British Pound Plunges, Italian Bond Yields Rise After Election Results

Bridgette Randall
26 Sep, 2022
Frankfurt

Benchmark indexes in Europe lacked direction in early trading but traded marginally higher. 

The DAX Index edged up 0.2% to 12,308.12, the CAC-40 index increased 0.3% to 5799.37 and the FTSE 100 index was nearly unchanged at 7.018.27. 

The euro inched lower to 96.66 cents on the ongoing worries of high inflation and rate path and the British pound dropped to a new 4-decade low of $1.083 on the worries that the recently announced tax cuts may increase government deficit. 

The yield on European bonds rose and Italian bod yields rose the most after the far-right party led coalition was ahead in the election. 

Giorgia Meloni led Brothers of Italy and coalition partners are set to win a majority of seats in the Senate and form a government. 

Italian bond yields rose to 4.5%, the highest since 2013 and spread with the German government bond yield widened to 235 basis points, approaching the record high of 250 basis points in 2020. 

Meloni campaigned on a promise to renegotiate the terms of payments received from the European Union that could jeopardize or delay as much as 200 billion euros from Brussels.  

 

Asian Markets Drop 

In Asia, popular averages declined following Friday's losses in the U.S. and Europe. 

The Nikkei index dropped 2.6% to 26,475.33, the Shanghai Composite index declined 1.2% to 3,051.41, the Sensex index plunged 1.6% to 57,145.32. 

The dollar continued its advance against all major currencies in Asia. 

The yen dropped to a new 25-year low 144.23, the yuan eased to 7.14 and the Indian rupee eased to a new low of 81.43 

 

China Adjusts Rates, Allows Gradual Depreciation

The People's Bank of China set the renminbi rate below 7.00 for the first time since July 2020 and let the currency slide below the psychologically important range between 6.0 and 7.0. 

The currency declined more after the central bank set the rate at 7.0298 but the tightly controlled currency dropped to 7.16, the level not seen since May 2008.   

Most Chinese exporters are keeping the export revenues in foreign bank accounts and taking advantage of the rising rates in the U.S. and Europe and not converting to renminbi as rates are falling in China.