By Shashwat Chauhan
(Reuters) -European shares dropped on Tuesday as Italian banks came under pressure after the cabinet approved a 40% windfall tax on lenders, while sticky inflation print from Germany and weak China trade data further soured investor sentiment.
Italian banks such as Intesa Sanpaolo, Banco BPM and UniCredit fell between 6.5% and 8.3% after Deputy Prime Minister Matteo Salvini said a 40% levy on banks' extra profits will feed items such as a reduction of the tax wedge, tax cuts and financial support to holders of mortgages on first homes.
Rome expects to collect less than 3 billion euros ($3.29 billion) from the measure, sources close to the matter told Reuters.
"The measures so far are clearly exclusive to the Italian market, but clearly the move itself does drag attention to other financial institutions within the continent which have also benefited from a profitability standpoint," said Georgios Leontaris, chief investment officer for Switzerland and EMEA at HSBC Global Private Banking and Wealth.
The pan-European STOXX 600 index fell 0.6%, while Italy's banking-heavy FTSE MIB dropped 2.1% to hit its lowest level in four weeks.
Euro zone banks tumbled 3.3%, also hurt by news that ratings agency Moody's cut credit ratings of several small- to mid-sized U.S. banks and said it may downgrade some of the biggest lenders in the United States.
Hopes that the Federal Reserve and the European Central Bank (ECB) are near the end of their tightening cycle had pushed the STOXX 600 to over one-year highs last month. But markets have hit a rough patch recently on concerns about slowing economic growth in Europe and China.
China-exposed miners shed 1.8% after data revealed imports and exports in the world's second-largest economy fell much faster than expected in July, threatening growth prospects and heightening pressure on Beijing to provide fresh stimulus.
Germany's DAX index fell 0.8% after data showed inflation eased to 6.5% in July, in line with economists' expectations.
"Even though headline inflation has halved, the problem that we have with regards to the outlook on eurozone inflation is that core inflation is still quite elevated, which will likely lead to an extra hike by the ECB in our view," said HSBC's Leontaris.
Traders have priced-in a 67% chance that the ECB will hold interest rates at 3.75% at its meeting in September.
(Reporting by Shashwat Chauhan and Sruthi Shankar in Bengaluru; Editing by Sherry Jacob-Phillips and Sonia Cheema)
