Europe midday: Political worries in the periphery weigh on sentiment

Concerns about the political situation in Italy and Greece are dampening sentiment at the start of the week.

As of 1207 BST the benchmark Stoxx 600 is off by 0.29% to 390.11, with Germany's Dax sliping 0.22% to 12,601.49 and a 0.17% fall in the FTSE Mibtel to 20,747.57.

On Sunday, Italian centre-left leader Matteo Renzi told Il Messaggero that calling snap elections would help reduce uncertainty in financial markets.

That followed a report a week before that Silvio Berlusconi's Forza Italia would back Renzi's call for early elections, in exchange for reforming the voting system towards purely proportional representation.

However, under the planned reform some analysts saw a non-negligible risk that anti-establishment parties might carry the day.

"We expect volatility in Italian and periphery assets to increase in coming weeks and to remain driven by electoral polls," Barclays Research told clients in a research note.

Also weighing on sentiment was a warning on Monday from Greece's finance minister that delays in agreeing on debt relief for his country might plunge it deeper into recession.

For Chris Beauchamp, chief market analyst IG, the punchy negotiations tactics used by Greece were the reason behind the wobble in European stocks. Yet in his opinion soothing words from Mario Draghi the day before were acting as an offset.

What's more he added: "Over the past few sessions we have seen a decent recovery in the breadth of the rally, with the number of risers beginning to outnumber the fallers. Perhaps we are coming to the end of the recent weakness in Eurozone stocks in particular, with a falling euro likely to aid any rally."

Acting as a backdrop, following the latest NATO summit and a meeting of G7 leaders in Sicily, German chancellor Angela Merkel said "the times we could completely depend on others are, to some extent, over."

Echoing Merkel's remarks, European Central Bank president Mario Draghi told the European parliament on Monday that: "The neo-protectionist stances that have been stated in the United States are certainly of concern."

Draghi reiterated that extraordinary policy support - including through forward guidance - was needed to ensure euro area inflation would return to rate-setters' 2.0% target over the medium-term.

French household spending was 0.5% higher month-on-month in April, a far weaker outcome than the 1.0% rise projected by economists although the 'miss' was somewhat offset by upwards revisions to data for the previous months.

On a cheerier note, France's gross domestic product expanded at a 0.4% quarter-on-quarter clip during the first three months of the year as investment bounced back, revised data from the national statistics office showed.

Consumers in the Eurozone's second largest economy were also more positive in May than had been thought, with INSEE's consumer climate gauge rising from 100.0 in April to 102.0 for May (consensus: 101.0).

Consumer prices in Spain on the other hand dipped by 0.1% month-on-month in May on a harmonised basis, according to INE, with the annual rate retreating by six tenths of a percentage point to 2.0%.

Economists had been expecting a reading 0.0% on the month and 2.1% year-on-year.

Concerns about the political situation in Italy and Greece dampened sentiment at the start of the week.

By the close the benchmark Stoxx 600 slipped 0.19% to 390.50, with Germany's Dax trading 0.24% lower at 12,598.68.49.

Somewhat ironically, the FTSE Mibtel outperformed as Milan's benchmark gauge bounced back a smidgen following bruising losses the day before, rising by 0.15% to 20,814.48.

On Sunday, Italian centre-left leader Matteo Renzi told Il Messaggero that calling snap elections would help reduce uncertainty in financial markets.

That followed a report a week before that Silvio Berlusconi's Forza Italia would back Renzi's call for early elections, in exchange for reforming the voting system towards purely proportional representation.

However, under the planned reform some analysts saw a non-negligible risk that anti-establishment parties might carry the day.

"We expect volatility in Italian and periphery assets to increase in coming weeks and to remain driven by electoral polls," Barclays Research told clients in a research note.

Also weighing on sentiment was a warning on Monday from Greece's finance minister that delays in agreeing on debt relief for his country might plunge it deeper into recession.

For Chris Beauchamp, chief market analyst IG, the punchy negotiations tactics used by Greece were the reason behind the wobble in European stocks. Yet in his opinion soothing words from Mario Draghi the day before were acting as an offset.

Adding to the selling pressure, Deutsche bank downgraded its view on European lenders' shares to 'underweight' from 'benchmark'.

The German broker believed euro area purchasing managers surveys had overshot and that as they inevitably fell back they would drag banks down with them.

"Banks are among the sectors most sensitive to swings in Euro area PMI momentum and tend to underperform when it turns negative."

Yet the flow of economic data was arguably on the positive side of things come Thursday.

French household spending was 0.5% higher month-on-month in April, a far weaker outcome than the 1.0% rise projected by economists although the 'miss' was somewhat offset by upwards revisions to data for the previous months.

On a cheerier note, France's gross domestic product expanded at a 0.4% quarter-on-quarter clip during the first three months of the year as investment bounced back, revised data from the national statistics office showed.

However, the European Commission's economic sentiment index for the single currency bloc retreated from a reading of 109.7 for April to 109.2 in May.

Consumer prices in Spain dipped by 0.1% month-on-month in May on a harmonised basis, according to INE, with the annual rate retreating by six tenths of a percentage point to 2.0%.

Economists had been expecting a reading 0.0% on the month and 2.1% year-on-year.

German consumer prices were also weaker than expected, slipping from a year-on-year pace of 2.0% for April to 1.4% in May (consensus: 1.6%).