Dow falls 392 points amid political turmoil in Italy
Political turmoil in Europe is again creating havoc with Americans’ 401(k) balances.
Jitters about the makeup of Italy’s next government and the possibility of a special election pitting Rome’s current leadership against anti-establishment and anti-euro populists sparked a big drop in U.S. stocks Tuesday. Investors scurried into safe assets such as U.S. government bonds.
The Dow,which slid 505 points at its low, ended the day down 392 points, or 1.6%, at 24,361.45 as Wall Street reacted to the prospect of new elections in the eurozone’s third-largest economy. Investors are worried about anti-euro political parties — 5 Star Movement and Northern League — gaining power in Italy, which could potentially lead to that nation’s exit from the 19-nation currency union.
Over the weekend, Italy’s president, Sergio Mattarella, blocked the creation of a coalition government after he vetoed the choice of a well-known euro-skeptic as finance minister put forth by the opposition parties. New elections could take place as early as late summer or early fall.
“A forthcoming election is being viewed in the market as a referendum on eurozone membership,” said Quincy Krosby, chief market strategist at Prudential Financial. “This is what has the market worried. Italy has long flirted with anti-eurozone sentiment.”
An even bigger worry is if Italy were to pursue a path to exit the eurozone, it would put financial markets “on notice that other eurozone members would seek a divorce,” Krosby adds.
Stocks were already dealing with the Federal Reserve’s ongoing plans to boost interest rates to more normal levels and uncertainty related to the U.S. and North Korea summit.
The political uncertainty in Italy slammed Italian bank stocks and government bonds and knocked the euro down by almost 1% to a nearly one-year low vs. the dollar. Other countries that are considered economically weaker in Europe, such as Portugal and Spain, also experienced losses in their debt, with their yields rising as their prices fell.
Worries spread to Wall Street, where the Dow Jones industrial average suffered its biggest one-day drop since April 24 and financial stocks fell sharply. The Financial Select Sector SPDR ETF, which tracks a broad basket of U.S. bank stocks, fell 3.3%.
Investors shifted their money into the safety of U.S. government bonds. As a result, bond prices rose and the yield on the 10-year U.S. Treasury, which moves in the opposite direction to prices, fell to 2.79%, from 2.93% Friday.
The higher borrowing costs in places such as Italy could cause growth to slow in Europe, said Joe Quinlan, chief market strategist at U.S. Trust in New York. High expectations for corporate earnings could also be in jeopardy, he added, if credit stress emerges in Europe and emerging markets.
Tuesday’s market turmoil, however, might not be as long-lasting as feared, said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance.
“The Italian situation seems to be more of a temporary political problem and not something larger,” he said.