European stocks slump as political rumblings in Italy rattle nerves

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 I945, -2.65% tumbled 2.7% to end at 21,350.88. Investors also fled Italian debt, with the 2-year bond yield TMBMKIT-02Y, +157.06% recently surging to 2.42%, as prices sank. Bond prices move in the opposite direction of yields.

See: In topsy-turvy Italian markets, sovereign debt seen as riskier than corporate bonds

In Spain, the IBEX-35 index IBEX, -2.49% gave up 2.5% to close at 9,521.30, as traders fretted about the future of Rajoy’s government.

France’s CAC 40 PX1, -1.29% fell 1.3% to end at 5,438.06, and Germany’s DAX 30 index DAX, -1.53% sank 1.5% to 12,666.51. In London, the FTSE 100 UKX, -1.26% 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 SXXP, -1.37% to 384.47. That adds to a 0.3% decline on Monday, when Italian stocks also suffered.

The euro EURUSD, -0.6280% 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.

Read: Here’s why markets are worried about Italian politics — again

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.

Check out: 4 ways the ECB is preventing an Italian rerun of the euro crisis — for now

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.

Stock movers

Italian bank stocks were battered, with Intesa Sanpaolo SpA ISP, -4.09% off 4.1%, Unione di Banche Italiane SpA UBI, -4.90% down 4.9%, and UniCredit SpA UCG, -5.61% lower by 5.6%.

Among Spanish bank shares, Banco Santander SA SAN, -5.43% SAN, -8.82% slumped 5.4%, and BBVA SA BBVA, -6.82% BBVA, -4.17% gave up 4.2%.

Dixons Carphone PLC DC., -20.74% tumbled 21% after the British electronics and phones retailer issued a pretax profit warning for fiscal 2019.

Let's block ads! (Why?)