Italy snap election fears spook global financial markets

The euro and US and European stock markets fell on Tuesday amid fears that political uncertainty in Italy could lead to broader instability in the eurozone.

Italy faces the prospect of fresh elections after populist anti-establishment, euroskeptic parties failed to form a government.

Read more: Italian stop-gap premier presents cabinet as League hits out at EU

How the market responded to Italy's turmoil

• The euro sank to its lowest value against the dollar since July, dropping to $1.1531 from $1.1669.
• Stocks across Europe took a hit, with Italy's benchmark stock index falling 2.7 percent, the German DAX falling 1.5 percent, with both Britain's FTSE 100 and the French CAC 40 falling 1.3 percent.
• The yield on 10-year Italian government bonds increased significantly as investors, spooked by the political uncertainty, dropped them in favor of safer assets. It increased to 3.10 percent from 2.69 percent.
• Reflecting the move to safer assets, the yield on US government bonds fell to 2.78 percent, the lowest percentage since the beginning of April, from 2.93 percent.
• Stocks in the US were also down, with the S&P 500 index dropping 31.47 points, or 1.2 percent, to 2,689.86 and the Dow Jones industrial average losing 391.64 points, or 1.6 percent, to 24,361.45.
• Japan's Nikkei 225 Index lost 1.52 percent to end at 22,018.52 on Wednesday.

'Work things out within the eurozone' 

A senior official in the US Treasury Department, speaking on the condition of anonymity, told reporters that Italy should work to resolve its current political crisis while staying within the eurozone.

"I think it would be better if they were to work things out within the eurozone without making significant changes there, and certainly the Italians have the opportunity to do that," he said. He added that he saw no immediate danger to the stability of the wider financial system.

Read more: Italian populist coalition's failure to govern throws government into doubt

Why Italy matters: Italy is the the eurozone's third largest economy. It has struggled to grow since the 2007-2009 financial crisis and has an enormous debt pile. Investors are worried that euroskeptic parties could form a future government that would abandon the euro or commit to spending that would cause wider instability in the bloc.

What's next? The country is likely to hold fresh elections by the end of the summer after Italian President Sergio Mattarella blocked efforts by two euroskeptic parties — the populist 5-Star Movement (M5S) and the right-wing League — to form a coalition government. Mattarella has tasked former economist Carlo Cottarelli with forming a caretaker government, but it is unlikely to win necessary approval from the Italian parliament.

Not just Italy: Other challenges are also putting a strain on global markets, including international trade tensions over US protectionist tariffs and uncertainty about the future of the 2015 Iran nuclear deal, along with nuclear tensions between the US and North Korea.

amp/cmk (AP, AFP, Reuters)

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