Stock Futures Dive as Debt Fears Strike Europe's Core


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Stock-index futures tumbled on Wednesday as investors dumped Italian government debt, sending yields surging and forcing traders to grapple with the specter of Europe's debt crisis spreading from the periphery to one of the euro zone's biggest economies.

Today's Markets

As of 8:50 a.m. ET, Dow Jones Industrial Average futures tumbled 223 points to 11,900, S&P 500 futures slid 30.5 points to 30.5 points to 1,243 and Nasdaq 100 future slumped 43.8 points to 2,351.

Wall Street has been fixated on developments from across the Atlantic for months as the euro zone's sovereign debt crisis has spread, posing an increased risk to the global financial system, and threatening to tip the region's economy back into a recession.

Italy, with its public debt of roughly $2.6 trillion, or 120% of its total economic output, has become the latest focus.  The yield on the country's debt has ballooned since the summer and the benchmark 10-year note hit a fresh euro-era high of 7.495% on Wednesday, according to an analysis by FOX Business, as traders have fled out of fear that the value of the debt will continue declining, and that the country may not be able to honor its commitments.  Greece, Portugal and Ireland, much smaller economies with smaller absolute levels of debt, needed international bailouts when their debt yields topped 7%.

The problem for Italy is twofold. The higher the yield it needs to pay, the more expensive it becomes for the embattled nation to refinance its debt years down the line, increasing its overall debt level.  Second, as yields climb and prices tumble, traders become more wary of purchasing the debt, and Italy could have trouble finding sufficient levels of lending on the private market, meaning it would need international support to refinance.

The country has begun putting in place economic reforms to cut back its debt level, but it isn't clear whether those reforms will be sufficient to cut down the debt, or convince the markets that it is on a sustainable path.

Italy's Prime Minister Silvio Berlusconi agreed to resign on Tuesday after a budget vote that is expected to be held next week, which market participants initially hoped would pave the way for reforms to pass through parliament, but the situation has become murkier.  It isn't certain who will take over the country, and if that person, or group, will be able to get the reforms passed.

For Europe as a whole, Italy is particularly problematic because it is a such a major economy, so many banks hold its debt, and because its debt level is so high any potential bailout may be larger than the continent can handle on its own.  Additionally, it has become much more difficult politically to pass rescue packages as countries like Germany have grown unwilling to spend to bailout other countries.

However, an Italian default, analysts say, could be catastrophic.

On top of the woes from Italy, the Greek situation is still not under control.  The Mediterranean country's prime minister agreed to resign over the weekend, but also isn't clear who will fill the power vacuum there and assure financial markets that it will take measures to receive a much-needed bailout.

European blue chips tumbled 2.6%, Italian shares plunged close to 4% and the euro plummeted 1.5% to $1.36.  The U.S. dollar, meanwhile, soared 1.1% against a basket of six world currencies.

A stronger dollar and weakening equities overshadowed concerns over Iran, pushing energy futures deep into the red as well.  The benchmark New York oil contract dipped $1.44, or 1.5%, to $95.37 a barrel.  Wholesale RBOB gasoline dipped 3 cents, or 1.2%, to $2.67 a gallon.

In metals, gold fell $6.60, or 0.37%, to $1,792 a troy ounce.  Yields on U.S. government debt fell as traders piled into the safe-haven asset.  The benchmark 10-year Treasury note yields 1.973% from 2.084%.

The economic calendar is quite light on Wednesday, with a report on wholesale inventories on tap for later in the morning.

Foreign Markets

European blue chips tumbled 2.8%, the English FTSE 100 fell 1.9% to 5,461 and the German DAX slid 2.8% to 5,797.

In Asia, the Japanese Nikkei 225 jumped 1.25 to 8,755 and the Chinese Hang Seng rallied 1.7% to 20,014.