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Italy & Spain Spark Fresh Euro Fears

The ASX is heading for a 60 point plus fall this morning after a wave of selling in shares, bonds and commodities swept markets lower on Tuesday as uncertainty about events in Italy and Spain drove investors to sell.

The local market added 9 points yesterday, but will sell off sharply at the opening after being down 64 points in the last half hour of trading

Australian bank shares will come in for some selling today if events in Europe and the US are any guide

Italian banks were hardest hit, with the country’s largest financial institution, UniCredit, falling 5.6%. But others across Europe also sold off: Spain’s Santander was down 5.4%; France’s BNP Paribas dropped 4.5%; and Germany’s Commerzbank fell 4.0%.

In the US the prices of some of the biggest banks like Bank America and JPMorgan were down 4% at one stage as Wall Street fell deeper into the red.

US and London markets were closed on Monday and the losses in other markets were much smaller as the Italian political situation remained confused.

But with traders back at their desks and the Italian situation even more confusing - and looking to worsen later in the week - the uncertainty saw the sell off erupt in Italy and spread across the globe.

Only the US Treasuries market saw concerted gains as investors headed for cover thanks to the growing political impasse in Italy.

The yield on the benchmark US 10 year bond fell from just over 2.86% to 2.766%. That was 0.36% under the 7 year high of just over 3.11% hit earlier this month, an indication of the near panic buying by investors.

Yield on the Italian 2 year bond leapt 1.8% to more than 2.6% at one stage - the highest they have been since 2013. The rise in yields was the largest one day surge for more than two decades.

Markets are worried that a second national election will be called later this week for September-October at which the two populist parties who made the biggest gains at the most recent elections, could sweep to power.

If that happens Italy could leave the euro, attempt to inflate its way out of its current slump and defy the EU and European Central Bank (the two parties want Italian debt wiped out).

Italy’s benchmark FTSE MIB sank in morning trade, down more than 3% at one stage before closing with a 2.85% loss. The UK’s FTSE ended down 127%, Germany’s Dax down 1.5%, and France’s CAC down 1.3%. Spain’s market fell 2.5% and the main Euro market index, the Stoxx 600 fell 1.37%.

US indexes were down well over 1% in the last half hour of trading

The Aussie dollar dipped under 75 US cents while oil fell by more than 1% to six week lows and gold dipped $US2 to $US1,309 an ounce

In Spain, Prime Minister Mariano Rajoy will face a no-confidence vote in parliament on Friday, which could lead to the ouster of his minority centre-right government and its replacement by the Socialist Party. The centre-left opposition party called for the vote after a corruption case ended in convictions for senior members of Rajoy’s Popular Party.

In Italy, the country’s president, Sergio Mattarella, frustrated a bid by the Five Star Movement and Northern League to form a coalition government. Investors fear the move will trigger new elections later this year that might give a more explicitly anti-Europe mandate to the two populist parties.

View More Articles By Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.



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