Italian stocks, banks surge as government seen bowing to budget pressure

LONDON (Reuters) – Italian stocks jumped on Monday on accumulating signs of a climbdown from the Italian government whose budget deficit plans had set it on course for disciplinary action from the European Union.

The governing coalition is discussing reducing next year’s budget deficit target to as low as 2 percent of gross domestic product from the draft budget target of 2.4 percent of GDP, a government source said on Monday.

The pan-European STOXX 600 climbed 1.3 percent, leading euro zone stocks .STOXX50E jumped 1.5 percent, and Italy’s FTSE MIB .FTMIB led the way with a 3.1 percent gain.

Italy’s banks index .FTIT8300 jumped 5.3 percent, on track for its strongest day since June.

A drop in Italian bond yields to two-month lows drove the relief rally in lenders which have large sovereign bond portfolios.

“You potentially move from a negative spiral to a more positive spiral where you end up with less pressure on the banks, more ability to lend and that will underpin growth in a better fashion,” said Pierre Bose, head of European strategy at Credit Suisse Wealth Management.

Unicredit (CRDI.MI) and Intesa Sanpaolo (ISP.MI) were among top Italian gainers, up 5.9 and 5.4 percent respectively. Lenders UBI Banca (UBI.MI), Banco BPM (BAMI.MI), BPER Banca (EMII.MI), and Mediobanca (MDBI.MI) rose 4.6 to 7 percent.

The Italian banks’ gains were amplified by large short positions investors have been building up on the stocks in recent weeks.

Europe’s banks index .SX7P jumped 2.4 percent, on track for its strongest day since July 2017.

But investors warned the signs of a compromise from the Italian government weren’t necessarily a silver bullet.

“There’s a little bit more conciliatory talk, but the fine print remains key in the sense that cutting it by 0.3 or 0.4 will help potentially prevent an excessive deficit procedure but the broader vulnerability to weakness in growth in Italy remains,” said Bose.

Outside politics, dealmaking and results drove the biggest moves.

Saint-Gobain (SGOB.PA) shares jumped 5 percent after the construction materials group launched a new business strategy and management structure which it said would improve margins and result in more cost savings.

Eurofins Scientific (EUFI.PA) rose 5.3 percent after the laboratory testing firm reduced its financing costs and extended its organic growth objectives beyond 2020, and Berenberg raised the stock to “buy” from “hold”.

In the small-cap space, Faroe Petroleum (FPM.L) shares surged 25.8 percent after Norway’s DNO (DNO.OL) offered to buy it for 152 pence per share in cash – a 20.8 percent premium to its Friday closing price – valuing it at 607.9 million pounds ($779.81 million).

DNO shares gained 3.5 percent.

Melrose Industries (MRON.L) meanwhile tumbled 4.8 percent after a Sky News report that the industrial company may shelve its auction for the sale of recently acquired GKN’s Powder Metallurgy unit after it received lower-than-expected bids for it.

Dutch marine engineer Boskalis (BOSN.AS) gained 3.7 percent after it said it had signed a multi-year deal with Saudi Aramco to work on its offshore facilities.

Boskalis would act in a consortium with Lamprell (LAM.L), whose shares also jumped 8.9 percent on the deal win.

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