Euro rallies as Italy concerns fade, investors eye data

GETTYSavona is expected to be confirmed as Italy's new finance minister next week

Hopes that new elections in Italy can be avoided helped send stocks broadly higher in the USA and Europe.

Hong Kong's Hang Seng rose 0.75% and the Shanghai composite index gained 1.4% after news that growth in China's vast manufacturing sector accelerated strongly - and well above forecasts - in May, reaching an eight-month high. USA stocks were poised for a solid open, with Dow futures and the broader S&P 500 futures up 0.5 per cent. Efforts to form a government collapsed Sunday after President Sergio Mattarella rejected a nominee for economy minister, Paolo Savona, who in the past had entertained a "Plan B" to leave the euro. South Korea's Kospi dropped 2.0 per cent to 2,407.95. The euro on Tuesday weakened significantly against the safe-haven Swiss franc and the Japanese yen.

That raised the prospect of a new general election, stoking fear that such a vote would effectively be a referendum on Italy's euro membership.

"Experience shows that these "crises" tend to settle down for long periods once the initial adjustment of market expectations has been effected", Carl Weinberg, chief global economist at High Frequency Economics, wrote in a note to clients. Italian bond yields were hit particularly hard, with the yield on its 10-year government bond jumping by around 50 basis points in just one day to its highest level since 2014, highlighting the growing risk of holding Italian assets.

ANALYST TAKE: "If a government can be formed that receives the stamp of approval from Mattarella and is therefore seen as not posing a threat to Italy's place in the eurozone, then this will come as a relief to markets in the near-term", said Craig Erlam, senior market analyst at OANDA. In the absence of any surprises here, Friday's nonfarm payrolls report will be the big market mover this week in terms of data releases. The single currency hit a nine-month low of 1.1367 against the franc and a 10-month low of 124.61 yen.

CHINA TRADE: A USA business group said American companies in China are uneasy about Washington's threat of export and investment controls in a trade dispute with Beijing but see them as a possible way to achieve fairer operating conditions.

Someone put the Kinder Morgan Trans Mountain expansion on sale on Craigslist
Also on Tuesday, Natural Resources Minister Jim Carr insisted Canada would not put the economy above a clean environment. One protester held up an image of Justin Trudeau covered in oil after Canada said controversial pipeline will get built.

Emerging market stocks lost 1.2 percent, marking a new low point for the year, under continued pressure from a rising USA dollar for countries that often borrow in that currency.

Even the idea of Italy leaving the euro was enough to send the country's bond yields to multi-year highs on Tuesday.

United States investment bank Goldman Sachs said today it had cut its euro/dollar forecast for the next 3, 6 and 12-months because of uncertainty stemming from Italy's political crisis, while HSBC said the dollar's recent rally had further to run.

Crude oil prices eased after rallying overnight. Oil prices have slumped in the last week following reports that OPEC countries and Russian Federation could start pumping more oil soon.

USA crude futures fell 0.18% to $68.09 a barrel after gaining 2.2% on Wednesday, when Russia's central bank expressed caution about plans to boost oil supply.

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