European Political Fears Send Markets Spiralling Lower

Political turmoil in Europe weighed on investor sentiment, pulling stocks lower across the board, whilst also dragging the euro sub $1.16, striking fresh year to date lows.

The Italian President frustrating efforts by the two Eurosceptic populist parties to form a coalition government means that the status quo prevails in Italy for now.

But far from calming the markets, risk off is being fuelled by the expectation that there will be another election sooner rather than later and that the populists will have a stronger hand, posing greater potential risks to the euro and resulting in a more extreme market response.

This political drama has reawakened fears over eurozone stability and default risk which have been dormant for several years.

Italian 10-year bond yields jumped 3.38% to its highest level since March 2014, whilst he spread over the German bond widening to 2.5% highlights the extent of the fears.

Whilst the chances of Italy actually defaulting on its debt is, in reality, still a long way off, we are certainly looking ahead to a summer of political unrest in Italy and volatility in the markets.

The FTSE MIB was down a further 2% on Monday, putting losses so far this week at just shy of 4% and losses for May at over 10%.

Spain adds to euros woes

Far from being an isolated case, political fears have spread to Spain as the vote of no confidence for Prime Minister Rajoy draws closer. This could see Rajoy’s minority government ousted and replaced by the Socialist Party opposition.

The potential changing political landscape which sees dark clouds forming overs Spain’s relationship with the EU, added to the euro’s woes and sent the IBEX down over 2.25%.

European negativity hits markets in UK and US

Negativity stemming from political instability in Europe spilled over in to the UK markets with the FTSE trading over 1% lower, whilst the pound was also in the firing line down close to 6-month lows versus the dollar.

The Spanish – Italian political double whammy saw US stocks drop sharply on the open. As investors moved out of riskier assets, flows in safe havens such as US bonds increased, pulling yields lower.

Falling yields negatively hit banking stocks pulling JP Morgan 2% lower, whilst Goldman Sachs and Citigroup both dived 1.5%, meanwhile the dollar charged northwards to a 7 month high versus a basket of currencies at 95.17.

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