European stock markets recover in cautious trade

European stock markets recovered yesterday from a sharp sell-off the day before that was triggered by the political turmoil in Italy.The euro pulled back from the 10-month lows against the dollar it had fallen to on Tuesday. And sentiment was helped by a stronger showing on Wall Street, which bounced back on favourable corporate earnings reports. Nevertheless, “risk aversion in financial markets is increasing in response to the Italian political crisis,” said VTB economist Neil MacKinnon.Craig Erlam at Oanda agreed. “Political uncertainty in Italy continues to act as a drag on risk appetite,” he said.But “while the situation in Italy will likely continue to be a driver of market sentiment, there are plenty of data releases that will be of interest to traders today,” the expert said. At the end of the session, London’s benchmark FTSE 100 index was 0.7% higher at 7,689.57 and Frankfurt’s DAX 30 gained 0.9% at 12,783.76, while the Paris CAC 40 slipped by 0.2% at 5,427.35 at close yesterday. Milan’s FTSE MIB rallied more than 2% at 21,797.82, almost making up for the sharp drop on Tuesday.Italy was plunged into crisis when President Sergio Mattarella at the weekend vetoed the nomination of a fierce eurosceptic as economy minister, leading the prime minister-designate to step down and upending a bid by the anti-establishment Five Star Movement and the far-right League to form a government.Mattarella then named Carlo Cottarelli, a pro-austerity economist formerly with the International Monetary fund, to lead a technocrat government, with another election likely in a few months.The chaotic developments have spooked investors, who fear another election will essentially be seen as a referendum on the country’s future in the eurozone.The turmoil has also sent the yield spread between Italy and Germany’s 10-year bonds to around a five-year high, reflecting investor concerns.Investors have been spooked also by US President Donald Trump’s decision Tuesday to press ahead with imposing tariffs on Chinese goods despite ongoing talks to resolve the dispute.The White House said the sanctions announced in March, largely focused on intellectual property, were still in the works and details would be announced in the coming month.China said the move breached a consensus reached between Washington and Beijing earlier this month that called off a threatened trade war.