Italian parties agree basis for government deal, say no threat to euro

By Marc Jones

By Marc Jones

Salvini, eurosceptic leader of the nationalist League and ally of the likes of Hungary Prime Minister Viktor Orban, has been locked in talks to reach a coalition government agreement with Five Star head Luigi Di Maio and bring an end to over two months of political deadlock following inconclusive elections.

Italian bonds and equities stood out as the laggards of European markets, and even the euro succumbed to selling pressure after trading steady for much of the morning session. The euro fell to a five-week low against the dollar, and Italy's benchmark 10-year bond was set for its biggest one-day gain since July of last year.

The focus this week has centered on rising U.S. Treasury yields, as investors point to data reflecting a strong U.S. economy that could indicate firming inflation.

This spread, a closely watched indicator of relative risk, was 129 bps on Tuesday.

"This is our message to the new government".

Italian two-year bond yields meanwhile jumped nearly 20 bps to 0.116 percent IT2YT=RR, trading above zero percent for the first time since May 2017, according to Reuters data.

"It would be insane to give up at the moment of truth", League leader Matteo Salvini said in a live video stream on Facebook, adding that he would not be intimidated by negative reaction from financial markets or attacks from the media.

But unease was evident across Italian markets. It was on track for its worst day since Jan 2017.

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Shares in the country's two biggest lenders UniCredit (CRDI.MI) and Intesa Sanpaolo (ISP.MI) declined around 3 percent.

President Sergio Mattarella must still confer a mandate on a proposed candidate for premier, whose government and program must win votes of confidence in both houses of parliament.

The leaked documents, as well as Salvini's own public statements, make clear that the emerging Italian government is on course for a major standoff with Brussels if the incoming government pushes hard for a to renegotiation of Italy's contribution to the European Union budget as well as the fiscal compact. "But I don't think it would be enough to derail the recent move in stocks", said King Lip, chief investment strategist at Baker Avenue Asset Management in San Francisco. Their spending plans, which include and revision of a 2011 pension reform, slashing the main tax rate for companies and individuals to as low as 15 per cent, which is popular among the League's base of small business owners in northern Italy, and a guaranteed monthly income for the poor, a proposal particularly popular in the south of Italy, are potentially destabilising for Italy's precarious public finances as they would cost tens of billions of euros at a time when the economy already suffers from high debt levels and growth is the most sluggish among countries that share the single currency.

Some analysts, however, see the headlines as mostly noise and reckon the proposals will likely be moderated by Mattarella. "The European Union would not be complete without the Italian nation", Juncker said.

A Five Star/League government has always been seen as the most disruptive scenario for eurozone leaders.

Benchmark 10-year notes last fell 5/32 in price to yield 3.1112 percent, from 3.095 percent late on Wednesday.

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