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Markets React to Italian Turmoil, Federal Reserve to Keep Interest Rates Steady

he collapse of the proposed Italian government with President Mattarella’s veto of proposed financial minister Savona dented confidence throughout markets worldwide. Italy’s return to the polls after only four months points to a stronger, joint populist government. Both populist parties, the League and 5 Star Movement, are expected to take a more significant share of parliamentary seats than they did in March. The League and 5 Star Movement voice anti-EU, anti-Euro views, causing many to fear a possible Italian exit from the Eurozone.

 

In the aftermath of this weekends Italian drama, US yields are down to their lowest since the announcement of Brexit. On Tuesday afternoon, the ten-year treasury yield dropped roughly 15 points to 2.77 percent. More troubling was the reversal of the yield curve, which has short-term rates higher than long-term rates. A metric that is considered a warning sign of a coming recession

 

On Tuesday the S&P 500 financial sector declined 500 points or 3.4 percent while the Dow toppled 400 points. This drop was mirrored overseas as European stocks across the continent continuing a run-off spurred by the news coming out of Italy. With market uncertainty high, the US Federal Reserve was seen as unlikely to raise interest rates in June. A huge turn around from what last week was seen as a certainty. The increasing stress on the market has led investors to wonder if the Reserve will meet its projection of three interest hikes this year.

 

Analyst Jordi Visser explained since an Italy exit from the Euro is unlikely, this drop in stock was seen as a result of positioning, with Hedge Funds caught off guard by an unexpected rise in US Treasury yields. By noon on Wednesday, Visser’s comment were backed up as the S&P 500 had shown a slight rebound of 200 points that was echoed in US stocks. In Europe, Italy’s FTSE MIB was back up 2 percent while Germany’s Bayer was up 4 percent at close.