Investors cheered by Italian government

The flags of Italy and the European Union fly from a bank in central Naples in November 2011 in Naples, Italy.
Christopher Furlong/Getty Images

LONDON Italy's stock market was the big gainer Monday at the start of an action-packed week in financial markets, as investors cheered the news that a new government was ready to take the helm after two months of political deadlock.

Italy's new coalition government led by Premier Enrico Letta brings together forces from both the left and the right and will begin its work after a confidence vote later Monday in Parliament.

As the third-biggest economy among the 17 European Union countries that use the euro, Italy is hugely important to the future of the single currency. It has the second-highest debt burden in the eurozone after Greece so remains under market pressure to keep a lid on its borrowings. Over the past couple of years, Italy has done a lot to bring its debt down but at a high cost, with the economy back in recession and unemployment on the rise.

"Given the fractious nature of Italian politics, the new government headed by Enrico Letta is indeed progress," said Michael Hewson, senior markets analyst at CMC Markets.

"However it was done without any of the protagonists who had led Italy's main political parties in the original election campaign, which could bring into question the democratic legitimacy of the entire process with technocrats in a number of key positions," he added.

Despite those worries, Italy's FTSE MIB index was outperforming all its peers, and some. It was trading 1.7 percent higher at 16,839. And in another sign of optimism, the yield on the country's benchmark 10-year bond dropped around 0.10 percentage point to 3.93 percent. That's the first time it has dropped below 4 percent since November, 2010.

The euro was also solid, trading 0.4 percent higher at $1.3078

Elsewhere in Europe, the FTSE 100 index of leading British shares was up 0.1 percent at 6,429 while Germany's DAX rose 0.4 percent to 7,847. The CAC-40 in France was 0.7 percent higher at 3,837.

Wall Street was poised for a solid opening, with both Dow futures and the broader S&P 500 futures up 0.3 percent.

There's little on the economic diary Monday, but investors will have a huge amount to ponder this week. Before an expected interest rate reduction from the European Central Bank on Thursday, the Federal Reserve will hold a two-day policy meeting that culminates on Wednesday. And on Friday, nonfarm payrolls data for April will be published, probably the biggest event of the week for investors.

Markets have largely held up fairly well over the past few weeks despite a run of disappointing economic data, particularly out of Europe and the U.S. Investors have concluded that the "soft patch" is likely to mean that the world's major central banks will remain in crisis mode and maintain their easy and cheap monetary policies for a while longer yet.

"As recent economic numbers have painted a fairly moribund picture of global economy investors will be predicting a dovish tone from policy makers," said Mike McCudden, head of derivatives at Interactive Investor.

Earlier in Asia, Australia's S&P/ASX 200 gained 0.6 percent to 5,125.80 and Hong Kong's Hang Seng edged up 0.3 percent to 22,580.77. South Korea's Kospi lost 0.2 percent to 1,940.70. Markets in mainland China and Japan were closed for holidays.

Oil prices tracked equities higher with the benchmark New York rate up 21 cents at $93.21 a barrel.