Could this be a slap on the wrist from the President of the European Council for some of the earlier comments from the ECB and EU?

It’s not just Italy causing concern of course:

At times like this it is worth looking at the VIX index - the so-called fear index which shows investors’ expectations of near term market volatility.

So far today it has jumped 17% to 15.49, the highest level since the beginning of May.

Unless there is something lost in the translation here, this appears to be another unhelpful comment, this time from EU commissioner Günther Oettinger:

As the Italian crisis continues, billionaire financier George Soros is in a negative mood about the EU in a speech today:

As the Italian crisis grips investors, markets had become complacent in the wake of the QE support programmes from the world’s leading central banks, says Premier Asset Management’s Jake Robbins:

The Presidential rejection of a democratically elected coalition government has thrown Italy into a constitutional crisis, one made worse given it was because of the coalition’s anti EU beliefs. In echoes of the euro crisis earlier this decade, these events could ultimately threaten the future of the EU, or at the very least, question it in its current form.

Whilst it is no surprise that Italian yields have soared and equities plunged as investors reprice the actual risk of holding Italian assets, this crisis has been on the cards for some time and shows how complacent financial markets have become in the era of quantitative easing. At the same time there has been a noticeable slowdown in growth across the EU this year which will also continue to weigh on sentiment towards both Italian and EU wide assets. Throw in heightened geopolitical risks in other parts of the world such as the US and Asia, rising interest rates and the reduction in central bank support through quantitative easing, then the outlook for financial markets is far less certain than over the past few years.

Here’s Reuters’ latest report on the volatility in the markets:

A deepening political crisis in Italy, the euro zone’s third biggest economy, fuelled a heavy selloff in Italian assets and the euro reminiscent of the euro zone debt crisis of 2010-2012.

Short-term Italian bond yields, which move inversely to price, were set for their biggest one-day jump since 1992, while Italian and wider euro zone banking stocks were set to suffer their worst day since August 2016.

Italy’s president has set the country on a path to fresh elections by appointing a former International Monetary Fund official as interim prime minister, with the task of planning for snap polls and passing the next budget.

The concern is that fresh elections could deliver an even stronger mandate for Italy’s anti-establishment, eurosceptic politicians.

“The spectacular rise of 2-year yields in Italy this morning reflects break-up or redenomination fears,” Martin van Vliet, ING Bank’s senior fixed income strategist, said.

Earlier Italy sold €5.5bn worth of six month bonds, but at the highest yield for more than five years.

Amid the turmoil surrounding the country’s political future, it sold the expected amount of bonds but at a yield or interest rate of an average 1.213%. At the previous auction for this maturity the yield was negative at -0.421%.

There are more sales due on Wednesday - up to €6bn in five year and ten year bonds.

US markets are expected to open lower in the wake of the European declines, with the Dow Jones Industrial Average forecast to lose around 190 points at the start of trading.

Back with the markets, and analyst Joshua Mahony at IG, says:

With markets transfixed on affairs in Italy and Spain (amid a vote of no confidence for Rajoy), we are seeing a sharp shift into safe haven assets, driving the Japanese yen and gold prices higher in recent days. FTSE 100-listed gold producers Fresnillo and Randgold are the best performers in the bluechip index in early trade amid a shift into gold. We often see stocks benefit when currencies come under pressure, but the flight to safety this morning means the euro and the pound are also getting another pounding alongside the stock market declines.

Away from markets for a moment, and some good news for Pret A Manger employees after the takeover deal, as tweeted by the chain’s chief executive:

Moody’s, which recently put Italy’s Baa2 credit rating on review for a downgrade, has commented on the latest developments.

It said Italy was likely to be downgraded if the next government pursued fiscal policies which were not sufficient to place the public debt ratio on a sustainable downward trajectory in the coming years.

Its rating could be confirmed if there was an ambitious programme of structural reform by the next government.

Neil Wilson, chief market analyst for Markets.com, says:

We’ve seen a steep selloff in risk assets as the Italian political troubles deepen, with investors seemingly dumping their exposure to Italy. Whilst a lot has already been written on the topic, the moves this morning warrant attention as we are seeing some incredible price action in Italian bonds with the market moving at speeds not seen since the worst of the Eurozone debt crisis.

The big question is whether this is just an Italian problem or one that risks significant spill-over into the rest of Europe. The one thing that has become apparent is that markets treated the election result with excessive calm and has been jolted by the populists’ success in agreeing terms...

For now this looks contained largely to Italy, but the contagion risks mount. Italian bond moves are isolated and whilst the euro has given some ground again it is mounting a firm defence above 1.15 for the time being. Italian stocks today are underperforming Europe, with the FTSE MIB falling more than 3% before bargain hunters produced a slight paring of the losses. However, the situation – which increasingly is a crisis in the making – is seeing investors take risk off the table and stocks across Europe are 1-2% lower.

Italian bond yields have risen sharply and spreads are widening with Bunds. The Italian 2-year yield has jumped above 2% and has kept on going, approaching 2012 sovereign debt crisis territory at 2.4%. Spreads with 10-year Bunds are now at the widest since 2013 and the market is moving before our eyes.

Eurozone breakup risks are higher, although they remain small overall (unless you take the long term view that every empire falls at some point and the EU is no different). If snap elections produce a clearer mandate for the populists and they succeed again in forming a government, Italy heads for a collision for the EU shortly after. EU and Eurozone rules are far too inflexible to handle radical domestic policy shifts of this kind and based on experience of Brexit negotiations, Italy could not hope for the EU rule makers to back down. A disorderly Italexit would be nasty enough but as a founding member of the club it would be a moment that the bloc would not recover from.

The chief risk is that the developments over the last week lead to a snap election that becomes in effect a referendum on membership of the euro. The two main populist parties may well step up their anti-euro, and anti-EU positions.

The market rout is intensifying, in the wake of the Italian political crisis.

The FTSE 100 is now down nearly 120 points or 1.5%, Germany’s Dax is down 1.6% and France’s Cac has fallen 1.87%.

As for Italy, the FTSE MIB is now down 3.2%. Italian two year bond yields are on track for the biggest one day rise for more than 16 years.

But the yields on UK gilts have fallen to their lowest levels this year as investors seek havens for their cash amid the turmoil.

The euro is also being hit, down 0.3% against the dollar and below $1.16 for the first time in six and a half months.

But the pound is not benefiting much, flat against the euro at €1.1451 and down 0.6% against the dollar to $1.3220, its lowest since November.

Time to call this a crisis, says Kit Juckes of Societe Generale:

Having rejected the NL/5-star leaders’ nomination of Paolo Savona as [Italian] Economy Minister, President Mattarella has called on Carlo Cottarelli to form an interim administration.

His chances of succeeding are slim and elections are likely in September. Which leaves us 3-4 months of uncertainty ahead of a vote that may be seen as a referendum on Euro-membership. The threat of further rating downgrades hangs over the BTP [Italian bond] market (and is largely priced-in), and the European Central Bank’s plans for providing forward guidance on policy normalisation are up in the air. Which means that the risk of EUR/USD reaching 1.10 by the end of the summer is significantly higher than the possibility of a recovery to 1.20.

With 10-year Bund yields under 30bp this morning, and the BTP/Bund spread heading towards 3% at a rate of knots, we should now call this a crisis. The 2010 and 2011-2012 Euro crises took EUR/USD down by 20-25%, which may put the 10% we’ve seen so far in context. Both those falls were almost completely reversed when the crisis passed, but that’s for another day, even if that day comes sooner as result of these developments. EUR/USD 1.1550 is the next key psychological level but I can’t see it holding. 1.0860, the springboard from which the euro rallied after the French election, should hold....

More on the sale of ubiquitous sandwich chain Pret A Manger:

Pret a Manger, the British sandwich shop chain, is being taken over by the German-controlled company behind Krispy Kreme donuts and Kenco coffee in a deal worth more than £1.5bn.

Bridgepoint, the UK-based private equity firm, has agreed to sell Pret to the investment group JAB Holdings, which has been rapidly acquiring companies linked to the coffee market in recent years.

Pret is based in London, where it was started by the entrepreneur Julian Metcalfe and his friend Sinclair Beecham with one shop in 1986. Metcalfe went on to create the Itsu restaurant chain and Metcalfe’s skinny popcorn.

Having expanded rapidly in recent years, opening 50 shops in the past year alone, Pret has more than 500 stores, generating revenues of £879m. It also has stores in the US, China and Dubai.

The company is trying to attract more British workers as it prepares for potential staff shortages after Brexit and seeks to expand further in the US and internationally.

The full story is here:

Back with Italy, and bond yields are continuing to leap higher:

Italian bond yields have jumped on the political turmoil engulfing the country, with the two year yields rising above 1% for the first time since 2014.

The euro continues to come under pressure, falling to its lowest level since November 2017 against the dollar.

It is down 4% so far this month at $1.159, and is also at a new six and a half month low against the Swiss franc. It has fallen 0.1% against the pound.