European shares fell at the end of a choppy trading session on Monday, as relief over Moody's decision to keep Italy's sovereign rating outlook stable proved short lived and the focus turned to Europe's response to Rome's budget plans. The pan-European STOXX 600 index suffered its fourth straight daily decline to close down 0.3 percent.
The European benchmark index had risen as much as 0.7 percent in early deals after the agency on Friday kept Italy's outlook at "stable" even as it cut the country's rating to one notch above junk status, because of concerns over government budget plans. That was initially met with relief as investors priced in lower risks of a junk rating for Italy, that would trigger some fund mangers to sell Italian debt and could kindle the prospect of broader economic upheavals across European markets.
"These are rollercoaster days. There was euphoria this morning and now we're back down to earth. The truth is that nothing has really changed," said Carlo Franchini at Banca Ifigest in Milan.
"Probably someone has started to think that Moody's rating move is not that positive after all."
Italian banks, heavily exposed to government bonds and hit hard by worries over Rome's spending plans, rose 3.6 percent at one point before turning negative to trade down 1.5 percent.
Italy told the European Commission on Monday it would stick to its 2019 budget plans in defiance of EU fiscal rules, but promised not to further inflate its deficit in coming years.
"We turn more negative on Italian banks ... as sovereign spread volatility looks set to continue amid clashes with Brussels on the budget law and potential additional sovereign rating downgrades," Credit Suisse analysts said.
"The Italian government appears to be counting on the European elections in ... (the second quarter of 2019) to overcome resistance from Brussels, a strategy we believe is fraught with high execution risk," Credit Suisse analysts added.
They downgraded Intesa Sanpaolo to "neutral" and Banco BMP to "underperform".
Across European equities, most sectors were trading in the red despite a broad-based bounce at the open, yet Fiat Chrysler
(FCA) rose 3 percent after the Italo-American car maker agreed to sell its Magneti Marelli unit in a 6.2 billion-euro ($7.1 billion) deal.
"While it is no secret that FCA has been intending to separate Marelli from its core business, both the structure of the transaction ... and the valuation are net positives for investors in our view," analysts at Evercore ISI said.
Salvatore Ferragamo topped the leader board in Milan, rising 7.4 percent and hitting a one-month high after Wanda Ferragamo, the honorary president and shareholder of the Italian shoemaker, died at the age of 96.
Jefferies analysts said Ferragamo's passing opened up potentially interesting scenarios, noting she held voting rights in the company that still had to be allocated.
"Whilst we still see M+A as a medium-term option, the shareholder changes will focus minds on possible developments here," Jefferies analysts said.
Philips tumbled 8.7 percent after core profit growth at the Dutch healthcare technology company missed analyst estimates, partly due to currency headwinds.
Ryanair rose 4.3 percent even after it reported a 7 percent fall in profit during its key April-September season and said European short-haul airfares would remain soft this winter. Traders said there were no negative surprises in the results following a profit warning.
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