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May 18, 2018, 12:54 p.m. EDT

Italian stocks end sharply lower as country’s political drama weighs on Europe’s market

FTSE MIB loses 1.5%, Italian yields post biggest weekly rise since 2016

By Sara Sjolin, MarketWatch

AFP/Getty Images
The antiestablishment Five Star Movement

European stocks on Friday retreated from an almost-four month high as uncertainty about Italian politics contributed to a downdraft in a market already jittery over trade tensions between global superpowers China and the U.S.

What are markets doing?

The Stoxx Europe 600 index (STOXX:XX:SXXP) closed 0.3% lower at 394.67, breaking a three-day winning run. On Thursday, the pan-European benchmark ended at its highest level since Jan. 30, buoyed by a rally for oil-related companies.

For the week, the Stoxx 600 scored a 0.6% gain.

Italy’s FTSE MIB Index (BORSA:IT:I945)  slumped 1.5% to 23,449.65, as political developments in the country flustered markets. The index declined by 2.9% on the week, its largest weekly percentage decline since early March during the general election.

The yield on 10-year Italian bond (XTUP:BX:TMBMKIT-10Y)  rose 9 basis points to 2.222%, according to Tradeweb. Over the course of the week, the benchmark Italian yield has jumped 33.4 basis points, its sharpest ascent since the middle of 2016.

Germany’s DAX 30 index (XEX:DX:DAX)  lost 0.3% to end at 13,077.72, while France’s CAC 40 index (PAR:FR:PX1)  ticked down 0.1% to 5,614.51.

In the U.K., the FTSE 100 index (FTSE:UK:UKX)  slipped 0.1% to 7,778.79, pulling back from a record close logged on Thursday.

The euro (XTUP:EURUSD)  fell to $1.1769 from $1.1794 late Thursday in New York.

What is driving the market?

Italian politics remained in focus on Friday after the country’s two biggest populist parties agreed on a coalition program that included plans to cut taxes and increase fiscal spending, but no direct threat to Italy’s membership of the eurozone.

The economic policies of the would-be government sets Italy on a possible collision course with Brussels that could revive memories of the eurozone debt crisis.

Credit-ratings firm DBRS warned on Thursday that the economic proposals from the 5 Star Movement and League could threaten Italy’s credit rating, according to Reuters.

Traders also watched the latest in the U.S.-China trade dispute after U.S. President Donald Trump somewhat dashed hopes of a trade deal between the two countries. At a press conference on Thursday, Trump said he doubts that the negotiations will succeed because “China has become very spoiled” on trade.

What are strategists saying?

“Although we have to brace ourselves for significant noise, including clashes between Rome and Brussels, a truly disruptive crisis [in Italy] is probably not on the cards for now,” said Holger Schmieding, chief economist at Berenberg, in a note.

“However, if highly-indebted Italy loosens the fiscal reins and reverses some recent reforms such as the ‘Fornero’ pension reform, the country would become vulnerable to a debt crisis if and when the next cyclical recession exposes the country’s weaknesses,” he added.

Stock movers

Ferrari NV (MIL:IT:RACE) lost 0.9% after the car maker named Antonio Picca Piccon as new chief financial officer, effective July 30. He’ll take over from Alessandro Gili, who is leaving on May 31.

Glencore PLC (LON:UK:GLEN)   (OTC:GLCNF)  fell 4.4% after Bloomberg reported that the miner may face a formal bribery investigation over its business conduct in Congo.

Shares of Cie. Financière Richemont SA (SWX:CH:CFR)  slid 5.3% after the luxury-goods company reported full-year earnings.

“There has been much positivity in luxury post strong results across the space; therefore we see the higher-than-expected inventory buybacks, slight miss on underlying EBIT and lower-than-expected dividend as being slightly disappointing today,” said analysts at UBS in a note.

Shares of AstraZeneca PLC (LON:UK:AZN)   (NAS:AZN)  dropped 2% after the pharma giant reported core earnings that missed forecasts. Core operating profit—the company’s preferred measure, which strips out one-time gains and impairments—fell to $896 million from $1.67 billion a year ago.

Ubisoft Entertainment SA (PAR:FR:UBI)  jumped 4.5% after the French videogame maker reported full-year revenue ahead of forecasts.

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