European shares followed Asian stocks higher on Wednesday, buoyed by reports Italy would step in to rescue troubled bank Monte dei Paschi and expectations the European Central Bank would extend its bond-buying stimulus scheme this week.
Italian government bond yields fell, narrowing the premium investors demand to hold them rather than benchmark German debt to its tightest for about a month.
The pan-European STOXX 600 index rose 0.8 per cent, led by banks, and Italy's FTSE MIB share index gained 1.2 per cent, hitting its highest for six months.
Shares in Monte dei Paschi, Italy's oldest bank and the focus of investor concerns over the country's banking sector, rose 9 per cent.
Reuters reported exclusively on Tuesday that Italy was preparing to take a 2-billion-euro controlling stake in the bank as prospects of a private funding rescue faded following PrimeMinister Matteo Renzi's decision to resign.
Investors' concerns were that a defeat for Renzi in a referendum on constitutional reforms could further undermine faith in the European Union - following Britain's decision toquit the bloc - as well as confidence in the euro currency.
Market reaction to Renzi's defeat and his resignations was relatively muted, partly as a consequence of a pledge by the ECB to buy Italian government debt if markets became unsettled.
“Despite the fact that the probability of early electionshas risen, the market is focusing on the banking sector and thefact the government seems to be showing more urgency in dealingwith that problem,” Mizuho strategist Antoine Bouvet said.
Italian 10-year government bond yields fell 6 basis points (bps) to 1.92 per cent on Wednesday, having hit 2.17 per cent in the run-up to the vote. Yields on German 10-yeardebt, the euro zone benchmark, fell 1 bps to 0.36 per cent.
The euro edged up 0.1 per cent to $1.0730. It fell aslow as $1.0505 on Monday in reaction to the referendum beforehitting a three-week high the same day.
“People had gone into the referendum with a very pessimisticview and I think the last five years have taught us that, as faras the euro is concerned, political issues often don't have alasting impact,” DZ Bank currency analyst Sonja Marten said.
The dollar index, which measures the US currency against a basket of six of its major peers, was marginally downon the day. The yen fell 0.3 per cent to 114.13 per dollar, approaching a 10-month low.
Many market participants were looking to the ECB's policy meeting on Thursday, at which it is widely expected to announcean extension of its quantitative easing programme. Uncertainty remains over whether the size of monthly purchases will be kept steady or scaled back, and over whether it will send a formal signal on the eventual end of the programme.
One of the biggest movers in the currency markets was the Australian dollar, down 0.4 per cent after data showed the Australian economy shrank by 0.5 per cent, its biggest contraction since 2008, in the third quarter.
Australian stocks, however, closed 0.9 per cent higher inanticipation of more fiscal and monetary stimulus. While rate futures imply scant chance of a Reserve Bank interestrate cut in the coming months, prospects of a hike vanished.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 per cent, while Japan's Nikkei added 0.7 per cent. Chinese shares gained 0.7 per cent.
China's foreign exchange reserves fell by more than expected last month to $3.05 trillion, their lowest since 2011, the central bank said.
The yuan currency last stood at 6.8850 to the dollar, compared to a mid-point of 6.8808 set by the central bank. The currency is down 5 percent so far this year.
Oil prices fell as investors questioned whether a deal tocut output agreed last week by the Organization of the PetroleumExporting Countries (OPEC) and others would be enough to drainthat global glut that has pushed prices lower.
Brent crude, the international benchmark, fell 30 cents to$53.63 a barrel.
“Investors are torn between hopes that producers will cutenough production to balance supply and demand, and fears thatthey won't,” brokerage PVM Oil Associates' senior analyst, TamasVarga, said.