Italian government bond yields have fallen by over 30 basis points this morning to two-month lows following speculation that the governing coalition is planning to reduce the budget deficit target for next year.
Rome had threatened to defy the European Commission by refusing to change its deficit target of 2.4 per cent of GDP and its growth forecast of 1.5 per cent.
Italy's governing coalition is now considering reducing its deficit target to as low as two per cent of GDP to avoid a disciplinary procedure from Brussels, a government source told Reuters.
Italy's change in tack pushed its 10-year government bond yield down by over 22 basis points to 3.19 per cent, while in Germany its spread stood at 284 basis points.
IG market analyst Joshua Mahony said: "The Italian fiscal spending plan remains a huge roadblock for European stability, and with the coalition apparently open to compromise over their 2019 budget plans, we are finally seeing a basis for optimism in Europe.
"Sharp upside for the FTSE MIB and Italian banks highlights the anxiety that has been inherent within the region. Differences remain between the Italian coalition and European Commission, yet the closer we get to a resolution, the more frequent days like today will be for European stock markets."
A government source told Reuters that the Italian government will meet this evening to discuss a potential reduction of its deficit goal in a move that could open negotiations between Rome and Brussels to stave off disciplinary procedures against Italy.