GLOBAL MARKETS-Italy's political turmoil hits euro; US stocks up

Mon Dec 10, 2012 11:39am EST

* Italy's prime minister to resign; Italian bond yields up

* U.S. stocks up on McDonald's sales; fiscal talks eyed

* Oil, copper firm after upbeat Chinese data

By Wanfeng Zhou

NEW YORK, Dec 10 (Reuters) - The euro fell against the yen while Italian stocks and bond prices sank on Monday after Italian Prime Minister Mario Monti said he would resign, raising concern about who will lead the euro zone's third biggest economy out of its debt crisis.

U.S. equity investors focused on domestic news, driving shares higher after stronger-than-expected sales from McDonald's Corp while awaiting any sign of progress in budget talks in Washington to avert looming tax hikes and spending cuts.

Monti announced over the weekend he would resign once the 2013 budget is approved, potentially bringing forward an election due early next year. Monti has become an investor favorite over the last year as he spearheaded a reform agenda in a bid to rescue Italy from the threat of a Greek-style collapse.

The news pushed Italy's benchmark 10-year bond yield up to 4.83 percent, the highest in roughly more than three weeks. Italian shares fell more than 2 percent, with banks hit hard because of their hefty domestic government bond holdings.

"The political situation in Italy just adds to the uncertainty in Europe, and this will have a negative impact on the euro in the coming months," said Matthew Lifson, senior trader and analyst at Cambridge Mercantile Group in Princeton, New Jersey.

The euro fell 0.2 percent against the yen to 106.36 yen. It dropped as low as 105.94, its weakest in about two weeks. But the common currency was able to erase losses against the dollar to trade little changed at $1.2924.

Some analysts said the bond and currency markets' reaction to the news out of Italy may have been overdone, given that Monti would have called for elections in a few months time anyway. Monti's decision simply expedites the process.

On Wall Street, the Dow Jones industrial average gained 29.08 points, or 0.22 percent, to 13,184.21. The Standard & Poor's 500 Index rose 2.47 points, or 0.17 percent, to 1,420.54. The Nasdaq Composite Index added 17.05 points, or 0.57 percent, to 2,995.09.

Shares of McDonald's rose 0.8 percent to $89.23 after the fast food chain reported stronger-than-expected sales in November, marking a rebound after a rare decline in October.

U.S. President Barack Obama met with Republican House of Representatives Speaker John Boehner on Sunday to negotiate a deal to avoid massive tax hikes and spending cuts that are set to go into effect in the new year. Markets have been on edge in the last month on forecasts that the scheduled measures could send the economy into recession.

The two sides declined to provide details about the unannounced meeting. Obama was expected to make remarks at 2 p.m. (1900 GMT) from Michigan where he is touring an auto plant.

"We haven't had any 'progress' the last two weeks or so, yet all in all equity markets have continued to hang tough," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati, Ohio. "The rhetoric from Washington is strong, but Wall Street is betting something probably will get done."

Gains in U.S. stocks helped European markets erase losses. Top European shares on the FTSEurofirst 300 index last traded 0.2 percent higher at 1134.83. The MSCI global stock index rose 0.2 percent to 335.17.

CHINESE DATA

Commodities markets rose on data from China that showed factory output in the world's number two economy accelerated to an eight-month high in November.

Copper prices hit their highest level in almost two months, gold rose to around $1,714 an ounce, and Brent oil snapped five straight days of losses to climb back above $108 a barrel.

Brent futures jumped to $108.54 before easing back to trade at $108.04, up $1.02. U.S. crude rose 56 cents to $86.49.

China's implied oil demand broke through the 10 million barrel per day barrier for the first time ever in November, and crude imports also rose, providing more evidence of economic recovery.

"The figures are another confirmation that Chinese oil demand is accelerating again, and there are good reasons to expect that it will carry on growing strongly next year," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.

U.S. Treasury debt prices rose on concerns over the protracted budget negotiations in Washington, political rumblings in Italy, and expectations for further monetary policy easing by the Federal Reserve when it meets this week.

The benchmark 10-year U.S. Treasury note was up 2/32 in price, with the yield at 1.6147 percent.

The Fed is expected to announce a new round of Treasury securities purchases at the end of its two-day meeting on Wednesday, according to a Reuters poll. The bond buying would replace the "Operation Twist" stimulus, which expires at the end of December.