film disappointed at the box office.

"Solo: A Star Wars Story" opened to an underwhelming $103 million in North America over the long holiday weekend, falling short of estimates closer to $150 million, according to industry researcher ComScore.

—CNBC's Jacob Pramuk contributed to this report

Let's block ads! (Why?)