European stocks fell across the board on Friday after 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% as investors dumped shares of banks.
What are markets doing?
Italy’s FTSE MIB Index I945, -4.28% slumped 4.5% to 20,542.20, putting the Italian equity benchmark on track to log its worst day since late January of 2016. Italy’s index also is poised for a weekly decline of 4.4%, but is still likely to register a monthly gain of about 1.5%.
The mood infected the rest of Europe, with Germany’s DAX 30 DAX, -1.67% down 1.8% to 12,214.04 and France’s CAC 40 PX1, -0.94% off 1.3% at 5,467.34. The U.K.’s FTSE 100 UKX, -0.27% declined by 0.7% at 7,491.17.
The pan-European Stoxx Europe 600 SXXP, -0.75% meanwhile, gave up 1% to reach 382.60. For the week, the widely watched equity benchmark was on pace to end the week down 0.5%, and flat on the month.
The euro EURUSD, -0.5068% slipped to $1.1581, compared with $1.1643 late Thursday in New York, while the pound GBPUSD, -0.4971% was changing hands at $1.3040, 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 TMBMKIT-10Y, +12.53% soared to 3.245% after trading at 2.910% Thursday, according to FactSet data. 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 has 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.
In Europe, there was also some not-so-cheery data as the eurozone’s annual rate of inflation rose further above the European Central Bank’s target in September.
What are strategists saying?
“This is well above the 2% target set by the EU and investors fear this situation could lead to a breach of the European Union budget limits,” wrote Carlo Alberto De Casa, chief analyst at ActivTrades in a Friday research note.
“But rather than the numbers themselves, what worries markets is the defiance of the populist Italian government. Their decision is seen as a strong and worrying message sent to the rest of the EU bloc,” he said.
“It is quite a clear message to Bruxelles that this Italian government is willing to challenge European rules.”
Stock movers
Italian banks were badly hit Friday, with trading halted at one point as those companies hit trading limits, according to Bloomberg. Shares of UniCredit SpA UCG, -8.39% were down 8%, those for Banco BPM SpA BAMI, -9.34% tumbled by nearly 9%, while Unione de Banche Italiana SpA’s stock UBI, -8.27% also was down by about 8%, after falling sharply in Thursday’s session.
While Italian banks took the biggest hits, losses were spread across the sector with heavyweights such as Nordea Bank AB NDASEK, -1.25% with its stock down 2% and HSBC Holdings PLC HSBC, -1.69% HSBA, -1.29% shares falling nearly 2% and those for Banco Santander SA SAN, -3.67% SAN, -3.37% and BNP Paribas SA BNP, -4.06% each sliding 4%.
Among the few gainers, shares of SAAB AB SAABB, +7.79% jumped nearly 8%. On Thursday, Boeing Co. BA, -0.05% said it was awarded a deal to provide next-generation military trainer jets to the U.S. Air Force, with SAAB providing some of those parts.
— Barbara Kollmeyer contributed to this article
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