Investors yanked European stocks into the red Thursday, with a selloff in German and Spanish stocks leading the broader market lower on the final day of trading in May.
In Germany, Deutsche Bank AG shares skidded and auto makers came under pressure as the U.S. imposed tariffs on European steel and aluminum.
In Spain, Prime Minister Mariano Rajoy faced the possibility of being forced out of office.
How markets performed
Germany’s DAX 30 index DAX, -1.40% tumbled 1.4% to end at 12,604.89, led by a selloff in shares of Deutsche Bank. The index closed at its lowest since late April, FactSet data showed. Spain’s IBEX 35 IBEX, -1.05% sank 1.3% to end at a two-month low at 9,465.50.
Losses in those market helped drag down the Stoxx Europe 600 Index SXXP, -0.63% 0.6%, ending at 383.06. The pan-European benchmark ended the month of May down 0.6%, a far cry from April’s jump of 3.9%.
Italy’s FTSE MIB index I945, -0.06% ended with a mild loss of 0.1% on Thursday at 21,784.18. In the fixed-income market, the country’s 2-year bond yield TMBMKIT-02Y, +0.00% fell 80 basis points to 0.96%, according to Tradeweb. Yields fall as bond prices rise. At one point this week, the yield had climbed more than a percentage point.
France’s CAC 40 index PX1, -0.53% flipped lower and closed down 0.5% at 5,398.40, and in London, the FTSE 100 UKX, -0.15% fell 0.2% to finish at 7,678.20.
The euro EURUSD, -0.1026% had risen above $1.17 intraday but eventually fell back to $1.1659. That wasn’t far from $1.1666 late Wednesday in New York.
What drove markets
A trade dispute between the U.S. and Europe and political strife in Spain slammed into European financial markets at an already vulnerable time for equity and bond investors who have been dealing with political instability in Italy.
Shares of auto makers extended losses after U.S. President Donald Trump made good on his threat, made in March, to slap tariffs on European steel and aluminum, starting Friday. Trump has claimed the tariffs will protect U.S. steelmakers.
Last-minute efforts by the EU were seen as failing to offer the concessions the U.S. wanted for it to hold off imposing a 25% tariff on EU steel imports and a levy of 10% on aluminum.
Jean-Claude Juncker, president of the European Commission, wrote in a tweet that it will defend Europe’s interests.
The European bloc has threatened to impose $3.5 billion of its own levies on U.S. agriculture, steel and industrial products and in turn, Trump threatened to hit European cars with a U.S. import tax. A report published Thursday in German magazine Wirtschaftswoche said Trump told French President Emmanuel Macron he wants to block luxury cars from Germany from the U.S. market.
Political developments in Italy, Spain
Political uncertainty in Europe has rocked global markets during the week on worries that a rise of antiestablishment parties to power could spark a crisis for the euro.
In Spain, Prime Minister Rajoy may be forced to leave office after the center-left Socialist Party on Thursday appeared to have won support to hold a no-confidence vote against Rajoy on Friday. Key to that move was support from the Basque Nationalist Party, or PNV, to hold the vote. The Socialist Party called for the vote after a corruption case ended in convictions for senior members of Rajoy’s People’s Party.
Rajoy’s government is unlikely to survive the vote, said currency analysts at Brown Brothers Harriman.
“The Socialists would likely lead the next government, but if Rajoy resigns and elections are held, the centrist Ciudadanos may emerge as the largest party,” said BBH.
Turning to Italy, investors on Thursday had watched for new developments after the head of the Five Star party, Luigi Di Maio, said he was open to withdrawing Paolo Savona as a candidate for finance minister.
Earlier this week, Italian President Sergio Mattarella rejected Savona as candidate for that post, effectively blocking a coalition of euroskeptic parties Five Star and League from forming a government. The political maneuverings have been going on since a March election resulted in no clear outcome.
“The political sentiment in Italy has improved, and if a government can be formed it would boost investor sentiment. However, traders are still mindful that underlying anti-establishment feelings are still prevalent in the country,” said David Madden, market analyst at CMC Markets.
In addition to political developments in Europe, traders on Friday will also have to weigh the closely watched monthly jobs report from the U.S.
Duetsche Bank shares DBK, -6.77% tumbled 7.2% after the Federal Reserve designated the German lender’s U.S. business in “troubled condition,” people familiar with the matter told The Wall Street Journal. That status has influenced moves by Deutsche Bank to reduce risk-taking in areas like trading and lending to customers.
Car makers lost ground as part of the tariffs dispute. Volkswagen AG VOW3, -1.95% dropped 2%, Daimler AG DAI, -1.89% gave up 1.9% and BMW AG BMW, -0.95% shed 1%. Renault SA RNO, -1.25% fell 1.3 % and Ferarri NV RACE, -0.36% turned lower, ending down by 0.3%. But Fiat Chrysler Automobiles NV FCA, +2.05% tacked on 2.1%.
Among European steelmakers, Tenaris SA TEN, -3.25% lost 3.2% but ArcelorMittal MT, +0.33% edged up 0.3%.
CRH PLC CRH, +3.17% picked up 3.2% after the building materials supplier outlined organizational changes and said it’s targeting an increase of 300 basis points in its margin for earnings before interest, taxes, depreciation and amortization by 2021.
French inflation jumped 2.3% on a harmonized basis in May, the first time since 2012 that the rate exceeded the ECB’s inflation target of 2%.
For the eurozone, inflation in April rose to 1.9%, closer to that target, according to preliminary data from Eurostat. FactSet’s consensus forecast was for a 1.6% reading.