Europe sags on Italy concerns, lending weakness

Reuters and AFP

LONDON/HONG KONG–Fresh signs of eurozone economic fragility and rising political pressure in Italy hit the euro and the region’s shares on Thursday, adding to wider market worries about a potential U.S. government shutdown. Wall Street was expected to open with gains of 0.2-0.3 percent as both the S&P 500 and Dow Jones Industrial look to snap a five-day run of losses. Focus is set to remain on Washington’s budget wrangling but investors already have a flurry of data to digest which included some upbeat jobless claims numbers that helped lift the dollar and offset some of the reemerging European concerns. Data from the European Central Bank earlier showed that lending to companies fell in all of the euro zone’s big countries in August, highlighting the questionable strength of the currency bloc’s economic recovery. Attention was also back on Italy as allies of scandal-hit former Prime Minster Silvio Berlusconi renewed threats to bring down the coalition government if he is barred from politics as part of his punishment for tax fraud. Italian shares were down 1.5 percent ahead of the U.S. restart leading a sea of red on European stock markets and the euro was having its weakest day against the dollar in three weeks as it fell below US$1.35. Italian government bonds were the region’s worst performer too as yields — which move inversely to prices — climbed 10 basis points. “This is the latest in a series of politically noisy events that threatens not only the stability of the current government, but the longer-term reform process more generally,” Timo del Carpio, European economist at RBC Capital Markets, said. In addition to the falls in Milan, Germany’s DAX and France’s CAC 40 dropped 0.1 percent although both trimmed losses after the U.S. data, while London’s FTSE turned positive.

Asian markets were mixed on Thursday as attention turned to another stand-off in Washington over the U.S. budget that could see parts of the government shut down if a deal is not agreed within days. Earlier losses in Tokyo were reversed as traders were cheered by a report that Japan’s government was planning to cut corporation taxes to negate the blow of an expected sales tax hike.

The Nikkei rose 1.22 percent, or 178.59 points, to 14,799.12 — having sunk more than one percent at one point in the morning — as the dollar surged against the yen.