Euro bounced back but stuck near 10-month lows with deepending political crisis in Italy

European Stock Markets

The euro bounced higher on Wednesday but remained stuck near 10-month lows against the dollar as concerns about a deepening political crisis in Italy kept a lid on any rebound. 

The failure to form a new government in the euro zone’s third-largest economy has raised the likelihood of an early election that some market players fear will become a de facto referendum on the single currency and Italy’s role in the European Union.

Sources close to some of Italy’s main parties said there was now a chance that President Sergio Mattarella could dissolve parliament in the coming days and send Italians back to the polls as early as July 29.

After major moves on Tuesday, when a massive sell-off in Italian debt markets rippled into currency markets, the foreign exchanges began European hours on a quieter note, with the dollar edging back slightly from its 2018 highs.

Italian government bond yields IT10YT=RR IT2YT=TWEB settled below multi-month highs after Tuesday’s market turmoil.

The euro, which plunged to a 10-month low of $1.1510 on Tuesday as Italian worries added to bearish sentiment around the single currency, rallied 0.3 percent to $1.1573 EUR= on Wednesday.

It has fallen more than 4 percent this month and most analysts remain cautious on its outlook.

The euro had dropped 1 percent against the safe-haven Swiss franc on Tuesday, its biggest daily fall since September, but it recovered half a percent to 1.1493 francs EURCHF= as some calm returned to markets.

It is down more than 4 percent this month, the biggest monthly decline since January 2015, when the Swiss central bank suddenly scrapped its floor for the euro against the Swiss currency.

Against the yen, the euro rose to 126.03 yen EURJPY= after hitting an 11-month low of 124.62 yen overnight, from about 131 yen a little more than a week ago.

The dollar slipped by 0.2 percent against a basket of currencies to 94.631 .DXY but steaded against the yen JPY=. It had hit a five-week low of 108.115 yen the previous day as the risk-averse mood boosted the Japanese currency.

Investors are also wary of an escalation in trade frictions between the United States and China after the White House said that it still holds the threat of imposing tariffs on $50 billion of imports from China.

Washington said it will use it unless Beijing addresses the issue of theft of American intellectual property.

U.S. bond yields have fallen over the past couple of days, undermining the dollar’s yield attraction and a key reason for the currency’s rapid turnaround in the last month.

Dow futures fall more than 150 points as Italian drama grabs the spotlight

Global Stock Markets

U.S. stock futures pointed to a sizable drop at the open Tuesday, as traders getting back to work after a three-day weekend were greeted by fresh Italian political drama.

Another Italian election looks likely within a few months, and it might lead the eurozone’s third-largest economy toward ditching the shared currency — which would represent quite a shakeup to the status quo.

Traders also were assessing efforts to revive a June summit between President Donald Trump and North Korean leader Kim Jong Un, as well as ongoing political uncertainty in Spain, where Prime Minister Mariano Rajoy was struggling to stay in power.

Dow Jones Industrial Average futures YMM8, -0.71% shed 165 points, or 0.7%, to 24,565, while S&P 500 futures ESM8, -0.70% lost 17.80 points, or 0.7%, to 2,700.50. Nasdaq-100 futures NQM8, -0.52% dropped 29 points, or 0.4%, to 6,931.25

Last week, the Dow DJIA, -0.24% advanced 0.2% for the week, the S&P 500 SPX, -0.24% added 0.3%, and the Nasdaq Composite COMP, +0.13% climbed 1.1%.

The three gauges are on track for May gains of 2.4% or more, as of Friday’s close. This month’s rally has put the Dow industrials back in the green for the year, up 0.1%.

See: Stocks are poised for their best May in 9 years, but this week is crucial
What’s driving markets?

U.S. stock futures are trading in the red alongside European equities SXXP, -1.44%  , which have been whacked by worries about a fresh Italian election, potentially in September.

An election looks to be in the cards, as an attempt to form a caretaker government led by International Monetary Fund veteran Carlo Cottarelli faces resistance. Cottarelli was put into that role on Monday by Italian President Sergio Mattarella, who had essentially blocked a coalition government of two big antiestablishment parties — the 5 Star Movement and the League.

Now those parties appear to be spurning Cottarelli, making him unlikely to win a vote of confidence in parliament. Instead, he likely will lead a caretaker government as prime minister only until another general election is called.

A March figure for the Case-Shiller home price index is due at 9 a.m. Eastern Time, and a May reading for the Conference Board’s consumer confidence index is slated to arrive at 10 a.m. Eastern. Economists polled by MarketWatch expect the confidence gauge to come in at 127.5.

On the Federal Reserve front, St. Louis Fed President James Bullard reportedly said early Tuesday in Japan that it was difficult for the American central bank to raise interest rates by a large margin when the Bank of Japan and the European Central Bank were pursuing accommodative policy.

The pan-European Stoxx Europe 600 Index SXXP, -1.40% fell 1.3%, while Italy’s FTSE MIB stock benchmark I945, -3.04% was down nearly 3%.

The euro EURUSD, -0.6796% recently changed hands at $1.1557, down from $1.1625 late Monday in New York, helping the ICE U.S. Dollar Index DXY, +0.75% inch up.

Gold futures GCM8, -0.09% edged higher, but U.S. oil futures CLN8, -1.47% fell more than 1%.

Italy Political Risks Infect Global Markets

European Stock Markets

A deepening political crisis in Italy provoked a second day of heavy selling on European financial markets, with the euro cut to a 6-1/2 month low, stocks punished and short-term borrowing costs surging for the government in Rome. 

Investors fear that repeat elections - which now seem inevitable in the euro zone’s third largest economy - may become a de facto referendum on Italian membership of the currency bloc and the country’s role in the European Union.

Short-dated Italian bond yields — one of the most sensitive gauges of political risk — soared as much as 80 basis points IT2YT=RR to their highest since late 2013 as investors’ anxiety deepened. [GVD/EUR]

The euro dropped below the $1.16 line EUR=EBS for the first time in 6-1/2 months, down 0.3 percent on the day. Against the Swiss franc, it fell by a similar margin at 1.1528 francs. [/FRX]

Stocks in Milan slid 2.6 percent on the main index .FTMIB after a 2.1 percent fall on Monday. Bank shares .FTIT8300 slumped another 5 percent, having lost 4 percent in the previous session, bruised by the sell-off in government bonds, a core part of Italian banks' portfolios.

Hardy recalled a promise made in 2012 by European Central Bank President Mario Draghi to keep the euro intact.

Adding to the uncertainty, Spanish Prime Minister Mariano Rajoy will face a vote of confidence in his leadership on Friday.

Spain's bond-yield spread with Germany was also at its widest in seven months at 122 bps ES10YT=RR. Madrid's IBEX bourse .IBEX was down almost 2 percent. [.EU]

Asia flinched too. Japan's Nikkei .N225 slipped 0.6 percent. Chinese shares were in the red, too, with the blue-chip index.CSI300 down 0.6 percent and Hong Kong's Hang Seng index .HSI off 0.7 percent. [.T][.SS]

E-Mini futures for the S&P500 ESc1 also gave up early gains to be down 0.5 percent. Meanwhile, the dollar was up against almost all major currencies except the safe-haven Japanese yen.

The U.S. currency is heading for its best month in 1-1/2 years .DXY - a move that is hurting many emerging market countries that borrow in dollars.

Away from Europe, the focus was also on the on-again, off-again U.S.-North Korean summit and the U.S.-China trade relationship.

An aide to North Korean leader Kim Jong Un arrived in Singapore on Monday night, Japanese public broadcaster NHK reported, and the White House said a “pre-advance” team was travelling to the city to meet the North Koreans.

The reports indicate that planning for the summit, initially scheduled for June 12, is moving ahead after President Donald Trump called it off last week. A day later, Trump said he had reconsidered, and officials from both countries were meeting to work out details.

In another sign that investors were flocking to safer bets, the euro hit a 11-month low versus the yen and fresh 6-1/2 low against the Swiss franc EURCHF=EBS

Elsewhere in bonds, U.S. 10-year Treasury yields US10YT=RR were at six-week lows at 2.883 percent after a U.S. holiday on Monday. Yields move inversely to price.

Analysts are awaiting U.S. inflation data later in the week which could provide clues to future interest rate rises ahead of the Federal Reserve policy meeting next month.

Oil prices remained under pressure from expectations that Saudi Arabia and Russia would pump more crude, even as U.S. oil output rises. [O/R]

U.S. crude futures CLc1 tumbled to six-week lows and looked set for a fifth straight day of declines. The July contract was last down 1.6 percent at $66.81 a barrel.

Brent crude futures LCOc1 edged up 0.3 percent after dropping to $74.49 per barrel on Monday, their lowest in about three weeks. They were last at $75.53.

Spot gold XAU was barely changed at $1,298.01 an ounce.

Euro climbs after Italy eurosceptic parties' attempt to form government fails

European Stock Markets

The euro climbed up on Monday and was set for its biggest one-day rise against the Swiss franc as a relief rally swept through currency markets after Italy’s anti-establishment 5-Star and League parties abandoned plans to form a government. 

President Sergio Mattarella is expected to ask a former International Monetary Fund official on Monday to head a stopgap government amidst political and constitutional turmoil, with early elections looking inevitable.

Markets were relieved at not having to immediately deal with the likelihood of a eurosceptic government. But market strategists doubted the rally in the euro would be sustained.

The euro initially rallied 0.6 percent to $1.1728, pulling itself above 6 1/2-month lows. It trimmed some gains to stand 0.4 percent up on the day at $1.1696.

The euro also strengthened by 0.8 percent against the Swiss franc, rebounding from near three-month lows, and was trading at 1.1629.

The euro has been weakened by the dollar’s rally and by widening bond spreads between Italian and German debt, as markets grappled with the prospects of a spendthrift coalition government in Rome comprising the two parties.

Goldman Sachs strategists said political uncertainty will remain elevated, because the prospect of new elections would remain a drag on the economy.

The euro’s surge meant that the dollar pulled back from a six-month peak of 94.30 hit against a basket of rivals on Friday. It was trading 0.2 percent lower on the day at 94.03.

Elsewhere, the dollar was flat against the Japanese yen at 109.42 yen. Risk aversion receded after U.S. President Donald Trump said on Sunday a U.S. team had arrived in North Korea to prepare for a summit between him and North Korean leader Kim Jong Un.

Trump had pulled out of the summit last week, which had sapped investor risk appetite and helped push the dollar to a two-week trough of 108.955 yen on Thursday.

The Australian dollar, which is sensitive to shifts in risk sentiment, gained 0.25 percent to $0.7569 after shedding 0.4 percent on Friday.

Trading volumes overall were set to drop with Britain and the United States, the two main financial centres for foreign exchange trading, both closed for holidays.

Euro slides down to fifth successive weekly decline with political uncertainity in Italy

European Stock Markets

The euro was headed on Friday for its fifth successive weekly decline versus the dollar, in what would be a first for the currency since 2015, as political uncertainty in Italy continued to worry investors

The euro has slumped six cents from more than $1.24 in the space of three weeks after a huge dollar rally and amid concerns about the demands of populist parties likely to form Italy’s next government.
On Thursday, the far-right League and 5-Star Movement agreed the basis for a governing accord that would slash taxes and ramp up welfare spending.

Ratings agency DBRS warned that the economic proposals of the anti-establishment parties could threaten Italy’s sovereign credit rating.

The euro on Friday inched up 0.2 percent to $1.1814. But the currency has fallen nearly 1.2 percent this week and on Wednesday dropped to a five-month low of $1.1763.

A founding member of the EU and the euro, Italy accounts for 15.4 percent of Eurozone GDP and the parties’ hostility toward the European Union stance is the biggest challenge to the bloc since Britain voted to leave two years ago.

Still, some investors have played down the broader impact on the euro and questioned whether the Italian parties will really follow through on such plans.

A powerful rally by the dollar is also hurting the euro.

On Friday the greenback edged higher against the yen and set a fresh four-month high, buoyed by a further rise in U.S. Treasury yields that suggests a an upbeat outlook for the world’s largest economy.
The dollar, which has risen 5 percent since mid-February, touched a high of 111.005 yen on Friday, its strongest level since Jan. 23.


Investors are betting that U.S. interest rates will need to rise further to curb inflation.

That has forced investors who took big positions against the dollar anticipating it would fall in 2018 to rush to unwind and cover their positions, pushing the greenback even higher.

In a note to clients, strategists at Citibank said the current rally in the dollar would not last long.
The U.S. budget deficit, which is projected to balloon to more than $1 trillion in 2019, they said, would contribute to a drop of 5 percent in the dollar index over the next 12 months.

Most emerging market currencies continued to wilt against the surging dollar.

The Indonesian rupiah weakened half a percent to 14,115, its lowest in more than 2-1/2 years and shrugging off a rate rise by the central bank late on Thursday.