Asia Unhedged has heard from a source in Berlin to watch Italian banks’ results this week: Strength in Italian banking would be a signal that Draghi had achieved his objectives and QE could terminate. This morning’s sell off in European bonds came after a rally in Italian bank stocks and a statement by the ECB’s head of supervision proposing more flexible treatment of bad loans.

Italian banks led the SX7E with BPER (+11%), UBI (+4%), BPM (+3%) and Unicredito (+2%) in four out of the top five slots.

Daniele Nouy, chair of the ECB’s supervisory board, said Thursday that proposed guidelines for dealing with bad loans would by “improved” by taking feedback into account in response to criticism from Italy. Italian lenders hold a full quarter of the US$1.04 stock of existing bad loans that would be subject to the new rules.