European shares ended both the day and week higher on Friday, as political progress in debt-laden Italy fuelled hopes a new government was close to being appointed and would act to implement reforms needed to help stem the eurozone debt crisis. Euro zone financials rallied as the Italian Senate approved a new budget law, which is due to receive final parliamentary approval on Saturday. This could usher in a new emergency government with a mandate to implement a range of austerity measures.
The FTSE Eurofirst 300 index of leading European shares clocked up a weekly gain as it rose 2.1 percent on the day to close at 983.73 points, led by Italian lender Intesa Sanpaolo, which rose 8.8 percent. "The rally in Italian banks today is driven by the falling yields on the sovereigns," said Marco Troiano, a banking analyst at Berenberg.
"I expect further volatility in the coming weeks, both on the banks and government bonds, but I am convinced that the sovereign risk story on Italy is overplayed, and that once the market concerns settle, Italian banks will re-rate strongly." His views echoed those of Allianz's Chief Financial Officer Oliver Baete, who also said he is confident Italy will put its financial house in order. The German insurer closed up 5.6 percent as it unveiled its third-quarter results, which saw an estimate-beating operating performance overshadow Greek writedowns.
Italy's 10-year benchmark government debt yields fell to 6.5 percent, comfortably below the 7 percent level seen by many as unsustainable. The spread over Germany's Bund shrank below 500 basis points, closing at 460 bps. "I mainly work on the spread at the moment," said a Milan-based equity trader who buys Italian equities when the spread tightens. "I expect it to shrink a little bit more before widening again when the new government starts discussing reforms and tensions come back. It's all about short-term speculation these days."
Milan's blue chip FTSE MIB index was the top performer in western Europe, rising 3.7 percent by the close as the yield on Italy's bonds fell after the Senate vote. Citi strategists recommended taking advantage of cheap valuations among Italian shares to buy "good Italian domiciled companies that do a lot of their business outside of Italy and outside of Europe," highlighting tyre maker Pirelli, which closed up 6 percent. The Euro STOXX 50, the euro zone's leading blue chip index, closed up 3.1 percent at 2,324.81 points, just above the 50 percent Fibonacci Retracement of the slump from its August high to September low.