By Tommy Wilkes
LONDON (Reuters) - Italian stocks slid on Wednesday after reports that the two parties seeking to form Italy's next government might seek debt forgiveness, while the dollar ignored a pull-back in U.S. bond yields and rallied to a new 2018 high.
Asian markets had earlier dipped after Pyongyang abruptly called off talks with Seoul, throwing a U.S.-North Korean summit into doubt, but that failed to rattle European stocks.
Markets were also unfazed by Italian politics and the bigger focus was a rocketing dollar and rising U.S. borrowing costs, which have spooked investors in recent weeks and intensified concern about damage to global demand, squeezing emerging markets.
The dollar resumed its rally in European trading and reached a high for the year (DXY). That gain left the euro below $1.18 (EUR=), its lowest since Dec. 19.
However, with 10-year Treasury yields slipping back below 7-year highs reached earlier this week, most European stock markets traded close to flat.
The exception was Italy. Reports suggested the 5-Star and League parties, trying to form a government after inconclusive March 4 elections, had written a draft coalition deal asking for debt forgiveness from the European Central Bank (ECB), frightening investors in the euro zone's third-largest economy.
"The proposal is surreal. Pretending the unilateral cancellation of 250 billion euros of debt bought by the ECB as part of the QE program... would be absurd," Anthilia Capital Partners fund manager Giuseppe Sersale said.
"Even if unfeasible, the tone of the debate bolsters expectations there will be a stormy relationship with Europe and a further relaxation of financial discipline," he said.
Italian stocks fell more than 1.5 percent (FTMIB) while the pan-European STOXX 600 (STOXX) slipped 0.12 percent.
Euro zone banks slid an even bigger 1.71 percent (SX7E), extending losses despite a League spokesman saying the request for cancellation of the debt was not in the official draft of the government program.
The difference in Italian 10-year government borrowing costs (IT10YT=RR) over German (DE10YT=RR) rose sharply to the highest since late March.
The MSCI world equity index (MIWD00000PUS), which tracks shares in 47 countries, slipped into negative territory.
U.S. stock futures traded down 1.25 percent (ESc1).
TREASURY YIELDS PAUSE
North Korea's cancellation of a June 12 summit in Singapore added to geopolitical worries for financial markets, given it could see tensions on the Korean peninsula flare again and damage U.S.-China efforts to resolve an ongoing trade dispute.
"This will weigh on the Korean reconstruction beneficiaries that have had a strong run on peace and even reunification hopes recently," JPMorgan (NYSE:JPM) analysts wrote in a note.
"The broader risk for the region if talks do break down is that Trump no longer feels the need to keep China on side and could escalate trade tensions again."
Elsewhere, the 10-year yield (US10YT=RR) slipped to 3.057 percent.
Strong U.S. retail sales and factory data on Tuesday pushed the U.S. 10-year yield as high as 3.095 percent, its highest since July 2011, raising worries about higher borrowing costs for companies worldwide.
The U.S. currency has enjoyed a blistering rally in recent weeks as investors focus on the Federal Reserve raising interest rates while central banks elsewhere push back policy tightening.
Rising U.S. borrowing costs and a stronger dollar hit hardest in emerging markets, where investors are withdrawing money - particularly from countries with large deficits and big dollar funding needs.
Argentina and Turkey have been at the center of the sell-off, their weakness compounded by political frictions.
The Turkish lira had been testing record lows against both the dollar and the euro but clawed higher after officials from the central bank said they would be prepared to act to halt the rout.
President Tayyip Erdogan's comments that he plans to take greater control of the economy have hammered the lira this week.
The Indonesian rupiah
In commodities markets, gold
Crude oil prices (LCOc1) (CLc1) declined but remained near recent highs amid concerns that U.S. sanctions on Iran may restrict crude exports from a major producer.
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