Italy's budget concession hopes to restore risk sentiment and boost the euro

LONDON (Reuters) – The euro rebounded Wednesday to its lowest level in six weeks, European equities rose and Italian bonds rebounded, worries that shook markets this week were eased by signs indicating that Rome could reduce budget deficits and future debt years.

An article in the newspaper Corriere della Serra – later confirmed by a government source to Reuters – said the deficit would fall to 2.2% of gross domestic product in 2020 and 2% in 2021, against 2.4% previously.

This has eased the markets that feared that Italy's decision to increase budget deficits well beyond what had been agreed by a previous government would aggravate its debt problems while fueling the conflict with the EU. European Union, whose leaders have already expressed their concerns.

The euro, which had hit a six-week low at $ 1,1506 after five consecutive days of losses, edged up 0.3%, while Italian borrowing costs slowed their highest records in four and a half years, after jumping 50 basis points since Thursday's release of budget details.

Two-year yields fell 15 basis points.

(GRAPHIC: Italian bond yield at 2 years: absolute variation – reut.rs/2QqI0NN)

"It's Italy today. The announcement of a possible reduction in budget deficits has been welcomed by all markets, and the euro has rallied too – this is the main risk parameter for the concerns related to the euro crisis. " said Bernd Berg, global currency and foreign exchange strategist at Woodman Asset Management in Zurich.

A pan-European stock market index opened a quarter more, while the Milan stock market jumped more than 1%. Movements were driven by an initial rebound of 3.1% in Italian banks. The huge public holdings of banks make them particularly vulnerable to bond sales and have been putting pressure on Italian stock markets for months.

(GRAPHIC: the Italian stocks lagging behind Europe – reut.rs/2QpHsbe)

Movements helped to reduce investor demand to maintain the risk of Italy over Safer Germany, at around 290 basis points, after exceeding its highest level in five years, exceeding 300 points base Tuesday. It paralyzed the demand for safe haven assets such as German bonds, dollar and Swiss franc.

The euro jumped half a percent to the franc and 0.4 percent to the yen. Analysts noted, however, that other southern European markets, Spain and Portugal, which had been caught up in the 2010-2011 Greek crisis, had weathered the fallout from Italy well this year.

"The contagion has been much more moderate than in the past and is an important signal. I expect decision-makers to stick to that, the evidence (the Italian crisis) is self-imposed and does not reflect what is happening in the most countries in general. the euro zone, "said Salman Ahmed, chief investment strategist at Lombard Odier in London.

He added that Italy's high yields – two-year bonds paying 1.3% against zero in Portugal – were also of interest to some investors.

Wall Street also seemed ready for a firmer opening, with futures for the S & P 500 the Dow up 0.2%.

The general sentiment of the global market, however, remains nervous, partly because of the bellicose rhetoric still issued by the coalition government in Rome, but also for fear of tariff escalation between Sino and the United States when China will reopen after a week of vacation.

Although US President Donald Trump has agreed to a new trade pact with Mexico and Canada, a controversial clause of the trilateral agreement, banning similar agreements with "non-merchant" countries, was considered as increasing the risks for Sino-US negotiations.

The volatility of US stocks also makes investors wary: Facebook has lost nearly 6% in the last three sessions after revealing the worst security breach ever recorded.

Global equities remained unchanged near two-week lows, while the MSCI Asia Pacific ex-Japan index fell 0.2% and Japan's Nikkei closed down 0.7%.

Chinese financial markets are closed and trading will resume on October 8. This is the day that Trump and Chinese President Xi Jinping must attend the G-20, which means that news may appear on the trade front.

The dollar index, which measured the greenback against a basket of major currencies, fell after peaking at 95.744, its highest level in six weeks.

Emerging currencies have somewhat eased the dollar's weakness, but the Indian rupee has reached a new record and the Indonesian rupee has reached its lowest level in more than 20 years, with oil prices close to the highest in four years. on the finances of the importing countries.

Indonesian authorities have intervened to support the currency and India is expected to raise interest rates this Friday.

The Turkish lira also fell by 1% against the dollar as the country, another oil importer, published data indicating inflation of over 25%. This increases pressure on the central bank to raise rates after a massive 625 bps move in August.

But Berg, of Woodman Asset Management, said the worst was over for Turkey, adding: "The currency is appreciated and the central bank has raised its rates aggressively, so that towards By the end of the year, inflation figures should stabilize and the worst of the currency crisis is over. "

Brent rose slightly to $ 84.89 a barrel, its highest level in four years, from $ 85.45, reached earlier this week.