UKX FTSE 100 Index

By Mark DeCambre, MarketWatch

Italy's FTSE MIB looks set for its fourth straight weekly skid

Italian stocks were trading sharply lower on Friday as the drama of the country's budget plan erupted anew and pushed up its sovereign bond yields amid worries that a market-disrupting conflagration between the European Union and Rome won't be averted.

What are markets doing?

Italy's FTSE MIB Italy index was down 1.6% at 18,780, poised for a weekly skid of 2.5% and its fourth straight weekly slide, representing the longest such decline since a five-week retreat ended June 8, according to FactSet data.

Italian political turmoil was dragging the pan-European Stoxx Europe 600 down 0.4% to 360.17 (http://www.marketwatch.com/story/european-stocks-see-bounce-but-on-track-for-big-weekly-declines-2018-10-12), but the index was nursing a weekly gain of about 0.4%. The U.K.'s FTSE 100 was trading virtually unchanged at 7,024.22, amid Britain's own unresolved Brexit woes. The stock gauge was on track for a weekly gain of about 0.4%.

Germany's DAX 30 , meanwhile, was trading 0.4% lower at 11,536.54, poised for a slight weekly advance of about 0.1%. France's CAC 40 fell 0.8% to 5,075.39, tracking a weekly decline of 0.4%, which would mark its fourth consecutive weekly drop.

The euro last traded at $1.1449, compared with $1.1453 late Thursday in New York. The British pound was up at $1.3038 from $1.3018 in the previous session.

Read: With 'no-deal' Brexit risk on the rise, analysts see uncertain path for pound (http://www.marketwatch.com/story/with-no-deal-brexit-risk-on-the-rise-analysts-see-uncertain-path-for-pound-2018-10-16)

What's driving the market?

Yields for 10-year Italian debt were at fresh 2014 highs at 3.777%, as the EU cautioned Rome that its budget draft would run afoul of rules in place for member countries. Meanwhile, the yields for the 10-year German paper at 0.402%, hitting its lowest since September. Investors tend to turn to German bonds, or bunds, as they are referred to by traders, as a haven during periods of heightened uncertainty in the eurozone because the country is the largest economy in that economic bloc. Bond prices rise as yields fall, and vice versa.

Earlier in the week, Italy's government approved a draft budget law for next year, confirming a set of expansionary measures that could lead to a fast-rising deficit.

The planned measures included in the draft law are set to widen the budget deficit to 2.4% of gross domestic product. EU officials fear the real deficit could be much higher than 2.4%.

The full draft budget law will be submitted to the Italian parliament by Saturday.

Lawmakers will need to approve it by the end of the year and if it is not approved, a fresh EU crisis could emerge as officials from antiestablishment 5 Star Movement and the far-right League have been committed to maintaining campaign promises that would lead to an increase in government spending.

A clash could rattle European markets if it intensifies, market participants have warned.

Investors were also watching U.K. Prime Minister Theresa May's efforts to forge a new trade and customs pact with the EU as Britain is set to relinquish its membership in March. On Thursday, May indicated that an extension of the U.K.'s current EU status could come into play because of unresolved differences between the parties.

European traders also were keeping an eye on tensions between the U.S. and Saudi Arabia as Treasury Secretary Steven Mnuchin on Thursday announced that he was pulling out of an investment conference in Riyadh (http://www.marketwatch.com/story/mnuchin-to-skip-saudi-conference-as-us-weighs-more-time-for-khashoggi-probe-2018-10-18) in response to the disappearance of Saudi journalist Jamal Khashoggi, a U.S. resident.

What are strategists saying?

"While there was no clear trigger behind this shift, renewed concerns around Italy's budget, disappointing earnings from industrial firms, still-elevated U.S. bond yields, and the prospect of a fallout in U.S.-Saudi relations may have all contributed," wrote Marios Hadjikyriacos, analyst with brokerage XM, in a Friday research note.

(END) Dow Jones Newswires

October 19, 2018 06:36 ET (10:36 GMT)

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