UKX FTSE 100 Index

By Mark DeCambre, MarketWatch

Italy's FTSE MIIB is down by about 3.5% intraday Friday

European stocks were led decidedly lower on Friday after Italy's antiestablishment government agreed (http://www.marketwatch.com/story/italy-heads-for-showdown-with-eu-budget-deficit-goal-stretches-to-24-2018-09-28) to a 2019 deficit projection of 2.4% of gross domestic product, delivering a budget proposal that is likely to draw ire from the European Union.

What are markets doing?

Italy's FTSE MIB Index slumped 3.5% to 20,765.99, putting the Italian equity benchmark on track to log its worst day since late January of 2016. Italy's index also is poised for a weekly decline of 3.6%, but is still likely to register a gain of about 2.5%.

Germany's DAX 30 was trading 0.9% at 12,320.50 and France's CAC 40 was off 0.5% at 5,511.36. The U.K.'s FTSE 100 declined by 0.3% at 7,523.52.

The pan-European Stoxx Europe 600 , meanwhile, gave up 0.6% to reach 384.27. For the week, the widely watched equity benchmark was on pace to end the week flat with a monthly gain of 0.5%.

The euro (http://www.marketwatch.com/story/dollar-climbs-as-euro-drops-under-italian-budget-pressure-2018-09-27) slipped to $1.1588, compared with $1.1643 late Thursday in New York, while the pound was changing hands at $1.3048, versus $1.3077 in the prior session.

Italian government bonds sold off, sending yields jumping. On Friday, the yield on the 10-year Italian bond soared to 3.245% after trading at 2.910% Thursday, according to FactSet data. Bond prices fall as yields rise.

What is driving the market?

A 2.4% deficit for Italy could cause the total amount of public debt to rise again next year rather than fall, as currently projected, market participants warn. The budget proposal comes after antiestablishment 5 Star Movement and the far-right League promised to increase spending to fulfill campaign promises on basic income, pensions and tax cuts.

Economy Minister Giovanni Tria, who isn't affiliated with either of the coalition's main parties, had reportedly been calling for a 1.6% target, in keeping with the EU's budget rules.

Rome will submit a draft budget proposal in October and that would put Italy on a "collision course" with the EU, which is likely to push back against a budget plan that produces a large deficit.

Drama has been building around the budget release (http://www.marketwatch.com/story/italian-stocks-tumble-euro-under-pressure-on-budget-worries-2018-09-27).

What are strategists saying?

"This is well above the 2% target set by the EU and investors fear this situation could lead to a breach of the European Union budget limits," wrote Carlo Alberto De Casa, chief analyst at ActivTrades in a Friday research note.

"But rather than the numbers themselves, what worries markets is the defiance of the populist Italian government. Their decision is seen as a strong and worrying message sent to the rest of the EU bloc," he said.

"It is quite a clear message to Bruxelles that this Italian government is willing to challenge European rules."

Stock movers

Italian banks were badly hit Friday. Shares of UniCredit SpA (UCG.MI) were down 6.9%, those for Banco BPM SpA (BAMI.MI) tumbled by 8.5%, while Unione de Banche Italiana SpA's stock (UBI.MI) also was down by about 8.4%, after falling sharply in Thursday's session.

(END) Dow Jones Newswires

September 28, 2018 07:22 ET (11:22 GMT)

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