Italian stocks stage comeback in recovering European market

By Kit Rees and Helen Reid

LONDON (Reuters) - A robust bounceback in Italian stocks helped lift European equities on Wednesday as investors recovered from the previous day's sharp selloff and digested the possibility of a new Italian election as early as July.

Italy's FTSE MIB (.FTMIB) index came back from the previous day's losses with a 2.1 percent rise, but the market was still down 2.7 percent so far this week and had given up all the gains made in 2018.

Major Italian parties called for a new election in July as last-minute efforts to form a government showed little sign of succeeding on Wednesday. [nL5N1T11FL]

Worries that a repeat election could become a de facto referendum on the euro have hit European stocks this week, with Italy's benchmark FTSE MIB (.FTMIB) touching its lowest level since July 2017 on Tuesday.

"It's taken the shine off markets which had been going very well recently, but at the moment I would say the sell-off looks to be of a smaller order than we've seen in previous incarnations of the euro zone crisis," Laith Khalaf, senior analyst at Hargreaves Lansdown, said.

Italian banks , which dropped 4.7 percent in the previous session, rose 2.7 percent following five straight days of losses.

Big lenders Intesa Sanpaolo (ISP.MI) and Unicredit (CRDI.MI) delivered the strongest boosts to Italian stocks, while Mediobanca (MDMI.MI) and Finecobank (FBK.MI) led the index with 7.1 and 6.4 percent gains.

The pan-European STOXX 600 (.STOXX) index ended the day up 0.3 percent, while Germany's DAX (.GDAXI) jumped 0.9 percent.

Atif Latif, director of trading at Guardian Stockbrokers, said that while he did not see a risk of contagion to other markets, volatility could remain as Italy seeks a resolution to its political crisis.

"Risk off remains so (we) would use this as an opportunity to buy good quality names caught in the crossfire," Latif added.

Volatility on Italy's FTSE MIB index climbed to its highest premium over Eurostoxx 50 volatility as a result of the sell-off, Goldman Sachs analysts said in a note.

Spanish banks, which had fallen in concert with Italian lenders on Tuesday as investors dumped peripheral financials, also staged a recovery on Wednesday. Santander (SAN.MC) and BBVA (BBVA.MC) rose 0.6 to 1.1 percent.

Euro zone financials (.SX7E) overall fell 0.1 percent however, in their sixth straight day of losses as investors remained wary of bank stocks which would be worst hit by any systemic risks to the euro zone.

While the focus remained firmly on politics, Vivendi (VIV.PA) was the biggest faller, down nearly 4 percent after its subsidiary Canal+ was left empty-handed in a crucial soccer broadcasting rights auction in France on Tuesday.

Bayer (BAYGn.DE) meanwhile drove gains on Germany's DAX, rising 3.9 percent after winning U.S. approval for its takeover of Monsanto, set to create by far the largest seeds and pesticides maker in the world.

A recovery in crude prices helped buoy the oil sector (.SXEP) up to lead Europe with a 2 percent gain, supporting the STOXX. Oil majors BP (BP.L), Royal Dutch Shell (RDSa.L) and Total (TOTF.PA) were the top boosts, up 1.7 to 2.6 percent.

(Reporting by Kit Rees and Helen Reid; Editing by Raissa Kasolowsky and Angus MacSwan)