Italian Crisis Worsens Global Financial Markets

Earlier this week, President of Italy, Sergio Maratella, blocked the formation of an anti-establishment government. Political instability ensued, leading the country to its bond market meltdown and its credit rating under threat.

With Europe’s deepening troubles, the crisis in Italy caused bigger problems in global market, as there is a sudden rally in haven bonds that showed little reaction to previous alarming news, such as US Treasurys. The 10-year German Bund yield, on the other hand, briefly went below 0.20% before bouncing back to 0.28% on Tuesday (31/5). The value has more than halved in the past two weeks, making it the worst fall since mid 2012.

The 10-year US Treasurys yields have also fallen below 3%. Investors’ worries that Italy could cause the eurozone to crumble are pushing up US dollar, adding more stress to a move that has already caused turmoil in global markets. The euro itself has fallen to its lowest since last July, which is now valued below 1.16 US dollar. Along with the currency, bond markets returns in other countries have also showed signs of volatility. German bonds are up 1.3% on the year, while Italian bonds are down 3%. US Treasurys gained 0.8% last week, showing their best performance this year. It is a relief to investors that haven bonds are providing offset.

However, the bond and stock markets have shown signs of rebound today. “Italy failing to form a government, the markets were on the edge and it happened just crack and perhaps the reaction was a little bit out-sized, Aaron Clark, portfolio manager at GW&K Investment Management said. “We’re seeing a little bit of reversal today, not a full reversal, but there’s still some lingering concerns to be sure."

Sources :

The Wall Street Journal

Bloomberg

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