European shares pulled back on Wednesday as US-China trade talks stalled and a drop in crude prices slammed the brakes on a stellar run in energy stocks, while uncertainty in Italian politics continued to weigh on banks.
The pan-European STOXX 600 index fell 1.1 per cent, its biggest drop in two months, pulling back from a 3.5 month high on Tuesday. Germany’s export-oriented DAX, which has been especially sensitive to trade disputes, tumbled 1.5 per cent.
US President Donald Trump yesterday signalled a new direction in US-China trade, saying the current track appeared “too hard to get done” and any possible deal needed “a different structure”.
Adding to investors’ nerves on trade was data showing eurozone economic growth in May slowed more sharply than expected.
Italy’s FTSE MIB hit its lowest level since early April as a sell-off in government bonds resumed and bank stocks sank 1.7 per cent.
“Italy remains centre stage with its political developments,” said Alessandro Balsotti, portfolio manager at JCI Capital. “The Prime Minister and Economy Minister choices and the actual creation of a government rather than new elections will be the drivers for investors in Italian assets in coming weeks.”
An attempt by a little-known professor to become Italy’s next Prime Minister hit a hurdle following allegations that he had inflated his academic credentials.
The FTSE MIB has fallen 4.5 per cent so far in May and is on track for its worst month in nearly two years. However some saw bargain-hunting opportunities.
Deutsche Bank on Wednesday said political worries could offer an opportunity to buy shares in Italy’s largest listed firm, oil major Eni. The energy index, the biggest sectoral gainer so far this year in Europe, fell three per cent as an unexpected build in US crude inventories and the possibility of an increase in OPEC output sent crude prices lower.
It was the index’s biggest single-day slide since the global stocks sell-off in early February.
Shares in majors Total, BP and Royal Dutch Shell fell between 1.9 and 3.2 per cent, while Eni declined 1.1 per cent. Basic resources stocks dropped 2.5 per cent, their biggest decline in two months as metal prices fell on the fading optimism over trade talks.
French telecom stocks were a rare bright spot. Iliad gained 2.7 per cent, while Orange led the CAC 40, up 0.7 per cent.
It was the second day of gains after comments from France’s telecoms regulator suggesting consolidation. Goldman Sachs analysts predicted telecom consolidation could create 16 to 32 billion euros of value.