Monday 22:15 GMT. Global stock markets sold off, with the S&P 500 recording its biggest one-day drop since November as investors worried over the outcome of the Italian general election and the prospect of instability in the country’s government.
An early rally for growth-sensitive assets faded amid sharp swings that saw US Treasury prices jump as Wall Street’s benchmark indices fell more than 1 per cent.
Wall Street’s “fear gauge”-- the CBOE’s Vix index – jumped 35 per cent to hit its highest level this year at 18.99, as single-day trading volumes in the contract rose to an all-time record.
Currency trading was also volatile, with demand for the Japanese yen rebounding sharply. A stronger yen versus both the dollar and the euro may pave the way for declines in the Tokyo stock market at the start of the Asian session on Tuesday.
The sell-off dragged the broad S&P 500 index 1.8 per cent lower to a close at 1,487 points. That is the lowest level in more than a month and it comes after the benchmark last week reached a five-year peak at 1,530.
“Investors flocked to the dollar and yen for safety after Italy’s general election took a surprise turn for the worse, and appeared headed for an inconclusive outcome,” said Joe Manimbo, senior market analyst at Western Union Business Solutions.
The FTSE All-World equity index fell 0.6 per cent after an early advance of 0.8 per cent that was helped by strength in Asia. This came as the FTSE Eurofirst 300 closed just a fraction higher.
Moves in commodities were less extreme, with copper bouncing off an eight-week low to add 0.3 per cent to $3.54 a pound. Brent crude reversed earlier gains to close back below the $114 a barrel mark. Gold advanced $13 to $1,593 an ounce.
The selling pressure on stocks boosted fixed-income “safety” plays in turn, with the yield on 10-year Treasuries down 10 basis points to its lowest level in since mid January at 1.86 per cent. The yield on 10-year Bunds was down 1 basis point to 1.56 per cent.
Italian benchmark bonds reversed early strength after exit polls suggested a centre left coalition would be able to form a government as a result of the country’s election. The 10-year Italian borrowing rate rose 4 basis points to 4.48 per cent, after an early decline to 4.17 per cent.
Traders had been worried that an inconclusive outcome could deliver a hung parliament that would hobble the country’s ability to tackle its budget difficulties and trigger a resurgence of eurozone angst.
The FTSE Mib index of Italian stocks, which was up 4 per cent at one point, has settled up 0.7 per cent, and pared a brief dip into negative territory late in the trading day. The euro, which had traded above $1.33, fell sharply late in the session to close back below the $1.31 mark at $1.3073.
Investors were also wary about the fallout from other fiscal and monetary issues.
Global markets wobbled in the middle of last week after Federal Reserve minutes were interpreted as reducing the expected duration of the central banks’ asset buying programme – an $85bn a month bond purchase strategy believed by many to be providing important support to equities, commodities and fixed income products.
Bulls will thus be hoping that Fed chairman Mr Bernanke reiterates that no policy change is imminent when he delivers his semi-annual Congressional testimony, on Tuesday and Wednesday.
Then investors’ attention will turn to the possible impact on the world’s biggest economy of the $1.2tn sequestration that is due to deliver a range of government spending cuts by the end of the week.
Another central bank in the news of late is the Bank of Japan.
The yen earlier in the session fell to Y94.76 to the dollar, its weakest point since April 2010, on reports that Haruhiko Kuroda, head of the Asian Development Bank and an advocate of aggressive monetary easing, is the frontrunner to become the next BoJ governor. Later the Japanese currency jumped more than 2 per cent against the dollar to trade at Y91.41.
Additional reporting by Jamie Chisholm in London