Italian bonds are posting solid gains on the day
And that in turn is also driving equities higher. FTSE MIB leads gains in Europe as the index is now up by more than 1%, with gains led by bank stocks - as a result of higher BTPs. 2-year yields are down by almost 14 bps on the day with 10-year yields touching the lowest levels in a week.
That has seen the German-Italian 10-year spread narrow by almost 10 bps today:
The rally in Italian assets was sparked by Salvini's comments overnight where he toned down his head-on approach on budget talks and said that Italy will "respect" the EU's budget laws. That's helping to provide a relief rally for domestic assets.
In essence, this should also be a positive for the euro as less political worries mean less headwinds but the single currency has struggled to get off the floor today still. But as highlighted earlier last month, there has been a divergence recently between the euro and Italy's political woes:
Perhaps it's time the euro plays catch up?
Either way, expect more back and forth rhetoric to play out between Tria, Salvini, and Di Maio when it comes to the budget talk. The start of this week may see some calming of the nerves but when push comes to shove, the government is likely to rear their ugly head and start challenging the EU again.
And when that narrative comes back in, expect Italian assets to come under pressure again. As mentioned many times, markets hate uncertainty. And this is no done deal just yet.
