Italian Markets Pummeled After Draghi’s Government Rocked

(Bloomberg) — Italian bond and stock futures plunged to fresh lows for the day and the euro dipped back below parity with the US dollar after Italy’s Prime Minister Mario Draghi said he would offer his resignation to the country’s president. That offer was subsequently rejected.

The euro was down as low as $0.9984 after Draghi’s offer was announced, but still above its lows from earlier in the session. September futures on 10-year Italian government debt plunged below 122, the lowest since June and below their 21-day moving average. Contracts on the benchmark equity index extended losses and fell by more than 5% on the day.

The political turmoil in Italy could complicate the European Central Bank’s efforts to raise interest rates for the first time in a decade as it looks to end years of negative borrowing costs in the region. ECB policy makers are scheduled to deliver their next decision on July 21. That day is also when a key Russian gas pipeline is scheduled to reopen.

The difficulty for the ECB is to tighten policy while keeping government bond markets orderly, given higher borrowing costs will hit more indebted nations such as Italy harder.

“The mandate is inflation, but the problem will lie in execution/transmission when the ECB hikes,” Bipan Rai, Canadian Imperial Bank of Commerce’s head of foreign-exchange strategy said. “This could complicate things.”

Markets for Italian bonds and stocks were closed at the time of the Draghi’s announcement, which President Sergio Mattarella has since rejected. Mattarella invited Draghi to address parliament to assess the political situation after a key coalition party boycotted a confidence vote on Draghi’s government Thursday.

Italy’s political turmoil comes as Europe grapples with an energy crunch caused by Russia curtailing gas exports amid its war in Ukraine, stoking fears of a recession. The European Union, whose industries are heavily dependent on Russian gas, cut its growth forecast for 2023 in new projections.

It’s the latest problem investors in Italian assets have to assess, adding to surging inflation, rate hikes and recession fears. Italian bonds have already been under pressure for months from the withdrawal of the ECB’s ultra-accommodative policies, widening spreads between Italian and benchmark German yields.