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European shares feel Brexit draught

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[LONDON] European shares drifted lower on Monday with investors on tenterhooks awaiting political signals about Britain's EU exit, while Asian stocks rose on hopes of more stimulus for economies already on central bank life support.

Financials across the eurozone came under pressure from a stern European Central Bank warning to Italy's No. 3 bank, Banca Monte dei Paschi di Siena, that it needs to slash its bad-debt burden.

The FTSE 100 index closed 0.8 per cent lower while the FTSE 250, which more reflects domestic companies as opposed to large international firms, was down 2.1 per cent.

The indices got little traction from a pledge by British finance minister George Osborne to slash corporation tax by over five per centage points to under 15 per cent to tempt businesses to stay following the country's shock vote to leave the European Union.

In Frankfurt the DAX 30 shed 0.7 per cent and in Paris the CAC 40 dropped 0.9 per cent.

The Milan exchange underperformed its peers, falling 1.7, on the back of sharp drops in BMPS, UniCredit and others, as the ECB drew fresh attention to the fragile balance sheets of Italian banks whose portfolio of gross bad loans amounts to 46.9 billion euros.

BMPS shares plunged 14 per cent to a historic low of 0.29 euros, while other Italian banking stocks dropped by up to nearly seven per cent.

Michael Hewson at CMC Markets said there were reports that the Italian government may step in to bail out its banking sector, a move that would have "all the hallmarks of throwing good money after bad".

European markets were missing the usual guidance from Wall Street, which was closed for Independence Day, a public holiday.

"With no US open to perk things up the European indices saw their mild losses accelerate into something larger," noted Connor Campbell at Spreadex.

This marked an end to the London benchmark index's "recent, uninterrupted rise" which followed the initial sell-off prompted by the Brexit vote.

"Brexit will remain the dominant story in the markets again this week with investors remaining somewhat in limbo over the future of the UK's relationship with the EU," said Craig Erlam, senior market analyst at Oanda trading group.

But following abrupt early selling following the referendum, the market's view on unfolding events has shifted somewhat, said analysts at Barclays Bourse in Paris.

"Investors have decided to focus on a favourable short-term scenario despite Brexit," they said in a note to clients.

"Either Brexit happens and in that case central banks will act to calm things down, or Brexit is postponed or cancelled," they summed up current thinking in dealing rooms.

London Stock Exchange Group shareholders Monday voted overwhelmingly for a merger with Deutsche Boerse, operator of the Frankfurt exchange, despite concerns it could be scuppered by Britain's EU exit.

Investors were now awaiting the release Wednesday of minutes from the Federal Reserve's most recent policy meeting to see if it sheds any light on its plans for interest rates, while US June jobs data is due on Friday.

Asian stocks pushed higher again Monday, building on last week's rally.

South Korea's promise of US$17 billion in stimulus last week came as dealers speculate that Japan will bolster its own multi-billion-dollar programme, while the chances of the US raising interest rates this year have all but evaporated.

Tokyo rose 0.6 per cent - marking a sixth-straight gain - Hong Kong climbed 1.3 per cent and Shanghai added 1.9 per cent by the close. Seoul added 0.4 per cent.

Sydney rose 0.7 per cent, despite the weekend's general election producing no clear winner raising the prospect of a hung parliament.