LIVE MARKETS-Italy's budget: timeline and scenarios

* European stocks edge higher

* U.S.-Mexico trade deal boosts sentiment

* U.S. stocks futures rise

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ITALY'S BUDGET: TIMELINE AND SCENARIOS (1156 GMT)

With (Other OTC: WWTH - news) investors looking ahead to a "back-to-school" period littered with risks, UBS

economists have provided a timeline and scenarios for one of the biggest challenges on their

radar: Italian budget preparations.

"There continues to be high uncertainty about the size and composition of Italy's draft

budget for 2019," they write.

What we do know, however, is that the budget plans will be released by Sep (Shanghai: 600021.SS - news) 27 in the

government's Stability Programme update, and in the draft budgetary plan to be sent to Brussels

by Oct (Shenzhen: 000069.SZ - news) 15.

Based on that draft, the European Commission will prepare an opinion by Nov 30, and, if it

detects serious non-compliance, can ask Italy for a revised budget. Italy doesn't have to take

that into account when adopting its budget by Dec (Shanghai: 600875.SS - news) 31, but the EC can start an excessive deficit

procedure if the deficit breaches, or is forecast to breach, the 3 percent limit.

The reason for investors' nerves? The new government's policy initiatives imply between 4.5

percent and 7 percent of GDP of additional spending, by UBS (LSE: 0QNR.L - news) ' estimates.

UBS sees four possible scenarios, with 2 and 3 more likely than 1 and 4:

* a projected 2019 budget deficit well below the 3 percent limit, without implementing key

spending promises - "this would be a big surprise"

* deficit stays below 3 percent but with key spending measures at least partially

implemented

* proposed deficit stays below 3 percent for 2019 but only because key spending such as the

flat

tax are shifted into later years - potentially implying bigger deficits for 2020 and beyond

* all proposed measures implemented in full in 2019 with a deficit well above the 3 percent

limit,

triggering severe push-back from the European Commission

Here's a reminder of the risk premium baked into Italian assets, weighing down the FTSE MIB:

(Helen Reid)

*****

ITALY LAGS AS EURO BREAK-UP INDEX RISES (0857 GMT)

The only areas not being lifted in the rally today are Spain and Italy. The FTSE MIB is down

1.1 percent while the IBEX falls 0.5 percent, with financials the biggest weight on both

periphery markets.

Italian stocks were the worst-performing yesterday too with investors telling us attention

is now turning to the challenge of the Italian budget which has to be thrashed out in September.

Sentix's euro zone break-up index rose in August, reflecting increased concerns about Italy

and Brexit. You can see below the euro zone index (in blue) and Italian index (in red).

"The behaviour of the Italian government in the refugee crisis also gives investors cause

for concern," writes Manfred Huebner, managing director at Sentix, noting Italy's likelihood of

leaving is still the highest of the euro countries in the Sentix survey.

(Helen Reid)

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OPENING SNAPSHOT: TRADE RALLY STILL ON (0740 GMT)

There is still some steam in the trade rally which lifted world markets after the United (Shenzhen: 000925.SZ - news)

States and Mexico reached a trade deal yesterday.

The STOXX 600 is up 0.3 percent with strong gains in car makers and miners while in London

the FTSE is catching up with a 0.6 percent rise, after a summer bank holiday.

A few strong individual moves with Danish brewer Royal Unibrew (LSE: 0FRZ.L - news) up 5.2 percent after it

raised its outlook and Denmark's Sydbank (LSE: 0MGE.L - news) falling 6.5 percent after reporting Q2 earnings.

(Julien Ponthus)

*****

WHAT WE'RE WATCHING AHEAD OF THE OPEN (0645 GMT)

European stocks are set to extend yesterday's gains with futures trading flat to 0.6 percent

higher as investors cheer the NAFTA deal between the U.S. and Mexico. Hopefully we'll also see

an improvement in volumes as traders in London return from the long weekend.

It's sparse in terms of company news though British business supplies distributor Bunzl

reported a 3.9 percent rise in first-half profit, thanks to gains from recent acquisitions. The

company also revealed its first Norwegian acquisition, of a catering equipment supplier.

Premarket indications see the stock gaining 1 to 2 percent.

On the deals front, Swedish compressor and vacuum pump maker Atlas Copco (LSE: 0R82.L - news) is buying a

cryogenics business from Brooks Automation (Frankfurt: 257275 - news) in a $675 million cash deal to expand its vacuum

technology portfolio.

Here's a round-up of key European company headlines:

Britain's Bunzl (LSE: BNZL.L - news) reports 3.9 percent rise in H1 profit

Atlas Copco to buy cryogenics business from Brooks in $675 million deal

UK's RPC Group (LSE: RPC.L - news) to sell Letica's food-packaging business for $95 mln

Equinor explores floating wind turbines to power N.Sea oilfields

Nestle (Swiss: NESN.VX - news) , Starbucks (Hanover: SRB.HA - news) wrap up $7.15 bln licensing deal

Swiss cartel watchdog declines to probe watchmakers over spare parts

Aegon (Swiss: AGN.SW - news) , Transamerica in $97.6 mln SEC (Shanghai: 603988.SS - news) settlement for misleading investors

Italy nationalization of Autostrade (Milan: ATL.MI - news) "only solution" - Deputy PM

GAM Holding (IOB: 0QN3.IL - news) outlines plan to liquidate absolute return funds

Swiss drugmaker Roche's diagnostics head exits

UK professional services firms' mood lowest since Nov 2016 - CBI

(Kit Rees)

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EUROPEAN STOCKS FUTURES EDGE HIGHER (0610 GMT)

European stocks futures have opened broadly higher but the gains are fairly timid as

investors continue to watch whether there will be any further developments with the NAFTA deal

and Canada.

"Trade tensions have been hanging over equity markets, and this is certainly a step in the

right direction," David Madden, market analyst at CMC Markets UK, said, referring to Monday's

deal between the U.S. and Mexico.

Likewise there still hasn't really been much progress on the U.S.-China trade front, which

continues to be a worry for markets.

Here's your stocks futures snapshot:

(Kit Rees)

*****

MORNING CALL: EUROPEAN SHARES SEEN OPENING HIGHER (0535 GMT)

Good morning. European stocks are expected to open higher, according to financial

spreadbetters, as investors cheer the deal between the United States and Mexico and traders in

London return from a holiday.

On Monday the U.S. and Mexico agreed to overhaul the North American Free Trade Agreement

(NAFTA), which boosted shares in European autos in the previous session.

The S&P 500 and Nasdaq (Frankfurt: 813516 - news) indexes both hit record levels, while Asian stocks were also broadly

higher.

Spreadbetters saw Britain's FTSE 100 up 0.5 percent, Germany's DAX 0.2 percent higher and

France's CAC also gaining 0.2 percent.

(Kit Rees)

(Reporting by Danilo Masoni, Helen Reid, Kit Rees and Julien Ponthus)