Italian shares underperformed positive European markets on Thursday, as the country's bank stocks slumped to five-week lows on jitters over next month's constitutional reform referendum. A bounce in basic resources and energy stocks helped the pan-European STOXX 600 index rise 0.6 percent, making up for losses seen in the previous session, but Milan's bluechip FTSE MIB index ended flat.
Italian Prime Minister Matteo Renzi said on Thursday he would not take part in any efforts to form a temporary government if he loses the December 4 vote, bolstering expectations he could quit. Polls suggest Renzi will lose.
"We have Renzi now saying he won't head up a technocratic government in the event he loses the vote so it's turned into a straight referendum on the prime minister and his government," ETX Capital Markets Analyst Neil Wilson said. "It's going to be that much harder to fix Italian banks if he loses and it looks like it's going that way."
Italy's lenders UniCredit and Banco Popolare fell 5.6 and 4.8 percent respectively and were among the biggest losers on the STOXX index. Further undermining their shares were fresh worries that higher provisions may be needed to cover for bad loans.
Deutsche Bank has forecast that banks could push the FTSE MIB down by 6 percent by early 2017 if the "No" campaign wins, which is its base case scenario. While Italy's bank index fell 2.4 percent after touching earlier in the session its lowest point since October 14, Europe's banking index added 0.3 percent.
In spite of the Italian woes, the beaten-down sector, which is still down 13 percent this year, has returned back on the radar as a spike in bond yields on the back of improved growth expectations has brightened the case for bank profits. Europe's Basic Resources index rose 1.6 percent on expectations metals prices would remain supported following a pledge by US President-elect Donald Trump to invest heavily in infrastructure projects. The index was the biggest sectoral gainer on the day.
The Energy index rose 1 percent as expectations of an Opec deal to limit production boosted crude prices. Among other outstanding gainers, South African financial services group Investec climbed 8.5 percent to a six-month high after reporting a jump in half-year profit, buoyed by a strong showing at its asset management and wealth arms.
Among top losers, Ahold Delhaize fell 3.7 percent after the supermarket operator missed expectations for third-quarter results due to weakness at its US grocery chains. Britain's Royal Mail slumped 7 percent, the biggest STOXX loser. A fall in spending on junk mail by companies rattled by Britain's vote to leave the European Union hit Royal Mail's first-half profit, pushing it to pledge to further limit its costs.