European shares fell on Tuesday after two sessions of robust gains as optimism over hopes of stimulus in major economies waned and investors awaited more guidance from central banks. Concerns about Italy's government further dented sentiment, though Italian bond yields fell after Prime Minister Giuseppe Conte said he would resign, potentially paving the way for a new coalition government.
Markets in Italy have been volatile since the leader of the League, Matteo Salvini, pulled support from his coalition arrangement with the 5-Star Movement on August 8. Milan's blue-chip index ended 1.1% lower, a reaction that analysts said was relatively mild because the possibility of the prime minister's resignation was more or less priced in and after Salvini said he was ready to keep the coalition government alive to approve a 2020 budget before heading to early elections.
"Cracks had already appeared in the Italian ruling coalition ever since Salvini called for a breakup of that union earlier this month," said Joshua Mahony, senior market analyst at IG Group. The pan-European STOXX 600 index which rose in the early hours of trading reversed course in the afternoon to end 0.7% lower. Madrid shares led the declines. All sub-sectors ended in the negative with interest-rate sensitive banks weighing the most on the benchmark index. Eurozone bond yields also fell back towards record lows.
The basic resources sector fell over 1% after BHP said that headwinds to global growth could hit demand for its main commodities, iron ore and copper. In a bright spot, Pandora, the Danish jewellery maker, jumped over 10% to the top of the STOXX 600 index. Despite a drop in second-quarter earnings, Pandora maintained its full-year forecast. European equities had staged a comeback in the last two sessions on growing hopes that central banks and governments will step in to help global economies stave off a recession.
However, the pan European STOXX 600 index is still down 3.4% for month so far, lagging the 10-year average. "Markets are still very cautious and the sentiment is still quite fragile because there are still so many potential crises looming," said Teeuwe Mevissen, senior market economist at Rabobank.
"Also there are relatively low volumes which could swing markets wildly in either direction." Investors will now be looking forward to the Jackson Hole Symposium on Thursday where substantive comments from US Federal Reserve Chief Jerome Powell and European Central Bank head Mario Draghi are expected.
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