Italy bank deal lifts Europe shares, dollar on back foot

By Nigel Stephenson

LONDON (Reuters) - Shares rose in Europe on Monday, with Italian banks gaining after a deal to wind up two failed regional lenders, while the dollar and U.S. bond yields held close to recent lows as subdued inflation raised questions over the outlook for monetary policy.

The-pan-European STOXX 600 share index (STOXX) rose 0.6 percent, led higher by banks (SX7P), after the agreement under which Italy's largest retail bank, Intesa Sanpaolo will take on the remaining good assets of collapsed Popolare di Vicenza and Veneto Banca.

Intesa shares (MI:ISP) rose 3.2 percent. The Italian government will pay it 5.2 billion euros and give it guarantees of up to a further 12 billion euros.

Investors have long viewed the Italian banking sector as a major cause of fragility within the euro zone.

In index of Italian banks (FTIT8000) was up 2 percent and the broader Milan market (FTMIB) rose 1.1 percent.

Italian 10-year government bond yields rose 0.2 basis point to 1.91 percent, widening the gap over benchmark German equivalents by 2 bps to 165.

"There is the danger that other banks need state support, but I think there's more clarity now that there is a solution for the banking sector," said ING fixed income strategist Martin van Vliet.

MSCI's broadest index of Asia-Pacific shares outside Japan (MIAPJ0000PUS) ticked up 0.6 percent as tech led gains.

Trading was slow with many markets in the region closed for holidays to celebrate the end of Ramadan.

Japan's Nikkei (N225) rose 0.1 percent.

Mainland Chinese shares rallied, with the CSI300 index (CSI300) rising 1.2 percent to hit its highest level in almost 18 months, after MSCI said the index provider could raise its weighting of China's mainland-listed 'A' shares.

The euro rose 0.1 percent to $1.1204 , with the dollar steady (DXY) as the gap between short- and longer-dated U.S. government bond yields held close to recent 10-year lows hit on signs inflation is likely to remain subdued.

Investors greeted the election last year of U.S. Donald Trump as likely to lift inflation, and with it U.S. interest rates but price rises have remained stubbornly subdued.

The Federal Reserve raised rates this month for the second time this year and has said it expects to raise again later this year. Futures imply only a 50 percent chance of a further hike by December.

Fed Chair Janet Yellen speaks on London on Tuesday and investors will be on alert for any clues to the rate outlook, after mixed views from other Fed officials in recent days.

"The market continues to call the Fed's bluff on its intentions to change rates. I don't think anything (Fed chair) Janet Yellen can say this week will change that," said Stephen Gallo, head of European FX strategy with Bank of Montreal.

European Central Bank President Mario Draghi speaks on Monday, ahead of a meeting of central bankers in Portugal later in the week.

The yen dipped 0.2 percent to 111.43 per dollar while sterling , on the up since more Bank of England policymakers have either called or said they are likely to call for higher interest rates, rose 0,1 percent to $1.2741.

A major cause of lower inflation globally has been a fall in oil prices in recent weeks on signs an agreement by producers in the Organization of the Petroleum Exporting Countries is failing to curb a global glut of crude.

Brent crude (LCOc1), the international benchmark, rose 59 cents or 1.3 percent to $46.13, buoyed by the weaker dollar. Oil prices are down around 13 percent since late May.

Dollar weakness also lifted copper. The industrial metal rose 0.4 percent to $5,823 a tonne, just shy of its highest since early April.

Gold, however, fell sharply, with traders citing anxiety ahead of U.S. economic data duiker later this week .

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