Italian election deadlock hammers Europe stocks

European shares tumbled on Tuesday after an Italian election stalemate threatened a renewal of the euro zone crisis, leading traders to use equity options to bet on a further market fall in coming months.

European shares tumbled on Tuesday after an Italian election stalemate threatened a renewal of the euro zone crisis, leading traders to use equity options to bet on a further market fall in coming months.

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The pan-European FTSEuro-first 300 index was down 1.1% at 1,153.45 points by around midday, while the euro zone's blue-chip Euro STOXX 50 index retreated 2.6% to 2,583.25 points.

Italy's FTSE MIB equity index was the worst performing European bourse, slumping 4.6% on concerns that the election, which left no party clearly in control of the Italian government, could hamper reforms and drive up its borrowing costs.

Worries about a new flare-up in the euro zone's debt crisis fed through to the bank sector, whose lenders could be hit with new writedowns and bad debts if the region's economy weakens as a result of debt problems in countries such as Italy and Spain.

The STOXX Europe 600 Banking Index was the worst-performing sector, falling 2.7% with Italian banks such as Intesa and Unicredit - which own large amounts of Italian government debt - dropping 10% and 8%, respectively.

Volatility Rises
Spanish foreign minister Jose Manuel Garcia-Margallo said the Italian result was extremely worrying, with Spain's IBEX stock market falling 3%. "Spain will also now come under pressure," said Syz Asset Management's chief economist Fabrizio Quirighetti, who added that European equity markets could potentially fall some 5% this week.

Despite the post-Italian election fall, European equity options broker at XBZ Ltd Mike Turner said the stock market decline was more of a "correction, not a sell-off", with the FTSEurofirst 300 still up around 20% from its 2012 low of 948.17 points.

Michel Juvet, chief investment officer at Swiss bank Bordier, said he had sold off equity positions last week on expectations that equity markets could retreat over Italian election problems.

"We cut the equity allocations last week across the board. Everything was pointing towards a correction. I see no rush to buy Italian assets at this moment," he said.