Europe’s pan-European stock benchmark ended Friday’s session as Italy’s antiestablishment government agreed to a 2019 deficit projection of 2.4% of gross domestic product, delivering a budget proposal that is likely to draw the ire of the European Union.
Italian stocks stood out with a hefty loss of more than 4% at the lows as investors dumped bank shares.
What are markets doing?
Italy’s FTSE MIB Index /zigman2/quotes/210598024/delayed IT:I945 -3.15% ended 3.7% lower to 20,711.70, its worst daily drop since late June 2016, according to FactSet. On the week, Italy’s index dropped 4.8%, making it its worst week since February. The index is down 4.2% in the quarter.
The mood infected the rest of Europe, with Germany’s DAX 30 /zigman2/quotes/210597999/delayed DX:DAX -3.68% closing 1.5% lower at 12,246.73. For the week, German index fell about 0.5%, the gauge declined by 1% for the month and 0.5% for the quarter.
France’s CAC 40 /zigman2/quotes/210597958/delayed FR:PX1 -4.23% ended 0.9% lower at 5,493.49, finishing the week flat, but gaining 1.6% for the month and 3.2% over the past three months, marking its best quarter since the third quarter of 2017, according to Dow Jones Market Data.
The U.K.’s FTSE 100 /zigman2/quotes/210598409/delayed UK:UKX -5.25% slipped to finish the session down 0.5% at 7,510.20. The U.K. stock benchmark still managed to end the week 0.3% higher, with a monthly gain of about 1.1% and a quarterly return of about 1.7%.
The pan-European Stoxx Europe 600 /zigman2/quotes/210599654/delayed XX:SXXP -3.26% , meanwhile, gave up 0.8% and closed Friday at 383.18. For the week, the widely watched equity benchmark finished 0.3% lower. For September, the index rose 0.2% and climbed 0.9% for the quarter.
The euro /zigman2/quotes/210561242/realtime/sampled EURUSD +0.2693% slipped to $1.1609, compared with $1.1643 late Thursday in New York, while the British pound /zigman2/quotes/210561263/realtime/sampled GBPUSD +0.0241% was changing hands at $1.3041, versus $1.3077 in the prior session.
Italian government bonds sold off, sending yields jumping. On Friday, the yield on the 10-year Italian bond /zigman2/quotes/211347230/realtime BX:TMBMKIT-10Y 0.00% jumped higher, last to yield 3.142% after trading at 2.910% Thursday. Bond prices fall as yields rise.
What is driving the market?
Italy’s woes come after the government late Thursday released official budget targets calling for a 2019 deficit of 2.4% of gross domestic product, up sharply from 0.8% this year and marking a significant rise in spending. The gap is seen potentially triggering downgrades of Italy’s credit rating, worsening the country’s debt outlook, and putting Rome and its populist coalition government on a collision course with Brussels over European Union fiscal rules.
Rome will submit a draft budget proposal in October and that would put Italy on a “collision course” with the EU, which is likely to push back against a budget plan that produces a large deficit. Drama had been building around the budget release.
The budget proposal comes after antiestablishment 5 Star Movement and the far-right League promised to increase spending to fulfill campaign promises on basic income, pensions and tax cuts. Economy Minister Giovanni Tria, who isn’t affiliated with either of the coalition’s main parties, had reportedly been calling for a 1.6% target, in keeping with the EU’s budget rules.