Italy woes rock global markets

Stocks fall in U.S. and Europe as political turmoil in Italy stokes fears of instability in the euro bloc.

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.

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 believe Italy could move closer to abandoning the euro currency if populist parties win the election. That 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 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.

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 Five 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 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. Spain is facing political turbulence of its own.

U.S. government bond prices jumped as investors moved money into lowerrisk 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 20-city index showed that home prices climbed in March.

U.S. crude oil fell 1.7% to $66.73 a barrel. Oil prices have slumped in the last week following reports that member nations of the Organization of the Petroleum Exporting Countries and Russia could start pumping more oil soon. Brent crude rose 0.1% to $75.39 a barrel.

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.