Italy’s Investors Laud Draghi’s Return to Keep Markets Calm

(Bloomberg) -- Italy's markets might have their savior back.

The nation's bonds and stocks surged after Mario Draghi, the former European Central Bank president who brought calm to the region's markets, accepted a mandate to be the next premier-designate and to try and form a coalition. Investors hope he can usher in political stability after the collapse of the ruling coalition and utilize European Union funds to help the economy recover from Covid-19.

“He is really a known quantity for markets,” said Imogen Bachra, European rates strategist at NatWest Markets. “We know that he is pro-EU and in favor of the European project, which markets will take comfort in.”

The last few years have been turbulent for Italian markets, rocked by the nation's high debt load and with vocal euroskeptic parties part of the government. Bond yields soared during the coronavirus crisis last year before the ECB stepped in with unprecedented asset purchases under its pandemic program.

Last month the coalition government collapsed over disagreements on how to spend the EU funds. Draghi accepted on Wednesday a request from Sergio Mattarella, Italy's head of state, to try and head up a new government, following outgoing premier Giuseppe Conte's failed comeback bid. He now has to sound out leaders of political parties to try and forge a broad parliamentary coalition.

That prospect led yields on benchmark 10-year securities to slide as much as 11 basis points to 0.55%, close to their record low of 0.50% set earlier this year. The move took the spread over German debt, a key gauge of risk, to the narrowest since 2016.

In contrast, the euro weakened for a third day, dropping 0.2% to $1.2016 amid broad dollar strength.

Banks Rally

The nation's FTSE MIB Index surged as much as 3%, the best performer among major equity markets in Europe. Italian banks, sensitive to the bond spread, soared with UniCredit SpA up as much as 6.9% and Intesa Sanpaolo SpA climbing as much as 7.5%.

During the height of the euro-area sovereign debt crisis in 2012, Draghi famously said the institution would do “whatever it takes” to keep the bloc together. Before he left his post in late 2019, he frequently emphasized that governments would need to boost fiscal spending to extract the region from anaemic growth and inflation rates.

“Draghi was very much a ‘getting things done' kind of guy,” said Piet Christiansen, chief strategist at Danske Bank A/S. “I'm bullish on the possibility of Draghi as PM.”

He will still have his work cut out given divisions within government. Moody's Investors Service warned Tuesday that alongside the U.K., Italy topped the list of regional concerns over the next five years for fear that it could waste its “once-in-a-generation” opportunity to use the EU funds to turn the economy around. Still, in the short-term, Draghi would be expected to provide a steady hand.

Mizuho International Plc sees the nation's 10-year yield spread over Germany narrowing through 85 basis points by the second half of the year, from 103 currently.

“It would be a major confidence boost for foreign investors as Draghi is so well known and respected,” said Peter Chatwell, head of multi-asset strategy at Mizuho. “Even if a government of national unity is able to basically do nothing other than manage through this Covid crisis, then that will also be ideal for investors, who don't want political uncertainty.”

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