UPDATE 2-Political risk hits Milan bourse, weak euro backs European shares


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    * Pan-European STOXX edges up 0.2 pct
    * Italy's FTSE MIB down, led by banks
    * Upgrade boosts oil services firm Saipem

 (Adds quotes, closing prices)
    By Danilo Masoni and Helen Reid
    MILAN/LONDON, May 16 (Reuters) - Italy's two anti-system
parties' progress to form a coalition  and free up billions of
euros for tax cuts and welfare scared off investors and hit the
Milan bourse on Wednesday while a weak euro provided support to
the broader European market. 
    The pan-European STOXX 600  .STOXX  index rose 0.2 percent,
hovering around its highest level since early February but
Italy's FTSE MIB  .FTMIB  fell 2.3 percent, its worst fall since
the election took place in early March.   
    Italian banks  .FTIT8300 , which are seen as a proxy for
political risk in the country due to notably to their government
bond holdings, fell 3.68 percent as borrowing costs jumped.  
    Italy already has a debt pile worth more than 130 percent of
annual output and the parties' pledge to introduce a flat tax
rate of 15 percent, new welfare payments and scrap an unpopular
pension reform are likely to street the country's finances.
    The fall of the Milan bourse comes after months of
outperformance against its European peers despite the fact that
the far-right League and the anti-establishment 5-Star Movement 
emerged as clear winners from the election. 
    "I often think that political risk is over-priced into the
market, but this time it hadn't really been priced in at all,"
said Chris Hiorns, manager of the Amity European fund at
    "You have to question why the Italian market was doing quite
so well when the political situation seemed so tenuous," said 
Hiorns, adding that Italian stocks might suffer further and
government bond yields rise even more.  
    One exception on the Italian market was Saipem  SPMI.MI , 
which soared 12.2 percent to the top of the STOXX after it was
upgraded by Bernstein to "outperform", reflecting growing
optimism in the recovery of the embattled Italian oil services
    The recent surge in crude oil prices has helped the oil and
gas sector rise 13 percent so far this year, leading sectoral
gainers in Europe.
    A weaker euro provided support for dollar-earning European
companies as the dollar extended its rally against a basket of
currencies on Wednesday and touch a five-month high. urn:newsml:reuters.com:*:nL5N1SN4QT
    Miners and the broader basic materials sector  .SXPP 
benefited from the trend and closed 2.79 percent higher.
    Among the other top gainers on the STOXX was Homeserve
 HSV.L  which surged to 9.3 percent after UBS upped its
recommendation for the stock to "buy". 
    Micro Focus  MCRO.L , which rose 6.1 percent after Britain's
leading software company said a new $40 million licensing deal
would help bolster its first-half revenue.  urn:newsml:reuters.com:*:nL5N1SN19N
    Paddy Power Betfair  PPB.I  rose 6.7 percent after the
bookmaker said it was in discussions regarding a potential
combination of its U.S. business and fantasy sports company
Fanduel to target the prospective U.S. sports betting market.
    Elsewhere, Elior  ELIOR.PA , however, fell 13.9 percent
following a profit warning.   urn:newsml:reuters.com:*:nL5N1SN0X8

 (Reporting by Danilo Masoni, Helen Reid and Julien Ponthus;
Editing by Catherine Evans and Alison Williams)
 ((Danilo.Masoni@TR.com; +39-02-66129734; Reuters Messaging:
danilo.masoni.thomsonreuters.com@reuters.net; On Twitter https://twitter.com/damasoni))

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