Stock Market Decline Provoked by Italy’s Political Anxiety Spreads to U.S.
By Matt Phillips and Prashant S. Rao
Stock markets in the United States fell in early trading on Tuesday, amid concerns that growing political uncertainty in Italy could weigh on global economic growth and reignite questions about the stability of the European single currency.
The decline in the United States followed an overnight drop in Asia and Europe. Stocks and bonds in Italy — Europe’s fourth-largest economy and a founding member of the eurozone — led the global decline.
Italy’s benchmark stock index fell nearly 3.7 percent at one point, and the country’s debt sank in value. The yield on Italy’s main 10-year bond rose to its highest level in more than four years, spiking to more than 3.40 percent in morning trading in Europe. Bond yields move in the opposite direction of bond prices.
There were indications that investor worries about Italy were beginning to infect thinking beyond the country’s borders, as well. 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 Tuesday, pushing their yields up as well.
The “spread” between debt from these countries and Germany — Europe’s biggest economy, and seen as having the region’s safest government bonds — widened sharply.
The dynamic brought back memories of the worst of the European debt crisis in 2012, when investors began to first consider the risk that Greece may default on its debt, and then moved on to countries including Ireland, Portugal and Spain. In subsequent years, European policymakers have been able to ease those investor concerns, in part through a European Central Bank policy of effectively printing money in order to push interest rates down and boost economic growth.
Developments in Italy seem to have reawakened fears of a debt crisis among investors.
Italy has not had a new government since 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 euroskeptic economy minister, but the proposal was vetoed by Italy’s president, who subsequently named a technocrat to take temporary charge instead.
The whirlwind developments — which leave open the prospect of early elections and the formation of another populist alliance — have hammered financial markets. 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.
In Europe, 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.
The yield on the 10-year United States Treasury note also fell to below 2.85 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.
In a note to clients, bond market analysts from BMO Capital Markets thought that the shift toward investor demand for safety was likely to last, pushing Treasury yields down further.
“The cracks that we’ve seen in risk appetite are only likely to widen,” they wrote.
Follow Matt Phillips and Prashant S. Rao on Twitter: @MatthewPhillips and @prashantrao.
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