Markets are bouncing back as fears over Italy's political crisis subside

LONDON – European stocks are bouncing back on Wednesday, having taken a big hit earlier in the week as news of Italy’s growing political crisis spread.

Having fallen almost 3% on Tuesday, Italy’s benchmark share index, the FTSE MIB is up more than 2% early on Tuesday afternoon, while other European bourses are seeing gains of as much as 1%.

Italy’s political situation deteriorated rapidly over the weekend, with the prospect of a fresh general election in the next few months now looming large. Many commentators fear a vote could effectively become a referendum on Italy’s membership of the euro.

Given Italy’s status as one of the key pillars of the single currency area, investors are worried about the possible collapse of the entire project and the knock-on impact it would have on the global economy. This drove a sell-off in stock markets across the world, as well as of Italian bonds.

That sell-off seems to have paused for breath on Wednesday, however, with markets looking reasonably calm.

Bond markets have also calmed, with yields on both Italy’s 10 and two-year government bonds – known as BTPs – falling in early morning trade. Just before 7.30 a.m. ET, the 10-year is trading at 2.88%, a fall of around 8% from Tuesday. Bond yields move inversely to prices, so yields increase during sell-offs and fall during good times.

Earlier, Italy held a successful bond auction, selling a total of €5.6 billion ($US6.5 billion) of debt, with investors picking up €1.75 billion ($US2 billion) of five-year bonds, €2 billion ($US2.3 billion) of seven-year bonds, and €1.8 billion ($US2.1 billion) of 10-year debt.

Investors were happy to buy the debt but yields were significantly lower compared to the last time it auctioned similar bonds. On Wednesday, Italy paid a yield of around 2.3% to sell the five-year bond, compared to a yield of around 0.6% at the last auction, according to a report from the Financial Times.

The euro has also recovered somewhat on Wednesday, with the single currency – which lost around 0.85% on Tuesday – gaining by a similar amount against the dollar during the morning hours in Europe.

Despite the calm in Europe, major Asian stock indexes suffered overnight, with several losing close to 2% in Wednesday trading.

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