Hopes that the Italian government might revise its public spending budget to bring it more in line with EU regulations underpinned a rally for the country’s stock and government bond markets at the start of this week.
The yield on the two-year sovereign debt fell by 0.32 percentage points on Monday to 0.639 per cent on Monday — the lowest intraday level in more than two months — while the FTSE MIB Banks share index jumped by 5.6 per cent, on track for its strongest day in a year and a half.
Lenders UBI Banca, Banco BPM and UniCredit were among the top gainers and among top European stocks, up more than 6 per cent. Intesa Sanpaolo and Mediobanca were also up more than 5 per cent.
The pick-up in bank stocks comes amid growing discussions among analysts that a new rollout of targeted longer-term refinancing operations (TLTRO) — a wave of stimulus from the European Central Bank designed to support the eurozone’s banks — could be on the way as soon as December.
Barclays analyst Giuseppe Maraffino said:
We believe there are compelling macro- and micro-economic reasons for a new TLTRO, and now expect the ECB to announce a round of TLTRO funding in December or early 2019.
Macroeconomic challenges are stacking up: external demand has fallen as risks related to trade, Italy, Brexit and China’s slowing growth have proliferated.
As such, we see TLTRO III as an effective way for the ECB to prevent a tightening in lending conditions at a time of growing macroeconomic risks.
But the improved tone in markets also came following news reports that Italy’s governing coalition was looking into revising next year’s public spending budget in order to reduce the deficit target from 2.4 per cent of gross domestic product.
In an interview with a local radio station, deputy prime minister Luigi Di Maio, who also heads the Five-Star Movement, said: “What is important is that the budget contains the goals that we have established,” referring to the party’s flagship policies: the citizen’s income and an increase in retirement age.
He added: “Then if the negotiation means that the deficit [target] must come down a bit, for us it’s not important.”
The country’s benchmark 10-year yield was also falling markedly, down by just over 0.24 percentage points on the session to 3.175 per cent, the biggest fall since June. It had touched a four-year high of 3.783 per cent on October 19.
The gap between German and Italian 10-year yields — which shows the premium traders are demanding to buy Italian debt — fell as low as 278.70 basis points, the lowest level in six weeks.
Italy and the European Commission have been clashing since the country’s government presented a fiscally aggressive draft budget, which the commission said violates the EU’s budget strictures, known as the stability and growth pact.
The tug of war culminated last week after the EU took the first steps towards fining the country for “a particularly serious case of non-compliance” with the bloc’s spending rules.