By Sara Sjolin, MarketWatch

Trump's spat with China over drone seizure may prompt some volatility, says analyst

European stock markets dropped from a 2016 high on Monday, with the recent rally in banks on pause as troubled lender Banca Monte dei Paschi di Siena SpA made a last-ditch effort to avoid a state bailout.

The Stoxx Europe 600 index dropped 0.3% to 359.01, after closing at the highest level since Dec. 31, 2015 on Friday (http://www.marketwatch.com/story/drug-makers-rise-as-european-stocks-wobble-near-their-2016-high-2016-12-16). The pan-European benchmark logged a 1.3% gain for the week, its second straight week of advances.

Banks have been a major factorin the recent rally, rising on hopes for a resolution to the Italian banking crisis and tracking sharp gains in the U.S. financial services sector.

On Monday, however, the sector moved lower, led by a 7.6% loss for Banca Monte dei Paschi di Siena (BMPS.MI) . The struggling Italian bank on Monday launched a share sale to raise about EUR5 billion ($5.23 billion) in capital (http://www.marketwatch.com/story/monte-dei-paschi-set-to-launch-share-sale-2016-12-19) to stay afloat for the rest of the year. If it fails in raising the money, the Italian government will bail out the bank, according to a Treasury official.

Shares of Deutsche Bank AG (DBK.XE) (DBK.XE) (DBK.XE) dropped 2.7% after Citigroup downgraded the company to sell from hold. The analysts said the German lender is now up 72% from its September low, making the stock overvalued.

In other Deutsche Bank news, the bank will pay $37 million to end government investigations (http://www.marketwatch.com/story/deutsche-bank-to-pay-to-end-dark-pool-probe-2016-12-19) into how it routed trades to "dark pool" private trading venues.

The Stoxx Europe 600 Banks Index was down 0.8% at 173.34. It has risen 23% in the past three months, but is still down 5% for the year.

China drone clash: Investors were Monday also watching developments in Asia, where rising tensions between China and the U.S. weighed on risk appetite (http://www.marketwatch.com/story/us-demands-return-of-survey-drone-taken-by-chinese-2016-12-16) and sent markets lower (http://www.marketwatch.com/story/stronger-yen-chinese-bond-selloff-weigh-down-asian-markets-2016-12-18). U.S. stock markets closed lower on Friday after news a Chinese warship had seized an underwater U.S. Navy drone in international waters off the coast of the Philippines. Both countries said over the weekend that China will return the drone.

Read:Trump's Twitter slip declares China's drone seizure 'unpresidented' (http://www.marketwatch.com/story/trumps-twitter-slip-declares-chinas-drone-seizure-unpresidented-2016-12-17)

"As we run up to Christmas, with little corporate news, the expectation is that markets will remain relatively quiet -- however, Donald Trump may provide some volatility for investors in the shape of a diplomatic spat with China," said Rebecca O'Keeffe, head of investment at stockbroker Interactive Investor, in a note.

"While no one expects the USA and China to be best friends, moving away from the current status quo into a frosty relationship could provide an unwelcome backdrop for markets," she said.

Other movers: Shares of Danone SA (DANOY) (DANOY) lost 2.9% after the food producer cut its sales guidance (http://www.marketwatch.com/story/danone-cuts-sales-view-citing-activia-brand-issue-2016-12-19), citing weakness in the Spanish market and problems with its yogurt product Activia.

BP PLC (BP.LN) (BP.LN) gained 0.8%. The oil major said it will invest nearly $1 billion in a natural gas field (http://www.marketwatch.com/story/bp-to-invest-1-bln-in-northwest-africa-gas-field-2016-12-19) off the coast of northwest Africa. Separately this weekend, BP said it has made a $2.2 billion agreement (http://www.marketwatch.com/story/bp-strikes-22-billion-deal-for-fields-in-uae-2016-12-17) to gain access to onshore oilfields in the United Arab Emirates.

Indexes: Germany's DAX 30 index fell 0.2% to 11,385, even as the Ifo business climate index for the country rose to its highest level since February 2014.

France's CAC 40 index dropped 0.4% to 4,814.10, while the U.K.'s FTSE 100 index lost 0.2% to 6,997.14 (http://www.marketwatch.com/story/ftse-100-pulls-back-from-7-week-high-as-miners-drag-2016-12-19).

(END) Dow Jones Newswires

December 19, 2016 04:40 ET (09:40 GMT)

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