Italy deficit rattles markets in Europe

LONDON: Plans by Italy's new populist government to loosen the budgetary belt a few notches roiled markets in Europe, while Tesla shares took a beating after CEO Elon Musk was charged with fraud.

With the spending plans putting the Italian government on a collission course with the European Commission, Milan took the brunt of the blow in equity markets, dropping by more than 4.6 percent at one point.

Thursday's budget deal that calls for a 2.4 percent deficit for the next three years came after warnings from the EU to rein in spending, and vastly exceeds the 0.8 percent deficit foreseen by the previous, centre-left government.

"The Italian budget continued to cast a shadow over the markets on Friday, setting up a rocky end to a rocky month," noted Connor Campbell, financial analyst at Spreadex trading group.

"Investors are distancing themselves from Italian bonds and stocks, and risk-off sentiment is spreading across Europe," said market analyst David Madden at CMC Markets UK.

"The severe sell-off in European financial stocks is reminiscent of the eurozone debt crisis," he added.

The trading of shares in some Italian banks was briefly suspended amid heavy price falls, with Banco BPM leading the way down with a drop of 9.4 percent.

The top two Italian banks, UniCredit and Intesa Sanpaolo, lost 6.7 and 8.3 percent respectively.

Shares prices of major European banks outside Italy also slumped, with French lender Credit Agricole down 4.4 percent, Deutsche Bank sliding 3.8 percent and Barclays losing 2.8 percent.

Meanwhile, the yield on Italian government bonds jumped and the euro also dropped heavily against the dollar.

Italian government bonds "have unsurprisingly been under pressure..." said analysts at UniCredit in a note to clients.

The spending plan "...creates several important challenges, from a confrontation with the EC to the possibility of a downgrade of the sovereign credit rating," they said, adding that volatility in Italian bond prices was likely continue, especially as the European Central Bank winds down expanding its purchases of government bonds.

- Tesla tanks -

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Wall Street pushed higher on Friday, although shares in Tesla tumbled by as much as 12.8 percent on its CEO being pursued on fraud charges.

The US Securities and Exchange Commission on Thursday charged Tesla CEO Elon Musk with securities fraud, alleging he misled investors last month in tweets about taking the company private.

The SEC is also seeking to bar Musk from serving as a director of a publically listed company.

Analyst notes said the SEC's move would likely increase the costs for Tesla to raise capital and could bolster private litigation against Tesla over Musk's claims on going private, while the prospect of Musk's complete removal was also worrisome.

"We believe it is important for the confidence of investors that Mr. Musk remain involved," said a note from JPMorgan Chase.

"We believe that the perceived 'magic' and 'mystique' of Elon Musk on the part of a large contingent of investors is a key reason the stock has commanded the lofty valuation multiples it has in recent years," the note added.

Meanwhile, benchmark crude oil, Brent North Sea, extended gains amid predictions that it could again hit $100 per barrel.

- Key figures around 1530 GMT -

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Milan - FTSE MIB: DOWN 3.7 percent at 20,712 points (close)

London - FTSE 100: DOWN 0.5 percent at 7,510.20 (close)

Frankfurt - DAX 30: DOWN 1.5 percent at 12,246.73 (close)

Paris - CAC 40: DOWN 0.9 percent at 5,493.49 (close)

Madrid - IBEX 35: DOWN 1. percent at 9, (close)

EURO STOXX 50: DOWN 1.4 percent at 3,401.97

New York - Dow Jones: UP 0.2 percent at 26,489.91

Tokyo - Nikkei 225: UP 1.4 percent at 24,120.04 (close)

Hong Kong - Hang Seng: UP 0.3 percent at 27,788.52(close)

Shanghai - Composite: UP 1.1 percent at 2,821.35 (close)

Euro/dollar: DOWN at $1.1623 from $1.1641 at 2100 GMT

Pound/dollar: DOWN at $1.3047 from $1.3078

Dollar/yen: UP at 113.60 from 113.39 yen

Oil - Brent Crude: UP $1.06 at $82.78 per barrel

Oil - West Texas Intermediate: UP $1.07 at $73.19 per barrel