Italian Markets Jump After League Vows to Respect Budget Rule

(Bloomberg) -- Italy’s markets extended a rally following conciliatory language on the country’s budget plans.

Yields on 10-year bonds dropped the most since June and stocks led regional gains. Italian leaders from the government coalition partner League began discussing the 2019 budget Tuesday, and agreed to respect European Union deficit rules, according to Ansa, echoing a pledge made earlier by Deputy Prime Minister Matteo Salvini.

Italian Markets Jump After League Vows to Respect Budget Rule

“The rally is reflecting the more supportive tone in Salvini’s comments over the past days, in essence that the 2019 deficit will remain within the 3 percent band,” said Antoine Bouvet, a strategist at Mizuho International Plc.

Italy’s 10-year yield dropped 11 basis points to 3.05 percent, after falling eight basis points on Monday. The bonds led gains in peripheral euro-area debt and the yield spread with their their German counterparts narrowed 12 basis points to 270 basis points.

The rally has encouraged some investors to cover their short positions, with combined open interest on Italian 10-year futures contracts expiring in September and December dropping the most in six months on Monday. The volume of September contracts was about 10 percent higher than the 10-day average on Tuesday.

Salvini is targeting a deficit of up to 2 percent, La Stampa reported, while Luigi Di Maio, who leads the Five Star party that also participates in the country’s ruling coalition, has stressed the need to put the people’s interests over those of investors. Market participants are looking for signs of just how far the coalition government will push the European Union’s budget limits.

The coalition government may opt to be less confrontational than investors fear ahead of 2019 European elections, with a focus on “zero-cost” measures rather than challenging reforms, though the “fear factor” may lead to significant volatility in coming weeks, Citigroup Inc. said in a note.

Italy’s FTSE MIB index rose as much as 1.2 percent on Tuesday and was up 0.6 percent as of 3:34 p.m. in London. The Italian benchmark has been under pressure since reaching a 9 1/2-year high on May 7, and is down 6.1 percent this year.

While highlighting the political risks, Citigroup is constructive on the Italian stock market and expects the FTSE MIB to rise from current levels by the end of the year. “Overall, it is likely to be an uptrend bumpy ride,” its strategists said.

©2018 Bloomberg L.P.