European stocks catch Italian cold, US stocks retreat

New York - Italian bank shares slumped on Monday as risks linked to a crucial weekend referendum cast a shadow over markets across Europe, while US stocks pulled back from record levels.

Shares in Italy's leading lender UniCredit tumbled 5.7%, while those in the second-largest bank Intesa Sanpalo fell 4.2%.

The poor sentiment spilled to the rest of Europe, with shares in Royal Bank of Scotland falling 3%, Deutsche Bank 2.4% and Societe Generale 2.1%.

Tensions between Italian Prime Minister Matteo Renzi and the EU have reached a boiling point ahead of Sunday's referendum on constitutional reform. Renzi has suggested he would step down if voters reject the proposal.

"Sunday's referendum on constitutional reform is Italy's Brexit moment and a 'No' vote would send tremendous shockwaves through the markets and the banking system," said Neil Wilson, senior market analyst at ETX Capital.

"It could also heap pressure on the euro. Already crushed post-Trump, the euro could hit parity with the dollar if Renzi loses as Italy's place in the eurozone could be doubt," Wilson predicted.

Deutsche Bank suggested markets have not fully priced in a "No" outcome.

"In the case of a 'No' victory we continue to believe that PM Renzi will resign," Deutsche Bank said in a research note. "Markets could react negatively, with the risk of particular stress on the Italian banking sector."

Frankfurt fell 1.1%, while Paris lost 0.9% and London 0.6%.

Major US indices retreated from records, with the S&P 500 falling 0.5%.

 US stocks have been on a tear since Donald Trump's November 8 election victory, which has sparked hopes of a wave of pro-growth policies from Washington.

"This is basically profit taking," said Peter Cardillo, chief market economist at First Standard Financial. "We've been high for a lot of days, so I think it is just a little a bit of a pause."

Leading US retailers declined on worries about the holiday shopping season, while banking shares pulled back in profit-taking.

OPEC decision

Focus also was on the oil market ahead of a key OPEC meeting on Wednesday to decide whether members can strike a deal to limit output.

Oil prices rebounded on Monday after Iraq's oil minister expressed optimism about a deal. That helped counter headlines over the weekend, when Saudi Arabia suggested recovering demand would help stabilise prices next year, even without OPEC intervention.

"Expect to see further choppiness until at least on Wednesday, unless OPEC's next move becomes clear one way or another before the actual meeting," said market analyst Fawad Razaqzada at Forex.com.