Italy’s bank stocks and government bonds rally ahead of ad hoc ECB meeting

European bank stocks rose and Italian government bonds rallied after the European Central Bank signalled readiness to discuss how to safeguard weaker nations in the bloc from rising debt costs.

The Stoxx Europe 600 share gauge rose 0.8 per cent in early dealings, while a regional banking sub-index added 3.5 per cent. A FTSE index of Italian shares added 2.7 per cent, with Italian bank Intesa Sanpaolo rising 7 per cent.

The yield on Italy’s 10-year bond, which influences government and consumer borrowing costs in the heavily indebted nation, fell 0.25 percentage points to 3.9 per cent. Bond yields fall as prices rise.

The Italian yield had shot up since last Thursday when the ECB confirmed, in the face of record inflation, that it would withdraw a programme of buying member states’ bonds and stood ready to raise interest rates, in its first such move since 2011.

On Wednesday morning, the central bank’s governing council confirmed it would hold an ad hoc meeting to discuss “current market conditions”, sparking hopes it will introduce a mechanism to support the economies of Italy and other indebted nations such as Greece.

“With no imminent backstop and clarity on support tools from ECB, spreads might continue to rise, leading to a risk of contagion,” strategists at Barclays had cautioned in a research note ahead of the eurozone central bank announcing its meeting.

The euro gained 0.6 per cent against the US dollar to $1.048.

As traders awaited further details from the ECB, the gap between Italy and Germany’s 10-year bond yields — a gauge of fear about financial stress in the single currency bloc — moderated to 2.19 percentage points, from more than 2.4 percentage points in the previous session. But it remained close to its widest point since the coronavirus-driven tumult of May 2020 as analysts remained sceptical about what tools the central bank has as its disposal.

“It may not take much more pressure for the ECB to act but we are still in the dark on how they will,” said Deutsche Bank strategist Jim Reid in a note to clients.

Futures trading implied Wall Street’s S&P 500 share index would edge 0.4 per cent higher ahead of the conclusion of the Federal Reserve’s rate-setting meeting. On Monday, concerns about tighter monetary policy had driven the S&P into a bear market, typically defined as a 20 per cent drop from a recent peak.

Economists mostly expected the Fed to raise its main funds rate by 0.75 percentage points, its first move of such a magnitude since 1994, after the annual pace of consumer price inflation hit a four-decade high of 8.6 per cent in May.

Money markets are pricing the funds rate to climb to more than 3.6 per cent by the end of the year, from a range of 0.75 per cent to 1 per cent currently, as the central bank battles rising fuel and food costs driven by Russia’s invasion of Ukraine.

The yield on the 10-year Treasury note, which underpins global debt costs, eased 0.08 percentage points to 3.4 per cent, staying close to its highest since 2011 as the outlook for interest rates and inflation remained uncertain.

“Bear markets,” said Plurimi Group chief investment officer Patrick Armstrong, “tend to provoke some buying”. He warned, however, that “there are a lot of things that will get worse before they get better”, while US markets could no longer count on “the sort of [monetary] policy decision that turns things around”.