European stocks drop on U.S. fears, Italy woes

LONDON (MarketWatch) — European stock markets showed broad-based losses on Monday on a trio of concerns, with worries over a potential government shutdown in the U.S., political instability in Italy and disappointing data from China.

The Stoxx Europe 600 index (XX:SXXP)  lost 0.7% to 309.98, on track for the lowest close since Sept. 10.

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Among country-specific indexes, Italy's FTSE MIB index (XX:FTSEMIB)  was the biggest decliner, off 1.7% to 17,346.15. Banks posted some of the biggest losses, with shares of Mediobanca SpA (IT:MB)  down 3.6%, Intesa Sanpaolo SpA (IT:ISP)  losing 3.7% and UniCredit SpA (IT:UCG)  off 2.5%.

The losses came after former Prime Minister Silvio Berlusconi's party said over the weekend that all five of its ministers would resign from the cabinet, adding to the political instability in the country. Berlusconi said he engineered the crisis because he opposes a planned increase in the sales tax, but Prime Minister Enrico Letta called this a "huge lie." Berlusconi's allies of the former prime minister threatened last week to bring down the government if a Senate committee this week votes to expel him from the upper house after his tax-fraud conviction.

The yield on the 10-year benchmark government bond (IT:10YR_ITA)  rose 9 basis points to 4.65%, marking the highest level in three months.

Uncertainty about budget negotiations in the U.S. also weighed on sentiment in Europe on Monday. The government could face its first shutdown in 17 years after lawmakers over the weekend failed to agree on the budget for the new fiscal year, which starts on Tuesday Oct. 1. If House Republicans and Senate Democrats cannot agree by the Tuesday morning deadline, thousands of government employees will be unable to work.

"If this becomes a protracted affair, there's a possibility the U.S. could default which will bring out the rating agencies ready with their knives to chop the sovereign's rating. In fact, Moody's reckons 4Q GDP could be reduced as much as 1.4% if there is a three-to-four week shutdown," said Ishaq Siddiqi, market strategist at ETX Capital.

U.S. stock futures pointed to a lower open on Monday.

In Europe, mining firms added pressure after weaker-than-expected data from China. The final HSBC China Manufacturing Purchasing Managers' Index for September came in at 50.2, lower than the preliminary reading of 51.2.

Shares of Anglo American PLC (UK:AAL)  slid 3%, Rio Tinto PLC (UK:RIO)   (AU:RIO)   (RIO)  dropped 2.6%, and BHP Billiton PLC (UK:BLT)   (BHP)   (AU:BHP)  lost 1.3%.

The losses weighed on the U.K.'s FTSE 100 index (UK:UKX) , which gave up 0.7% to 6,464.22.

Germany's DAX 30 index (DX:DAX)  slid 1% to 8,577.42, and France's CAC 40 index (FR:PX1)  dropped 1.2% to 4,135.33.

Banks weighed on the indexes, with shares of Commerzbank AG (DE:CBK) 2.9% lower in Frankfurt, Crédit Agricole SA (FR:ACA)  down 2% in Paris and HSBC Holdings PLC (UK:HSBA)   (HBC)   (HK:5)  off 1.2% in London.

Outside the major indexes, shares of Stora Enso Oyj (FI:STERV)  slid 4.5% after UBS cut the pulp and paper manufacturer to sell from neutral. The analysts said they remain cautious on the global pulp market and fear volumes are outpacing demand with new supply entering the market short-term.

UBS also lowered the rating on Schneider Electric SA (FR:SU)  to sell from neutral, sending the shares 3.2% lower.