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While you were sleeping: Italy’s chaos boosts US Treasuries, sinks equities

Wednesday 30th May 2018

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US Treasuries rallied, while equities on both sides of the Atlantic dropped amid concern that political turmoil in Italy might pose a threat to the eurozone and prompt the US Federal Reserve to slow its interest rate hike trajectory.

Wall Street weakened. In 2.45pm trading in New York, the Dow Jones Industrial Average shed 2 percent, while theNasdaq Composite Index dropped 0.8 percent. In 2.30pm trading, the Standard & Poor’s 500 Index retreated 1.4 percent.

US financial markets had been closed on Monday for the Memorial Day holiday. 

The Dow slid, led by declines in shares of JPMorgan Chase as well as those of Goldman Sachs and American Express, recently down 4.8 percent, 3.8 percent and 3.7 percent respectively.

“The political situation in Italy is troublesome and then you get broader concerns about the strength of the euro market in general and that in turn has some people thinking maybe the Fed here in the US slows down on raising rates,” Peter Jankovskis, co-chief investment officer at Oakbrook Investments, told Bloomberg. “That’s been a big pillar for the financials overall, that rates will continue to rise and their margins will continue to improve because of that.”

Coca-Cola was the only stock in the Dow to gain, trading 0.5 percent stronger.

US Treasuries rallied, pushing yields on the 10-year note 12 basis points lower to 2.82 percent.

The Fed is widely expected to lifts its target interest rate at its next meeting in June and has flagged another hike later this year. 

“Fed officials may well choose to slow the pace of their rate hikes over the rest of this year if the storm clouds hanging over the euro-zone (and some emerging markets) do not pass,” Andrew Kenningham, chief global economist at Capital Economics, said in a note on Tuesday. “And if the crisis in Italy takes another dramatic turn for the worse, all bets are off.”

In Europe, the Stoxx 600 Index finished the session with a 1.4 percent fall from the previous close. Germany’s DAX Index gave up 1.5 percent, while France’s CAC 40 Index declined 1.3 percent, and the UK’s FTSE 100 Index also dropped 1.3 percent.

In Italy, government bonds extended their plunge, lifting the yield on the country’s 10-year note 48 basis points to 3.164 percent, according to Bloomberg. 

Italy’s crisis could prompt the European Central Bank to alter its plans for its quantitative easing program, according to Capital Economics’ Kenningham.

“For now, our forecast is for the ECB to announce in July that it will taper its asset purchases from 30 billion euros per month in September this year to zero by next January,” Kenningham said. “But if the sell-off in Italian government bonds is not reversed, policymakers may revise these plans.”

“One option would be to persist with QE at its current pace for longer, particularly as Italian bonds would be among the most vulnerable to any widening of spreads as the ECB tapers its asset purchases,” Kenningham said.


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