Europe midday: Stocks higher on Italian debt rally, gains in auto shares

Stockmarkets on the Continent are trading near their best levels of the session with investors breathing a sigh of relief after Italy dodged a downgrade of its sovereign debt for the second time in less than a week.

However, news that German Chancellor, Angela Merkel, wished to step down as leader of the CDU in the wake of her party's poor showing in regional elections in Hesse, at the weekend, took some of the shine off of the news out of Italy.

Commenting on the latter, Craig Erlam at Oanda told clients: "The rather muted reaction in the markets possibly reflects the position Merkel finds herself in. In years gone by, this would have been seen as a major political casualty but in the current environment of rising populism, Merkel’s handling of the refugee crisis – no matter how admirable – is now harming her party. A new face may help to stem the bleeding."

For their part, analysts at Capital Economics cautioned that Merkel's weakened position may make it that much harder to broker an agreement on the Italian budget "increasing the threat of contagion to other markets and adding to the risks to Italian banks".

Merkel's CDU and the SPD, her partner in the current government coalition, both lost roughly 10% of their votes in comparison to the last elections in the Land which is home to the country's financial centre, Frankfurt.

The Green party on the other hand saw its support jump from 11.1% to 19.5%, even as the far-right AfD came away with 12% of the ballot.

As of 1210 GMT, the benchmark Stoxx 600 was advancing by 1.65% or 5.80 points to 358.11, alongside a gain of 2.44% or 456.22 points for Milan's FTSE Mibtel, while the German Dax was ahead by 1.94% or 217.11 points to 11,417.73.

In parallel, the yield on the benchmark 10-year Italian note was down by 12 basis points to 3.32%.

Stoking those gains in Italian BTPs, on Friday, Standard&Poor's reaffirmed Italy's BBB long-term credit rating, although it did lower its outlook on the same from 'stable' to 'negative'.

According to the ratings agency, Rome's draft 2019 budget plans risks eroding investor confidence in the economy's prospects and stifling the incipient recovery in the country's private sector.

Meanwhile, euro/dollar was drifting down by 0.13% to change hands a 1.13899, although it was off an intra-day low of 1.1360.

According to some market commentary, it was the uncertainty around the German CDU that was dragging on the single currency.

On the corporate side of things, it was all about Automobiles, with the Stoxx 600's sector gauge jumping 4.82% to 500.13, after Bloomberg reported that Chinese officials had proposed halving the car purchase tax.

In parallel, and bolstered by gains in Italian lenders' shares, the Stoxx 600 sector gauge was adding 2.61% to 143.55.