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Europe rattled by Italy stress, safe havens keep gaining

[August 09, 2019] By Marc Jones

LONDON (Reuters) - Trade war worries and the prospect of early elections in Italy and Britain hit European markets on Friday, while the week's search for safety left gold on course for its best week in three years, Japan's yen near an eight-month high and bonds surging.

A turbulent week dominated by a symbolic drop in China's currency was not finished yet. A report that Washington was delaying a decision about allowing some trade between U.S. companies and Huawei again spooked Asia.

Europe was then led lower by a 2.4% slump in Italian stocks after Matteo Salvini, the leader of one of the country's ruling parties, the League, pulled his support for the governing coalition on Thursday. [.EU]

Snap elections have been likely for months, but markets were jarred when Salvini – who’s publicly insisted the government would last its full five years – pushed for a new poll.

Investors dumped Italian government debt, pushing yields -- which move inversely to prices -- on Rome's 10-year bonds up 26 basis points to 1.8%, the biggest daily increase in over a year.

"Those who waste time hurt the country," the League said in a statement as it presented a no-confidence motion to the Senate in Rome.

London's FTSE and the pound were under strain, too, after the UK reported its economy shrank in the second quarter, the first contraction in seven years.

That followed reports on Thursday that the new UK Prime Minister, Boris Johnson, was planning for an election after an Oct. 31 Brexit. Those reports had shoved sterling to a two-year low against the euro. [GBP/]

"It has been a very volatile week," said Elwin de Groot, Rabobank's head of macro strategy.

"Until recently, the markets' view was that this trade war will be resolved, but clearly now the thinking is that maybe this is not the case and it could be accelerating from here," and Italy and Brexit worries are now adding to that, he said.

U.S. stock futures didn't look much brighter. They were down as much as 0.5% in Europe, although the S&P 500 had its best session in two months on Thursday. [.N]

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, August 7, 2019. REUTERS/Staff

MSCI's broadest index of world shares, which tracks 47 countries, was headed for its second straight week of declines, after one of its worst days in years on Monday.

Asia ex-Japan had ended down 2.3% for the week after data showed China's first decline in producer prices in three years, compounding the Huawei disappointment.

GOLD RUSH

The offshore yuan managed to hold steady, even after China's central bank set its daily midpoint fixing at 7.0136 per dollar, the weakest since April 2, 2008.

The yen meanwhile rose as much as 0.4% against the dollar to 105.70 yen, virtually an eight-month high.

"The news about Huawei triggered the rise in the yen," said Junichi Ishikawa, senior foreign exchange strategist at IG Securities. "This is a reminder that the U.S.-China trade dispute remains a risk, and this risk is not receding."

Other safe havens also gained. Gold rose back above $1,500 on Friday, its highest in more than six years, en route to its best week since April 2016.

Oil prices held most of the previous day's gains as well, on expectations of more production cuts by OPEC. [O/R]

Brent crude hovered at $57.32 per barrel. U.S. West Texas Intermediate crude fell 0.1% to $52.50. Worries about the global economy meant Brent was down over 6% for the week and WTI more than 5%.

"The trade spat is driving the market crazy," said Jigar Trivedi, commodities analyst at Mumbai-based Anand Rathi Shares & Stock Brokers. "$1,500 (for gold) is now the new normal unless trade relations take a turn in a right direction."

(Additional reporting by Arpan Varghese in Bengaluru, editing by Larry King)

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