Italy deficit shakes markets in Europe
london — Plans by Italy’s new populist government to loosen the budgetary belt a few notches roiled markets in Europe, while Tesla shares took a beating after CEO Elon Musk was charged with fraud.
With the spending plans putting the Italian government on a collission course with the European Commission, Milan took the brunt of the blow in equity markets, dropping by more than 4.6 per cent at one point.
Thursday’s budget deal that calls for a 2.4 per cent deficit for the next three years came after warnings from the EU to rein in spending, and vastly exceeds the 0.8 per cent deficit foreseen by the previous, centre-left government.
“The Italian budget continued to cast a shadow over the markets on Friday, setting up a rocky end to a rocky month,” noted Connor Campbell, financial analyst at Spreadex trading group.
“Turning to this afternoon and at the moment the Dow Jones looks set to dodge the kind of losses seen in Europe, with the futures suggesting a milder... decline.”
The trading of shares in some Italian banks was briefly suspended amid heavy price falls, with Banco BPM tumbling by of almost 11 per cent at one point.
In afternoon trading, it and other major Italian banks UniCredit, Intesa Sanpaolo and BPER Banca were down over eight per cent. Shares prices of major European banks outside Italy also slumped, with French lender Credit Agricole down 4.7 per cent, Deutsche Bank sliding four per cent and Barclays losing 2.8 per cent.
Meanwhile, the yield on Italian government bonds jumped and the euro also dropped heavily against the dollar.
Italian government bonds “have unsurprisingly been under pressure following the government plan to aim at a 2.4 per cent deficit/GDP in 2019,” said analysts at UniCredit in a note to clients.
The spending plan “...creates several important challenges, from a confrontation with the EC to the possibility of a downgrade of the sovereign credit rating,” they said, adding that volatility in Italian bond prices was likely continue,
especially as the European Central Bank winds down expanding its purchases of government bonds.
Wall Street opened lower on Friday, although the losses were more muted than in Europe, except notably for shares in Tesla, which tumbled 11.5 per cent at the opening of trading.
Asian markets had earlier closed higher, tracking Thursday’s rally on Wall Street where investors were buoyed by the Federal Reserve’s positive outlook for the US economy.
Asian markets rebounded on Friday as strong US economic data supported the Federal Reserve’s decision to raise interest rates. Hong Kong’s Hang Seng index added 0.3 per cent to 27,788.52. The Shanghai Composite Index rallied 1.1 per cent to 2,821.35. Australia’s S&P ASX 200 was 0.4 per cent higher at 6,207.60. South Korea’s Kospi bucked the regional trend, losing 0.5 per cent to 2,343.07. Shares fell in Taiwan and the Philippines but rose in Singapore and Indonesia.
The Italian budget continued to cast a shadow over the markets
Connor Campbell, Financial analyst at Spreadex