Italy and Spain underperform as European equities edge up

Thu May 22, 2014 12:40pm EDT

* Italian and Spanish stock markets fall

* Traders cite concerns over European elections this week

* Rising demand for protection in case FTSE MIB falls

* FTSEurofirst 300 closes up 0.1 pct at 1,366.29 points

* Raiffeisen rallies after Q1 results

By Sudip Kar-Gupta

LONDON, May 22 (Reuters) - Italian and Spanish stocks underperformed firmer equity markets elsewhere in Europe on Thursday, as traders said concerns about this week's European Parliament elections were weighing on Milan and Madrid.

Italy's FTSE MIB equity index closed down by 1.1 percent, while Spain's IBEX stock market fell 0.1 percent.

Both underperformed the pan-European FTSEurofirst 300 index , which edged up 0.1 percent to 1,366.29 points - still in sight of a six-year high of 1,372.81 points set last week. Germany's DAX also rose 0.2 percent.

Analysts say the European election results could undermine some euro zone governments.

In Greece, a strong showing by anti-bailout parties may hurt an already-fragile coalition, potentially paving the way to national elections. In Italy, a poor result for Prime Minister Matteo Renzi's party might weaken his drive for the swift reforms he promised when he took power in a party coup.

Yields on Spanish and Italian bonds stabilised on Thursday.

Yet demand to protect against falls in Italian shares has risen sharply in the past week as investors fear that a strong showing for the Eurosceptic 5-Star Movement may weaken Renzi's government.

Some investors also remained concerned about the gap between Germany - Europe's economic powerhouse - and weaker southern European states such as Spain, Portugal and Italy. A purchasing managers' survey on Thursday showed Germany's private sector expanded steadily this month, whereas data last week showed a contraction in the Italian economy.

The European Central Bank may unveil measures next month to help the euro zone economy, such as a rate cut, which would keep the euro currency in check.

However, some traders say any ensuing fall in the euro may still not be enough to help weaker economies such as Spain and Italy.

"Economic prospects rarely determine which way stock markets will go but the situation in southern Europe is now so dangerous for all business there that these times may be an exception," said HED Capital head Richard Edwards.

"Keep selling rallies," he added.

RAIFFEISEN RALLIES

Austria's Raiffeisen Bank was the best-performing stock on the FTSEurofirst 300 index. It rose 6 percent after posting first-quarter profits that exceeded market expectations. Raiffeisen also said it could soon pay back nearly 2 billion euros ($2.73 billion) in state aid.

The broad rally in European equities since the start of 2014 has been maintained by expectations of new European Central Bank stimulus measures, and by corporate takeover activity.

The FTSEurofirst 300 has gained around 4 percent this year. Italy's FTSE MIB is up around 7 percent, Spain's IBEX has risen 6 percent, outperforming a rise of around 2 percent on the DAX.

($1 = 0.7318 Euros)

Europe bourses in 2014: link.reuters.com/pap87v

Asset performance in 2014: link.reuters.com/gap87v

Today's European research round-up (additional reporting by Francesco Canepa; Editing by Larry King and Andrew Heavens)

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