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

European bank shares rose and Italian government bonds rose after the European Central Bank agreed to discuss how to protect weaker countries in the bloc from rising debt burdens.

The Stoxx Europe 600 stock meter rose 0.8 percent in early trades, while a regional banking sub-index rose 3.5 percent. An FTSE index of Italian equities added 2.7 percent, while Italian bank Intesa Sanpaolo rose 7 percent.

The yield on Italy’s 10-year bond, which affects borrowing costs for governments and consumers in the heavily indebted country, fell 0.25 percentage points to 3.9 percent. Bond yields fall when prices rise.

Italian interest rates had skyrocketed since last Thursday, when the ECB, in the face of record inflation, confirmed it would withdraw from a bond-buying program from member states and was poised to raise interest rates for the first time since 2011.

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

“Without an imminent backstop and clarity on ECB support tools, spreads could continue to widen, leading to a risk of contagion,” Barclays strategists had warned in a research note ahead of the meeting’s announcement by the central bank of the United States. euro zone.

The euro gained 0.6 percent against the US dollar to $1,048.

While traders awaited further details from the ECB, the differential between Italy and Germany’s 10-year yields — a gauge of fears of financial stress in the single currency bloc — narrowed 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-induced May 2020 turmoil, as analysts remained skeptical about what tools the central bank has at its disposal.

“There may not be much more pressure for the ECB to act, but we are still in the dark about how they will do that,” Deutsche Bank strategist Jim Reid said in a note to customers.

Futures trading implied that Wall Street’s S&P 500 stock index would rise 0.4 percent ahead of the close of the Federal Reserve’s rate-setting meeting. On Monday, concerns about monetary tightening had driven the S&P into a bear market, typically defined as a 20 percent drop from a recent peak.

Economists typically expected the Fed to raise its key interest rate by 0.75 percentage points, the first move of its magnitude since 1994, after the annual pace of consumer price inflation hit a four-decade high of 8.6 percent in May.

Money markets are pricing fund rates to rise to more than 3.6 percent by the end of the year, from 0.75 percent to 1 percent currently, as the central bank battles rising fuel and food costs due to Russia’s invasion of Ukraine .

The 10-year Treasury yield, which supports the global cost of debt, fell 0.08 percentage points to 3.4 percent and remained close to its highest level since 2011 as the outlook for interest rates and inflation remained uncertain.

“Bear markets,” said Patrick Armstrong, chief investment officer of the Plurimi Group, “tend to encourage buying.” However, he warned that “a lot of things are going to get worse before they get better”, while US markets could no longer count on “the kind of [monetary] policy decision that turns things around”.

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