European markets rise despite Italian political drama

New York - European stocks and the euro rebounded on Monday as investors shrugged off an Italian referendum outcome that led to the resignation of Italian Prime Minister Matteo Renzi.

The region's markets began the day in negative territory, with Milan tumbling 2%, but recovered somewhat with sentiment soothed also by the defeat of the far right in Austria's presidential election.

US stocks notched strong gains, with the Dow climbing to its second record in three days and the tech-rich Nasdaq adding 1%.

Renzi stood by his promise to resign after his attempt to change the constitution was overwhelmingly rejected in Sunday's poll. He is expected to leave by the end of the week.

The referendum verdict sent the European single currency crashing to $1.0506 - the lowest level since mid-March 2015 - before bouncing back to $1.0768.

Equities also staged a recovery. Frankfurt jumped 1.6% on the day, Paris gained 1.0% and London added 0.2%, reversing initial losses.

Milan stocks closed down 0.2%, with banking shares slumping from three to 8%.

"Most European stocks rallied on Monday, a sign that they are hopeful of averting a full blown political crisis in Italy," said Joe Manimbo, senior market analyst at Western Union Business Solutions.

"It also helped that a pro-EU candidate won Austria's presidential election, which dealt a blow to the rising populist movement, a source of much political uncertainty in the bloc."

In Austria, Greens-backed independent candidate Alexander Van der Bellen swept to victory on Sunday.

"The defeat of the far-right Norbert Hofer by Alexander Van der Bellen in Austria provided a chink of light for the euro, preventing its more excessive losses from sticking around for too long," said Spreadex analyst Connor Campbell.

Italian bond yield climbs

Italy's referendum result also sent the yield on Italy's 10-year government bonds jumping to as high as 2.062% - the highest since Thursday - from 1.902% on Friday.

Analysts remain concerned that political instability could scupper Italy's efforts to resolve a bad loans crisis in the banking sector and spark fresh eurozone turmoil.

"Italian risk has undoubtedly increased with the banks no longer the only major threat," said Craig Erlam at currency trading group Oanda.

"Italy now poses a great threat to the European project and with elections now likely to take place next year, alongside those in the other two largest economies in the eurozone, there's likely to be a lot more talk once again of a break-up with 'Itexit' this time possibly being the straw that breaks the camel's back."