Italy’s Political Shakeup Dampens Stock Market

US traders are coming off a holiday weekend, and Italy dealt them a rude awakening, as evidenced by the broader indices all trading in the red. The writing was on the wall with declines in the European markets coupled with US futures suggesting sharp declines, including a triple-digit drop in the Dow, amid political turmoil in Italy that’s spilling over into the mood of the global markets.

It was a lower open across the board, with all 30 Dow components losing ground, dragging the Dow Jones Industrial Average down by as much as 200 points. Among the hardest hit were financials Goldman Sachs and JPMorgan in addition to Boeing. The Nasdaq and S&P 500 were also sent tumbling.

Italy’s political shakeup which has the populist leaders and the EU at odds threatens to displace the No. 3 economy from the European Union and could lead to a fresh election as soon as September, which could pose a “referendum on the euro,” reports suggest. The political uncertainty has increased the risk tied to a possible default of Italy’s massive debt.

European markets have been feeling the heat over the past couple of days. At last check

  • Italy’s FTSE MIB fell 2.1%
  • Stoxx Europe 600 fell to its lowest levels since March
  • Spain’s IBEX 35 was down 2.4%
  • Italy’s 10-year yield soared as Italian bonds sold off
  • The euro declined by 0.4% to its lowest level against the USD year to date

Market Contagion

The Asian markets ended the day lower, illustrating the impact that Italy’s political crisis is having on the global markets. But it wasn’t all fueled by Italy. Apple revealed that it would be migrating its iPhones to OLED screen technology and away from LCD, which sent shares of screen makers lower, pressuring the MSCI Asia Pacific Index.

Investors fled stocks for safer asset classes, triggering a rally in US Treasuries, including the 10-year note, 2-year and 30-year Treasury Bond. Till now, the bond markets have been largely unphased by geopolitical developments this year.

Meanwhile, Allianz Chief Economic Advisor Mohamed El-Erian appeared on CNBC this morning and said that the Italian politics-fueled fallout in the global markets underscores the strength in the US economy. He suggested that other economies of the world have been riding on the coattails of the U.S., saying: “We were just in a lucky coincidence. People are now realizing the only economy with real legs to it was the U.S. economy.”

El-Erian is forecasting U.S. GDP expansion of at least 2.5% to 3% in 2018.

Featured image courtesy of Shutterstock. 

Gerelyn has been covering ICOs and the cryptocurrency market since mid-2017. She's also reported on fintech more broadly in addition to asset management, having previously specialized in institutional investing. She owns some BTC and ETH.