European assets in turmoil as the US and UK return from vacation

After a brief respite on Monday, financial market switched to risk-off mode on Tuesday as both US and UK traders came back from a long weekend. In the equity market, yesterday optimism has completely disappeared with equity indices blinking red across the screen. Asian market closed in negative territory with the Nikkei down 0.55% and the CSI down 0.76%. In Europe, the picture in not brighter as the German DAX fell 0.58%, the Eurostoxx 600 0.68% and the SMI 0.61%. Italian are by far the worst performer – the FTSE MIB gave up 1.70% – amid renewed about the country’s political future. Italian sovereign bonds went through another sell-off this morning with the 10-year yield jumping as high as 2.93%, up 25bps from yesterday’s close. The 2-year one currently stands at 1.57%, up 67bps.

In the FX market, investors sold the single currency and took shelter in safe-haven ones. The Japanese yen was in solid demand and rose 0.50% against the greenback. USD/JPY kept grinding lower and hit 108.79. The closest support lies at 108.65 (low from May 4th). EUR/CHF is currently testing the 1.1450-1.15 support area (low from late February and psychological level). A break of the support would open the road towards 1.12. However, the downside in EUR/CHF may be limited by the strength of USD/CHF (flat at 0.9935 today).

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The Italian – and to some extend the Spanish – situation will continue to drive short-sentiment as market participants are concerned that the League and the 5-Star Movement will ask for snap elections, which would ultimately increase in the uncertainty. This environment will therefore remain euro negative.

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