Italy Banks Lead Stocks Lower on Risk of Stronger Populists

(Bloomberg) -- Italian banks led European financial stocks lower on growing concerns that fresh elections could strengthen the hand of populist parties to challenge European economic orthodoxy.

Banca Monte dei Paschi di Siena SpA, the habitually-volatile state-rescued bank, led declines with a drop of as much as 7.8 percent. Seven of the eight worst performers on the Bloomberg Europe Banks Index were Italian lenders as of 3:54 p.m., with UniCredit SpA and Intesa Sanpaolo SpA losing almost 5 percent. The FTSE MIB Italian stock benchmark erased 2018 gains.

"New political elections amid increasing consensus for populist parties is scaring investors,” said Gabriele Pinosa, head of Go-spa Consulting, a Milan-based advisory firm. “A stronger victory of frustrated euro-skeptic parties may lead them to take stronger actions against European rules and euro. This is particularly negative for Italian banks, due to their exposure to the country’s sovereign debt.”

At least a part of the pressure on equities comes from the bond market. The yield on Italy’s benchmark 10-year sovereign bonds surged again on Monday to over 2.60 percent, it highest in almost four years.

Declines deepened after League party leader Matteo Salvini said that it makes no sense for Italy to remain in the European Union unless the bloc rewrites its rules, and that he aims to govern with ministers that were blocked by the president. Leaders of the league and the Five Star Movement pulled the plug on their attempt to form a government Sunday after the president vetoed the choice of a euro-skeptic, Germany-bashing candidate as finance minister.

Mattarella on Monday nominated Carlo Cottarelli, a former International Monetary Fund official, as prime minister-designate to propose a government. His proposal is almost certain to be rejected by parliament, leading to a new vote as soon as September.

The political situation is “clearly unfavorable” to the rebound of Italian lenders as well as to banks exposed to Italy, such as France’s BNP Paribas SA and Credit Agricole, Natixis said in a note on Monday. Despite “solid fundamentals” BNP, Agricole, UniCredit and Intesa will all see continued pressure, the brokerage said.

The European financials index was down 1.3 percent, taking the decline for this year to 8 percent. FinecoBank SpA and Banco BPM SpA joined Monte Paschi as the bottom three stocks on the index.

©2018 Bloomberg L.P.

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