Italy has shown signs of first retreating from budget clashes with Brussels, triggering a rally in Rome.
On the day when equities rose throughout the world, tentative signs of progress in negotiations between European commissions and Italian populist leaders produced a key barometer of the Italian stock market increased by almost 3%.
Bank shares – seen as very vulnerable in terms of loss of confidence in Italian assets triggered by prolonged confrontation – rose 5% on Monday.
Reports that Rome was willing to cut the budget deficit from 2.4% of national output to as low as 2% also caused a fall in the interest rate paid by the Italian government to borrow on world financial markets.
Italy's main stock market index – FTSE MIB – is the best performer from leading European exchanges on the day of overall gains, closing 2.8% higher. The Frankfurt Dax index rose 1.45%, while the FTSE 100 City ended the day up 1.2% at 7,036.
After last week's sharp decline, shares rallied on Wall Street in early New York trade. The Dow Jones industrial average rose just under 1% amid signs of strong Black Friday spending by American consumers.
Since coming to power in the spring, the Italian coalition government has been on the path of a collision with the commission over its plan to stimulate growth by running a larger budget deficit.
The proposed move will violate the euro zone's fiscal rules and in recent weeks, investors have become increasingly worried about Italian public finances.
Concessions hinted at by the Roman government will go to a place far enough to meet demands made by Brussels.
The proposed budget deficit of 2% of GDP will still open the possibility of Rome being fined by the rules of procedure for excessive deficits of commissions but even partially enough to trigger a decline in yields on 10-year Italian bonds – an official benchmark of borrowing costs.
The spread between Italy's paid interest rates and much cheaper interest rates for Germany fell to the lowest point in more than a month.
Analysts said the pressure to revise the budget came from last week's lackluster bond sales, which showed that domestic investors lost confidence in Italian assets. Even so, the rally eased as the day passed as financial markets grew concerned that concessions made by Italy would not be enough.
Luigi Di Maio, Italy's finance minister, said: "What is important is that the budget contains the goals that we have set. Then if negotiation means a deficit [target] have to go down a little, for us it's not important. "
Cyril Regnat, a Paris-based bond strategist at investment bank Natixis, said he was surprised at the second time of the real shift in Rome after Italy's deputy prime minister, Matteo Salvini, recently ruled out budget adjustments and market reactions.
"The market is overreacting," he said. "From today, we don't have real support or numbers [to the reports of lowering the budget deficit target]. "
Regnat said that the possibility of a decline in Italy's economic growth in 2019 would make the probability of achieving a deficit target of 2% or 2.2% "very small".