European shares inched lower in quiet trading on Monday with Italian stocks left behind as talk over a possible early election weighed, hitting banks. Activity was reduced as holidays in major markets such Britain and the United States kept investors away. The euro zone equity index slipped 0.16 percent, while Italian blue chips fell 2 percent to their lowest level in more than three weeks, while Germany's DAX added 0.2 percent.
Weekend reports that Italy's main parties could converge on a proportional electoral law pointed to growing chances of an early election in the autumn, possibly leading to no clear majority. In an interview on Sunday, former Prime Minister Matteo Renzi said an accord on a proportional voting system was possible though it could result in a coalition government that may have trouble holding together.
"The risk of early elections has suddenly increased to 60 percent," LC Macro Advisers economist Lorenzo Codogno said, noting that the "nightmare" scenario of an outright victory for eurosceptic 5-Star Movement had only a very small probability. "A hung parliament is thus the most likely outcome," he said.
While Italian government bond yield shot up, Italian banks , already hit by concerns surrounding the rescue of two ailing regional lenders Popolare di Vicenza and Veneto Banca lenders, fell 3.3 percent, suffering their biggest one-day drop in almost four months and dragging euro zone banks down 0.8 percent. Among Europe's heavyweight lenders, Italy's Intesa Sanpaolo and UniCredit fell around 2 and 4 percent respectively, while Deutsche Bank slipped 0.4 percent and Banco Santander ended flat.
On the Italian blue chip index, utilities also suffered with state-controlled Enel down 2.3 percent. A trader at an Italian bank said an expected continuation of record inflows into European equities from the United States, however, made any political related sell-off a buying opportunity.
European shares remain close to 21 month highs hit earlier in May as investors comforted by surprisingly strong earnings and solid economic prospects poured fresh money into the region. Spanish-listed shares of International Airlines Group, the parent company of British Airways, fell 2.8 percent. British Airways flights suffered massive disruptions over the weekend with over 1,000 flights cancelled after a computer system failure.
Lanxess rose 6.7 percent, leading gainers on the STOXX after news that billionaire Warren Buffett had acquired a 3 percent stake in the German chemicals maker. Another top mover was Danish jewellery maker Pandora which fell 4.3 percent after weaker-than-expected results at US peers Tiffany's and Signet Jewelers last week.
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