Italian stocks lead Europe as budget deficit fears quelled

LONDON (Reuters) - Italian stocks turned from a drag into a boost for European markets on Wednesday as signs the government would target a lower budget deficit quelled investors’ fears of a damaging showdown with the European Commission.

Italian bank stocks jumped as much as 3 percent after government bond yields fell back and the spread to Bunds narrowed thanks to reports the government was targeting a lower budget deficit in 2020 and 2021.

Still in the thrall of developments on the Italian front, the leading euro zone stocks index and the pan-European STOXX 600 climbed 0.3 percent with bank stocks the best-performing, up 0.8 percent.

Italy’s FTSE MIB outperformed, up 0.5 percent with the banks index last trading up 0.7 percent.

Unicredit and Intesa Sanpaolo were among the top gainers, up 2.6 percent each, while Mediobanca, UBI Banca, and Banco BPM also rose as much as 5 percent.

Banks, which have large sovereign bond holdings, suffer the most from selloffs in the bond market and the index saw its fifth consecutive day down on Tuesday before news the government was aiming for a lower budget deficit.

“Any indication from the government that may deny such indications and lead to a step up in confrontation will negatively affect BTP spreads,” said Unicredit analysts.

“The situation remains fluid and mood can make sudden U-turns, depending on a rather unpredictable news flow.”