Italian financial markets shaken by political turmoil

Italian financial markets shaken by political turmoil

Gap between Italian and German debt yields widens in sign of rising concern

Stocks fell and investors moved into the safety of government bonds on Friday, while Italian assets came under pressure as optimism was tempered by the re-emergence of political risk in Europe and fresh trade concerns.

Traders pulled out of Italian government debt with Rome’s ruling coalition government on the verge of collapse, sending yields rocketing, while shares in the country’s banks fell sharply.

Giuseppe Conte, Italy’s prime minister, said on Thursday he would start proceedings to recall parliament for a vote of no confidence, plunging the country into political turmoil.

Italian two-year government bond yields rose 23 basis points to 0.286 per cent, while the yield on 10-year debt was 25bp higher, which would be its biggest daily gain since 2018. The rise in yield points to a drop in price.

The moves meant the closely watched spread between Italian 10-year government bonds and German Bunds of the same maturity rose to as much as 2.367 percentage points, its highest level since June, suggesting that the risk premium investors place on Italian debt has risen.

Nadia Gharbi, an economist at Pictet Wealth Management, said one of the reasons for the sharp market reaction is that a possible general election in the autumn would come in the middle of 2020 budget negotiations with the EU.

“The 2020 budget will be the real acid test,” she said. “It is hard to see how further tensions with Brussels can be avoided.”

Rating agency Fitch will release a closely watched review of Italy’s sovereign debt later on Friday.

“Since we see the possibility of a downgrade being too close to call and with the likelihood of new elections increasing sharply, Italian bonds are expected to remain vulnerable,” said Italian bank UniCredit.

The stock index tracking Italian banks fell more than 4 per cent to its lowest level since October 2016, with Milan’s wider FTSE MIB index down 2.1 per cent.

Wider government debt rallied, with the yield on the 10-year German Bund falling 2bp to minus 0.570 per cent, while the benchmark 10-year US Treasury yield slipped 1bp to near 1.7 per cent, a threshold last reached two years ago.

European stocks and US futures fell as an overnight rally on Wall Street fizzled out. Optimism was tempered by a Bloomberg report that Washington was delaying licences for US companies to deal with Huawei, after China halted crop purchases.

Investors were taking stock after a tumultuous week that saw sharp moves in bonds, equities and commodities prices.

Neil MacKinnon, a strategist at VTB Capital, said: “The unifying macro theme this week is the increasing risk of a global recession, competitive currency devaluations and increasing trade frictions.”

Wall Street posted its biggest gain in two months overnight, but that sense of optimism barely fed into Asian trade, where stocks were mixed.

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