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Italian Bond Rates Spark Sell-off

Milan's FTSE MIB falls 3.8 percent, Dow down nearly 400 points.

Italian prime minister Silvio Berlusconi’s vow to step down did little to quell the uncertainty surrounding the country’s finances and sparked a sharp stock sell-off on both sides of the Atlantic.

 

Investors unloaded Italian debt, pushing the yield on the country’s bonds over 7 percent, an interest rate high enough to make it hard for Italy to borrow more money and keep ahead of its obligations. Yields over 7 percent led to bailouts of Greece, Ireland and Portugal, but Italy — the world’s 11th largest economy — is seen as too big for the European Union to rescue if necessary.

 

Milan’s FTSE MIB was hit hardest, tumbling 3.8 percent. Frankfurt’s DAX and Paris’ CAC 40 both retreated 2.2 percent and London’s FTSE 100 sank 1.9 percent.

 

Italian firms weathered some of the biggest declines with Safilo Group down 9.4 percent, Ferragamo dropping 5.6 percent, and Benetton falling 4.9 percent. Among the other stocks on the decline were Hermes, which fell 2 percent; PPR, which was down 1.5 percent, and Metro, which tumbled 3.1 percent.

 

The euro slipped more than 2 percent against the dollar.

 

On Wall Street, the S&P Retail Index fell 2.9 percent, or 15.81 points, to 533.83, as the Dow Jones Industrial Average declined 3.2 percent, or 389.24 points, to 11,780.94. Macy’s Inc. and Ralph Laruen Corp., each of which posted quarterly profit gains, both saw their stocks decline. Macy’s shares slipped 5.3 percent to $30.45, as Lauren’s stock declined 5.7 percent to $149.94. Also losing ground were Aéropostale Inc., down 6.1 percent to $16.39; Nordstrom Inc., 4.4 percent to $48.93; Abercrombie & Fitch Co., 3.3 percent to $56.28, and J.C. Penney Co. Inc., 3.2 percent to $32.70.

 

Samantha Panella, analyst at Raymond James & Associates, said that although the market has grown more accustomed to big swings, a 400-point swing in the Dow was still significant.

 

And although there is little direct correlation between Europe’s troubles and U.S. retailers, the troubles could seep into the consumer psyche and eventually hurt luxe spending, which is tied to some degree to the market.

 

“Anything affecting the macro [economic picture], that can have an impact in the minds of consumers,” Panella said. “Sometimes negative headlines become a self-fulfilling prophecy when it comes to consumer spending.”

 

Even so, the analyst said the job market was still the most important factor to U.S. spending.