UKX FTSE 100 Index

By Sara Sjolin, MarketWatch

Yields drop across Europe as Italian president considers populists' idea for PM

European stocks moved cautiously higher on Tuesday, with Italy leading the advancers as the country's president considered the candidate put forward by an euroskeptic alliance to lead their coalition government.

What are markets doing?

The Stoxx Europe 600 index rose 0.1% to 396.18. That built on a 0.3% gain from Monday, when the benchmark logged its highest close (http://www.marketwatch.com/story/european-stocks-head-for-almost-4-month-high-but-italy-dents-gain-2018-05-21) since Jan. 30.

Italy's FTSE MIB index moved 0.5% higher to 23,206.73, rebounding after falling 1.5% over Monday's and Friday's sessions. The volatile trade in Italy came as the country's two biggest anti-establishment parties continued their push to form a governing coalition, which some fear could plunge Italy into a sovereign debt crisis (http://www.marketwatch.com/story/greek-like-crisis-fears-hang-over-italys-markets-as-populists-ready-government-2018-05-21).

In Germany, the DAX 30 index added 0.1% to 13,092.83. The German market was closed on Monday in observance of Whit Monday.

France's CAC 40 index was marginally higher at 5,638.96 on Tuesday, while the U.K.'s FTSE 100 index added 0.3% to 7,880.11 (http://www.marketwatch.com/story/uk-stocks-hang-onto-all-time-high-ahead-of-boe-hearing-2018-05-22).

The euro rose to $1.1810, from $1.1791 late Monday in New York.

The pound climbed to $1.3464 from $1.3426 as Bank of England Governor Mark Carney spoke at a parliamentary hearing. The central bank chief defended his stance that rates won't rise until the U.K. economy is stronger.

What is driving the market?

Italian politics remained in focus after the leaders of the 5 Star Movement and League on Monday evening presented their prime minister candidate to President Sergio Mattarella (http://www.marketwatch.com/story/italys-coalition-parties-propose-little-known-professor-as-compromise-prime-minister-candidate-2018-05-21). Their choice, little-known political novice and academic Giuseppe Conte, is said to concern Mattarella, and the president has yet to give Conte the go-ahead.

Instead, Mattarella has called a meeting Tuesday with the heads of the upper and lower houses of Italy's parliament to discuss the situation. The president is expected to announce his decision on how to move forward later this week.

Analysts fear a 5 Star-League coalition could set Italy on a collision course with the EU and threaten the foundations of the eurozone. The two parties have promised to challenge Brussels's budget guidelines and rules on immigration, and have vowed to increase fiscal spending and cut taxes -- moves some worry could throw the Italian economy into disarray.

Yields ease back

Those concerns have sparked a spike in Italian borrowing costs recently, but yields there and across Europe eased back on Tuesday.

The yield on 10-year Italian government bonds fell 8 basis points to 2.293%, according to Tradeweb. The yield jumped to its highest since March 2017 on Monday.

In Spain, the 10-year yield fell 5 basis points to 1.455%, while the Portuguese benchmark rate declined 7 basis points to 1.921%.

What are strategists saying?

"A very-last-minute failure cannot be ruled out, but a government between [5 Star Movement] and [League] seems likely at this stage," said economists at Barclays in a note.

"What is less clear is whether such a government would be able to deliver measures pledged that, according to our estimates, would cost about EUR100 billion gross per year unless properly backed by strong and credible offsetting saving measures. We remain of the view that it will be difficult for a 5SM-L government to approve in full their economic program due to internal and external constraints," they added.

Stock movers

Inmarsat PLC (ISAT.LN) shares plunged 12% after news late Monday that the U.K. satellite company will lose its global monopoly on maritime safety communications.

Credit Agricole SA (ACA.FR) climbed 3% after a French court ruled in favor of the bank (http://www.marketwatch.com/story/credit-agricole-wins-court-ruling-in-tax-case-2018-05-22) in a tax case.

Shares of Deutsche Post AG (DPW.XE) added 1% after UBS upgraded the company to buy from neutral. The German delivery company said its subsidiary DHL Supply Chain has acquired Colombian logistics company Suppla Group (http://www.marketwatch.com/story/deutsche-post-dhl-unit-buys-colombias-suppla-2018-05-22).

(END) Dow Jones Newswires

May 22, 2018 05:46 ET (09:46 GMT)

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