Euro tumbles to 20-month low after Italy PM resigns
European Central Bank meets Thursday, could front load purchases of Italian bonds
The euro fell to a 20-month low on Monday and investors fled riskier assets after Italian Prime Minister Matteo Renzi said he would resign following a stinging defeat on constitutional reform that could destabilise the country's shaky banking system.
Renzi's defeat deals a body blow to a European Union already reeling under anti-establishment anger that led to the shock exit of UK from the club in June.
"It's not very hard to see a new election, and it's not very hard to see the [opposition] 5-Star Movement taking power and they've basically said they want to get out of either the European Union or the euro or both," said Mark Wills, head of State Street Global Advisors' investment solutions group for the Asia Pacific.
"For Italy, establishing stable governance and a plan to guide the nation is of critical importance given the fragility of the economy, challenging policies and the liquidity problems in the banking system."
The single currency, which opened at around $1.0685, slumped as much as 1.4 per cent to $1.0505, its lowest since March 2015, before recovering a bit to $1.0555.
The drop to its session low was the sharpest since June and opened the way to a retest of the March 2015 trough around $1.0457.
- Italian PM to resign after conceding defeat in referendum
- Austrians send 'pro-European signal' with election of left-wing president
Analysts at RBCCM argued that, based on what happened in 2012 at the height of the Greek crisis, the risk of a euro zone crisis could see the euro trade as low as $0.8000.
"It may sound extreme, but if a second euro zone crisis were to hit, with the U.S. dollar at a much stronger starting point, EUR/USD could arguably trade lower still," they wrote.
The euro slid as much as 2.1 per cent to 118.71 yen, but pared some of the losses to trade down 1.2 per cent at 119.79 yen.
The dollar was supported by expectations of a U.S. rate increase this month and more to come next year. The dollar index,, which tracks the greenback against a basket of six global peers, jumped 0.6 per cent to 101.38.
Against the yen, the U.S. currency was little changed at 113.59.
Italian bonds under pressure
The New Zealand dollar, which earlier weakened almost 1 per cent to $0.707 after Prime Minister John Key unexpectedly announced his resignation on Monday, recovered a little to trade at $0.7107.
New Zealand stocks ended the day 0.7 per cent lower.
MSCI's broadest index of Asia-Pacific shares outside Japan eased 0.4 per cent, while E-mini futures for the S&P 500 narrowed losses to 0.3 per cent.
Japan's Nikkei slid 0.9 per cent.
Even as the long-awaited opening of a scheme to connect the Shenzhen and Hong Kong stock markets went live on Monday, China's blue-chip index slumped the most in six months after the nation's top securities regulator warned against "barbaric" share acquisitions, although small caps remained firm.
China's CSI 300 index tumbled 1.6 per cent. Hong Kong's Hang Seng index slipped 0.25 per cent. The link between China's booming Shenzhen stock market and neighbouring Hong Kong allows foreign investors access for the first time to some of the fastest growing technology companies in the world's second-biggest economy.
Back in Europe, dealers said Italian bonds were set to come under pressure as top-rated U.S. Treasuries and German bunds gained.
U.S. 10-year Treasury yields fell to 2.3507 per cent from 2.39 per cent at Friday's close.
Investors and European politicians fear the 'No' camp's victory could cause political instability and renewed turmoil for Italy's banking sector, which has been hit by concerns over its huge exposure to bad loans built up during years of economic downturn.
"Forming a stable government in Italy may be difficult, the resuscitation of [ailing lender] Monte Dei Pashci may be impacted, there is some potential that this may create an opening for a secessionist political party," said Angus Gluskie, managing director of White Funds Management in Sydney.
Renzi's resignation represents a fresh blow to the European Union, which is struggling to overcome a raft of crises, and was eager for Renzi to continue his reform push in the euro zone's heavily indebted third-largest economy.
Markets had earlier taken some encouragement when Austria's far-right presidential candidate was soundly defeated by a pro-European contender, confounding forecasts of a tight election.
The European Central Bank meets Thursday amid much speculation it will announce a six-month extension of its asset buying program and widen the type of bonds it can purchase.
"There has been some speculation that the ECB would step and front load purchases of Italian bonds if markets became unsettled by a 'No' result, so perhaps it is the thoughts of a central bank liquidity sugar pill driving things again," said ANZ economist Jo Masters.
Oil pulls back
In the last trading session before the referendum, the Italian benchmark posted a 0.2 per cent decline. The pan-European STOXX 50 closed down 0.4 per cent.
Wall Street ended on Friday on a cautious note, with the Dow off 0.11 per cent, while the S&P 500 rose 0.04 per cent and the Nasdaq gained 0.09 per cent.
While the U.S. payroll report was firm enough to cement expectations of a rate hike by the Federal Reserve this month, a surprise pullback in wages helped bonds pare a little of their recent losses.
In commodity markets, oil ran into risk aversion and some profit-taking after recording its best week in at least five years following OPEC's decision to cut crude output.
Markets are now focused on the implementation and impact of OPEC's first output cuts since 2008, to be joined by Russia and possibly other non-OPEC producers.
Brent crude was down 51 cents at $53.99 a barrel, while U.S. crude lost 47 cents to $51.21.