Markets update: Stocks, lira, pound and euro drop in risk off trade

There have been some sharp moves in the markets in the first half of Wednesday’s session with global stock indices, Turkish Lira, euro and pound all tumbling and safe haven yen, Swiss franc and to a lesser degree gold all rallying.

Sentiment has turned sour for a variety of reasons, but among the main culprits have been the ongoing sell-off in Italian assets amid the political turbulence in the nation and after US President Donald Trump cast doubt over the North Korea-US summit taking place in June.

Italian 10-year yields have hit their highest level since March 2017 as bond prices sold off along with equities. The gap between German and Italian 10-year yield has risen to its highest since June last year.

Investors have dumped Italian assets amid fears about the nation’s economic health and future in the Eurozone. The anti-establishment Five Star Movement and the far-right League are close to forming a government.

The pound and the euro meanwhile dropped on the back fresh data showing softer-than-expected inflation in the UK and weakening economic activity in the Eurozone.

The headline UK Consumer Price Index eased to 2.4% year-over-year in April from 2.5% previously, while core CPI unexpected dropped to 2.1% from 2.4%. Other measures of inflation such as the House Price Index and Producer Price Index Input prices also failed to match expectations.

In the Eurozone, surveyed purchasing managers in the manufacturing and services industries reported slowing growth in activity in the latest sign of faltering economic growth.

Thanks to recent soft patch in data, market participants have pushed back their expectations about the timing of policy tightening in the UK and Eurozone, and as a result the pound and euro have both suffered.

As far as the Turkish Lira is concerned, well it has been falling heavily in recent days to new record lows against the dollar and the momentum has gathered pace amid panic selling.

The Turkish central bank has its hands tied because of interference in monetary policy from President Recep Tayyip Erdogan.

Despite the currency crisis and inflation running at 10.85% in April, the central bank has been unable or rather prevented from raising interest rates. This has raised fears the nation’s high inflation rate could get out of hand and potentially turn into hyperinflation, which would be very difficult to control.

Looking ahead to the second half of today’s session, there will be a couple of second tier economic data from the US in the afternoon and later the FOMC’s last meeting minutes will be in focus.