European equities ended last week by unwinding two weeks worth of solid gains.  On Friday, the STOXX 600 was down 0.83% on very high volumes, but the real chaos was in Italy where the FTSE MIB was down 3.7%.  Within the STOXX 600, Banks felt the pain the most, down 2.8% with Insurance not far behind at 1.7%.  Italian banks made up four of the worst five performers in the broad STOXX 600, with Banco BPM, Unione di Banche Italia, UniCredit, and Intesa Sanpaolo all off at least 7.8%.  The FTSE MIB saw a continuation of these issues today, falling 0.49% on the session.

The reason for all the chaos was the Italian government destroying market hopes of fiscal restraint.  Thursday night, they announced a deficit-to-GDP target for the 2019 budget of 2.4% of GDP.  Italian government debt-to-GDP is 132%, and its economic indicators consistently lag; there’s just no way they can sustainably spend 2+% of GDP if the markets don’t want to let them. Eurozone officials echoed these concerns in a meeting earlier today and look to mitigate escalation of these concerns.

While much has been made of the Italy-EU fault lines, this market-imposed discipline is much more binding at present and saves much of the work that EU bodies might otherwise have to do in restraining Italian spending.

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