Hopes that Italy might avoid a potentially damaging general election lifted European markets yesterday, bringing Italian bond yields off multi-year highs and dampening some of the recent buying interest for German and US government bonds.
World stocks gained 0.38 per cent, and European shares made tentative gains after falling almost 4 per cent in the past five days. Wall Street opened higher.
The Dow Jones Industrial Average rose 199.21 points, or 0.82 per cent, to 24,560.66, the S&P 500 gained 25.37 points, or 0.94 per cent, to 2,715.23 and the Nasdaq Composite added 60.50 points, or 0.82 per cent, to 7,457.09.
The recovery was partly driven by news that Italy’s two anti-establishment parties were renewing efforts to form a government, rather than force the country to the polls for the second time this year.
Another positive was a smooth auction of Italian debt that raised 5.57 billion euros, easing concerns about Rome’s ability to finance itself.
“(The auction) clearly indicates that investors still have faith in the Italian economy, if not the government,” said Seema Shah, global investment strategist at Principal Global Investors. But she warned that political uncertainty would remain elevated.
Japan’s biggest private life insurance firm, Nippon Life, which holds some 4.8 trillion yen ($44 billion) worth of euro zone bonds, said it had no plans for now to buy or sell its Italian debt holdings.
Milan-listed equities snapped a five-day losing streak and bounced almost 2 per cent while short-dated Italian bond yields – a sensitive gauge of political risk – fell more than half a per cent from half-decade highs.
They had suffered their worst day in nearly 26 years on Tuesday. Ten-year Italian yields slipped 0.18 percentage points.
The risk for investors is that eurosceptic political parties are further boosted, with any election viewed as a de facto referendum on Italy’s euro membership.
The events have evoked memories of the 2011-2012 euro debt crisis, with potentially huge implications for the single currency.
The risks had sent investors scurrying for safer German and US government bonds as well as currencies such as the yen and Swiss franc, at the expense of the euro.