Italian stocks turned sharply lower on Monday, acting as a deadweight on other European markets as investors looked at the increasing possibility of new elections for Italy, while political uncertainty also swirled around Spain.
But investors may see thinner volumes than normal as London markets closed for a bank holiday and U.S. markets will shut in observance of Memorial Day.
What are markets doing?
The Stoxx Europe 600 Index
fell 0.4% to 389.41. The index fell 0.9% last week, breaking an eight-week winning run that had been the longest positive stretch since June 2014.
In a turbulent session, Italy’s FTSE MIB index
shed initial opening gains to drop 2.5% to 21,851.74. The index has been on a roller-coaster ride in recent sessions as two antiestablishment parties — 5 Star Movement and League — that recently decided to form a coalition after March elections have been attempting to form a government. The index tumbled 4.5% last week.
Spanish stocks also tripped by the afternoon, with the IBEX- 35 index
dropping 0.8% to 9,743.70 amid questions about the stability of the ruling government.
turned lower against the dollar by the afternoon, dropping to 1.1609, from $1.1645 late Friday.
What is driving markets?
On Monday, Italian President Sergio Mattarella asked former International Monetary Fund official Carlo Cottarelli to try to form a new government. Paolo Savona, an 81-year-old economist and former industry minister who had been up for the post of economy minister has expressed views that the country will leave the euro.
The move came just hours after Mattarella blocked two antiestablishment parties from taking power by rejecting their euroskeptic candidate for economy minister. In response, the antiestablishment parties have now called for new elections — the last election was in March.
Concerns about the two parties vows to challenge the EU’s budget rules and slash taxes while increasing fiscal spending have driven up the cost of Italian debt recently.
Meanwhile, Spain remains on edge after the country’s main opposition party called for a vote of no confidence on Prime Minister Rajoy over a corruption case that ended in convictions for a former party treasurer and other senior members of the party. The vote is due to take place on Friday, with the debate beginning in parliament on Thursday.
The editorial sections of two major Spanish newspapers, El País and El Mundo, both called for early general elections on Saturday.
Italian 10-year bond yields
marched higher, and the spread over German bonds of the same duration was at the highest level since 2014, according to The Wall Street Journal. Italian 10-year bonds reached 2.63%, while Spanish borrowing costs also rose Monday.
Fresh hopes over a meeting between U.S. President Trump and North Korean leader Kim Jong Un may go ahead after a flurry of weekend diplomacy, did little to appease European markets.
After Trump abruptly called off that meeting last week, U.S. and North Korean officials met to get an agreement on denuclearization ahead of the summit. Leaders of the two Koreas held a surprise meeting of their own over the weekend.
What are strategists saying?
“New elections are now more likely, with 5-star and the League campaigning on a ‘we woz robbed’ ticket, and the election itself in danger of turning into a de facto referendum on euro membership. But when could elections happen, given that summer is fast approaching? And what new developments could be sprung on us in the meantime?” commented chief foreign-exchange strategist for Société Générale, in a note to clients.
“The real problem is that without the support of the 5 Stars Movement and the Northern League a technocratic government will not obtain a parliamentary vote of confidence, which means that it will only be able to manage current affairs until a new vote will be held,” said Althea Spinozzi, fixed-income specialist at Saxo Bank, in a note.
“Political uncertainty and prospects for new elections in Spain would raise market fears of a prolonged political vacuum, as seen after the last general election,” wrote Arne Lohmann Rasmussen, head of fixed income research at Danske Bank, in a note to clients.
Banks were the leading sector facing pressure on Monday, led by Italian financial names, with shares of Intesa Sanpaolo SpA
sliding 4.6%, Unione di Banche Italiane SpA
down 6.3% and Mediobanca SpA
slid 18% after the Danish biotech firm reportedly ended combination trials of its lung-cancer drug Darzalex, citing an increase in deaths after the treatment and citing no ob,served benefits.