NEW YORK (Reuters) - Stocks and the euro fell on Monday as fears the euro zone debt crisis could spread to Italy caused investors to sell risky assets and snap up safe-haven debt, pushing the yield on the benchmark 10-year U.S. Treasury note below 3.0 percent.
Italy has the second-highest sovereign debt ratio relative to GDP in the euro zone, after Greece. Investors fear the crisis may spread to the much larger economies of Italy and Spain.
“Italy has a more realistic financial plan than Greece and is much better equipped to meet their debt obligations,” said Kathy Lien, director of currency research at GFT Forex in New York. “However, that may not be enough to stop contagion fears, which can be irrational at times.”
The concern about Italy, the euro zone’s third-largest economy, prompted an emergency meeting of top European Union officials. Italian government bonds and stocks dropped as investors cut their exposure.
U.S. stocks suffered their worst day in nearly a month following the Italy news, along with concern about the stalemate in U.S. budget talks.
The Dow Jones industrial average .DJI fell 151.44 points, or 1.20 percent, to end at 12,505.76. The Standard & Poor's 500 Index .SPX lost 24.31 points, or 1.81 percent, to 1,319.49. The Nasdaq Composite Index .IXIC slid 57.19 points, or 2.00 percent, to 2,802.62.
The MSCI world equity index .MIWD00000PUS fell 2 percent to about a one-week low, while the pan-European FTSEurofirst 300 index .FTEU3 of top shares fell 1.5 percent to close at 1,097.60, its lowest closing level since June 28.
U.S. exchange-traded funds tracking European equity markets also came under pressure. The iShares MSCI Italy Index Fund (EWI.P), a fund that tracks Italian stocks, fell 6.2 percent while the iShares MSCI Spain index fund (EWP.P) dropped 5.2 percent.
Some analysts say if euro zone debt problems are not contained, they could hurt the global economy, especially banks exposed to the debt. The U.S. economy alone has struggled to pick up the pace of its recovery from the worst downturn since the 1930s.
A weaker-than-expected U.S. jobs report on Friday and data showing China’s import growth fell to its slowest pace in 20 months, suggesting a slowing economy, also drove investors away from stocks.
The benchmark 10-year U.S. Treasury note jumped 27/32 in price, pushing its yield back below 3.0 pct to a two-week low at 2.92 percent from 3.02 percent late on Friday.
“We are seeing some follow-through buying in Treasuries, and the European situation continues to fester. It is just an environment where there are a lot of factors that are stacking up as bullish for bonds,” said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.
After the U.S. stock market close, aluminum maker Alcoa (AA.N), also a Dow component, reported earnings, unofficially marking the start of the second-quarter U.S. reporting period. Its shares rose 1 percent to $16.07 after the results.
In the foreign-exchange market, the dollar .DXY rose 1.1 percent against a basket of major currencies.
The euro was down 1.8 percent at $1.4012 after earlier hitting a session low at $1.3984, its lowest in six weeks.
“Italy would be a challenge that makes Greece look miniature by comparison,” said Karl Schamotta, senior strategist at Western Union Business Solutions in Calgary. “We have a wide-ranging contagion issue here — or at least the perception of one — and that’s making people very nervous.”
JP Morgan said Italian banks are vulnerable because of their high reliance on wholesale funding. Moreover, their government bond holdings stand at 6.33 percent of assets, higher than those of Spanish banks.
Oil fell on the euro zone crisis as well, while gold prices rose.
On the New York Mercantile Exchange, U.S. crude for August delivery fell $1.05, or 1.09 percent, to settle at $95.15 a barrel.
In London, ICE Brent crude for August delivery settled at $117.24 a barrel, down $1.09, or 0.92 percent.
Spot gold , which is used as a safe haven in times of global economic uncertainty, was up 0.4 percent at $1,550.10 an ounce.
Reporting by Caroline Valetkevitch in New York, with additional reporting by Natsuko Waki in London, and Chris Reese and Julie Haviv in New York; Editing by Dan Grebler