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Monti resignation sparks European stocks sell-off

The unsettling news out of the euro zone’s third biggest economy is weighing on sentiment, says an analyst
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First Published: Mon, Dec 10 2012. 05 02 PM IST
Italy’s Prime Minister Mario Monti. Photo: Andreas Solaro/AFP
Italy’s Prime Minister Mario Monti. Photo: Andreas Solaro/AFP
London: European stock markets sank on Monday, with Milan shares plunging after Italian Prime Minister Mario Monti announced his intention to resign, in the latest twist in the fast-moving euro zone debt crisis.
Milan’s FTSE MIB benchmark index of top companies slumped 3.38% to 15,169.44 points in early morning deals, as Italian government borrowing costs spiked on the back of political uncertainty.
Madrid’s IBEX 35 index dived 1.44% to 7,734.4 points, hit also by rising bond yields in debt-laden Spain.
Elsewhere, London’s FTSE 100 dipped 0.23% to 5,900.58 points, Frankfurt’s DAX 30 shed 0.47% to 7,482.92 and the Paris CAC 40 lost 0.60% to 3,583.54 points.
“For all the drama that has been surrounding Spain and Greece recently, it’s Italy now everyone is focusing on today. The unsettling news out of the euro zone’s third biggest economy is weighing on sentiment,” said Gekko Markets analyst Anita Paluch.
In foreign exchange activity, the European single currency dropped to $1.2909, down from $1.2928 late in New York on Friday. Gold prices rose to $1,710.82 an ounce on the London Bullion Market, from $1,701.50.
Meanwhile, the cost to Italy of borrowing for 10 years rose sharply on political uncertainty after Silvio Berlusconi said that he would challenge Monti in forthcoming elections.
“Whether it’s Monti’s early departure or the fact that Berlusconi is going to run for office again, that’s proving the most unsettling for markets is clearly open for debate,” said Mike McCudden, head of derivatives at brokerage firm Interactive Investor. “However, many consider Italy as being on the cusp of plunging into a financial markets abyss.
“Monti’s appointment and formation of a technocratic government really was seen as the only way to steer Italy away from Armageddon, and strong leadership to ensure austerity is implemented—and tax receipts continue to creep higher—is imperative,” said McCudden.
In reaction to the turmoil, the 10-year yield on the market for existing government bonds jumped to 4.759% on Monday, from 4.525% late on Friday.
Monti, caretaker prime minister since Berlusconi left office last year under a cloud of controversy, is credited with enacting deep economic reforms that had brought down sharply Italian bond yields.
“Italian elections—possibly as early as February—could weigh on European assets for the medium term. The market had expected elections in April,” added Kathleen Brooks, research director at trading website Forex.com.
“Monti will resign, so the market needs to weigh up the prospect of a new leader who may not want to stick to Monti’s economic reform programme,” she told AFP. “Added to that, Berlusconi’s potential return to power may cause Italian relations with other euro zone members—particularly Germany—to deteriorate.”
Brooks added that the euro losses were capped by expectations of more quantitative easing stimulus measures from the US Federal Reserve, which will announce its latest interest rate decision on Wednesday.
In earlier deals, Asian equities mostly rose on Monday as dealers cheered an improvement in the US unemployment rate and another batch of manufacturing figures indicating China’s economy is emerging from a slumber.
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First Published: Mon, Dec 10 2012. 05 02 PM IST