Europe close: Italian stocks reel with country's euro membership in the spotlight
Italian stocks ran into heavy selling again on Tuesday, with losses in the country's government debt accelerating as investors reacted to the threat of fresh general elections after August which might see the country's anti-establishment parties gain further ground if the latest polls could be trusted.
Such concerns saw the country's main stockmarket gauge, the FTSE Mibtel, erase 2.65% or 581.81 points to finish at 21,350.88, surrendering the last of its gains for the year-to-date in the process.
The pan-European Stoxx 600 index on the other hand was down by a more moderate 1.37% or 5.25 points to 384.47, although shares of lenders were weakest on both indices, with the Stoxx sector gauge shedding 3.20% to 164.52.
Those losses followed Italian president Sergio Mattarella's decision at the weekend not to approve the appointment of a prominent Eurosceptic, Paolo Savona, as the country's Finance minister, and far-right League's decision not to name an alternative candidate, which triggered the departure of the new Prime Minister Giuseppe Conte and the collapse of the coalition government.
"The latest opinion polls suggest that the League is gaining electorate support, while M5S's ratings remain broadly stable, so a new election might strengthen their hand," said analysts at Daiwa Capital Markets.
"And, given that the President's rationale for refusing to appoint Savona to the role of Finance Minister was that there had been no meaningful debate about Italy's place in the euro, an election result that saw continued strong support for M5S and the League, would leave the President with little choice but to allow the formation of a M5S/League government with whoever they want in it."
Analysts at Rabobank expressed a similar view, telling clients: "While Matarella may have bought some time, his move could yet backfire, serving merely to embolden even greater support for both parties that may see market concerns of Italy's drift from the euro area intensify."
However, a Eurobarometer survey carried out by the European Commission in November revealed that 59% of Italians supported membership in the euro, with 30% against it.
Indeed, across the bloc roughly three-quarters of respondents were in favour of the single currency.
The country's bonds were seeing staggering losses alongside, with the pick-up in 'risk-off' sentiment negatively impacting other sovereigns, albeit to a much smaller extent.
Adding to the sour mood among investors, Spain's Ibex 35 was lower by 2.49% or 243.10 points alongside the Milanese gauge at 9,521.30.
The country's Prime Minister, Mariano Rajoy, was facing a no confidence vote in Madrid on Friday.
As recently as 7 May, Italy's main stockmarket gauge had been trading roughly 12% higher year-to-date and was the top performer among its peers, as investors hoped that positive political developments in the Netherlands and France would be replicated in the single currency bloc's third-largest economy.
The flow of economic data did little to offset the negative sentiment, rather the opposite.
In particular, ISTAT's consumer confidence index for Italy slipped from a reading of 116.9 for April to 113.7 for May (consensus: 116.6).
Meanwhile, the European Central Bank reported an acceleration in the rate of growth of euro area private sector credit for April, to a 3.0% year-on-year pace versus a 2.6% gain in March.
However, Claus Vistesen at Pantheon Macroeconomics pointed out some negative trends in other parts of the ECB's money supply data.
"The slowdown, at least in part, was due to economic agents shifting into less liquid deposits, which is not a good sign in the Eurozone. Rising headline inflation and slowing nominal M1 growth has historically been a very reliable signal of slowing growth," Vistesen said.
"Allowing for a lag of about six-to-nine months, it means that 2019 GDP forecasts will soon have to come down. Ours, at least, will if we get confirmation of this slowdown in the remaining two reports for Q2."