MILAN/LONDON (Reuters) - Euro zone shares hit a roadbump on Friday as heightened risk of a snap election in Spain piled new political anxiety on investors already shaken by the new Italian government’s plans to ramp up fiscal spending.
Spanish and Italian stocks fell sharply, with peripheral banks firmly in the firing line, while German shares and Bunds - considered a safe haven - made gains as investors pulled money from peripheral euro zone debt and stocks.
Spain stole the spotlight from Italy as pressure built on Prime Minister Mariano Rajoy, with opposition parties calling for a no-confidence vote and a snap election over a corruption case involving members of his party.
This, combined with worries over Italy’s new eurosceptic government, difficult global trade talks and a slowing economy, helped push Europe’s STOXX 600 to its first weekly loss in two months.
Spain's main stock index .IBEX lost as much as 2.4 percent in a volatile day, closing the session down 1.7 percent with banks leading losses. Shares in Caixabank (CABK.MC), Santander (SAN.MC) and BBVA (BBVA.MC) tumbled 2.9 to 3.8 percent.
Italian and Spanish banks saw the most intense trading in a while, with more than three times the average daily volume traded in Banco BPM (BAMI.MI) and Caixabank, while Unicredit, Intesa Sanpaolo, Santander and Sabadell (SABE.MC) shares traded hands at more than twice their daily intensity.
The euro zone’s bank stock index .SX7E fell 1.9 percent. It was its second straight week of losses, taking it to a 13-month low.
Spanish gas and electrical utilities, sensitive to government policy changes, also fell. Gas Natural (GAS.MC), Endesa (ELE.MC), Acciona (ANA.MC) and Red Electrica (REE.MC) were among top fallers, down 2.7 to 3.3 percent.
Barclays analysts said they saw a snap Spanish election as increasingly likely, but added: “It is currently very unclear what the exact path to the next election would be.”
Italy's FTSE MIB .FTMIB sank to new seven-week lows, down 1.5 percent.
Italian equity funds posted record redemptions of $380 million from last week with worries over the political situation in the euro zone’s third-largest economy also sparking outflows from European equity and bond funds, EPFR figures showed.
Italian banks .FTIT8300, seen as a proxy for political risk in Italy due to their big sovereign bond holdings, ended the day down 3.7 percent at an 11-month low, with top lenders Intesa Sanpaolo (ISP.MI) and UniCredit (CRDI.MI) down 3.2 and 3.9 percent.
“The new coalition government proposes measures which our economists see as likely to widen the budget deficit and lead Italy’s national debt to rise again,” Goldman Sachs analysts said. They estimated the new government’s measures would have a 60 basis point impact on banks’ capital buffers.
Mid-sized Italian lenders Banco BPM, Finecobank and Mediobanca were among the worst performers in Europe, down 4.1 to 7.3 percent.
Autos .SXAP rose 0.3 percent after U.S. President Donald Trump’s threat to impose import tariffs drew strong criticism, with U.S. business groups and members of his own party warning of damage to the industry and American interests.
Oil and gas stocks .SXEP were down 1.9 percent as crude prices slumped.
Top loser on the STOXX was Centamin (CEY.L), which plummeted 18.3 percent after the mining group made a drastic cut to its full-year production guidance and raised its cost expectations because of lower-grade ore at a mine in Egypt.
To view a graphic on Spain, Italy, Europe stocks falling, click: reut.rs/2LvRbe7
Reporting by Danilo Masoni and Helen Reid,; Editing by Louise Ireland and Gareth Jones