European markets rattled by Italy again as political concerns linger

New Italian Prime Minister Giuseppe Conte.(Photo by Elisabetta Villa/Getty Images)
  • Italian bond yields jumped again overnight amid lingering political concerns.
  • While markets have cooled down since the policial crisis in May, some analysts believe more trouble lays ahead.

The fallout from Italy’s precarious political situation continues to reverberate through European markets.

Sure, escalating trade tensions were one catalyst for the sell-off. German car-maker Daimler unexpectedly cut its profit forecasts, citing the current trade stand-off between the US and China.

But falls in the major European markets were led comfortably by Italy, as a 2% slump in the Milan stock index was accompanied by another bond selloff.

It followed reports that two candidates with strong anti-Europe views were chosen for senior roles within the tentative new government’s finance committee.

Economics professor Alberto Bagnai will lead the finance committee in the Italian upper house, while Claudio Borghi will head up the budget committee in the lower house.

Yields on Italian 2-year bond yields jumped by 30 basis points to 0.93%:

Source: Investing.com

It was a considerable move, although less pronounced than the spike in late May when markets reacted violently after President Sergio Mattarella rejected the government’s move to appoint euro-sceptic economist Paolo Savona to the role of finance minister.

Part of the May selloff was driven by concerns about whether Italy was a threat to leave the European Union, although such an event is unlikely given that Italy would have to change its constitution to do so.

But some analysts aren’t convinced that the prospect of further market ructions stemming from Italy’s political situation have been put to rest.

Danske Bank analyst Aila Mihr told the Financial Times that September is the next key date for markets to watch, which is when the new government will release its 2019 budget proposal.

Given that it has one of the highest government debt ratios in the Eurozone, Mihr said that if the government doesn’t announce a plan to reign in spending then it could give rise to another sharp bond selloff.

The current spread between Italian bond yields and benchmark German bonds currently sits at around 220 basis points — up from 130 before the political turmoil in May but down from 300 at the height of the crisis.

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