Stock markets gloomy on Italian crisis

Equities reversed an earlier firm trend

European stock markets turned lower on Tuesday as political crisis in Italy weighed on sentiment, while US stocks flatlined, cutting short their recent recovery.

European markets had started higher, lifted by hopes for central bank and government stimulus measures, and for easing tensions in the China-US trade war.

Trading floors have been on edge for weeks owing to a number of concerns including the trade war, Brexit, a global economic slowdown and tensions in the Middle East.

Equities still got a positive start to the week, with Germany reportedly planning government support to avert a recession in Europe's biggest economy and central banks elsewhere looking to ease monetary policy.

But on Tuesday investors worried mostly about Italy, where a political crisis was set to come to a head after Prime Minister Giuseppe Conte said he would resign, lashing out at far-right Interior Minister Matteo Salvini for pursuing his own interests by pulling the plug on the government coalition.

- 'Centre of attention' -

Italy is "the centre of attention", said Tangi Le Liboux at Paris-based brokerage Aurel BGC.

Investors mostly fear a revival of a EU-Rome spat over deficits, which could weigh on eurozone cohesion, analyst said.

"The most plausible outcome is a new general election, either later this year or in early 2020, which will usher in a League-dominated administration that continues to clash with the EU," Capital Economics said.

US stocks reacted mostly to global bond yields coming back under pressure, suggesting markets are again focusing on the chances of a worldwide economic downturn, said analysts at Charles Schwab.

"US stocks are dipping in early action, coming off yesterday's solid gain that extended Friday's rally," they said.

Among the key events this week is a speech by Federal Reserve boss Jerome Powell at the annual Jackson Hole symposium of central bankers in Wyoming.

- 'Blissfully' -

The Fed policy board "did not unanimously agree to the last 0.25 percent cut," said Jeffrey Halley, senior market analyst for Asia-Pacific at OANDA.

"US economic data continues to perform blissfully, implying the economy is doing just fine," he said.

"Against that backdrop, I struggle to see why... Powell would hit the panic button at Jackson Hole this week. The financial markets could be setting themselves up for an ugly correction into the week's end."

The White House's decision to delay again by 90 days a ban on US firms doing business with Huawei was taken as a conciliatory move towards China and provided hope.

The announcement followed comments from US President Donald Trump and key advisers expressing optimism over the talks, with top-level negotiations between the economic titans lined up for next month.

- 'Deaf ears' -

The "details don't necessarily suggest the US is making too many concessions on the China trade negotiations," said Rodrigo Catril, senior forex strategist at National Australia Bank.

In foreign exchange deals, the pound fell early in the day after the EU rejected British Prime Minister Boris Johnson's demand to scrap the Irish border backstop plan to achieve a Brexit deal.

"The latest effort from Boris to persuade the EU to move their lines on the Irish border has fallen on deaf ears," said David Cheetham at XTB.

But then the British currency got an afternoon shot in the arm after Chancellor Angela Merkel was reported as saying that Germany would think about "practical solutions" to the backstop.

Calling the market's reaction "more noise than anything else", Neil Wilson at Markets.Com, said however that "at the very most it opens just a chink of light amid all the doom and gloom for the pound".

- Key figures around 1540 GMT -

London - FTSE 100: DOWN 0.9 percent at 7,125.00 points (close)

Frankfurt - DAX 30: DOWN 0.6 percent at 11,651.18 (close)

Paris - CAC 40: DOWN 0.5 percent at 5,344.64 (close)

EURO STOXX 50: DOWN 0.6 percent at 3,350.23

New York - Dow: FLAT at 26,127.05

Tokyo - Nikkei 225: UP 0.6 percent at 20,677.22 (close)

Hong Kong - Hang Seng: DOWN 0.2 percent at 26,231.54 (close)

Shanghai - Composite: DOWN 0.1 percent at 2,880.00 (close)

Euro/dollar: UP at $1.1094 from $1.1078 at 2015 GMT

Pound/dollar: UP at $1.2154 from $1.2134

Euro/pound: DOWN at 91.29 pence from 91.30 pence

Dollar/yen: DOWN at 106.36 yen from 106.66 yen

Brent North Sea crude: DOWN 54 cents at $59.20 per barrel

West Texas Intermediate: DOWN 69 cents at $55.45 per barrel

burs-jh/dl