LONDON (Reuters) – A worsening political crisis in Italy provoked a second sale day on the European financial markets. The euro fell to a 6½-month low, stocks were punished and short-term borrowing costs soared the government in Rome.
Investors fear that repeated elections – which now seem inevitable in the eurozone's third-largest economy – could be a de facto referendum on Italy's membership of the monetary bloc and the role of the country in the European Union.
Short-term Italian bond yields, one of the most sensitive indicators of political risk, have risen 80 basis points since the end of 2013 to IT2YT = RR as investor anxiety intensified. [GVD/EUR]
The euro fell for the first time in 6-1 / 2 months below the EUR 1.16 line EUR = EBS, 0.3 percent less than the day before. Compared with the Swiss franc, it was similar to 1.1528 francs. [/FRX]
The shares in Milan slid by 2.6 percent on the main index .FTMIB after a decline of 2.1 percent on Monday. Bank stocks .FTIT8300 fell another 5 percent after losing 4 percent in the last session. The loss of government bonds, a core area of the portfolios of Italian banks, was severely affected.
"It's just a slide, and if the slide continues, you'll ask where the end is," said Saxo Bank's FX strategy director John Hardy. He added that there is a risk of global contagion as the benchmark index of the US S & P 500 stock index .SPX is close to breaking some important support lines. [.N]
Hardy recalls the promise of European Central Bank President Mario Draghi to keep the euro intact.
"If this takes a few more sessions, I think you have to see an official (European) answer, a" whatever is needed, "he said.
Adding to uncertainty, Spanish Prime Minister Mariano Rajoy will see a vote of confidence in his leadership on Friday
Spain's bond yield spread to Germany was the furthest in seven months at 122 bp ES10YT = RR Madrid's IBEX stock market .IBEX lost almost 2 percent. [.EU]
Asia also flinched Nikkei .N225 lost 0.6 percent and Chinese equities also traded blue chips, with CSI300 down 0.6 percent and Hong Kong's Hang Seng .HSI index down 0.7 percent. [.T] [.SS]  E-mini-futures for the S & P500 ESc1 gave also early on gains of 0.5 percent. Meanwhile, the dollar was up against almost all major currencies, except for the safe Japanese yen.
The US currency is headed towards its best month in 1-1 / 2 years. DXY – a move that harms many emerging markets that borrow in dollars.
"This should push risk levels down," says Nick Twidale, an analyst with Rakuten Securities Australia, based in Sydney.
Outside Europe, the focus has also been on the resurgent US-North Korean summit and trade relations between the US and China.
An adviser to North Korean leader Kim Jong Un arrived in Singapore on Monday night, the Japanese public broadcaster NHK reported, and the White House said a "advance team" traveled to the city to meet the North Koreans.
The reports indicate that the planning of the summit, which was originally scheduled for June 12, is progressing after President Donald Trump recalled it last week. A day later, Trump said he had rethought it and officials from both countries met to work out details.
PLAY IT SAFE
Another sign that investors were looking for safer bets, the euro reached an 11-month low against the yen and a fresh 6-1 / 2 low against the Swiss franc EURCHF = EBS [ElsewhereinbondsUS10YTreasuryyieldsUS10YT=RRwereat2883percentafteraUSholidayMondaywithasix-weeklowReturnsareinverselyrelatedtoprice
Analysts are waiting for US inflation data later in the week, suggesting future interest rate hikes ahead of the next Fed meeting.
Oil prices remained under pressure from expectations that Saudi Arabia and Russia would pump even more crude oil despite rising US oil production. [O/R]
U.S. Crude oil futures CLc1 fell to six weeks lows, looking for a fifth straight day of decline. The July contract was most recently up 1.6 percent at $ 66.81 a barrel.
Brent crude oil futures LCOc1 rose 0.3 percent after falling to $ 74.49 a barrel on Monday, its lowest level in about three weeks. You were last at $ 75.53.
Spot Gold XAU has barely changed at $ 1,298.01 per ounce.
Additional coverage by Swati Pandey in Sydney; Editing by David Stamp