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Euro, Italian bonds cheer EU recovery fund plan

Published 05/18/2020, 07:46 PM
Updated 05/19/2020, 05:05 AM
© Reuters. Passersby wearing protective face masks, following an outbreak of the coronavirus, are reflected on a screen displaying stock prices outside a brokerage in Tokyo

By Marc Jones

LONDON (Reuters) - The euro and Italian government bonds continued on Tuesday to cheer German- and French-led plans for a 500 billion euro EU coronavirus recovery fund, though stock markets were suffering from fatigue after their best day in months.

There was still a sense of optimism after Monday's news that early-stage tests on a possible COVID-19 vaccine had also proved encouraging but the momentum was shifting.

Europe's STOXX 600 index gave up an early rise to slip 0.4% after surging 4% in the previous session, oil began to tread water [O/R] and safe-haven U.S. government bonds were making ground in debt markets.

"The Franco-German proposals are ambitious, targeted and, of course, welcome," European Central Bank President Christine Lagarde said of Monday's plan, which would move the EU in the direction of a so-called 'transfer union'.

The euro was buying $1.0932, having gained about 1% against the dollar since the plan was announced. It was also up near a two-month high against the Swiss franc, while the cost of betting against the euro was falling.

After a sizeable fall in Italian borrowing costs, Spanish and Portuguese yields led the moves lower on Tuesday. Morgan Stanley (NYSE:MS)'s economists called the Franco-German proposal a "powerful common response, helping to mitigate the risk of a southern slump."

The Spanish 10-year yield fell 9 basis points to 0.715%, the lowest since early April, while Portuguese bond yields hit their lowest since March 31, down 12 bps on the day at 0.78%.

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Italian yields were between 2 and 8 bps lower on the day. The 10-year government bond yield fell nearly 10 basis points to 1.602%, its lowest since April 9 at one point.

"It was a meaningful breakthrough but it is not going to be plain sailing from here," said Vasileios Gkionakis, Global Head of FX Strategy at Lombard Odier, citing resistance already voiced by a sizeable number of northern EU countries.

In the equity markets, Wall Street's S&P 500 futures were down 0.4% after Monday's strong rally.

Asia had followed. MSCI (NYSE:MSCI)'s broadest index of Asia-Pacific shares outside Japan jumped 1.8% to two-week highs and Japan's Nikkei had added nearly 2%.

In the commodity markets, profit-taking pruned Brent's early gains, though the rally looked broadly intact amid signs that producers are cutting output just as demand picks up.

Brent last stood 0.5% higher at $35 a barrel, after touching its highest since April 9. U.S. WTI was at $32.50. Gold was little changed at $1,731 an ounce.

Latest comments

Friedrich Nietzsche: "Insanity is something rare for individuals, but the rule for groups, parties, peoples, times."
The markets are over reacting all latest news...beware the ice maybe thin.
I'm begging the Fed for 12% correction, maybe Mrs Almighty highness Powell can step away from the *****printer for a few days. Take a well deserved break.
Next step is more 3000 billions Usd and Europe only 500 billions.at this pace please tell me a value for Usd
"Experts say" ..there are no experts just political operatives. Do the opposite and you will be safer.
Totally True. Seems like the opposite always works.
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