Italy's stock exchange has opened sharply higher following the formation of a new government in the country.

As three months of political deadlock looked set to end, Italian stocks rose by 2.6%, leading the European pack.

Banks were the stand-out performers, up 3.6%.

Other European stocks also felt the effects of Italy's increasing political calm.

The pan-European STOXX 600 index rose 0.5% in early trading, while German stocks gained 0.8% and the FTSE 100 rose 0.7%.


On 4 March, Italy's election resulted in stalemate, with no party or bloc winning a majority.

The uncertainty had battered Italy's stocks, resulting in a slide of more than 9% in May - the worst month since 2016.

But after Italy's anti-establishment parties 5-Star Movement and the League revived prospects of a coalition, the risk of a second election was removed.

:: Who is Giuseppe Conte?

Image: Luigi Di Maio (L) and Matteo Salvini have formed a coalition government

Matteo Salvini, leader of the eurosceptic League party, wrote on Facebook after meeting with 5-Star leader Luigi Di Maio: "Maybe, finally, we are there."

The two parties have proposed law professor Giuseppe Conte to be the new prime minister.

The new premier is to be sworn in today, after receiving the mandate to form a government by Italian President Sergio Mattarella.

The government then faces votes of confidence in both houses of parliament next week.

Greg McKenna, chief market strategist at AxiTrader, said markets had "over-reacted to the Italian mess" earlier in the week.

Image: There were fears a second election could give anti-euro parties a stronger mandate

The "Italian mess" had seen stocks and the euro plunge, with fears that any second election could give the parties a new more anti-EU mandate.

But in early Friday trading, the single currency was set to reverse its six-week losing streak after a drop in Italian bond yields.

The euro traded flat on Friday at $1.1691 but on a weekly basis it looks like posting a small 0.3% gain, possibly depending on what happens in Spain, where prime minister Mariano Rajoy has been kicked out in a no-confidence vote.