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U.S. stocks bounced off intraday lows and major indexes trimmed early losses Tuesday, but the S&P 500 still finished lower for a fifth session as a big drop in the Chinese market revived fresh questions about the global economy. The Dow Jones Industrial Average fell 0.5% to 25,191.43. The S&P500 shed 0.6% to 2,740.69, while Nasdaq Composite Index slid 0.4%, to 7,437.54.
As the European Union rejected Italy’s budget proposal and tensions between Brussels and Rome escalate, investors’ faith in European assets is plummeting. The Stoxx Europe 600 dropped 1.6% on Tuesday for its fifth straight loss, bringing its loss for October to 7.6% so far. On the year, the benchmark is down 9%. The U.K.’s FTSE 100 fell 1.2% to 6,955.21, falling four of the past five sessions, after being stuck in the red along with other major European bourses, as questions about Brexit tensions and growing concerns about global growth, particularly in China, battered sentiment.
There is no 'Plan B' for Italy’s budget
Italian Prime Minister Giuseppe Conte insisted his government has no “Plan B” to change its budget, despite the skeptical responses of the European Commission and investors.
The European Commission has rejected Italy’s budget for flouting Europe’s fiscal rules, and has given Rome three weeks to try again. It’s the first time this has been done, and the move is risky because it sets up a political confrontation that could end badly. But the rules are there for a reason, and if the system is to work, Italy can’t be allowed to opt out.
Countries have often deviated from their mutually agreed-upon targets, and the commission has typically been flexible after recessions or other disruptive events. But Italy’s case is different. Granted, its economy is growing only sluggishly, but its planned budget overshoot is “unprecedented,” as the commission said in a letter to the government last week, and its public debt, at more than 130 percent of GDP, is enormous.
Finance Minister Giovanni Tria says that Rome will make boosting economic growth the priority. It not only rejected the EU’s fiscal rules as a practical matter, but also challenged them in principle. This left the commission little choice but to escalate the dispute.
Italy’s new plan fails to lower the structural deficit until 2022, and the delay has already spooked investors. Medium-term bond yields have climbed to the highest in nearly five years and Moody’s, the credit rating agency, has downgraded Italy’s bonds to a notch above junk. For now, the burden of interest payments is low by historical standards, but with a vast public debt and no serious effort to get public borrowing under control, the threat of another sovereign debt crisis is real.
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