May 29, 2018, by Lorcan Roche Kelly
Any investor looking for an easy start back following the holiday weekend saw those hopes dashed after taking one look at their screens this morning. European bonds are the biggest movers, with Italian notes driving the rout as that country’s yields go into meltdown. The yield on Italy’s two-year bond rose to over 2.5 percent, having traded below 0.3 percent as recently as yesterday morning. U.S. bonds are getting a haven bid, with the 10-year Treasury yield briefly moving below 2.800 percent earlier. The euro is also under pressure, trading at $1.1544 as investors dust off their “ euro-crisis” playbooks.
The selloff is being driven by rising political risks in Italy that seem to echo the Greek crisis earlier this decade. The Italian president rejected the populist coalition’s choice for finance minister, instead selecting economist Carlo Cottarelli to form a government ahead of new elections as early as fall. The prospect of a strengthened euro-critical alliance emerging from that vote is seeing fears of a euro break-up resurface. Italy is not alone; there are also increasing risks of early elections in Spain, with Prime Minister Mariano Rajoy facing a no-confidence vote in parliament on Friday.
President Donald Trump appeared to confirm that his summit with North Korean leader Kim Jong Un will now go ahead in a tweet on Sunday afternoon, saying that a U.S. team was in North Korea making arrangements. North Korea has dispatched a top aide to Washington, according to a person familiar with the issue, another sign the meeting is taking place. The White House has said Trump plans to meet Japanese Prime Minister Shinzo Abe ahead of the “expected” gathering with Kim.
Overnight, the MSCI Asia Pacific Index lost 0.4 percent, while Japan’s Topix index closed 0.5 percent lower for a seventh day of declines. In Europe, the Stoxx 600 Index was 1.4 percent lower by 5:50 a.m. Eastern Time, with Italy’s main Milan gauge 2.9 percent lower as banks sold off, and Spain’s IBEX 35 Index down 2.8 percent. S&P 500 futures pointed to a drop at the open.
While today is relatively quiet from an economic data prospective, there is a lot coming up this week that could add to market volatility. Inflation data due on Thursday may show the U.S. central bank’s preferred measure of price pressures has slipped in April. Federal Reserve Bank of St. Louis President James Bullard said that the pace of normalization should be slowed in a speech this morning in Tokyo. Payroll numbers for May are due on Friday, with economists surveyed expecting an increase to 190,000 positions added in the month, from 164,000 in April.