LONDON - A sharp decline in Italian equities, especially banking shares, on political uncertainty in the country dragged down the broader European stock market on Monday, which also faced pressure from weaker miners.
Italy's FTSE MIB index fell 1.7 percent on profit taking following an 18 percent surge in two months and after a warning from Prime Minister Enrico Letta on Sunday that the collapse of his government would undermine economic recovery.
Local newspapers said centre-right leader Silvio Berlusconi, who was convicted of tax fraud this month, would bring down the government in October if he is expelled from the Senate.
“The political uncertainty in Italy is making investors nervous as it threatens the reform process introduced by the previous government. Investors will be very cautious in betting on Italian stocks in this kind of environment,” Koen De Leus, senior economist at KBC, said.
Italian banks were the biggest drag on the STOXX Europe 600 banking index, which fell 1.3 percent to top the sectoral fallers' list. Unicredit was down 3.9 percent, Banco Popolare dropped 3.6 percent, while Intesa Sanpaolo fell 3.3 percent,
Weaker Italian stocks put pressure on the wider market, with the FTSEurofirst 300 index down 0.4 percent at 1,226.92 points at 1054 GMT. The index, which climbed to a 2-1/2-month peak on Wednesday, is still up about 8 percent this year.
Trading volumes were just 30 percent of its 90-day daily average by midday trading due to the summer holiday season.
The market was also pushed lower because of miners, with the basic resources index falling 1.3 percent, tracking a sharp decline in metals on worries the US Federal Reserve may trim its commodity-friendly measures.
“Weaker metals prices, thin volumes and some profit-taking are putting pressure on mining shares,” said Tom Robertson, senior trader at Accendo Markets.
“But I imagine that the market is likely to show sideways movements until September, although any sort of indication from the Fed to trim its stimulus measures could sway things.”
Investors await the minutes of the US Federal Reserve's last policy meeting on Wednesday for hints on when the central bank might start scaling back its bond purchases, which have helped equities in the past months scale new highs.
Cement maker Lafarge fell 3.2 percent, the worst performer on France's CAC 40, as clashes in Egypt added to concerns over relatively weak second-quarter results. Egypt accounts for around 10 percent of the company's balance-sheet.