Italian turmoil hits global markets, sending stocks plunging in U.S. and beyond
Stocks in the U.S. and Europe sank Tuesday following political turmoil in Italy, which stoked fears of instability in the euro bloc.
Investors sold stocks, and prices for U.S. government bonds surged as investors shifted money into lower-risk investments. Bond yields dropped, and interest rates on mortgages and other kinds of loans dropped along with them. Bank shares plunged as Wall Street expected the banks would earn thinner profits.
Major U.S. exporters such as technology and industrial companies and big makers of drugs and medical devices also skidded. Those companies depend on strong sales outside the United States.
Investors dumped Italian government bonds, driving borrowing costs sharply higher for that country and rekindling fears of more financial strain for Europe’s third-largest economy. They instead bought German and British government bonds, which are seen as more stable.
The political upheaval in Italy is likely to lead to new elections in the next few months. Investors are interpreting that potential vote as a referendum and expect that Italy could move closer to abandoning the euro currency if populist parties win the election. If that happens, it would have major implications for the European financial system and its economy.
“Eurozone membership will be at the forefront of the next election,” said Alicia Levine, the head of global investment strategy at BNY Mellon Investment Management. “Should Italy leave the eurozone, it’s clearly bad for European assets and it’s bad for the European banking system.”
New jitters about the stability of the euro pushed down that currency’s value against the dollar. It sank to $1.1531, its lowest since July, from $1.1669.
The Standard & Poor’s 500 index sank 31.47 points, or 1.2%, to 2,689.86. The Dow Jones industrial average dropped 391.64 points, or 1.6%, to 24,361.45; earlier in the day, it was down as much as 505 points.
Smaller U.S. companies, which tend to be more domestically focused than the large multinationals in the Dow, fared much better than the rest of the market. The Russell 2000 index slipped 3.28 points, or 0.2%, to 1,623.65.
The Nasdaq composite fell 37.26 points, or 0.5%, to 7,396.59.
In Europe, Italy’s benchmark stock index plunged 2.7%.
U.S. markets were closed Monday for the Memorial Day holiday.
Italian President Sergio Mattarella picked Carlo Cottarelli for prime minister after the anti-establishment 5-Star Movement and right-wing League refused to withdraw an anti-euro candidate as economy minister. That ended their attempt to establish a government after inconclusive elections in March. Cottarelli is likely to lose a vote of no confidence in parliament, which would mean another round of elections.
Investors dumped Italian stocks and bonds as a result. Yields on Italian government bonds soared as their prices declined. The yield on the 10-year Italian government bond jumped to 3.10% from 2.69%, a huge move. At the beginning of May the yield was just 1.78%. The sharp rise reflects weakening confidence among investors in Italy’s government.
The German DAX declined 1.5%, and Britain’s FTSE 100 and the French CAC 40 both sank 1.3%. Some of the worst losses went to European banks: Germany’s Deutsche Bank dropped 6.2% to $11.30 and Banco Santander of Spain tumbled 9.1% to $5.31.
“Uncertainty and the unknowns themselves affect the real economy,” said Levine of Bank of New York Mellon. “You’ve going to have less investment. You’re going to have a decline in consumer spending. You’ve going to have, on the margin, less consumer activity affecting growth.”
Spain was facing political turbulence of its own. That country’s parliament will hold a vote of no confidence in Prime Minister Mariano Rajoy after graft convictions of businesspeople and officials tied to his conservative Popular Party. The Spanish IBEX 35 sank 2.5%.
U.S. government bond prices jumped as investors moved money into lower-risk assets. The yield on the 10-year Treasury fell to 2.78%, its lowest since early April, from 2.93%. Shares of JPMorgan Chase dropped 4.3% to $105.93, and Bank of America fell 4% to $28.96.
Some U.S. stocks did well.
Defense contractor Booz Allen Hamilton Holding climbed 5.3% to $44.02 after it posted a larger quarterly profit than analysts expected.
Cabinet maker American Woodmark jumped 14.7% to $101.60, recovering some of its recent losses after issuing a strong quarterly report.
KB Home rose 1.6% to $26.95 after the S&P CoreLogic Case-Shiller index of prices in 20 cities showed that home prices climbed in March.
U.S. crude oil fell 1.7% to $66.73 a barrel in New York. Oil prices have slumped in the last week following reports that OPEC countries and Russia could start pumping more oil soon. Brent crude, used to price international oils, rose 0.1% to $75.39 a barrel in London.
Wholesale gasoline fell 1.7% to $2.14 a gallon. Heating oil fell 1.1% to $2.19 a gallon. Natural gas fell 2.2% to $2.88 per 1,000 cubic feet.
Gold fell 0.4% to $1,299 an ounce. Silver fell 1% to $16.37 an ounce. Copper fell 0.5% to $3.06 a pound.
In Asia, Japan’s Nikkei 225 fell 0.6%, and the South Korean Kospi lost 0.9%. Hong Kong’s Hang Seng index declined 1%.
UPDATES:
2:05 p.m.: This article was updated with closing prices, context and analyst comment.
1:15 p.m.: This article was updated with the close of U.S. markets and additional details, as well as analyst comment.
This article was originally published at 9:40 a.m.
