Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., February 15, 2018. Reuters
NEW YORK: A spiraling Italian political crisis provoked a global stock market sell-off on Tuesday, cut the euro to a 10-month low and spiked borrowing costs for the government in Rome.
Investors fear that repeat elections - which now seem likely in the euro zone's third-largest economy as soon as July - may become a de-facto referendum on Italian membership of the currency bloc and the country's role in the European Union.
Safe-haven U.S. Treasury bonds and German bunds rallied, as did the Japanese yen, the U.S. dollar and gold by midday in the U.S. trading day. Oil sank further from the near-four-year highs set earlier in the month. That all weighed on already embattled emerging markets.
The Dow Jones Industrial Average <.DJI> fell 391.64 points, or 1.58 percent, to 24,361.45, the S&P 500 <.SPX> lost 31.47 points, or 1.16 percent, to 2,689.86 and the Nasdaq Composite <.IXIC> dropped 37.26 points, or 0.5 percent, to 7,396.59.
"As part of the overall narrative of cautionary situations and risks that the market needs to worry about, this could potentially become cause for contagion," said Wasif Latif, head of global multi-assets for USAA Asset Management Co.
"What once seemed like a synchronized global economic recovery is now a waning growth story."
Italy seems likely to repeat elections soon after its prime minister-designate, Carlo Cottarelli, failed to secure support from major political parties for even a stop-gap government, sources told Reuters on Tuesday.
Italy has searched for a new government since inconclusive elections in March, and investors fear voters will choose leaders hoping to break with the continent's austere fiscal policy approach and even the multinational euro currency that replaced the lira in 2002.
"As the slide continues, you ask where is the end," said John Hardy, Saxo Bank's head of foreign-exchange strategy.
"If this continues for another couple of sessions, I think you will have to see some official response. A 'whatever it takes' kind of moment," he said.
Facing a sovereign debt crisis, European Central Bank President Mario Draghi promised in a legendary 2012 speech to "whatever it takes" to keep the single currency intact.
POLITICS TAKE CENTER STAGE
Short-dated Italian bond yields
The euro fell against the Swiss franc, Japanese yen and U.S. dollar, nearing $1.15
Stocks in Milan <.FTMIB> slid 2.7 percent in their fifth straight day of losses. Bank shares there <.FTIT8300> fell 4.7 percent, bruised by the sell-off in government bonds, a core part of bank portfolios.
Adding to the uncertainty in Europe, Spanish Prime Minister Mariano Rajoy will face a vote of confidence in his leadership on Friday.
Spain's bond-yield spread with Germany also went to its widest this year at nearly 1.35 percentage points
Away from Europe, the focus was on the on-again, off-again U.S.-North Korean summit and on the U.S.-China trade relationship.
An aide to North Korean leader Kim Jong Un arrived in Singapore on Monday, Japanese public broadcaster NHK reported, and the White House said a "pre-advance" team was traveling to the city to meet the North Koreans.
The reports indicate that planning for the summit, initially scheduled for June 12, is moving ahead even though U.S. President Donald Trump called it off last week. A day later, Trump said he had reconsidered, and officials from both countries were meeting to work out details.
Asia flinched. Japan's Nikkei <.N225> slipped 0.6 percent. MSCI's broadest index of Asia-Pacific shares outside Japan <.MIAPJ0000PUS> closed 0.9 percent lower.
The United States also said on Tuesday that it would continue pursuing action on trade with China, days after Washington and Beijing announced a tentative solution to their dispute and suggested that tensions had cooled.
In the United States, volatility <.VIX> leapt and bank stocks <.SPSY> withered. Benchmark 10-year notes
Emerging market stocks <.MSCIEF> lost 1.2 percent, marking a new low point for the year, under continued pressure from a rising U.S. dollar for countries that often borrow in that currency.
The greenback is poised to turn in its best monthly performance against a basket of trading partners' currencies <.DXY> since 2015.
Oil struggled under pressure from expectations that Saudi Arabia and Russia would pump more oil to counter potential supply shortfalls from Venezuela and Iran, even as U.S. output has surged in recent years.
Rising U.S. oil supplies have helped pushed the spread between Brent and U.S. crude
Reuters also reported separately:
The S&P 500 and the Dow Jones Industrial Average registered their biggest one-day percentage drops in a month on Tuesday as political turmoil in Italy sparked concerns about the stability of the euro zone and shares of U.S. banks tumbled.
Italy has been unable to assemble a coalition government since inconclusive elections in March, which saw the rise of anti-establishment parties that support leaving the euro. The most recent nominee for prime minister failed to secure support from the country's major political parties.
The political crisis in Rome, and the threat to the euro project it represents, triggered a rush to traditional safe havens like U.S. debt, pulling down U.S. 10-year Treasury yields and in turn spurring losses for U.S. banks. Shares of S&P 500 banks registered their biggest one-day decline in more than two months, ending more than 4 percent lower.
"The direct connection between the Italian government and the S&P 500 is tenuous, but it indirectly reminds people of geopolitical uncertainty," said Ed Keon, chief investment strategist at QMA in Newark, New Jersey.
The Dow Jones Industrial Average fell 391.64 points, or 1.58 percent, to 24,361.45, the S&P 500 lost 31.47 points, or 1.16 percent, to 2,689.86 and the Nasdaq Composite dropped 37.26 points, or 0.5 percent, to 7,396.59.
Shares of large U.S. banks were also pressured by downbeat guidance from JPMorgan Chase & Co and Morgan Stanley. JPMorgan's corporate and investment bank chief said his bank's second-quarter markets revenue would be flat compared with a year earlier. The co-head of Morgan Stanley's wealth management division said activity had slowed since March, according to a CNBC report https://www.cnbc.com/2018/05/29/morgan-stanley-shares-drop-after-executive-outlines-challenges.html.
JPMorgan Chase shares, which fell 4.3 percent, were the biggest drag on the S&P 500. Morgan Stanley shares dropped 5.8 percent, the second-largest percentage decline on the index.
"It's evolving into not the greatest environment for bank stocks," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.
Shares of energy companies were also led lower by a drop in U.S. crude oil futures on expectations that Saudi Arabia and Russia could pump more crude to compensate for a potential supply shortfall. [O/R]
Declining issues outnumbered advancing ones on the NYSE by a 1.49-to-1 ratio; on Nasdaq, a 1.63-to-1 ratio favored decliners.
The S&P 500 posted seven new 52-week highs and 12 new lows; the Nasdaq Composite recorded 95 new highs and 51 new lows.
Volume on U.S. exchanges was 7.58 billion shares, compared to the 6.58 billion average over the last 20 trading days. - Reuters
Reuters also reported separately:
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