Italian government bonds stage sharp rally on recovery fund hopes

Italian borrowing costs have dropped by the most in a more than a month on mounting hopes EU leaders will forge a deal to launch a fund to help the bloc recover from the economic pain caused by coronavirus.

Italian 10-year bond yields, which reflect the cost of borrowing for Europe’s third-largest economy, fell 0.09 percentage point to 1.15 per cent. The decline in yield, which is the biggest since early June, reflects rising prices for the debt.

The gap between 10-year Italian and German bond yields also narrowed to the lowest level since late March. The spread is seen as an indicator of market sentiment towards the bloc’s more financially vulnerable nations.

Yields on the debt of other big eurozone borrowers, including Spain and Portugal, also declined on Monday.

After days of haggling over the recovery fund, which has pitted the leaders of a group of richer countries against those nations hardest hit by the pandemic, Dutch prime minister Mark Rutte and Austrian chancellor Sebastian Kurz expressed optimism about breaking the logjam.

Overnight negotiations broke up at 6am on Monday after Charles Michel, president of the European Council, floated a figure of €390bn in grants for stricken countries. This was lower than proposals going into the summit but higher than earlier demands from an alliance of “frugal” nations including the Netherlands.

Traders were expected to pay close attention to news from the EU summit as it resumes on Monday afternoon.

In currencies, the euro early on Monday hit a four-month high against the US dollar. However, those gains evaporated during the afternoon session. The reaction in equity markets was also muted, with the composite Europe Stoxx 600 up 0.6 per cent. Germany’s Dax was up by a similar margin while the CAC 40 in Paris rose 0.2 per cent. Milan’s FTSE MIB rose 0.9 per cent.

In London, the FTSE 100 slipped 0.2 per cent, with British Airways owner IAG and online retailer Ocado the biggest fallers. The FTSE’s best performer was drugmaker AstraZeneca, up 2.5 per cent amid a burst of enthusiasm about coronavirus vaccines that caused shares in biotech group Synairgen to rise more than five times, or 450 per cent. They recently traded at 201p, up from Friday’s close of 36.5.

Wall Street’s S&P 500 opened 0.1 per cent higher.

Investors are looking for fresh clues on how the pandemic has hit corporate earnings, with Microsoft, IBM and Unilever among those that will report second-quarter results this week.

In Asia, China’s CSI 300 index of Shanghai and Shenzhen-listed stocks jumped 2.6 per cent on indications that Beijing was taking steps to support a recent rally in equities. Regulators said on Friday that they would allow insurers to invest more of their assets in the stock market.

“There’s a lot of speculation of more policy [support] coming for . . . the buildings materials sector,” said a director at one mainland brokerage.

But Hong Kong’s Hang Seng index closed flat as the city suffered a fresh wave of coronavirus infections. Japanese stocks were weighed down by data showing exports in June fell by a faster rate than forecast by economists.


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