Banking stocks held European shares below four and a half years highs yesterday as investors fretted about Italy’s public finances, even though a late recovery showed underlying appetite for equities.

The STOXX euro zone banking index shed 0.8 per cent as Friday’s downgrade of Italy’s sovereign debt triggered a selloff in shares in the country’s banks, which own much of Rome’s public debt.

Milan-listed Mediobanca, BP Emilia and Banco Popolare led sector fallers, shedding between three per cent and five per cent, after Fitch warned that inconclusive elections last month threatened to delay efforts to revive the economy and control the country’s debt.

Investors were fretting Italy’s borrowing cost may rise further and banks may eventually have to pay higher charges for using Italian sovereign debt as collateral to obtain loans from the European Central Bank.

“Everyone I talk to wants to steer clear of Italy until there is clarity on the political situation,” said one senior pan-European trader in Milan, adding a recently introduced financial transaction tax on Italian stocks further dented the country’s appeal.

“Banks are hit first but I think that, slowly but surely, everything will come off.”

Banks weighed on the pan-European FTSEurofirst 300 index, which fell 0.1 per cent to 1,194.64 points, further slipping from a high of 1,197.73 hit on Friday and previously not seen since 2008.

The index managed to close well above its day low of 1.194.64, mirroring a rise to five and a half year highs in the US S&P 500 index, in a sign investors were prepared to buy any market dip.

Charts on the euro zone Euro STOXX 50, which closed 0.4 per cent lower at 2,718.71 points, also showed the trend remained up, even though a pause is possible after the index posted its biggest weekly gain since November on Friday.

“It’s just a minor pullback after last week’s solid gains,” Roelof-Jan van den Akker, a senior technical analyst at ING in Amsterdam, said. “I’m just looking for the next entry point.”

Van den Akker said the index could pull back to its 50-day moving average at around 2,675 and its February peak at 2,665, but it remained supported at 2,525 by a rising trendline connecting lows hit in June and July.

He expected the Euro STOXX 50 to resume its rally towards 2,900 after a pause.

Irish drugmaker Elan topped the FTSEurofirst 300 yesterday, rising 4.2 per cent after it announced the pricing of a $1 billion share buyback.

It was closely followed by Italian car maker Fiat, which extended Friday’s gain with a fresh 3.3 per cent jump as investors continued to close short positions on the stock after the firm signed a labour contract with trade unions.

Among brokers recommending to buy Fiat was Nick Xanders, who heads up European equity strategy at BTIG and proposed a pair trade with German rival Volkswagen, which he sees as overestimated by sell-side analysts.

“If I don’t get lynched for saying this, I will be surprised,” Xanders wrote in a note.

“For Fiat to get back to last year’s downtrend line, there is the potential to outperform VW by nine per cent but looking back even longer, there is a lot of further potential upside. Italy is a risk and the cost of trading doesn’t help, but there is more upside here.”

None of the 29 analysts covering Volkswagen has a “sell” recommendation on the shares and 22 rate the stock a “buy” or “strong buy”, Thomson Reuters data showed.

Out of 26 analysts covering Fiat, only three recommended buying the stocks, compared to 11 “sell” recommendations.

Sign up to our free newsletters

Get the best updates straight to your inbox:
Please select at least one mailing list.

You can unsubscribe at any time by clicking the link in the footer of our emails. We use Mailchimp as our marketing platform. By subscribing, you acknowledge that your information will be transferred to Mailchimp for processing.