By Sara Sjolin, MarketWatch

Spanish stocks tumble after calls for vote of no confidence in PM

European stocks ended a choppy session marginally higher on Friday as traders weighed up a brewing political crisis in Spain against better-than-expected sentiment data from Germany and measured comments from North Korea.

What are markets doing?

The Stoxx Europe 600 Index rose 0.1% to close at 391.08, trimming its weekly loss to 0.9% The weekly loss breaks the benchmark's eight-week winning run, which marked its longest stretch since June 2014.

Spanish stocks were under heavy selling pressure, with the IBEX 35 index ending down 1.7% at 9,826.50 on reports the opposition Socialist party called for a vote of no confidence on Prime Minister Mariano Rajoy.

Italy's FTSE MIB index lost 1.5% to 22,398.15 and suffered for a 4.5% loss for the week. The index has been on a roller-coaster rise this week after the populist coalition of the 5 Star Movement and League on Monday presented their prime minister candidate to President Sergio Mattarella.

The U.K.'s FTSE 100 index rose 0.2% to 7,730.28. U.K. markets are closed on Monday for a local holiday.

Germany's DAX 30 index rose 0.7% to 12,938.01, while France's CAC 40 dropped 0.1% to 5,542.55.

The euro traded at $1.1670, compared with $1.1722 late Thursday.

What is driving markets?

Stocks pared losses in the afternoon as attention turned to Spain where the country's main opposition party called for a vote of no confidence (http://www.marketwatch.com/story/spains-rajoy-under-pressure-as-opposition-calls-for-confidence-vote-2018-05-25)on Prime Minister Rajoy over a corruption case that ended in convictions for a former party treasurer and other senior members of the party.

The credibility of Rajoy, who already has a shaky hold on power, was questioned by the judge who handed down the ruling on Thursday, according to Reuters. It isn't clear if the opposition socialists can get enough votes to loosen his grip on power.

The yield on 10-year Spanish government debt jumped 7 basis points to 1.452%, according to Tradeweb.

European markets had opened in positive territory, rebounding after Thursday's sharp losses that came in the wake of Trump's decision to cancel a historic meeting with North Korea. Traders found some reassurance on Friday in a measured response from Pyongyang where a senior official said its leader Kim Jong Un is still willing to meet (http://www.marketwatch.com/story/north-korea-says-its-still-willing-to-meet-trump-any-time-2018-05-24).

Closer to home, traders were also encouraged by data showing the recent slide in German business sentiment coming to a halt in May (http://www.marketwatch.com/story/german-business-sentiment-steadies-in-may-ifo-2018-05-25). The Ifo business climate index came in at 102.2 in May, unchanged from April and above economists' forecasts of 101.9 points.

Meanwhile in Italy...

Traders were watching who will get the top jobs in Italy's new coalition after President Mattarella late Wednesday gave little known law professor Giuseppe Conte a formal mandate to form a government. Conte is expected to present his cabinet picks on Friday and then Mattarella and both houses of parliament need to approve his choices.

If that happens, Italy will become the largest country in Europe to be run by an antiestablishment government, which has already put itself on collision course with Brussels. The two parties have vowed to challenge the EU's budget rules and slash taxes while increasing fiscal spending.

The yield on 10-year Italian paper jumped 6 basis points to 2.451% on Friday.

What are strategists saying?

"Southern Europe is showing its true colors again as the political uncertainty in Italy and Spain has driven their respective markets lower. The populist parties in Italy, 5 Star Movement and Lega, are close to forming a coalition, and this has spooked investor confidence," said David Madden, market analyst at CMC Markets UK, in a note.

"Mariano Rajoy, the Spanish prime minister, is under severe pressure as he faces losing his job, or being forced to call a snap general election. As borrowing costs for the Italian and Spanish governments rise, we are seeing severe losses on the FTSEMIB and IBEX 35. Traders despise political uncertainty, and we could see further investment in northern European stocks and government bonds while the turmoil persists," he added.

Stock movers

Share of Centamin PLC posted the biggest slide in Europe, falling more than 18% after the miner cut its 2018 production guidance at the Sukari gold mine in Egypt by 11%-13%.

Italian and Spanish banks were also lower. Shares of Banco BPM SpA (BAMI.MI) and Intesa Sanpaolo SpA (ISP.MI) fell 7.3% and 3.2%, respectively, in Milan, while CaixaBank SA (CABK.MC) and Banco Santander SA (SAN.MC) (SAN) fell 3.8% and 2.7%, respectively, in Madrid.

Energy companies declined as oil prices dropped more than 4% after reports that the Organization of the Petroleum Exporting Countries and Russia are discussing plans to boost production. The Stoxx Europe 600 Oil & Gas dropped 1.9%.

Royal Mail PLC (RMG.LN) declined by 2.8% after Berenberg cut the delivery company to sell from hold, according to Dow Jones Newswires. Berenberg said Royal Mail faces little profit growth in coming years, as its customers are likely to scale back on sending out marketing materials due to the EU's new General Data Protection Regulation. The GDPR privacy rules come into effect on Friday.

Read:5 things to know about the GDPR rules taking effect Friday--which could cost big, bad tech billions (http://www.marketwatch.com/story/5-things-to-know-about-europes-new-data-rules-which-could-cost-big-bad-tech-billions-2018-03-21)

 

(END) Dow Jones Newswires

May 25, 2018 12:45 ET (16:45 GMT)

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