European stocks and Italian debt rise as Draghi prepares to form government


European equities were on track for a third consecutive daily rise on Wednesday, with Italian assets rallying as hopes that former European Central Bank chief Mario Draghi can bring political stability to Rome added to the positive mood.

The Stoxx Europe 600 index rose 0.4 per cent by lunchtime in London, putting it 2.9 per cent ahead so far this week. The UK’s FTSE 100 was 0.1 per cent higher and Germany’s Xetra Dax gained 0.6 per cent.

Mr Draghi met Italy’s president Sergio Mattarella on Wednesday and agreed to try to form a national unity government after the nation’s power-sharing coalition collapsed last month.

Investors snapped up Italian stocks and debt on the prospect of one of the nation’s best-regarded public officials taking charge. The yield on Italy’s benchmark 10-year government bond, which moves inversely to its price, dropped 0.07 percentage points to 0.58 per cent, while Italy’s FTSE MIB share index rose 2.7 per cent for its best daily performance since November.

The additional yield on Italian debt compared with its less risky German equivalent — a key measure of political risk in the eurozone — stood at 1.06 percentage points. That spread exceeded 2.8 points in March last year as investors baulked at funding weaker eurozone nations during the depths of the market tumult caused by the coronavirus crisis.

Column chart of 10-year government yield, daily percentage point change showing the biggest one-day rally in Italian bonds since June

Mr Draghi is lauded by many investors for his “whatever it takes” commitment to the euro during the 2012 sovereign debt crisis.

“If there is anyone who can stitch together a working coalition, it is likely to be Draghi,” said Nick Andrews of research house Gavekal. The former ECB chief’s “powers of persuasion are formidable”, he added.

Samy Chaar, chief economist at Swiss Bank Lombard Odier, said Mr Draghi’s appointment would also ripple beyond Rome as the former ECB boss “would be a great addition to France and Germany in reforming Europe” and increasing the chances of “more productive public investment” in the recession-scarred bloc.

But strategists at Italian bank UniCredit warned that Mr Draghi might be unable to marshal support for a unity government in the country’s parliament. “The situation is highly uncertain,” they wrote, adding that the rally in Italian bonds “should be treated with caution as it is ultimately tightly linked to the political situation”.

Wall Street’s main stock markets also opened higher for the third consecutive day, as investors cheered strong tech sector earnings and banked on President Joe Biden’s $1.9bn stimulus bill bypassing Republican opposition. The S&P 500 added 0.2 per cent and the Nasdaq Composite gained 0.3 per cent.

Democrats have said they are willing to use a procedure known as budget reconciliation, which is reserved for certain tax and spending measures, to pass the stimulus bill, enabling them to circumvent Republican opponents.

Google parent Alphabet released quarterly results late on Tuesday that exceeded analysts’ forecasts, thanks to an unexpected boost in advertising.

The strong revenue beat came not only from retailers targeting locked-down consumers but also from travel companies banking on a rush for holidays once coronavirus vaccines are rolled out. “The market narrative is now all about cyclical recovery,” said Mr Chaar.


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