Italian Shares Lead Europe Stock Rally as Draghi Accepts Mandate

(Bloomberg) -- European equities extended gains into a third day on fading retail speculation and earnings optimism, while Italian shares jumped after Mario Draghi took on the mandate of premier-designate.

The Stoxx Europe 600 Index added 0.3% at the close. Rallying Italian banks pushed the FTSE MIB Index up 2.1% as former European Central Bank President Draghi accepted a request from Italy's head of state to try to form a government that will combat the pandemic and a deep recession.

Italian Banks, Vodafone Gain; Unite Falls: EMEA Equity Movers

Stocks capped their best three-day gain since November, after slumping last week on worries about retail-trading volatility. Economic data on Wednesday showed euro-area services and composite PMI were revised upward for January, while in the U.S., Senate Democrats put a $1.9 trillion stimulus plan on a fast track to passage.

The Stoxx 600 has bounced off its 50-day moving average after testing the key technical level last week.

“We are cautiously optimistic for Italy as Mario Draghi is a game changer and a well-respected figure,” said Sebastien Galy, senior macro strategist at Nordea Asset Management, adding that a failure to form a government may lead to a snap election. “The reaction of the market suggests they think such a Draghi government can govern for a while and enact reforms.”

Italian lenders surged with bonds, leading gains on the Stoxx 600 Banks Index. Intesa Sanpaolo SpA, Mediobanca SpA and UniCredit SpA each climbed at least 4%. Bank of America Corp. strategists today recommended buying Italian financials, saying that if Draghi becomes the nation's prime minister, this would be the “best outcome for markets” and that banks will benefit from an improvement in credit spreads.

Separately, Daimler AG rose 8.9% after the company said it will spin off a majority stake in its trucks division to shareholders, helping to make autos the top performing industry group in the Stoxx 600 index.

Earnings updates also triggered some share moves. Novo Nordisk A/S climbed after reporting results in line with estimates and saying it will pay a final dividend. Vodafone Group Plc gained 5.9% after better-than-expected quarterly service revenue.

“Volatility could persist in the near term, but we think equities will continue to grind higher as the growth/policy trade-off remains supportive,” Barclays Plc strategists led by Emmanuel Cau wrote in a note. “The direction of travel is toward stronger growth, as effective vaccines mean reopening is a matter of ‘when,' not ‘if,' and more stimulus is coming.”

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