European Shares Gain on Hopes for Italian Budget Shift

By Anonymous

European markets rebounded amid hopes that Italy’s budget deficit will come in lower than expected, while U.S. stocks looked set to open higher after upbeat comments from the Federal Reserve.

The Stoxx Europe 600 traded 0.36% higher, the euro gained against the dollar and Italy’s FTSE MIB was up 0.7% after rising by as much as 1.5% in early trading. European markets were bolstered after overnight media reports that the Italian government was considering a lower deficit target after next year. An Italian government official confirmed that the move was being considered. Most European indexes traded higher, shrugging off losses in Asia.

U.S. futures pointed to a positive open, with both the Dow Jones Industrial Average and the S&P 500 set to gain 0.2%. That’s after sentiment was bolstered by comments from U.S. Federal Bank Chief Jerome Powell on Tuesday, said James Hughes, an analyst at Axitrader.

Fed projections envisioned an unusually favorable set of conditions in which the unemployment rate holds below 4% over the next three years but inflation never rises much above the Fed’s 2% target. Mr. Powell conceded this outlook is “remarkably positive” and that the U.S. hasn’t witnessed such a sustained spell since 1950.

The Italian government is expected to make announcements on its budget later Wednesday.

The question now is whether the European Union will be satisfied by what Italy says on its planned deficits, said Mohammed Kazmi, a portfolio manager at Geneva-based bank Union Bancaire Privée. “Volatility will remain high until we get the European Commission’s decision, and the rating agency decisions [on Italy] that’ll come later in October,” he said.

Italian markets have been falling since Friday after the government significantly widened its budget-deficit target for next year to 2.4% of gross domestic product, setting up a likely clash with the European Union given the proximity to the bloc’s 3% limit.

Yields on Italian 10-year government bonds, also known as BTPs, were down 3.2 basis points to 3.38%, while the spread with 10-year German bonds edged lower. German markets were closed.

European Shares Gain on Hopes for Italian Budget Shift

Italian Prime Minister Giuseppe Conte speaks to reporters outside Chigi Palace, in Rome. Photo: Andrea Ronchini/Zuma Press

So far Italy’s problems have not spread through the rest of Europe, though the euro has felt some pressure.

“It’s not a huge surprise. It’s been a lot more about Italy [and its debt levels],” said Esty Dwek, senior investment specialist at Natixis Investment Managers.

But Italy adds to Europe’s problems, Ms. Dwek said. “It’s the European wall of worry: you have Brexit, you have Italy, then you have Turkey, and concerns about contagion to European banks.”

The Turkish Lira slid again against the dollar after inflation rose more than expected to a 15-year high, falling over 1% against the dollar.

In the U.K., shares in luxury car maker Aston Martin shed 5.1% on its debut after an initial public offering in London.

Elsewhere, Japan’s Nikkei closed down 0.7% from a 27-year high, while Hong Kong’s Hang Seng closed 0.1% lower.

The WSJ Dollar Index, which measures the currency against a basket of 16 of its peers, was up 0.1% at 89.94.

Yields in U.S. Treasurys edged up to 3.071% from a previous close of 3.065%. Yields move inversely to prices.

In commodities, gold was up 0.1% at $1,207.7 per ounce.

Brent crude, the global benchmark, gained 0.3% to $85.03 a barrel.

—Emese Bartha contributed to this article.