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Fear of new euro crisis

Markets plunge as turmoil in Italy spooks investors

Matteo Salvini

Matteo Salvini: ‘nothing to worry about’ (CNBC)


Markets plunged today on fears of instability across Europe as a result of political turmoil in Italy.

Failure to form a coalition government by Italy’s two populist parties has seen the Italian President appoint Carlo Cottarelli as interim Prime Minister in what looks like a stop-gap measure.

A repeat election now seems inevitable in the euro zone’s third-largest economy. It may become a test of opinion on Italian membership of the currency bloc and even the country’s membership of the European Union.

Matteo Salvini, leader of anti-EU and anti-immigration party Lega Nord, said other countries “have nothing to be worried about”, but markets have taken a different view.

The FTSE 100 index was poised to close 97.64 points (1.26%) lower at 7,632.64. Short-dated Italian bond yields — a sensitive gauge of political risk — soared as much as 150 basis points. The euro dropped towards $1.15 for the first time in close to a year, down 0.8% on the day.

Prudential and RBS were among the bigger fallers – down 4.3% at 1808.75p and 3.49% at 279p respectively – as the financial markets bore the brunt of speculation that another election in Italy could turn into a referendum on the euro. Standard Life Aberdeen was another faller, down 2.78% at 349.9p despite announcing a return of cash to shareholders. The FTSE 250 was down 1.68% at 20,755.64.

Dixons Carphone fell 20.74% following a surprise profit warning and plans to shut 92 stores.

David Jones, chief market strategist at said: “Traders and investors have come back from the long Bank Holiday weekend to increased levels of volatility across all markets.

There is a familiar feel to the catalyst behind this, leaving some wondering if we are going to have another Eurozone crisis along the lines of that involving Greece from 2016.

‘This time around it feels as if the political can, rather than the financial one is being kicked into the long grass – and this is what is spooking markets.”

One of the main worries for traders is another election in a few months could result in a populist government that wants to renegotiate Italy’s debt with the EU. This is running at around 130% of the country’s GDP – the second highest level after Greece.

The immediate casualty was the euro which hit a three-year high against the US dollar as recently as February this year. Since then it’s dropped back by around 8% to its lowest level since last July.

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