Spain, Italy lead European stocks higher as they get ready for new governments

Stocks in Spain and Italy led broader European equities higher, as the countries got ready to bring in new governments after a week when Italian political uncertainty rocked markets.

In addition to political developments in Europe, traders will also have to weigh the closely watched monthly jobs report from the U.S.

How markets are performing

Italy’s FTSE MIB index  jumped 2.7% to 22,365.37. In the fixed-income market, the country’s 2-year bond yield  fell 50 basis points to 0.64%, according to Tradeweb. Yields fall as bond prices rise.

Spain’s IBEX 35  tacked on 1.1% to 9,562.80, coming off a two-month low logged Thursday.

In Frankfurt, the DAX 30 index  was up 0.8% to 12,697.03, recovering somewhat from a 1.4% tumble in the prior session on losses for Deutsche Bank and car makers.

Those moves helped the broader Stoxx Europe 600 Index gain 0.7% to 385.63, after dropping 0.6% on Thursday. For the week, the pan-European benchmark looks likely to fall by 1.3%.

France’s CAC 40 index added 1.1% to 5,459.78. In London, the FTSE 100  picked up 0.7% to 7,730.44.

The euro  rose $1.1697, ticking up 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.

Meanwhile, over in Madrid, Prime Minister Rajoy has been essentially forced out of power, admitting defeat ahead of a no-confidence vote in parliament on Friday. Media reports say he acknowledged he would be replaced, after the opposition Socialist Party won enough support from lawmakers to hold the vote, which was prompted by corruption convictions for senior members of Rajoy’s People’s Party.

Rajoy will be replaced as Spain’s prime minister by Pedro Sánchez, leader of the Socialist Party. Te question now is whether he will decide to call a fresh general election ahead of the scheduled 2020 ballot.

Later in the session, traders are expected to turn their attention to the release of the monthly U.S. nonfarm payrolls report, tracked by the Federal Reserve for its decision making around the path of interest rates. Economists expect 225,000 new jobs were added in May and that the employment rate will stay at 3.9%. The report is scheduled for release at 1:30 p.m. London time, or 8:30 a.m. Eastern Time.

What strategists are saying

“While [the new Italian coalition agreement] may be acceptable to President Mattarella under the leadership of Giuseppe Conte in its current guise, future relations with Brussels are likely to be much more prickly than previous administrations, even with Savona away from the finance brief, as the new government looks to implement their tax cuts and citizens income program,” wrote Michael Hewson, chief market analyst at CMC Markets UK, in a note.

Deutsche Bank under pressure

Deutsche Bank shares  rose 2.7%, 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.  and Australia & New Zealand Banking Group Ltd.  . 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.”

Stock movers

Italian bank stocks were among the big winners Friday. Banco BPM SpA  shares leapt 7.6% and and a 6.1% rise in BPER Banca SpA  shares were up 6.1% to lead the Stoxx 600..

Elekta AB  shares dropped 4.1%. 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.