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Italian bonds and bank stocks rally as ECB signals help for weaker economies

European bank stocks and Italian government bonds rallied as the European Central Bank signaled readiness to try to safeguard weaker nations in the bloc from rising debt costs.

The Stoxx Europe 600 index added 1.4 per cent, with its banking sub-index gaining 2.4 per cent. Intesa Sanpaolo and UniCredit, two leading Italian banks, advanced more than 4 per cent.

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 program, fell 0.33 percentage points to 3.85 per cent – down from Tuesday’s high around 4.2 per cent. Bond yields fall as prices rise.

On Wednesday, the central bank followed up an ad hoc 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 had ordered staff to “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 2.24 percentage points after the ECB statement, down from 2.41 percentage points in the previous session, a level not reached since the coronavirus -induced market ructions in early 2022.

Futures trading implied Wall Street’s S&P 500 share index would gain 1 per cent 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 markettypically defined as a 20 per cent drop from a recent peak.

Economists broadly expect 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 type 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 at present, 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, fell by 0.1 percentage points to 3.39 per cent, staying near its highest level since 2011 as the outlook for interest rates and inflation remained uncertain.

“Bear markets tend to provoke some buying,” said Patrick Armstrong, chief investment officer of Plurimi Group. 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 ”.

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