Italy drags down European stocks
Europe’s soft underbelly, Italian banks, is the place to watch
Italy’s largest banks, Intesa Sanpaolo and Unicredito, fell by about 3 percent in morning trading today, and French and German banks fell in sympathy.
The overall Italian stock index was the worst performer among the major European stock markets (down 1.3% vs. a 0.5% decline for Germany’s DAX index). Italy’s banking crisis remains a background risk for Europe, as the jerry-rigged backdoor bailout for the country’s weakest banks shows signs of disintegration.
The spread between German and Italian 10-year bonds widened from 1.70% to 1.77% between May 23 and May 26. This is still a relatively minor move after the risk-on trade that dominated following the French elections. But the soft underbelly of Europe is the place to watch.