European shares slid on Friday, with Italian stocks 2.5 percent lower on political uncertainty, while comments by US President Donald Trump that he was not going to make a trade deal with China also weighed on sentiment.
Italy’s main index touched a two-month low, with its bank index tumbling 4.5 percent after the leader of the ruling League party, Matteo Salvini, pulled his support for the country’s governing coalition on Thursday and called for fresh elections.
Italy’s budget crisis and prospect of ultra-low interest rates for longer have already damaged bank stocks’ valuations and the fresh political concerns sent the bank index to its lowest since September 2016.
Italian 10-year government bond yields posted their biggest weekly rise this year.
“It leads to uncertainty, because obviously we don’t know when it will be possible for Italy to improve their budget because they’ve only just come to an agreement with Brussels, which could very easily be upended,” Rabobank NV head of macro strategy Elwin de Groot said.
Along with drops of more than 1 percent in most other major indices, including trade-sensitive German stocks, the pan-European STOXX 600 gave up 0.8 percent, in line with a move lower in world stocks.
Trump’s remarks on a trade deal with China followed a report that said Washington was delaying a decision to allow some trade between US firms and China’s telecom equipment maker Huawei Technologies Co (華為) again.
This added to worries about an escalation in trade tensions between the world’s two biggest economies, which has seen the STOXX 600 fall 1.7 percent over the week as investors worried over a prolonged impact on global economic growth.
Sectors most exposed to China and trade issues, such as technology, basic materials and automakers, led losses in Europe along with banks.
“It is a risk-off sentiment, but investors aren’t desperate yet ... it’s more like the realization that we are in for a rough ride,” De Groot said.
However, losses on London’s FTSE were limited by a rally in healthcare stocks and a 7.2 percent surge in advertising company WPP PLC after it reported improved second-quarter trading.
The rise in the healthcare index came after strong results from Hikma Pharma PLC and Carl Zeiss SMT GmbH, and was also helped by a 2.6 percent rise in Bayer AG.
The British pound was hit by data showing that the UK’s economy experienced a shock contraction in the second quarter in a severe hangover from a pre-Brexit stockpiling boost.
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