Italian and Spanish stocks led broader European equities higher Friday, as the countries usher in new governments after a week when Italian political uncertainty rocked markets.
Stocks held to gains after the release of the closely watched monthly jobs report from the U.S., which beat expectations.
How markets are performing
Italy’s FTSE MIB index I945, +1.49% jumped 2.3% to 22,282.33. In the fixed-income market, the country’s 2-year bond yield TMBMKIT-02Y, +0.79% fell 39 basis points to 0.81%, according to Tradeweb, in a tumultuous week for the Italian debt market. Yields fall as bond prices rise.
Spain’s IBEX 35 IBEX, +1.76% tacked on 2% at 9,651.90, coming off a two-month low logged Thursday.
In Frankfurt, the DAX 30 index DAX, +0.95% was up 1.4% to 12,777.53, recovering from Thursday’s tumble driven by losses for Deutsche Bank and car makers.
Those moves helped the broader Stoxx Europe 600 Index SXXP, +1.01% rise 1.2% to 387.47. But for the week, the pan-European benchmark looks likely to fall by 0.9%.
France’s CAC 40 index PX1, +1.24% added 1.5% to 5,476.45. In London, the FTSE 100 UKX, +0.31% picked up 0.5% at 7,716.89.
The euro EURUSD, -0.1197% reversed gains and fell to $1.1674, from $1.1694 late Thursday in New York.
What’s driving markets
Politics are once again in focus, after uncertainty over Italy’s government rattled markets earlier in the week.
Late Thursday, populist parties the 5 Star Movement and the League made a deal to form a coalition government led by political novice Giuseppe Conte, a lawyer and academic, as prime minister.
Their earlier bid to jointly take power effectively crumbled at the start of the week, Italian President Sergio Mattarella rejected their euroskeptic candidate for economy minister, Paolo Savona. Savona has given up his bid for the post and accepted a role as minister for European affairs.
Read: Think the Italy panic was bad? Just wait until central banks turn off the spigot
Meanwhile, Spanish lawmakers ousted Mariano Rajoy as prime minister through a 180-169 vote of no confidence. Pedro Sánchez, leader of the Socialist Party, will replace Rajoy after the socialists led the drive to hold a no-confidence vote, prompted by corruption convictions for senior members of Rajoy’s party.
Stocks stayed in high gear after the U.S. Labor Department said the world's largest economy added 223,000 new jobs in May, exceeding a forecast of 200,000 produced by a MarketWatch poll of economists. The unemployment rate fell to 3.8% from 3.9%.
What strategists are saying
• “While many markets may now be trading back at levels they opened the week at, there has been volatility along the way with Italian 2-year yields peaking above 2.7% having been in negative territory two week ago, the Italian FTSE MIB falling more than 6.5% from Monday’s open before reversing .... and the euro slipping to 10-month lows against the euro,” said Oanda’s senior market analyst Craig Erlam.
“While this week has been a stark reminder of how quickly things can unravel in pockets of the European political scene and reminds us of the risks that still exist in Italy, there is a sense of relief that some form of stability has resumed for now,” Erlam said.
•“Markets are taking some comfort from the recent Fed minutes, which highlighted that the [Federal Open Market] Committee would be comfortable with inflation just above 2%. But there remains a risk that the Fed could end up behind the curve and having to tighten more quickly if inflation accelerates more sharply,” said Kully Samra, vice president at Charles Schwab.
Deutsche Bank under pressure
Deutsche Bank shares DBK, +1.78% rose 3.6%, even after S&P Global Ratings downgraded the German lender to ‘BBB+’ from ‘A-’, citing concerns about its restructuring.
Separately, an Australian regulator on Friday said Deutsche Bank will face “criminal cartel charges” alongside Citigroup Inc. C, +1.14% and Australia & New Zealand Banking Group Ltd. ANZ, -1.51% . The charges are related to trading in ANZ shares following an institutional share placement in August 2015.
On Thursday, Deutsche Bank shares tumbled 7.2% after the U.S. Federal Reserve designated the German lender’s U.S. business as in “troubled condition.”
See: Deutsche Bank’s stock looks cheap after 40% slide, but analysts remain wary
Stock movers
Italian bank stocks were among the big winners Friday. Banco BPM SpA BAMI, +8.45% shares leapt 7.6% and and a 6.1% rise in BPER Banca SpA BPE, +7.87% shares were up 6.1% to lead the Stoxx 600. The FTSE Italia All-Share Banks Sector Index IT8300, +3.84% climbed 4.8%.
Elekta AB EKTAB, -0.56% shares dropped 1.7%, paring deeper losses. The radiological equipment maker posted fourth-quarter adjusted earnings of 918 million Swedish kronor, missing a FactSet consensus estimate of 985 Swedish kronor.
Economic data
The final reading of the eurozone purchasing managers’ index for manufacturing in May was 55.5, said IHS Markit. That was unchanged from the preliminary estimate, but down from 56.2 in April.
Italy’s final manufacturing PMI print for May was 52.7. That compares with a 52.8 flash reading and a print of 53.5 in April.