Italian stocks led eurozone shares lower on Monday as the risk of a new government crisis fuelled a selloff in companies exposed to Italian sovereign debt and posed risks to the country's still weak economy.
Italy's FTSE MIB share index was down 1.6 per cent after members of Silvio Berlusconi's centre-right party warned they would bring down the government if the former premier is expelled from parliament over a recent tax fraud conviction.
The threat of a government crisis raised the prospect of a new wave of political instability that could delay the country's economic reform and dash growing expectations for a pickup in the economy. Early signs of economic improvement have helped the FTSE MIB rise 6.8 per cent in the last month, outperforming Germany's DAX and France's CAC.
"It doesn't look like the politicians will find a compromise to get out of this crisis, which, in turn, puts all measures that need to be taken to spur the economy on ice," a Milan-based trader said.
ECB review expected
Italian banks UniCredit and Intesa Sanpaolo fell around four per cent, as investors worried about their holdings of Italian sovereign bonds, which fell in value on the secondary market.
The two stocks were the biggest drag on the eurozone Euro STOXX 50 index, which was down 0.7 per cent at 2,805.27 points.
The reaction in Italian banking stocks, which have risen 14.7 per cent since the start of the year, was magnified by underlying concerns about some of their other assets, which will come under scrutiny in an upcoming review of eurozone banks to be carried out by the European Central Bank.
"I wouldn't sell Italian sovereign bonds on the back of the latest government tensions," the head of strategy at an Italian investment bank said. "Banks, however, have got a few more problems of their own, such as the asset quality."
Euro STOXX 50 likely to rise
A recent improvement in data on the eurozone economic has helped the Euro STOXX 50 rise around eight per cent since the start of July, or more than twice as much as the U.S. S&P 500.
"It may take a few of days to build a base, but it looks like we're going to have another top for 2013 in Europe," said Valerie Gastaldy, head of Paris-based technical analysis firm, Day-by-Day.
She said she expected the Euro STOXX 50 to reach around 3,000 points in the next month.
Volume on the Euro STOXX 50 was thin at 27 per cent of its 90-day average at 10:54 GMT, partly because London financial markets were closed for a public holiday.
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