European bank stocks and Italian government bonds rallied after the European Central Bank signalled readiness to try to safeguard weaker nations in the bloc from rising debt costs.
The Stoxx Europe 600 index added 1.1 per cent, with its banking sub-index gaining 2.9 per cent. Italian bank Intesa Sanpaolo rose 5.5 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 programme, fell 0.12 percentage points to just below 4 per cent. Bond yields fall as prices rise. The euro gained 0.7 per cent against the US dollar to $1.049.
On Wednesday morning, the central bank’s governing council said it would have an ad hoc meeting to discuss “current market conditions”, sparking hopes of a new mechanism to support Italy and other indebted nations such as Greece.
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.
But despite Wednesday’s rally, some investors said they did not expect a rapid announcement of any new ECB support mechanism, as they recalled the wrangling between eurozone member states over a hard-fought Greek bailout in 2015.
“There’s scepticism that all the ECB governors will get on board,” said Edward Park, chief investment officer at Brooks Macdonald. “I expect today to end with some powerful words but little in terms of concrete action.”
Deutsche Bank strategist Jim Reid said: “It may not take much more pressure for the ECB to act but we are still in the dark on how they will.”
The gap between Italy and Germany’s 10-year bond yields — a gauge of financial stress in the single currency bloc — moderated to 2.24 percentage points, from more than 2.4 percentage points in the previous session. But it remained close to its widest since the coronavirus-driven tumult of May 2020.
Futures trading implied Wall Street’s S&P 500 share index would gain 0.7 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 market, typically defined as a 20 per cent drop from a recent peak.
Economists mostly 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 tip 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 currently, 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, eased 0.07 percentage points to 3.41 per cent, staying near its highest since 2011 as the outlook for interest rates and inflation remained uncertain.
“Bear markets,” said Plurimi Group chief investment officer Patrick Armstrong, “tend to provoke some buying.” 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”.