European shares fell to a three-week low on Friday as investors stayed cautious before a referendum in Italy that could trigger fresh political uncertainty in the region.

The pan-European STOXX 600 index fell 1.2 per cent,weighed down by weaker financial stocks and a pull-back in the commodity sector after oil prices fell from 16-month highs.

European equities have been underperforming Wall Street,which has surged to fresh record highs on expectations of fiscal stimulus under Donald Trump’s administration.

Some investors expect the trend to continue, as Europe faces a string of ballots over the next 12 months starting from Sunday, when Italians votes on Prime Minister Matteo Renzi’s constitutional reform and Austrians elect their president.

“Many are of the opinion that traders will continue to favour US over European stocks,” City of London Markets traderMarkus Huber said in a note.

Opinion polls conducted until a blackout period started last week showed the “No” vote comfortably in the lead in Italy, raising worries that Renzi would quit and hammering bank stocks. But some social media surveys this week indicated that the “Yes"front was narrowing its disadvantage.

Deutsche Bank said in case of a surprise “Yes” victory, the potential of a rebound of the Italian market remained restricted to financials, due to their very low valuation.

But it cautioned that any systemic solution to Italian banks’ bad loan problem, which has forced multi-billion-euro cash calls at Monte Paschi and UniCredit, remained difficult.

Europe’s basic resources stocks fell 2.4 per cent, tracking weaker metal prices, while weaker oil prices sent the oil index falling 1.4 per cent.

Among the biggest weights to the STOXX were oil major Royal Dutch Shell and miner BHP, down 1.6 and 3.7 per cent, respectively.

Tech stocks were also under pressure with Aixtron down 5.6 per cent after a report that US PresidentBarack Obama was poised to block the sale of the German chip equipment maker to China’s FGC.

Aixtron DE said it had not received a ruling from Obama.

Dialog Semiconductor fell 4.1 per cent, tracking losses among its US and Asian peers on the back of a report in DigiTimes saying Apple was reducing orders for itsiPhone 7 smartphone.

But Berkeley rose more than 4 per cent, the biggest gainer on the STOXX as traders said its first half results were better than expected even though the high-end London builder said demand fell 20 percent in the period.

Real estate stocks outperformed after the CEO of Vonovia, Germany's biggest property group, told local magazine WirtschaftsWoche that he did not rule out a merger deal with Deutsche Wohnen in the medium term.

Deutsche Wohnen was up 0.7 per cent, while Vonovia edged 0.4 per cent lower.

French property group Klepierre also rose, up 1.4per cent, underpinned by upgrades at Barclays and Kepler Cheuvreux, who both cited an attractive valuation following a recent underperformance.

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