World stocks hit one-week lows and the euro slid across the board today as intensifying concerns that Italy could be the next victim of the euro zone debt crisis prompted an emergency meeting of top European officials.
Fresh signs of tension in Italy's government and problems for economy minister Giulio Tremonti - trusted by financial markets to cut spending - prompted a sell-off in the country's government bonds. Italy has the euro zone's highest sovereign debt ratio relative to its economy after Greece.
A weaker-than-expected US jobs report on Friday and data showing China's import growth fell to its slowest pace in 20 months also encouraged investors to sell their risky assets.
"Investor sentiment is on the back foot this morning. Nobody knows where this is going to stop and when the next domino will fall," said Jeremy Batstone-Carr, strategist at Charles Stanley.
"Italy is in a different order of magnitude from Greece, Portugal and Ireland and takes the crisis to a whole new level."
The MSCI world equity index fell 0.7 per cent to a one-week low. European stocks fell 0.7 per cent while emerging stocks lost 1 per cent. US stock futures fell almost 1 per cent, pointing to a weaker open on Wall Street later.
The Euro STOXX 50 volatility index rose 7.9 per cent, its highest in nearly two weeks. JP Morgan says Italian banks are vulnerable because of their high reliance on wholesale funding. Their loan-to-deposit ratio stands at 1.42 - higher than that of Spanish banks and above the average of 0.9 for French and German banks.
Moreover, their government bond holdings stand at 6.33 per cent of assets, higher than those of Spanisn banks.
"The higher the market pressure on BTPs, the lower the appetite of Italian banks to sponsor their domestic government bond market for fear of raising their sensitivity to the sovereign even further," the bank said in a note to clients.
Bund futures rose 50 ticks. The Italian/German 10-year yield spread widened by 14 basis points to 258 bps.
Herman Van Rompuy, the president of the European Council, today met European Central Bank president Jean-Claude Trichet and Jean-Claude Juncker, the chairman of the eurogroup, ahead of a meeting of the 17 euro zone finance ministers later.
"Concerns over Italy show contagion risks in the euro zone are increasing. Investor confidence remains low and will limit demand for euro denominated assets," said Manuel Oliveri, currency analyst at UBS in Zurich.
The euro extended earlier losses to lose 0.7 per cent on the day to $1.4113.
Reports saying some EU leaders were considering allowing a selective default by Athens to put its debt on a more sustainable footing also dented the single currency, traders said.
Reuters
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