Europe close: Stocks slip as Italian pessimism weighs

Stocks on the Continent finished slightly off their worst levels of the session, as investors continued to trim their holdings of Italian assets and following weak readings on a key survey for levels of economic activity in the euro area.

Yields on 10-year Italian government bonds jumped by seven basis points to 2.40%, having earlier surpassed their late-2014 highs, with the spread versus yields on similarly-dated German bunds, which traders term the 'risk spread', ballooning to 190 basis points (near the top of the range of analysts' forecasts).

Weighing on sentiment towards Italy on Wednesday, according to some market commentary, were early reports that the Five Star and League were locked in a stand-off with the country's President, Sergio Mattarella, over their intention to name a well-known 'Eurosceptic' to the post of finance minister.

By the close of trading in Frankfurt, the benchmark Stoxx 600 was down by 1.10% or 4.36 points at 392.58, alongside a 1.47% or 193.08 point fall for the German Dax to 12,976.84.

Milan's FTSE Mibtel, the worst performer throughout most of the session, ended 1.31% or 304.86 points lower to 22,911.71.

Meanwhile, euro/dollar traded lower by 0.79% to 1.16863, alongside a five basis point dip in the yield on the benchmark 10-year German bund to 0.50% as investors sought out the safer corners of the market.

Longer-term italian government bonds also finished off their worst levels of the day, with yields at the 10-year tenor up by seven basis at 2.44%, versus a session high of 2.46%.

Helping to stem selling in Italy's sovereign debt, in the afternoon it was reported that Mattarella had indeed asked Giuseppe Conte to form a government.

Conte accepted, saying his government would be based on the agreement thrashed out over the prior weekend by the Five Star and League.

Further westards, but still on the periphery of the euro area, Spain's government clinched the much-needed support of the Basque Nationalist party for the approval of the country's 2018 budget.

Nevertheless, the main factor dampening investor sentiment on Wednesday were critical remarks made by the US president overnight regarding the likelihood of a trade deal with China and for the upcoming meeting with North Korea's Kim Jong Un.

Against that backdrop, not even a renewed bout of weakness in the single currency was enough to stem the selling, rather the opposite in fact.

"Global equity bourses have rolled over as a currency crisis looms in Turkey and BTP/Bund spreads continue to widen. The USD has caught a bid as a result," explained analysts at TD Securities.

Investor sentiment was also knocked lower by a much weaker-than-expected reading on euro area economic activity for May.

IHS Markit's 'composite' purchasing managers' index, which tracks activity on both the manufacturing and services side of the economy, fell from a reading of 55.1 in April to an 18-month low of 54.1 for May.

Economists had projected a reading of 55.0.

The survey's chief economist, Chris Williamson, cautioned that many firms had noted the unusually high number of public holidays in May as one of the chief factors that dragged on activity.

"However, it's also becoming increasingly evident that underlying growth momentum has slowed compared to late last year, especially in relation to exports," he added.

Perhaps, yet as analysts at UniCredit Bank said: "We see two main reasons for the loss of growth momentum in the eurozone: the deceleration in global trade compounded by fears of protectionist policies, and the recent spike in oil prices, which has already significantly raised gasoline prices at the pump, thus starting to erode the purchasing power of households."

On the corporate side of things, after the close of markets the Journal reported that Deutsche Bank was mulling plans for as many as 10,000 job cuts.