Singapore - The euro fell to a
20-month low on Monday and investors fled riskier assets after
Italian Prime Minister Matteo Renzi said he would resign
following a stinging defeat on constitutional reform that could
destabilise the country's shaky banking system.
European stock markets are also set for a weak start, with
Italy underperforming as investors brace for turbulence and
political crisis in the euro zone's heavily indebted
third-largest economy.
Financial spreadbetter IG Markets expects the EuroSTOXX 50
to open down 0.6 percent, and Germany's DAX
and Britain's FTSE to start the day 0.4 percent lower.
Renzi's failure deals a body blow to a European Union
already reeling under anti-establishment anger that led to the
shock exit of the UK from the club in June.
"It's not very hard to see a new election on the horizon,
and it's not very hard to see the (opposition) 5-Star Movement
taking power with stated aims to either leave the EU, drop the
euro, or both," said Mark Wills, head of State Street Global
Advisors' investment solutions group for the Asia Pacific.
"For Italy, establishing stable governance and a plan to
guide the nation is of critical importance given the fragility
of the economy, challenging policies and the liquidity problems
in the banking system."
The single currency slumped as much as 1.4 percent to
$1.0505, before recovering a bit to $1.0563.
The drop to its session low was the sharpest since June and
opened the way to a retest of the March 2015 trough around
$1.0457.
Analysts at RBCCM argued that, based on what happened in
2012 at the height of the Greek crisis, the risk of a euro zone
crisis could see the euro trade as low as $0.8000.
"It may sound extreme, but if a second euro zone crisis were
to hit, with the US dollar at a much stronger starting point,
EUR/USD could arguably trade lower still," they wrote.
The euro slid as much as 2.05 percent to 118.71
yen, but pared some of the losses to trade down 1.1 percent at
119.85 yen.
The dollar was supported by expectations of a US rate
increase this month and more to come next year. The dollar
index,, which tracks the greenback against a basket of
six global peers, jumped 0.6 percent to 101.37.
Against the yen, the U.S. currency, which rose earlier to as
high as 113.85, pulled back 0.1 percent to 113.41 yen.
The New Zealand dollar, which earlier weakened almost
1 percent to $0.707 after Prime Minister John Key unexpectedly
announced his resignation on Monday, recovered a little to trade
at $0.7106.
New Zealand stocks ended the day 0.7 percent lower.
MSCI's broadest index of Asia-Pacific shares outside Japan
eased 0.6 percent, while E-mini futures for the
S&P 500 narrowed losses to 0.3 percent.
Japan's Nikkei closed down 0.8 percent.
Even as the long-awaited opening of a scheme to connect the
Shenzhen and Hong Kong stock markets went live on Monday,
China's blue-chip index slumped the most in six months after the
nation's top securities regulator warned against "barbaric"
share acquisitions, although small caps remained firm.
China's CSI 300 index tumbled 1.7 percent. Hong
Kong's Hang Seng index retreated 0.7 percent.
The link between China's booming Shenzhen stock market and
neighbouring Hong Kong allows foreign investors access for the
first time to some of the fastest growing technology companies
in the world's second-biggest economy.
Back in Europe, dealers said Italian bonds were set to come
under pressure as top-rated US Treasuries and German bunds
gained.
US 10-year Treasury yields fell to 2.3435 percent from
2.39 percent at Friday's close.
Investors and European politicians fear the 'No' camp's
victory in Italy could cause political instability and renewed
turmoil for the nation's banking sector, which has been hit by
concerns over its huge exposure to bad loans built up during
years of economic downturn.
"Forming a stable government in Italy may be difficult, the
resuscitation of (ailing lender) Monte Dei Pashci may
be impacted, there is some potential that this may create an
opening for a secessionist political party," said Angus Gluskie,
managing director of White Funds Management in Sydney.
The prime minister's resignation represents a fresh blow to
the European Union, which is struggling to overcome a raft of
crises, and was eager for Renzi to continue his reform push.
Markets had earlier taken some encouragement when Austria's
far-right presidential candidate was soundly defeated by a
pro-European contender, confounding forecasts of a tight
election.
The European Central Bank meets Thursday amid much
speculation it will announce a six-month extension of its asset
buying program and widen the type of bonds it can purchase.
"There has been some speculation that the ECB would step and
front load purchases of Italian bonds if markets became
unsettled by a 'No' result, so perhaps it is the thoughts of a
central bank liquidity sugar pill driving things again," said
ANZ economist Jo Masters.
Oil pulls back
In the last trading session before the referendum, the
Italian benchmark posted a 0.2 percent decline.
The pan-European STOXX 50 closed down 0.4
percent.
Wall Street ended Friday on a cautious note, with the Dow
off 0.11 percent, while the S&P 500 rose 0.04
percent and the Nasdaq gained 0.09 percent.
While the U.S. November payroll report on Friday was firm
enough to cement expectations of a rate hike by the Federal
Reserve this month, a surprise pullback in wages helped bonds
pare a little of their recent losses.
In commodity markets, oil ran into risk aversion and some
profit-taking after recording its best week in at least five
years following OPEC's decision to cut crude output.
Markets are now focused on the implementation and impact of
OPEC's first output cuts since 2008, to be joined by Russia and
possibly other non-OPEC producers.
Brent crude was down 58 cents at $53.92 a barrel,
while U.S. crude lost 53 cents to $51.15.