October 24, 2018 / 7:45 AM / a month ago

Stocks recovery helps Italian bonds; PMI data in focus

* Italy bond yields come off Tuesday’s highs

* Wall Street, European stocks recover after tough few sessions

* German yields near lows ahead of euro zone PMI data

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr

By Abhinav Ramnarayan

LONDON, Oct 24 (Reuters) - Italian government bonds erased some of the previous day’s losses on Wednesday as risk sentiment improved after a stock market recovery, though analysts warned that the country has a difficult period coming up.

Italian borrowing costs were down 4 to 5 basis points across the curve, down from the weekly highs they reached on Tuesday after the European Union rejected Italy’s draft budget for 2019.

Analysts attribute the recovery to an upswing in risk sentiment following a late rally in Wall Street and a corresponding boost for European shares Wednesday morning after a difficult few weeks for the stock market.

“The slight improvement in risk sentiment in equity markets could be feeding through, but it’s going to be a tough week for the (Italy/Germany) spread,” said ING strategist Martin Van Vliet. “Many investors are going to remain on the sidelines until the S&P decision.”

S&P Global is due to review Italy’s credit rating on Friday, and currently has it on BBB with a Stable outlook.

Analysts expect a downgrade, but are divided on whether this will be only a downgrade on the outlook to “negative” or whether the agency will drop Italy’s credit rating by a notch to BBB-, the last investment-grade rating.

PMI DATA AHEAD

Other euro zone government bonds were unchanged or lower on Wednesday before the release of data that should indicate how recent market ructions have affected business sentiment.

Euro zone purchasing managers’ indices (PMI) are is due at 0800 GMT, and analysts said investors will be keeping a close eye on how widening Italian bond spreads and global equity market volatility may affect the economy.

PMI data for France, released early on Wednesday, marked a 25-month low, although it indicated the economy was still expanding.

The PMIs could affect Thursday’s European Central Bank meeting, when its president, Mario Draghi, may give hints on how concerns over Italy’s budget equity market slowdowns will affect monetary policy.

“Besides risk-sentiment, economic sentiment should be key today as both can influence the tone at tomorrow’s ECB meeting,” Commerzbank analysts said in a note to clients.

They said that demand for German Bunds ought to stay strong, with investors looking to buy dips in price.

Germany’s 10-year government bond yield, the benchmark for the region, was lower at 0.41 percent, near recent lows. French 10-year yields were a basis point lower at 0.78 percent. (Reporting by Abhinav Ramnarayan, editing by Larry King)

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