Spanish, Italian political concerns hit markets

Feb 04, 2013, 10:04 AM EST

LONDON (AP) — Spanish and Italian stocks led markets lower Monday as investors started fretting about the political situation in both countries, with some indexes suffering one of their worst days in months — certainly of 2013.

Since last summer, concerns over Europe's debt crisis have been eased thanks, in part, to the efforts of the Spanish and Italian governments in getting a handle on their debts.

But an Italian general election at the end of this month looks like it may not be as clear cut as many people thought. There's now an acknowledgement that the idea of Silvio Berlusconi returning as the country's premier is not such a fanciful one.

Meanwhile, the Spanish government is embroiled in a corruption scandal over secret cash payment that's raising questions over the future of Prime Minister Mariano Rajoy despite his weekend denial of any wrongdoing.

With the political situation uncertain in the two countries that are widely thought to be too big to bail out, investors have decided to book some profits all across Europe.

"Political uncertainty is causing a stir in European markets," said Jennifer Lee, an analyst at BMO Capital Markets.

The main indexes in Spain and Italy were bearing the brunt of the selling with Madrid's IBEX down 1.7 percent and Milan's 2.8 percent lower.

Elsewhere, the FTSE 100 index of leading British shares was down 1.1 percent at 6,274 while Germany's DAX fell 1.6 percent to 7,712. The CAC-40 in France was 1.6 percent lower at 3,714.

U.S. stocks suffered in the slipstream of Europe with the Dow Jones industrial average down 0.7 percent at 13,918 soon after the open, while the broader S&P 500 index 0.6 percent lower at 1,505.

The scale of Monday's retreat stands in stark contrast to the performance of stocks so far this year, which saw the Dow close above 14,000 on Friday for the first time in over five years. It's now not far off its all-time high.

Hopes over the U.S. economy have helped fuel the optimism across financial markets this year, which has also seen the euro pick up a head of steam and oil prices approach the $100 a barrel mark. But waning European debt concerns have also facilitated the march higher.

There was a sense through the day that markets would struggle Monday. With a dearth of scheduled economic news, there was always the opportunity for investors may use the opportunity to book some gains.

"In recent weeks the mantra seems to have been very much one of buying regardless, but now that the major indices have retested those levels not seen since 2007, now may well be the time to take something of a reality check," said Fawad Razaqzada, market strategist at GFT Markets.

The euro was suffering, like stocks, amid the renewed European concerns and some profit-taking

Europe's single currency was trading 0.6 percent lower at $1.3561.

Earlier in Asia, Japanese stocks continued to gain ground alongside the falling yen, which is expected to help the country's big exporters. The Nikkei 225 closed 0.6 percent higher at 11,260.35.

The yen has been falling over the past few weeks as the new government focuses on getting a moribund economy going again. As part of that drive it has asked the Bank of Japan to do more and that's probably going to mean an expansion of the money supply.

The yen had recovered somewhat during European trading hours and the dollar was 0.1 percent lower at 92.69 yen.

Oil prices drifted lower with the benchmark New York rate down $1.59 at $96.18 a barrel.