European stock markets experienced a decline on Tuesday
driven by pressure on Italian banks following the cabinet’s approval of a windfall tax of 40% on lenders. Additionally, disheartening inflation figures from Germany and weak trade data from China further dampened investor sentiment.
Italian banks
Italian banks, including Intesa Sanpaolo (ISP.MI), Banco BPM (BAMI.MI), and UniCredit (CRDI.MI), faced significant drops ranging from 6.5% to 8.3%. Deputy Prime Minister Matteo Salvini’s announcement of the levy on banks’ extra profits prompted this decline
with the funds earmarked for purposes like reducing the tax burden, implementing tax cuts
and providing financial support to holders of mortgages on primary residences. Rome anticipates collecting less than 3 billion euros ($3.29 billion) from this measure
according to sources familiar with the matter cited by Reuters.
Georgios Leontaris, Chief Investment Officer for Switzerland and EMEA at HSBC Global Private Banking and Wealth
noted that although these measures currently limited to the Italian market
they have drawn attention to other financial institutions across Europe that have also benefited from increased profitability. Consequently, the pan-European STOXX 600 index (.STOXX) dropped by 0.6%,
while Italy’s banking-centric FTSE MIB (.FTMIB) experienced a more substantial decrease of 2.1%, reaching its lowest level in four weeks.
The Eurozone’s banking sector
The Eurozone’s banking sector (.SX7E) faced a decline of 3.3%, compounded by news that ratings agency Moody’s had lowered credit ratings for several small- to mid-sized U.S. banks and indicated potential downgrades for some of the largest U.S. lenders.
Although hopes of the Federal Reserve and the European Central Bank (ECB) nearing the conclusion of their tightening cycles had propelled the STOXX 600 to one-year highs the previous month, recent market volatility has been driven by concerns over slowed economic growth in Europe and China. China-focused miners (.SXPP) also experienced a decline of 1.8%, driven by July’s trade data from the second-largest global economy revealing more significant declines in imports and exports than expected. This development heightened pressures on Beijing to implement fresh stimulus measures to counteract the potential threat to growth prospects.
Furthermore, Germany’s DAX index (.GDAXI) saw a decrease of 0.8% subsequent to data indicating a cooling of inflation to 6.5% in July, in line with economists’ predictions. Although headline inflation has halved, concerns remain regarding elevated core inflation, which may lead to an additional interest rate hike by the ECB, as suggested by HSBC’s Leontaris.
Traders have priced in a 67% likelihood of the ECB maintaining interest rates at 3.75% during its September meeting.
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