Market Extra: Why investors are cheering Italy, Brexit headlines for a change — though it might not last

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In a rare treat for beaten-down stock-market bulls, headlines out of Rome and London were credited with helping to lift global equities and other assets perceived as risky on Monday, though analysts questioned how lasting the relief would prove to be.

The upbeat tone was inspired, in party, after Italy’s coalition government signaled its willingness to give some ground on the size of its budget gap, with Reuters reporting that officials were willing to trim the 2019 deficit target to around 2% to 2.1% of gross domestic product from the 2.4% figure previously submitted. It wasn’t clear, however, whether the move would appease the European Union, which has threatened a disciplinary procedure over what it sees as a violation of its fiscal rules.

“Spooked by the widening of Italian bond yield spreads that could endanger the solvency of the whole Italian banking system, [5 Star Movement leader Silvio] Di Maio and company have decided to walk back their rebellious rhetoric and appear to be in the process of working out a compromise with EU,” said Boris Schlossberg, managing director of FX strategy at BK Asset Management, in a note.

The yield on the 10-year Italian government bond TMBMKIT-10Y, -4.13% or BTP, fell nearly 19 basis points to 3.228%, while the all-important spread between the Italian bond and its “risk-free” German counterpart, the 10-year bund TMBMKDE-10Y, +5.99% narrowed by around 20 basis points to 2.9 percentage points. Bond yields fall as prices rise.

Meanwhile, European equities rallied, with the Italy’s FTSE MIB I945, +2.43%  up 2.8%, turning it positive for the month, while the pan-European Stoxx 600 SXXP, +0.79%  rose 1%. U.S. stock-index futures pointed higher, also buoyed by a rebound in oil pries, as U.S. equities attempted to bounce back from a brutal Thanksgiving week performance that saw the S&P 500 SPX, -0.66%  fall 2.9% and the Dow Jones Industrial Average DJIA, -0.73%  shed 3.3%, leaving both gauges in negative territory for 2018.

The euro EURUSD, +0.2293%  rose 0.2% versus the dollar to $1.1366.

Di Mao, a deputy prime minister and leader of the populist 5 Star Movement, one of the coalition’s two main parties, didn’t dispute the report, but instead emphasized that he was most interested in ensuring that fiscal policy remains stimulative in 2019, Bloomberg reported. Matteo Salvini, also deputy prime minister and head of the other major coalition party, the far-right League, told an Italian radio broadcaster that the government was willing to give some ground in order to deprive Brussels of an “excuse” for holding “60 million Italians hostage over a decimal place.”

The prospect a budget showdown between Rome and Brussels that could lead to renewed turmoil in the European bond market, with potential ramifications for the banking sector, have served as one of several points of worry for global investors. That said, it’s unclear how Brussels will react to the softening of Italy’s formerly hard-line stance on the budget.

Read: Here’s why investors remain uneasy about Italy’s banks and the ‘doom loop’

In an unprecedented step, the EU in October rejected Italy’s draft budget. After Rome initially refused to back down, the European Commission this month recommended beginning a disciplinary process, known as the excessive deficit procedure, against Italy.

“The coalition’s propensity for equivocal public stances could also come back into play, as it has on other occasions when pragmatism appeared to be set to break out. Elsewhere, the government remains just as committed to difficult-to-square spending plans,” said Ken Odeluga, market analyst at City Index, in a note.

For now, however, investors appear ready to take the optimistic view.

In a less surprising development, European leaders on Sunday endorsed British Prime Minister Theresa May’s proposed Brexit plan, though she is still expected to face an uphill battle in winning parliamentary approval.

London’s benchmark FTSE 100 index UKX, +0.61%  rose 0.8%, while the British pound GBPUSD, +0.4768%  rose 0.3% versus the dollar.

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