World stocks reverse course as Italy stress grips Europe again | 2018-10-03 |

World stocks reverse course as Italy stress grips Europe again

3 October, 2018 12:00 AM printer

LONDON: World stocks went south and European assets sold off on Tuesday after anti-euro comments from an Italian party official weighed on the single currency and sent Italy's bond yields up to multi-year highs.

A boost to investors' risk appetite from the new U.S.-Mexico-Canada trade pact proved short-lived with the MSCI world equity index falling back 0.3 percent, reports agencies.

The leading index of euro zone stocks lost 0.8 percent while the pan-European STOXX 600 fell 0.5 percent, tracking Asian stocks lower and extending losses as Italian assets were under renewed stress.

Italian government bonds sold off after the economic head of the ruling League party said most of Italy's problems could be solved by having its own currency.

Italian 10-year bond yields hit a new 4 1/2 year high and shares in Italian banks, which have large sovereign bond holdings, sold off sharply to hit a 19-month low, down 2.8 percent. Italy's FTSE MIB tumbled 1.4 percent.

Euro zone banks also dropped 1.3 percent as the comments reignited investors' anxieties about contagion to euro zone finances from Italy's higher budget deficit plans, which the government set out on Thursday.

"While our economists do not expect systemic implications for the global economy, contagion risks have risen," said Goldman Sachs analysts.

"We think European risky assets remain vulnerable and there is potential for negative spillovers to the Euro area given the high trade exposure to Italy."

The euro fell 0.3 percent, briefly touching its lowest since Aug 21 at US$1.1523 and last trading at US$1.1536.

The single currency has been hurt by concerns that a significant increase in the Italian budget will deepen Italy's debt and deficit problems, and by extension the European Union's.

"The history of the euro zone tends to be one of great fudges - think of the case of Greece," said David Keir, manager of the global income and growth fund at Saracen.

"But I would caution against any wider systemic spreading. The reality is making kneejerk reactions to big political decisions can very much be the wrong thing to do," he added.