Relief rally in Italian equities and country-specific ETF led global market gains Monday after Italy’s finance minister assuaged investors over the government’s spending plans.
On Monday, the iShares MSCI Italy Capped ETF (NYSEArca: EWI) jumped 3.0%. In contrast, the broad region-related Vanguard FTSE Europe ETF (NYSEArca: VGK) was 0.9% higher.
Concerns over a bigger Italian budget deficit were diminished after Italy’s finance minister, Giovanni Tria, predicted yields would drop when the government laid out its budget for 2019, Reuters reports.
Tria stated that the new government will implement policies to bolster the economy with prudent fiscal measures. Additionally, he added that the coalition’s radical budget plans would be introduced gradually, reassuring investors that the government will not cross European Union’s fiscal rules.
“As the government puts words into actions, the (bond yield) spread will return to more normal levels,” Tria said.
Investors previously dumped Italian bonds over the summer over concerns the new governing coalition’s fiscal plans would further strain the country’s already huge budget deficit.
Specifically, government ministers pledged to enact a minimum income for the poor, cut down a previous pension reform and diminish taxes in the forthcoming 2019 budget, which fueled concern over the government’s ability to pay for these programs.
Italy Economy & Growth Gap
Furthermore, the government will focus on stimulating the economy with a goal of halving the one percentage growth gap between Italy and the rest of the Eurozone by next year.
“We will implement these measures gradually… We are looking into Italy’s big state balance sheet to find financial resources to be shifted toward these measures,” Tria said.
Revealing its optimistic outlook, Investment bank Morgan Stanley recommended tactically buying Italian bonds and stocks ahead of the country’s budget announcement, Reuters reported.
“While the macro outlook remains challenging in the medium term, a middle-ground fiscal expansion is likely to come as a relief to markets,” Morgan Stanley analysts said in a note.
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