European stocks waver on Italy, U.S. debt fears

LONDON (MarketWatch) — European stock markets struggled for direction on Thursday as worries about renewed political instability in Italy and debt-ceiling negotiations in Washington partly offset better-than-expected U.S. jobless-claims data.

The Stoxx Europe 600 index (XX:SXXP)  ended at 313.02, the same closing level as Wednesday.

Click to Play Government shutdown looms

Overseas markets are worried about a potential U.S. gov't shutdown. Bed Bath & Beyond reports after the bell, and the S&P 500 looks to snap a five-day losing streak that may depend on the latest estimate for second-quarter U.S. . Photo: AP

"We're waiting for some directions to where to go from here. There is no point in worrying about the debt ceiling until we know what the implications are. We've been here before and it seemed like the market reaction in 2011 was a bit overdone," said Peter Dixon, strategist at Commerzbank in London. "It has the potential to cause the markets to take a leg down, but until we have the full information, markets don't want to move. If you sell now and nothing happens, you will just have to buy back into the market later at a higher price."

"In addition we're waiting for some definitive signals on where the economy is going," he added and said recent upbeat data from Europe shouldn't necessarily push the markets much higher from here because much of the good news is already priced in.

"I just don't feel like there's any appetite for a bull run right now. But who knows, once we start to move into the third-quarter earnings season," he said.

Shares of Ladbrokes PLC (UK:LAD)  posted the biggest drop in the index, off 7.6%, after the betting firm said 2013 operating profit for its digital division will fall below current market expectations.

"Our digital earnings have been disappointing, reflecting a lack of competitiveness in sportsbook, lower margins than planned and a greater disruptive impact than expected from the transition necessary to grow digital for the long term," Chief Executive Richard Glynn said in a statement.

On a more upbeat note, shares of Hennes & Mauritz AB (SE:HMB)  gained 6.7% after the Swedish fashion retailer reported a 22% rise in third-quarter profit and said sales in China had been particularly strong during the period.

U.S. data

More broadly, European stock markets briefly moved into positive territory in afternoon action after U.S. stocks opened higher on the back of upbeat jobless claims data. New applications for unemployment benefits fell by 5,000 last week to 305,000, beating expectations of a 327,000 print. Meanwhile, the Commerce Department said the U.S. economy grew by 2.5% in the second quarter, unchanged from a previous estimate.

The data came as U.S. lawmakers struggle to agree on a budget before the new fiscal year begins next week, with a failure to pass the bill possibly leading to a government shutdown. Read: What's next in the government shutdown saga

On Wednesday, the Senate took the first of several procedural votes to enact funding for the fiscal year, agreeing unanimously to debate a bill passed by the House that would remove funding of the 2010 Affordable Care Act. Democrats in the Senate aim to replace that bill with a stopgap measure that will maintain funding.

Additionally, Treasury Secretary Jacob Lew told legislators that he'll run out of options to avoid hitting or surpassing the debt limit by Oct. 17 or sooner. Moody's Investors Service warned on Tuesday that a failure to raise the debt limit would result in a worse outcome for financial markets than a government shutdown. The ratings agency argued that market participants would view a decision not to raise the debt limit as having a higher probability of sovereign default.

"The main risk to the U.S. economic outlook remains political. Our baseline outlook is that policy makers continue to avoid the government shutdown or interruption of debt payments that serve as threat points in the ongoing fiscal brinkmanship in the U.S. capitol," analysts at Barclays said in a note.

"But the perpetual conflict and political discord of recent years has led to increased uncertainty, sizable fiscal drags in the resolution (e.g., sequestration), and temporary market disruptions. In other words, recent experience tells us the risk need not be fully realized in order to affect financial markets; walking close enough to the edge is sufficient," they added.

Italian instability

In Europe, the instability in the Italian political system was back in the spotlight. Supporters of Silvio Berlusconi late Wednesday threatened to leave parliament if the former prime minister is ousted from senate due to a tax-fraud conviction, prompting a rebuke from President Giorgio Napolitano. The President on Thursday reportedly accused the Berlusconi supporters of undermining Italy's parliamentary system and said the threat—if carried out—could pressure him into dissolving parliament.

Getty Images Enlarge Image Silvio Berlusconi.

The FTSE MIB index (XX:FTSEMIB)  dropped 1.2% to close at 17,872.53.

Among other country-specific indexes in Europe, France's CAC 40 index (FR:PX1)  lost 0.2% to 4,186.72, and Germany's DAX 30 index (DX:DAX)  was slightly lower at 8,664.10. The U.K.'s FTSE 100 index (UK:UKX)  rose 0.2% at 6,565.59.

Providing support in London, shares TUI Travel PLC (UK:TT)  climbed 3.9% after the holiday firm said it had a strong summer season and raised its full-year guidance for underlying operating profit to growth of at least 11%, up from 10% expected previously.

Outside the major indexes, shares of Vestas Wind Systems AS (DK:VWS)  gained 7.9% after the wind-turbine maker said it has received a 400MW order in the U.S.

Shares of Mapfre SA (ES:MAP)  lost 3.1% in Madrid after Bankia SA (ES:BKIA) completed the sale of a 12% stake in the insurance firm. Bankia shares rose 1%.