LONDON, Nov 20 (Reuters) - Investors took some cheer on Monday from the decision by ratings agency Moody's on Friday to upgrade its view of both Italy and Portugal's long-term creditworthiness.

Moody's on Friday left Italy's sovereign debt rating at Baa3, one notch above junk, but issued a surprise upgrade to the outlook to stable from negative, in an unexpected boost for Prime Minister Giorgia Meloni's government.

Separately, Moody's upgraded Portugal's long-term issuer rating two notches to A3 from Baa2, despite the political crisis triggered by the resignation of the country's prime minister due to an investigation into alleged irregularities in his government

Market reaction was measured on Monday. Most notably, the premium investors demand to hold Italian debt rather than benchmark German bonds fell to the lowest since late September, as Italian sovereign yields fell.

The risk premium for Portuguese debt fell to its lowest since late July.

MARKET REACTION:

STOCKS: Milan's FTSE MIB index rose 0.1% in early trade, in line with a modest rise in the broader STOXX 600 , while Lisbon's PSI 20 index was up 0.4%.

FOREX: The euro was roughly steady on the day against the dollar at $1.0917, and a touch weaker against the pound at 87.51 pence.

BONDS: Italian 10-year BTP yields were down 3 basis points on the day at 4.334%, outperforming German Bund yields, which rose 1 bp to 2.6%. Portuguese 10-year yields were steady at 3.252%, leaving the premium over German debt down 2.6 bps at 59 bps.

COMMENTS:

CHIARA ZANGARELLI, ECONOMIST, MORGAN STANLEY, LONDON:

"Now that the uncertainties from the rating agencies are behind us, we think that the market would need to start to price in the expected abundant issuance schedule for 1Q24.|

"Against our expectations, Moody's revised Italy's outlook to stable from negative, keeping Italy's rating unchanged at Baa3. With rating agency actions now all behind us, all eyes are on the EC opinion on Italy's Draft Budgetary Plan, due to be published next week."

FILIPPO ALLOATTI, HEAD OF FINANCIALS (CREDIT), FEDERATED HERMES LIMITED, LONDON:

"Moody's upgrade of the outlook in Italy to stable is in recognition of the good health, and profitability, of the banking sector. This change is also due to the stabilising factors around both the public and private debt dynamics. We agree with agency's updated view.

"Contrary to the received wisdom, we think both the country and the euro system have the means to make the large debt to GDP manageable."

AZZURA GUELFI, EQUITY RESEARCH ANALYST, CITI, LONDON:

"Citi's rates strategy view is that this should be supportive for Italian sovereign spread tightening into the year end given supply trends.

"Given a strong correlation between Italian sovereign spread and Italian banks' cost of equity, we expect this to be supportive newsflow for Italian banking sector equity valuations, along with the solid set of results recently reported, the constructive outlook for 2024 and further opportunities for capital return." (Reporting by London Markets Team; Editing by Samuel Indyk)