Italy’s political crisis helped drag equities lower yesterday which, combined with US debt worries, saw European shares close the last full trading week of the third-quarter on a sour note.

The crisis in Rome, which is threatening economic reform in the country and could hit euro zone’s fragile recovery, led yesterday to Italy paying the highest yield since June to borrow over 10-years, a spike that sent Italian equities down 1.3 per cent.

Tenaris, the Milan-listed oil services firm shed 3.5 per cent, also weighed on by BofA Merrill Lynch’s downgrade of the company to “neutral” from “buy”.

“It is highly probable that this (Italian) government has a short life,” Nicola Marinelli, fund manager at Glendevon King Asset Management, said.

“(However) I do not think that all this is going to have a major impact; so weakness on headline news could be used to add positions to Italian government bonds and Italian corporate bonds and equities.”

The broader STOXX Europe 600 index fell 0.3 per cent to 312.18 points, taking some of the gloss off a quarter which – with one trading day remaining – has seen European shares rise nearly 12 per cent and outperform stocks in the US, boosted by improving economic data.

Stronger economic data helped the index to a five-year high last week and left it trading at 1.7 times its book value, its highest valuation multiple since 2011, Datastream data showed.

The improving macro outlook encouraged US investors to switch into European stocks and out of their domestic market in the seven days to September 25, as the US budget talks and uncertainty over monetary and fiscal policy in the country hampered Wall Street shares.

“Debt ceiling has taken over from tapering as the over-used word of the week and the S&P has accordingly had a soggy end to the month and quarter,” said Mark Tinker, fund manager at AXA Framlington, said.

“We saw a sharp spike in the put-call ratio... which is probably being reflected by the delta hedging desks over the last few days creating some downward pressure on the S&P, which is spilling over into other markets,” he said.

The Euro STOXX 50 put/call ratio, one of Europe’s widely used gauges of investor sentiment, jumped to a two-year high recently, signalled a sharp rise in investor risk aversion as the market rally lost steam while talks in Washington on raised the US government’s borrowing limit loomed.

“If the budget bill is not passed on Monday, it could lead to a government shutdown or the country defaulting from October 1st,” Ronnie Chopra, a strategist at TradeNext, said.

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