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BLOOMBERG
Bond yields tumbled around the world and equities slumped as a raft of news on China, Italy and US banks fanned worries about the financial system and global economy. Across markets, there was a broad move into safety. The yield on the 10-year Treasury dropped 10 basis points and the equivalent rates in Germany fell 13 basis points. A gauge of the dollar climbed about 0.4%.
Banks posted the steepest losses in Europe after Italy announced an unexpected tax on windfall profits, sending shares of UniCredit SpA and Intesa Sanpaolo SpA down more than 6%. Investors will also be closely watching US financials after Moody’s lowered credit ratings for 10 small and midsize lenders and warned about the risks tied to commercial real estate.
Investor sentiment also took a hit after China released more data that showed its economic engine is sputtering. Exports plunged by the most since early 2020, the beginning of the Covid pandemic, and imports contracted last month. The Hang Seng China Enterprises Index and a gauge of European mining shares fell about 2%.
Commodities prices retreated, with oil and copper losing about 1%. Rattled by the collapse of a regional banks in California and New York this year, investors have been watching closely for signs of stress in the industry as rising interest rates force firms to pay more for deposits and bump up the cost of funding from alternative sources.
At the same time, banks are a reliable profit center for governments seeking more revenue. Out of the European lenders which reported this season, 69% of them beat consensus estimates, according to data compiled by Bloomberg Intelligence. That’s the highest beat rate among all sectors on the MSCI Europe this season.
The new Italy tax increases “the risk that other cash-strapped European governments seek similar or other ways to raise fiscal revenues from their banks,” said Rajeev De Mello, a global macro portfolio manager at Gama Asset Management SA.
“This news is a strong headwind for the banking sector, which is an important component of European indexes.” The Treasury auction and US inflation data on Thursday also has the potential to fuel volatility. The bond market has to absorb a combined $103 billion of 3-, 10- and 30-year auctions before the week is out — up $7 billion from the May slate.