Italian government bonds rallied on Wednesday as the European Central Bank signalled readiness to try to safeguard weaker nations in the bloc from rising borrowing costs.
Wall Street equities also rallied from multi-month lows, as investors waited in expectation that the Federal Reserve would deliver its biggest rate hike in almost three decades in an effort to stamp out soaring inflation.
The Stoxx Europe 600 index added 1.4 per cent, with its banking sub-index gaining 2.5 per cent. Intesa Sanpaolo and UniCredit, two leading Italian banks, advanced 4.6 per cent and 3.7 per cent respectively.
The yield on Italy’s 10-year bond, which influences government and consumer borrowing costs in the debt-laden country and has shot up in recent days after the ECB confirmed the end of a bond-buying stimulus programme, fell 0.37 percentage points to 3.8 per cent — down from Tuesday’s high of around 4.2 per cent. Bond yields fall as prices rise.
On Wednesday, the ECB followed up an unscheduled meeting to discuss “current market conditions” with a pledge to “apply flexibility” in how it reinvests proceeds of bonds bought under its pandemic emergency purchase scheme.
It also said it would “accelerate the completion of the design of a new anti-fragmentation instrument”, referring to a mechanism that may prevent eurozone governments paying vastly different financing costs.
Concerns about weaker nations in the eurozone had intensified since last Thursday when the ECB confirmed, in the face of record inflation, that it stood ready to raise interest rates in its first such move since 2011.
“There are concerns about this notion of fragmentation as you get different monetary policy outcomes in different countries in the eurozone,” said Edward Park, chief investment officer at Brooks Macdonald.
The gap between Italy and Germany’s 10-year bond yields — a gauge of financial stress in the single currency bloc — stood at 2.17 percentage points after the ECB statement, down from 2.41 percentage points in the previous session.
On Wall Street, the S&P 500 share index gained 1 per cent ahead of the conclusion of the Fed’s rate-setting meeting later on Wednesday. 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.
The technology-heavy Nasdaq Composite rose 1.8 per cent.
The sell-off earlier this week was prompted by news in the Wall Street Journal that the Fed was considering raising interest rates by a larger-than-expected 0.75 percentage points at its meeting today, in what would be its first move of that magnitude since 1994.
“I don’t think this is necessarily a bad thing,” said Baylee Wakefield, multi-asset fund manager at Aviva Investors, adding that swift rate hikes would build confidence in the central bank’s “credibility” and an opportunity to “show they can be nimble.”
The annual pace of US consumer price inflation hit a four-decade high of 8.6 per cent in May as Russia’s invasion of Ukraine raised fuel and food costs. Money markets are pricing a fed funds rate of 4 per cent next year, from a range of 0.75 per cent to 1 per cent currently.
The yield on the 10-year Treasury note fell by 0.1 percentage points to 3.38 per cent, still near its highest level since 2011.
Source: Financial Times
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