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Analysts at Westpac explained that the focus in Europe was a sharp deterioration in sentiment around the growing likelihood of new elections in Italy and the prospect of increased support for Eurosceptic populists, notably the right-wing Lega whose leader Salvini teasingly stated that their plans do not include “immediate euro exit”.

Key Quotes:

“Although Italian bonds recovered slightly into the European close, yield spreads still widened to their worst levels since 2012-2013. Italian stocks, led by financials, also fell sharply before a mild retracement into their close, to -2.7%. The 2 year Italian government bond closed at 2.77%, a staggering move from 0.90% on Monday. The 10 year bond yield jumped 48 basis points to 3.16%.

Spanish markets also weakened due to the increasing likelihood of elections and growing support for left-wing, anti-austerity opposition parties. Spanish shares closed down 2.5%.

Not surprisingly, safe haven currencies were strongest – the Japanese yen and Swiss franc. USD/JPY fell from 109.00 late Sydney to 108.11 – a one-month low – before steadying around 108.60 as US stocks trimmed losses into the NY close. EUR/CHF dropped 1% to around 1.14, a low since October 2017 which will not please the Swiss National Bank.

After mostly stable trade in Sydney Tuesday around 1.1630, EUR/USD slid as far as 1.1510 in the London morning, a low since July 2017. GBP/USD suffered collateral damage, at one point falling as much as a cent.   AUD held up reasonably well given the depth of risk aversion, down about 0.5% or 40 pips on the day, to 0.7500. NZD fell from 0.6940 to 0.6890. AUD/NZD ranged sideways between 1.0860 and 1.0890.

The US 10yr treasury yield fell from 2.90% to 2.76% – a six-week low – while 2yr yields fell from 2.46% to 2.32% – also a six-week low. Fed fund futures pared expectations of Fed hikes, to 1.5 hikes by year end (from two). Gold failed as a safe haven, managing to only hold steady.

US data understandably was largely overlooked. Consumer confidence met expectations, at 128.0 in May, still very upbeat. US house prices rose 6.8%yr in March, a high since 2014.”