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MORNING BID-Italy reels after Eurogroup's all-night squabble

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·3 min read
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A look at the day ahead from EMEA senior markets correspondent Saikat Chatterjee. The views expressed are his own. What common bond? Far from announcing anything close to a solution, euro zone finance ministers failed to agree in all-night talks on more support for coronavirus-hit economies. The breakdown came after Italy and the Netherlands squabbled over what conditions should be attached to euro zone credit, blocking progress on half a trillion euros worth of aid.

That's triggered big moves this morning in Italian bonds, with yields spiking more than 20 basis points and spreads between German and Italian benchmark debt widening beyond the 200 bps, up 29 bps. Italian shares are down 1% with bank shares losing 3%.

French Finance Minister Bruno Le Maire was quoted by one official as saying: "Shame on Europe. Stop this clownesque show!" Discussions have been suspended until Thursday.

Elsewhere, there has been a growing disconnect between news about virus infection rates and market sentiment. But equity market moves were more tentative on Wednesday, after U.S. stocks rose as much as 10% over the previous two sessions. Both the MSCI World and the MSCI Asia indexes were in negative territory, even though the Chinese city of Wuhan, the epicentre of the coronavirus pandemic, began letting people leave on Wednesday for the first time since it was locked down 76 days ago.

Yesterday's gains were driven partly by news that the number of COVID-19 hospitalisations seemed to be levelling off in New York state, though deaths across the United States jumped by a record 1,800-plus. And Britain's chief scientific adviser said it would take another week or so to say if the graph of new cases was flattening with almost 800 deaths on Tuesday.

So nimble investors are trying to gauge the scale of the economic damage and possibly take profits after the recent rally before the earnings season begins next week. Expectations are for European first-quarter earnings to fall 15.7% versus the first-quarter of 2019, Refinitiv data show. That would be the biggest drop since the 2008 global financial crisis. Growth figures are equally dire, with a Reuters poll showing Japan is set for a recession with a steep third straight quarterly contraction in April-June. S&P Global has cut the outlook on Australia's rating to negative.

The dollar, a classic barometer of risk, is firmer across the board; the euro and the Australian dollar are the biggest losers. U.S. Treasury yields and German benchmark yields also fell after two successive days of rises.

Emerging-market assets also retreated. Mexico's peso, a lightning rod due to the country's exposure to the U.S. economy, weakened more than 1% and Turkey’s lira fell back towards Monday's levels, when the currency revisited levels last seen during its 2018 crisis.

On the European corporate front, Covid-19 continues to hit earnings and dividends: Direct Line withdrew its final 2019 dividend and Swedish lockmaker Assa Abloy said its operating earnings fell steeply in the first quarter. Deutsche Post, Heineken and Relx were among those scrapping their outlook.

Swedbank will report a first-quarter loss due to rising costs, credit impairments and a previously announced fine after a money laundering-related investigation. Britain's biggest retailer, Tesco, expects coronavirus costs to hit 925 million pounds and warns it can't give any profit forecasts for this financial year.