Political risks grip European markets

Bloomberg

Traders could be forgiven if flashbacks of the euro zone crisis come back to haunt them as the euro slid to a six-month low and risk premiums on Spanish and Italian bonds soared amid rising political risks.
European risk assets took a massive pounding ahead of a long weekend in London as investors fled from riskier bonds, stocks and credit securities to the safety of German bunds that were set for their biggest gain since 2012.
The yield premium on Italian bonds surged to the highest in four years as the leader of a populist coalition said the new government would implement its agreed program. Over in Spain, the benchmark stock index tumbled the most in three months after opposition leaders called on Prime Minister Mariano Rajoy to step down over a corruption scandal.
“Political developments in Italy remind people of the Greek debt crisis,” said Marius Daheim, a senior rates strategist at SEB AG in Frankfurt. “Italy may well be the final risk factor that causes investors to drop their ‘Goldilocks scenario’.”
The yield on Italy’s two-year bonds rose 22 basis points to 0.49 percent, after touching the highest in almost three years. The nation’s benchmark 10-year notes now offer investors a spread of 205 basis points over bunds, near the highest in four years.
In Spain, stocks and bonds slumped as investors reacted to growing calls seeking the ouster of Rajoy. The nation’s benchmark notes snapped a three-day rally after the Socialists — the biggest opposition party — submitted a no-confidence motion against the prime minister. However, Rajoy said he aims to see out the rest of his four-year term. The benchmark IBEX-35 Index of shares slid as much as 2.7 percent, the most since February.
Meanwhile, the FTSE MIB fell as much as 2.4 percent with banks among worst hit. Italy’s Five Star and League parties published a plan that includes reviewing fiscal policy, bail-in rules and Basel banking accords, raising concerns that the measures could slow the reduction of bad debt and hit banks’ valuations.
The VStoxx volatility index surged 11%, reaching its highest level since April 11.