Eurozone inflation in big jump just as uncertainties mount

Italian bond yields can go

But even with that threat averted for now, Italy's populist coalition, in a bid to fulfill campaign promises, could test Europe on issues including migration and spending.

Italian financial markets jumped on the announcement of the first populist government for an European Union founding member, formed by the anti-establishment Five Star Movement and nationalist League.

The ECB's bond buying programme has provided a powerful backstop to euro zone government debt, although moves in Italian markets in recent days suggest that this buffer may have lost its punch.

But investors have dropped long-standing bets that the European Central Bank would hike rates in June 2019 amid signs of weaker economic growth in the euro zone and market turmoil associated with a political crisis in Italy.

He also warned that Italy "must never forget the very serious risk of losing the irreplaceable asset of trust".

The U.S. Embassy in Rome on Friday warned U.S. travelers to beware of three separate demonstrations set to take place Saturday, saying they could become "unruly or violent".

A deepening political and constitutional crisis in Italy, the euro zone's third biggest economy, fuelled a sharp rise in the country's short-term borrowing costs on Tuesday and renewed selling in the euro and stocks.

Most analysts believe Italy will remain a member of the eurozone.

The Italian election risk had also sent investors scurrying for safer German and USA government bonds, as well as currencies such as the yen and Swiss franc, at the expense of the euro.

The pan-European Stoxx 600 closed provisionally up nearly 1 percent, with most sectors and major bourses in positive territory. The yield on the 10-year Treasury fell to 2.78 per cent, its lowest since early April, from 2.93 per cent.

Over the weekend, populist parties attempted to form a government, which ultimately failed after Italian president Sergio Mattarella vetoed their choice for finance minister, Paolo Savona, a euroskeptic who once described the eurozone as "a German cage". The Russell 2000 index fell far less than the Dow average, giving up 3.28 points, or 0.2 percent, to 1,623.65.

Hopes that Italy might avoid a potentially damaging general election lifted European markets on Wednesday, bringing Italian bond yields off multi-year highs and dampening some of the recent buying interest for German and US government bonds.

Spain's IBEX 35 jumped 1.8 percent after Spanish Prime Minister Mariano Rajoy was ousted as leader of the country Friday. The 1.1500 level also corresponds to trend line support from the December 2016 lows at 1.0340.

Germany's 10-year yield rose seven basis points to 0.33 percent.

West Texas Intermediate crude gained 1.2 percent to $67.53 a barrel, the first advance in more than a week. Brent crude, used to price global oils, rose 0.1 percent to $75.39 a barrel in London. Sydney gave up 0.5 %, Singapore dived 1.7 % and Seoul was 1.6 % decrease.

On Wednesday Japan's Nikkei 225 stock index dropped 1.5%, South Korea's Kospi dropped 1.8% and the Hang Seng in Hong Kong slipped 1.2%.

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