UKX FTSE 100 Index

By Barbara Kollmeyer, MarketWatch , Donato Paolo Mancini

Banks lead the gainers, Aston Martin shares stall

European markets closed solidly higher Wednesday, driven by hopes that Italy's budget deficit could be lowered, though concerns about the country's debt and budget plan still capped investors' confidence.

What are markets doing?

The Stoxx Europe 600 rose 0.5% to 383.84, after a drop of 0.5% on Tuesday (http://www.marketwatch.com/story/europe-stocks-under-pressure-as-italy-greek-fiscal-worries-cast-a-pall-2018-10-02).

Regional gains were led by Italy's FTSE MIB index up 0.8% to finish at 20,736.01. On the downside, Greece's ASX Composite showed steep declines among European benchmarks, ending off 2.1% to 666.84.

German markets was closed for a holiday, while France's CAC 40 climbed 0.4% to 5,491.40, while the U.K.'s FTSE 100 rose 0.5% to 7,510.28, snapping a three-session skid.

The euro pared back much of an earlier run higher (http://www.marketwatch.com/story/euro-rebounds-after-report-italy-will-play-by-eus-budget-deficit-rules-2018-10-03), trading at $1.1548 from $1.1549 late in New York on Tuesday, while the pound was flat at $1.2985 from $1.2980.

What is driving the market?

The Italian government officially plans on maintaining its deficit at 2.4% in the next three years, with further announcements on the issue are expected later Wednesday. Markets were cheered by a report in Italian daily newspaper Corriere della Sera (https://www.corriere.it/politica/18_ottobre_02/segnale-governo-bruxellesdeficit-24-2019-ma-poi-scende-ce01b162-c67f-11e8-8ad0-429d1e46ab5e.shtml?refresh_ce-cp) that the government's budget deficit target will be set at 2.4% of GDP in 2019, but decline to 2.2% in 2020 and 2.0% in 2021. That sent the euro soaring early in the day.

Investors in Italian markets are wary of a so-called "doom loop," whereby fragile balances between lenders and government finances come under further strain.

Italian banks have a high exposure to the country's bonds, while their European counterparts have gradually decreased their portfolios. The fear is that, if the rhetoric between Italy's government and the European Union worsens, that pressure could compound to levels that aren't sustainable.

Yields on Italian 10-year government bonds , also known as BTPs, were down 7.1 basis points to 3.350%, while the spread with 10-year German bonds edged lower.

In the U.K., Prime Minister Theresa May, who was delivered the keynote speech at the Conservative party conference (http://www.itv.com/news/2018-10-03/theresa-may-keynote-speech-conservative-party-conference/), said the U.K.'s post-Brexit future is "full of promise" and her Chequers plan was the only one that would work.

What are strategists saying?

"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," said Mohammed Kazmi, a portfolio manager at Geneva-based bank Union Bancaire Privée.

Esty Dwek, senior investment specialist at Natixis Investment Managers, said Italy adds to Europe's problems: "it is the European wall of worry: you have Brexit, you have Italy, then you have Turkey, and concerns about contagion to European banks."

What are strategists saying?

Banks led the gainers, notably Italian names such as Banco BPM SpA (BAMI.MI), which rose 2.1% and shares of Spain's Banco Santander SA (SAN.MC)(SAN), which gained 1.8%. HSBC Holdings PLC shares (HSBA.LN) (HSBA.LN) rose 0.8%.

Tesco PLC (TSCO.LN) tumbled 8.6% after the grocer reported first-half operating profit that was below expectations (http://www.marketwatch.com/story/tesco-shares-drop-after-operating-profit-miss-2018-10-03).

Among smaller companies, shares of luxury auto maker Aston Martin (AML.LN)tumbled 4.7% in its debut in London (http://www.marketwatch.com/story/aston-martin-ipo-values-james-bond-carmaker-at-56-billion-2018-10-03).

(END) Dow Jones Newswires

October 03, 2018 13:19 ET (17:19 GMT)

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