EU Bailout Plan Sparks Hope For Euro and Italian Bonds

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Euro, Italian bonds cheer EU bailout plan

LONDON ( Reuters) — On Tuesday, the euro and Italian government bonds continued to cheer German and French-led plans for a EUR 500 billion EU coronavirus recovery fund, while financial markets fatigued after their best day in months.

After Monday’s news that early-stage research on a potential COVID-19 vaccine had also proved positive, there was still a sense of hope but the momentum was changing.

Europe’s STOXX 600 index gave up an early rise to slip by 0.4 percent after a 4 percent increase in the previous session, oil began to tread water [O/R], and safe-haven U.S. government bonds made their way into debt markets.

Christine Lagarde, President of the European Central Bank, said that the Franco-German plans are optimistic, targeted, and, of course, welcome when it comes to Monday’s initiative to push the EU towards a so-called ‘transfer union’ amid the pandemic.

The euro was buying $1,0932 after the proposal was revealed, having risen around 1 percent against the dollar. This was also up a nearly two-month high against the Swiss franc, although the cost of betting against the euro was down.

Following a large decrease in Italian borrowing rates, on Tuesday, Spanish and Portuguese yields led the moves down. Economists from Morgan Stanley (NYSE: MS) called the Franco-German plan a strong joint response that helps reduce the risk of a southern recession.

The Spanish 10-year yield dropped by 9 basis points to 0.715 percent. The lowest since early April, while Portuguese bond yields dropped by 0.78 percent on the day to their lowest since 31 March.

On the day, Italian bonds were 2 to 8 bps lower. The 10-year government bond yield fell to 1,602 percent by nearly 10 basis points. Its lowest since at one point on April 9.

It was a big development but it won’t be easy sailing from here, according to Vasileios Gkionakis, Lombard Odier’s Global Head of FX Strategy, citing opposition already voiced by a large number of northern EU countries.

In the equity markets, the S&P 500 futures from Wall Street dropped 0.4 percent after the solid rally from Monday.

Asia followed suit. MSCI (NYSE:MSCI)’s largest Asia-Pacific share index outside Japan soared 1.8% to two-week highs and Japan’s Nikkei gained almost 2%.

Profit-taking in commodity markets pruned Brent’s early gains. Although the rally looked broadly intact amid signs that producers are cutting output just as demand picks up.

After touching its highest since April 9, Brent last stood 0.5 percent higher at $35 a barrel. A.S. WTI had been at $32.50. Gold had improved a small amount at $1,731 an ounce.