European stock markets slumped yesterday, and the pound hit a fresh two-year low against the euro as traders reacted to a fast-moving Italian political crisis and data showing Britain’s Brexit-facing economy is on the brink of recession.
“Markets tumbled on Italian political risk,” said Craig Erlam, senior market analyst at Oanda trading group.
Wall Street followed suit, opening solidly down as the US-China trade war continues to dampen investor enthusiasm.
Milan’s stock market sank more than two per cent after Italy’s far-right Deputy Prime Minister Matteo Salvini pulled his support for the country’s coalition government on Thursday and called for snap elections.
The heightened political tensions in the heavily indebted country – the eurozone’s third largest economy – also caused yields to rise on Italian government bonds.
“Naturally, Italian stocks – banks, in particular – and bonds have been hardest hit but they are dragging everyone else down with them,” Erlam said. In currency trading, sterling’s woes helped propel the European single currency to a two-year high at 92.72 pence.
The weaker pound capped losses on London’s benchmark FTSE 100 index that features numerous multinationals earning in dollars.
Adding to Britain’s economic troubles, official data released yesterday showed the country’s gross domestic product (GDP) fell 0.2 per cent in the second quarter, the first time it has contracted in almost seven years. Another contraction in the third quarter would put Britain in an official recession, ahead of the nation’s expected withdrawal from the EU on October 31.
“All in all, today’s disappointing GDP figure is set to raise alarm bells over Brexit dragging the UK economy deeper into the abyss,” said Lukman Otunuga, senior research analyst at FXTM.
Elsewhere, Frankfurt’s DAX 30 index sank one percent after data showed German exports in June were eight per cent lower than last year, just the latest poor economic indicator for the country.
In Asia, stock markets largely reversed early gains from a bargain-hunting push as investors remained cautious over the US-China trade war.
Tokyo managed to hold on to its winnings after figures showed that Japan, the world’s third-biggest economy, was growing faster than predicted.
In a volatile week for markets, equities were hammered Monday after Beijing allowed the yuan to slide sharply against the dollar following US President Donald Trump’s announcement of fresh tariffs on Chinese goods starting September 1.
Safe haven assets such as bonds, gold and the yen remained in demand yesterday, signalling that trade war fears would continue to weigh on markets.
Oil prices surged despite the International Energy Agency lowering its growth forecast for demand over concerns about the health of the global economy.