Italy relief, hopes for China stimulus buoy global stocks

[October 22, 2018]  By Karin Strohecker and Tom Wilson

LONDON (Reuters) - European shares crept higher on Monday on relief over Italy's budget, tracking rallies in Asia markets after China promised to provide stimulus to stabilize its economy and offset the impact of U.S. tariffs.

Promises of tax cuts and coordinated official statements of support for stock markets in the world's second-largest economy saw Chinese shares stage their biggest one-day surge in three years. Shanghai blue chips jumped around 4.3 percent, adding to Friday's bounce on Beijing's pledge of support for the economy and companies.

Japan's Nikkei rose 0.4 percent. Markets elsewhere in Asia also enjoyed healthy gains..

European stocks climbed 0.2 percent after Moody's kept Italy's sovereign rating stable on Friday instead of cutting it to negative. The decision fueled a rally in Italian government bonds and boosted shares in the country's banks.

The Moody's report and China's verbal support for its economy helped markets look beyond worries over the impact on global growth from policy tightening by the Federal reserve and the U.S.-China trade war, market participants said.

"It looks like the Chinese authorities will do what they can to stem the negative effects of those factors," said Investec economist Victoria Clarke.

The mood was set to travel to U.S. markets, where E-Mini futures for the S&P 500 were 0.1 percent higher. Nasdaq's added 0.4 percent.

This week is the peak period of the U.S. earnings season, with Amazon, Alphabet, Microsoft and Caterpillar among the companies reporting.

Helped by a strong economy and deep corporate tax cuts, S&P 500 earnings per share are expected to grow 22 percent in the third quarter, according to I/B/E/S data from Refinitiv.

"The season on an absolute basis will likely wind up being 'strong' and the vast majority of companies will exceed consensus expectations," said analysts at JPMorgan in a note.

"However, headwinds are building at the margin in the form of U.S. dollar strength, supply chain disruptions owing to all the trade uncertainty, and rising costs. Even the mere hint of a turn in profit fundamentals would have severe ramifications."

The outlook for global growth in 2019 has dimmed for the first time, according to Reuters polls of economists, who cautioned that the U.S.-China trade war and tightening financial conditions would trigger the next downturn.

ITALIAN RELIEF

On currency markets, the euro rallied after the Moody's report before pairing gains. By late morning it was down 0.1 percent at $1.15.

The single currency has benefited from comments by Italian Deputy Prime Minister Luigi Di Maio, who reiterated the country does not intend to leave the euro.

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, October 18, 2018. REUTERS/Staff/File Photo

Bond yields dropped across the curve, with 10-year yields enjoying their biggest one-day drop since the June.

But later in the day, Italy must explain to the European Commission its breach of rules. It faces the rejection of its budget, a move that could lead to sanctions.

The government expects the commission to decide on Tuesday to ask a member state to revise its draft budget, for the first time ever, a government source said on Sunday.

Italy is also expected to be on the agenda when the European Central Bank meets on Thursday. The bank is considered certain to keep policy on hold and is likely to put off discussion about its reinvestment policy until December.

The dollar was up 0.1 percent against a basket of currencies at 95.796 [USD/]

Sterling, meanwhile, slipped 0.4 percent to $1.3022 as Brexit worries rose ahead of a speech to Britain's parliament by Prime Minister Theresa May.

Though May will tell parliament that 95 percent of Britain's divorce deal has been agreed, she will repeat her opposition to the European Union's proposal for the land border with Northern Ireland. .

The border issue scuppered efforts to reach a Brexit deal at last week's EU summit, and many see the risk of a challenge to her leadership being mounted.

Saudi Arabia also remained in the spotlight after Riyadh called the killing of journalist Jamal Khashoggi a "huge and grave mistake" but sought to shield its powerful crown prince from the crisis.

U.S. President Donald Trump and European leaders are pushing Saudi Arabia for more answers.

In commodity markets, Brent crude futures edged above $80 per barrel, with U.S. sanctions against Iran's crude exports due to be implemented next month. [O/N]

Gold prices edged higher towards the 2 1/2-month peak hit last week.

(Additional reporting by Abhinav Ramnarayan in London and Wayne Cole in Sydney; editing by Larry King and Andrew Heavens)

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