Italy's political turmoil roils Asian equity markets, 'monumental' compared to Greek crisis

File photo showing people walking past an electronic board showing exchange rates outside a brokerage at a business district in Tokyo, Japan, on March 23, 2018.
File photo showing people walking past an electronic board showing exchange rates outside a brokerage at a business district in Tokyo, Japan, on March 23, 2018. PHOTO: REUTERS

SINGAPORE - Asian bourses on Wednesday (May 30) were battered by the effects of a brewing Italian political storm, as local and regional equity markets continued their downward trajectory from early trading.

Singapore shares fell over 2 per cent heading into the afternoon break, dragged down by financials, with DBS Group, OCBC and UOB leading the losses.

Malaysia's Bursa slipped up to 2.3 per cent to touch a more than five-month low, while the Indonesian index fell as much as 0.9 per cent ahead of a central bank policy meeting later in the day, where it is expected to raise its benchmark interest rate.

Italy's President Sergio Mattarella had rejected an anti-EU (European Union) nominee for economy minister, setting the stage for elections later in the year which could put in place a parliamentary majority hostile to European institutions.

Investors are worried that repeat elections in the eurozone's third-largest economy - which reportedly could be held as early as July - may translate into a de facto referendum on Italian membership in the euro and the country's role in the EU.

In addition, ratings agency Moody's hinted on May 25 that it may look to review Italy's debt rating, citing concerns over the two anti-establishment parties' fiscal plans that could ratchet up spending by as much as 100 billion euros (S$156.35 billion), according to reports by CNBC.

Bank of Singapore's head of investment strategy Eli Lee highlighted that with the higher odds of fresh Italian elections, what was previously viewed by the market as mainly Italy-specific risks "now have larger implications on Europe" and "represent much greater stakes".

The right-wing La Lega party is enjoying strong momentum and attempting to position the new elections around the issue of Italy's independence, with the spectre of "Italexit" continuing to haunt markets in the meantime, said Mr Lee, referencing a term popularised by nations wanting to exit the EU.

Contagion pathways, harking back to the 2011-12 European crisis, remain live, Mr Lee said, adding that the Italian 10-year yields have reacted dramatically and the German bund/BTP (Italian bonds) spread has been "driven to its widest since the European crisis".

He added: "While Italian equities make up less than 5 per cent of the Eurostoxx 50, the widening of peripheral bond spreads often brings up euro existential questions, as we've seen in the past, and can lead to a spike in the European equity risk premium which takes a heavy toll on overall markets."

On the foreign exchange front, the euro continued its tumble against the Singapore dollar, trading at S$1.5513 as at 12.10pm on Wednesday, while the Japanese yen hit a similar 11-month low of 125.37 against the euro.

The US dollar was trading at US$1.1535 against the common currency, plummeting to a depth not seen since July 2017.

The S&P 500 and the Dow Jones Industrial Average registered their biggest one-day percentage drops in a month overnight on Tuesday.

Comparing Italy's latest meltdown to the past Greek crisis, head of trading, APAC at Oanda Stephen Innes warned it is "monumental by comparison".

"Italy's economy is 10 times the size of Greece, not to mention it is burdened with the fourth most massive public debt in the world. And given an imminent Italian election may very well amount to a referendum on the euro, there is a flight to safety from European assets beyond the Italian borders," he said in a note, adding that European capital markets are "in chaos as it may end up being more than just Rome that is burning".

While the rising political uncertainty in Italy and growing US-China trade tensions should see gold holding, it is "unlikely" that gold will move significantly higher until "we reach the EU 'crisis zone' which we are nowhere near at this stage", Mr Innes noted.