October 26, 2018 / 10:26 AM / 22 days ago

UPDATE 2-Pessimism on Italy, U.S. tech earnings push German yields to 7-week low

* Bund yields hit 7-week lows as stock markets tank again

* Money markets push back rate hike expectations

* Italian bond yields fall ahead of S&P review

* Euro zone periphery govt bond yields tmsnrt.rs/2ii2Bqr (Updates prices, adds quote)

By Abhinav Ramnarayan

LONDON, Oct 26 (Reuters) - German borrowing costs hit a seven-week low as pessimism over Italian budget talks and disappointing updates from U.S. tech giants Amazon and Google drove investors to the safety of the world’s best-rated government bonds.

Euro zone yields were already near lows on Thursday after the European Central Bank stuck to plans to claw back stimulus, but its chief Mario Draghi acknowledged a loss of growth momentum and a “bunch of uncertainties” ahead.

After the meeting, euro zone money markets pushed back expectations of a 10-basis point hike to December next year, from October 2019 on Monday.

On top of this, U.S. Treasury yields fell to over three-week lows on the back of a lower-than-expected holiday season sales outlook from Amazon and a revenue estimate miss from Google’s owner Alphabet Inc.

European stocks were down a hefty 1.7 percent on Friday afternoon, around nine percent lower this month so far, setting them up for their biggest monthly fall since 2011.

“Expectations for U.S. company earnings is quite high, so whenever they are not being met, the reactions are quite severe,” said BayernLB credit strategist Miraji Othman.

“You also have the risk factors regarding Italy and its budget deficit. Everything comes together at the moment and has left people quite pessimistic,” he said.

German Bunds, seen as one of the world’s safest and most liquid assets, saw their yields drop 5.6 basis points to 0.343 percent in early trade on Friday, their biggest one-day fall this month.

Most other euro zone bond yields were three to four basis points lower .

ITALY RATING

After initially weakening along with European stocks, Italian bond yields also fell ahead of a ratings review from S&P Global due later on Friday. The ratings agency currently has Italy at a BBB rating with a stable outlook.

Italy’s two-year yields and five-year yields were last down two to three basis points at 1.45 percent and 2.80 percent respectively.

The country’s 10-year yields were down four basis points to around 3.46 percent and the closely-watched spread over Germany was at 310 bps.

Expectations among analysts are divided on whether the agency will downgrade Italy to its last investment grade rating or only change the outlook to negative.

“Market consensus is too lenient,” said Antoine Bouvet, rates strategist at Mizuho.

“The rating is meant to be modal-based but it is hard not to take action when a government cancels out a pension reform, or they plan a budget based on too optimistic growth expectations.”

Moody’s last week downgraded Italy to Baa3, just a notch above junk, but said the outlook was stable, leading to something of a relief rally.

“The Moody’s decision has taken some of the pressure off Italy. I think S&P is more likely to change the outlook,” said Othman of BayernLB.

Italy is already planning ahead with a new debt issue, and announced it will offer a new BTP Italia inflation-linked bond between Nov. 19 and 22. (Reporting by Abhinav Ramnarayan; Editing by Andrew Heavens)

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