Stocks slump as Italy turmoil sparks fresh Euro fears

U.S. stocks slid on Tuesday as political turbulence in Italy sparked concerns the recently elected populist government could push the country toward an exit of the eurozone, a prospect some are calling “Quitaly.”

Markets also fell broadly in Europe earlier Tuesday after an attempt by populist parties to form a government in Italy failed. Some observers fear that new election will become a de facto referendum on whether Italy, the third-largest economy in the currency bloc, will remain in the union. 

The two populist parties governing Italy have failed to form a government, prompting the country’s president to install an interim prime minister. The temporary PM, former International Monetary Fund official Carlo Cottarelli, is set to face a vote of confidence in the parliament later in the week. 

But Italy’s ruling parties, the left-wing 5-Star Movement and far-right League, have vowed to vote against the new government, as have other parties. That would force Italy to hold new elections in the fall.

“[T]he issue of Italy’s EU and euro membership could be central to the election,” analysts with Capital Economics wrote in a note. “If both parties call for a euro referendum, then [bond] yields would move far higher to reflect redenomination risks.”

In U.S. markets, banks and technology companies led the way lower on Wall Street in early trading on Tuesday. Bank of America gave up 1.8 percent and Oracle lost 1.2 percent.

In early trading the Dow lost 206, or 0.8 percent, to 24,547, while the the Nasdaq and S&P 500 indexes also slumped. In another sign of caution, bond prices rose as investors moved money into lower-risk assets. The yield on the 10-year Treasury note fell to 2.87 percent.

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