© The Financial Times Ltd 2014 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
Wednesday 20:00 GMT. Worries about the eurozone unsettled global equities and the euro and pushed up prices for “core” government bonds and gold, as political uncertainty in Italy compounded lingering concerns about Cyprus’s banking crisis.
However, the S&P 500 US equity index managed to pare an early decline to end less than 0.1 per cent lower – once again within a whisker of its 2007 record closing high. The FTSE Eurofirst 300 fell 0.4 per cent to a three-week low, and there were bigger falls for Italian and Spanish shares. The FTSE MIB in Milan shed 0.9 per cent and Madrid’s Ibex 35 index fell 1.1 per cent.
In Tokyo, the Nikkei 225 Average edged up 0.2 per cent but was held back by the impact of shares going ex-dividend, traders said.
The euro, meanwhile, touched a fresh four-month low against the dollar, while Spanish and Italian government bond yields rose sharply.
Italy came back into focus after Pier Luigi Bersani, head of its centre-left alliance, failed to persuade the anti-establishment Five Star Movement to back a project to form a minority government. Talks with Silvio Berlusconi’s centre-right alliance also came to nothing.
Further gloom came from a disappointing auction of Italian debt. “Demand for both the five-year and 10-year [bonds] was lower than previously, reflecting ongoing political uncertainty in Italy and lingering concerns in Cyprus,” said Nick Stamenkovic, macro strategist at RIA Capital Markets.
Italy’s political gridlock was probably to blame for the first fall in five months for the European Commission’s headline sentiment indicator in March, according to Tobias Blattner at Daiwa Capital Markets. “Surprisingly, though, sentiment improved in all peripheral member states except in Spain,” he added.
However, Kathleen Brooks at Forex.com suggested that in the longer term, Mr Bersani’s failure might not be such a bad thing.
“A coalition government would have been extremely fragile even if one could have been formed before Easter,” she said.
“This sets the way for another technocratic government that could stick to the reform path of [Mario] Monti’s previous technocratic government.”
But she warned: “Be aware of the potential for an Italian credit downgrade. A bank holiday weekend could be the perfect time for a rating agency to take the axe to Italy’s credit rating.”
On the currency markets, the euro fell as low as $1.2752 before recovering slightly, while Spain’s 10-year government bond yield jumped 12 basis points to 5.06 per cent and Italy’s 16bp to 4.76 per cent.
The return of Italy into the market’s crosshairs came as investors continued to fret about the impact of Cyprus’s banking woes.
The island will impose severe capital controls to prevent a run on banks, which will reopen on Thursday after a near two-week break. And analysts were already questioning who might be the next eurozone casualty.
“Cyprus has shown that even the smallest members of the eurozone can rock the single currency area,” said James Howat at Capital Economics.
“Slovenia is probably the next country most likely to be forced into a bailout programme, but Malta and Luxembourg are also vulnerable given the size of their banking sectors relative to their economies.”
Tension in the markets was reflected in fresh gains for highly rated government bonds and other havens.
The yield on the German Bund fell 6bp to 1.28 per cent, the lowest since July, while that on the 10-year US Treasury was also 6bp lower at 1.85 per cent.
Gold, meanwhile, rose 0.4 per cent to $1,605 an ounce, even as the dollar index reached a seven-month high.
Industrial commodities were mixed, with Brent oil up 33 cents at $109.69 a barrel but copper down 0.2 per cent at $7,608 in London.
Follow the FT’s market comments on Twitter @FTMarkets
Copyright The Financial Times Limited 2014. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.