Political turmoil has pushed up Italy’s bond yields since two populist Eurosceptic parties formed a coalition government in late May
Political turmoil has pushed up Italy’s bond yields since two populist Eurosceptic parties formed a coalition government in late May © Bloomberg

Friday 21.44 BST

What you need to know

  • US inflation data come in as expected
  • Mixed picture on Wall Street
  • Italian bond yields break through five-year high
  • European stocks slide

Overview

Italian bond yields reached a five-year high on Friday after the government unveiled plans for a sharp increase in public spending and proposed a 2.4 per cent budget deficit, risking a collision with the EU.

The Italian bond sell-off hit the bonds of Portugal and Greece as well, and across European equity markets, Italy’s FTSE MIB index stood out with a 3.7 per cent drop.

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The yield on Italian 10-year benchmark debt climbed to a peak of 3.26 per cent on Friday, the highest point since the start of the month, before settling down to trade at 3.14 per cent. The yield on two-year Italian bonds rose 25bp to 1.01 per cent but remained below their most recent high.

The Italian market fell, with the FTSE MIB ending the day down 3.7 per cent over the day while the euro slipped 0.3 per cent against the dollar, to $1.161, compounded by weaker-than expected inflation data out of the eurozone that was revealed on Friday.

Michael Ingram, chief market strategist at WH Ireland, said of the Italian government’s spending plans: “This is not helpful for Italian bonds and it plays into the slow-burn issue of populism [in the eurozone].

“Ultimately this is a political issue and it’s not going to go away quickly. As long as their aspiration is to pump up growth in Italy they look set to remain on a collision course with the EU, which will result in ongoing tension and keep bond yields high.”

Equities

European stocks fell during the day, with the Euro Stoxx 50 declining 2 per cent led by falls in financials and utilities. Frankfurt’s Xetra Dax fell 1.5 per cent and France’s CAC 40 declined 0.9 per cent. The FTSE 100 ended on Friday down 0.5 per cent.

Wall Street was a more mixed bag. The S&P 500 index enjoyed positive early trading, but ended the last trading day of the month as flat as a pancake, while the Dow and Nasdaq inched 0.1 per cent higher.

Tesla was one black spot on the US market on Friday, following a lawsuit on Thursday by US regulators against founder Elon Musk, who is accused of securities fraud after allegedly misleading investors about plans to take the company private with a tweet in August. The electric car maker’s stock was down more than 12 per cent.

Forex and fixed income

The dollar index rose 0.2 per cent, while the yen held flat at ¥113.55 to the dollar. The Argentine peso suffered another big drop — falling 3.8 per cent versus the dollar — and emerging market currencies on the whole lost ground.

The yield on the benchmark 10-year Treasury edged up 1bp to 3.06 per cent, little changed after inflation data released on Friday by the commerce department revealed that the Federal Reserve’s preferred measure of inflation data — the core consumption expenditures price index, or PCE — held steady at a six-year high in August.

The PCE index rose 2 per cent last month from a year earlier, bolstering the case for the US central bank’s policymakers to stick to their planned pace of interest rate rises this year and next.

Commodities

After a volatile week Brent crude, the global benchmark, rose 1.9 per cent to $82.93. West Texas Intermediate, the US benchmark, was 2 per cent higher at $73.53. Gold inched up to $1,191.50 an ounce.

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