Stocks take battering as Italian crisis roils financial markets

Tokyo (Reuters): Asian stocks extended a global sell-off yesterday (30 May) as Italy’s political crisis rippled across financial markets, toppling the euro to a 10-month low, pushing up Italian borrowing costs and sending investors rushing to safe-haven assets such as US Treasuries.

MSCI’s broadest index of Asia-Pacific shares outside Japan tumbled 1.5%, while Japan’s Nikkei average sold off as much 1.9% to hit a six-week low. Chinese shares also headed south, with the Shanghai Composite index down 1.8%, South Korea’s KOSPI and Australia’s S&P/ASX 200 slipped 2.0% and 0.6%, respectively.

The sharp downturn followed from an equally harsh session on Wall Street on Tuesday (29 May), where the Dow Jones Industrial Average fell 1.6%, the S&P 500 lost 1.2% and the Nasdaq Composite dropped 0.5%. The financial sector took a hard hit.

Investors fear that repeat elections in the euro zone’s third-largest economy - which could come 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.

“The way Italy’s short-term debt yields are spiking makes you think default risk is on radar in the market. It tells how grave the situation is,” said SMBC Nikko Securities senior strategist Makoto Noji. “What the markets are starting to factor-in is not a default per se but an early election leading to a victory of eurosceptics and an exit from the euro.”

Short-dated Italian bond yields - a sensitive gauge of political risk - soared 1.5%age points from Monday (28 May) to their highest since 2013 in their biggest move in nearly 26 years.

Tradeweb Markets LLC reported average trading volume in the debt is up by more than 60% in May compared to the month prior.

Safe-haven US Treasury bonds and German bunds rallied, as did the Japanese yen, the US dollar and gold. The euro fell against the Swiss franc, Japanese yen and US dollar, nearing $1.15 and touching its lowest point since July.

In Asia, the focus was also on the on-again, off-again US-North Korean summit and the US-China trade relationship.

A top North Korean official was headed to New York on Tuesday for talks with US Secretary of State Mike Pompeo, the latest indication that the summit between President Donald Trump and North Korean leader Kim Jong Un may go ahead next month.

Trump confirmed in a tweet that Kim Yong Chol, a former spy chief and trusted adviser to North Korea’s leader, was on his way for what would be the highest-level meeting in this week’s flurry of diplomatic activity aimed at salvaging the historic summit.

US-China trade tensions also added to the sombre mood in markets.

The United States said on Tuesday that it would continue pursuing actions on trade with China, prompting Chinese state media to slam the US announcement.

Emerging market stocks lost 1.2%, marking a new low point for the year, under continued pressure from a rising US dollar for countries that often borrow in that currency.