European stocks fell for a second day as uncertainties over the make-up of Italy’s new government deepened.
Italy’s main stock index extended early losses to sink to a 10-month low, falling by 3% on Tuesday.
Bank shares were also down, slumping by almost 5% to a 13-month low, bruised by a sell-off in Italian government bonds, a significant part of the banks’ portfolios.
Intesa Sanpaolo, BPER Banca, Unicredit and UBI Banca fell sharply, down by 4.4% to 5.8%, while Poste Italiane also tumbled 5.7%.
Italy’s bond market also suffered a steep sell-off. The yield on 10-year debt hit 3.133% – a level not seen since 2014.
A rise in bond yields means the Italian government is paying more interest on its debt.
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The FTSE 100 fell by 1.1% to its lowest level in almost three weeks as it resumed trading after the bank holiday weekend, and banks RBS and Barclays were among the biggest fallers with shares tumbling by 3%.
The stress in Italy also spread to other eurozone markets, with Portuguese stocks sliding by 2.7%,
In Spain, which is in the throes of its own political crisis as Prime Minister Mariano Rajoy faces a no-confidence vote later this week, stocks fell by 2.9%.
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Banco Santander, the eurozone’s biggest bank by market capitalisation, fell by 5% and BBVA by 3%.
Italy has been without a government since inconclusive elections on 4 March, at which voters flocked to anti-establishment and far-right parties the Five Star Movement and League Nord to leave a hung parliament.
Carlo Cottarelli, a former International Monetary Fund official, has accepted a mandate to form a technocratic and politically “neutral” government, but has admitted Italians could face a snap poll if he does not win parliamentary support for his interim administration.
Investors fear there is a risk of the eurozone breaking up as fresh elections might give the two populist parties a more eurosceptic mandate.
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Renewed concerns caused the Frankfurt-based Sentix research group’s eurozone break-up index to climb to its highest level since April 2017, when investors feared a eurosceptic Le Pen presidency in France.
The pan-European STOXX 600 fell by 1.6% – with banks the worst-performing, while the eurozone’s banks index tumbled by 4.3% and was on track for its biggest monthly drop since the Brexit vote in June 2016.