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Italy ETF Strengthens on Relief Rally in Debt Market

This article was originally published on ETFTrends.com.

Italy ETFs were among the few areas of strength in international markets Tuesday after the Italian debt market gained and yields declined from four year highs in response to Fitch Ratings decision to leave the country's credit rating unchanged.

On Tuesday, the iShares MSCI Italy Capped ETF (EWI) rose 1.3%.

Italian bond yields dipped after Fitch left its credit rating unchanged at BBB but revised its outlook to negative, Reuters reports. Yields on benchmark 10-year Italian Generic Government bonds dropped 14 basis points to 3.02% on Tuesday, compared to around 3.23% at the end of last week.

Yields on Italy's bonds surged to their highest level since August 2014 at the end of last week on concerns over the country's fall budget. The recent move helped trigger buying of Italian government debt after the sell-off.

While Fitch maintained its triple-B credit rating for Italy, the ratings agency issued a warning over the populist government’s “new and untested nature” and its promises to hike spending.

“Italy is benefitting from only the downgrade of the outlook, which was already priced in, though some investors may have expected a one notch downgrade,” Daniel Lenz, rates strategist at DZ Bank, told Reuters.

Italy is not out of the woods yet

Nevertheless, some analysts warn that Italy is not out of the woods yet. The conflicting statements from senior officials over Italy’s commitment to the European Union's budget restrictions has kept investors on edge and the ongoing emerging market currency woes continue to pressure the international outlook.

“I’m still 100 percent sure the good start will remain,” Lenz added. “We’re already seeing pressure on the (Turkish) lira and expect risk aversion will increase.”

On Sunday, Deputy Prime Minister Luigi Di Maio promised to follow the party’s main campaign pledge of universal income for the poor, which add further pressure on the budget deficit.

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