Brussels and Rome are inching closer together in budget discussions. This is taken as a positive by the markets this morning. The much-debated budget deficit is now down to 2.04% in Conte´s last proposal.

The Italian budget saga has been somewhat “forgotten” in Europe as May and Macron have been in focus. In early December we reminded our readers:

Rhetoric from Italian politicians continue, but more notable is the fact Italian 10-year yields have come off rather quickly as of late.

The move lower in yields has continued and the Italian 10-year trades below the magical 3% level for the first time since that big move higher occurred in late September. Italy as a theme has lost some of the importance among investors, and although it is a net positive itself, it won´t impact markets, beyond the Italian assets (mainly banks) for now.

BTP – note the 200-day average at the 2.75% level.

The (in)famous Italian versus German 10-year spread has come off lately, and is taking another rather sharp move lower today, trading currently at 266 bps.

The biggest beneficiary on this budget news is the Italian banking sector, currently up 3% on the day. Note we are trading above the 50-day average here which is a rarity for this index. The trend is obviously still negative, but the battered Italian banks seem to be forming some kind of longer-term bottom.

The broader Italian index, MIB, is the best performer in Europe today, but we doubt the news will turn around the entire negative trend. Note the 50-day average right around these levels.

Expect more headlines from Italy going forward, especially the Italians bashing Macron.

Source; charts by Bloomberg