Global equities rose for the third consecutive session on Wednesday, with Italian assets rallying as hopes that former European Central Bank chief Mario Draghi can bring political stability to Rome added to the positive mood.
The Stoxx Europe 600 index closed up 0.3 per cent, putting it 2.9 per cent ahead so far this week. Germany’s Xetra Dax gained 0.7 per cent, while London’s FTSE 100 slipped 0.1 per cent. In the US, volatility surrounding wild swings in stocks targeted by Reddit users subsided as benchmark indices posted their third successive day of gains.
Mr Draghi met Italy’s president Sergio Mattarella on Wednesday and agreed to try to form a national unity government after the nation’s power-sharing coalition collapsed last month.
Investors snapped up Italian stocks and debt on the prospect of one of the nation’s best-regarded public officials taking charge. The yield on Italy’s benchmark 10-year government bond, which moves inversely to its price, dropped 0.07 percentage points to 0.59 per cent, while Italy’s FTSE MIB share index rose 2.1 per cent for its best daily performance in three weeks.
The additional yield on Italian debt compared with its less risky German equivalent — a key measure of political risk in the eurozone — stood at 1.06 percentage points. That spread exceeded 2.8 points in March last year as investors balked at funding weaker eurozone nations during the depths of the market tumult caused by the coronavirus crisis.
Mr Draghi is lauded by many investors for his “whatever it takes” commitment to the euro during the 2012 sovereign debt crisis.
“If there is anyone who can stitch together a working coalition, it is likely to be Draghi,” said Nick Andrews of research house Gavekal. The former ECB chief’s “powers of persuasion are formidable”, he added.
Samy Chaar, chief economist at Swiss bank Lombard Odier, said Mr Draghi’s appointment would also ripple beyond Rome as the former ECB boss “would be a great addition to France and Germany in reforming Europe” and increasing the chances of “more productive public investment” in the recession-scarred bloc.
But strategists at Italian bank UniCredit warned that Mr Draghi might be unable to marshal support for a unity government in the country’s parliament. “The situation is highly uncertain,” they wrote, adding that the rally in Italian bonds “should be treated with caution as it is ultimately tightly linked to the political situation”.
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The S&P 500 rose 0.5 per cent and the Nasdaq Composite moved 0.7 per cent higher, as volatility on Wall Street subsided. Cboe’s Vix volatility index, known as Wall Street’s “fear gauge”, fell to 23, marking its lowest level in a week after a wild run-up in stock prices driven by Reddit users.
Video game retailer GameStop, which had seen its stock price shoot up to $325 at the end of January before sinking to $90 on Tuesday, moved moderately higher to $101.
Investors attention returned to the more run of the mill activity of digesting earnings results, while also banking on President Joe Biden’s $1.9tn stimulus proposal bypassing Republican opposition in the US Congress.
Democrats have said they were willing to use a procedure known as budget reconciliation, which is reserved for some tax and spending measures, to pass the stimulus bill, enabling them to circumvent Republican dissenters.
An unexpectedly strong service sector activity survey stoked fears of US inflation overheating, with the yield on 10-year US government bonds adding 0.03 percentage points to 1.13 per cent.
“As the fiscal boost feeds through and widespread vaccinations allow the economy to reopen, we expect [US] growth to accelerate further in the second quarter,” said Andrew Hunter of Capital Economics, who warned that a rapid recovery in demand, “alongside ongoing supply constraints, could soon start to stoke inflationary pressures”.