Spain leads Europe stocks higher on breakthrough for PM Rajoy

By Patrick Graham

LONDON (Reuters) - Stock markets rose on Monday, led in Europe by a surge for Spain's IBEX index on signs of an end to 10 months of political deadlock that has paralysed government in one of the countries worst-hit by the euro zone's debt crisis.

The bond yields at which governments in Europe's debt-ridden southern countries fund their budget gaps were also sharply lower, 10-year bond yields falling 5 basis points in Spain and 15 in Portugal after a ratings decision seen as crucial to keeping the European Central Bank buying Lisbon's bonds.

A 2-percent rise for European banking stocks helped most of the continent's major stock markets gain half a percent or more in early trade. The IBEX outstripped its German and French equivalents with a 1.2 percent rise.

Spain's conservative leader Mariano Rajoy was on course to secure a second term in power for his People's Party (PP) after the Socialists agreed to abstain in a confidence vote this week, ending an impasse stretching back to elections last December.

"In the very short term the formation of a government is good news for Spanish spreads," Rabobank analysts said in a morning note.

"However, in the medium term Spain will still be left with a minority government that is likely to face an uphill struggle to pass any legislation."

U.S. stocks are still within sight of all-time highs hit earlier this year while Europe's have recovered from three-year February's three-year lows as the U.S. economy recovers and central banks globally continue to pump cash into the system.

Political risks have moved to the top of the agenda, with Britain's vote to leave the European Union upping the stakes further for German and French elections next year while offering investment opportunities through a sharp weakening of the pound.

"We have seen a stronger open this morning after more corporate activity in the U.S., which will help the media names in the session," said Atif Latif, director of trading at Guardian Stockbrokers in London.

"Also French Connection private equity talk is helping M&A activity (and) this will become a theme given the advantages of the FX weakness allowing more UK listed names to become attractive targets. More M&A will continue for the foreseeable future, but outside of this, the tone in the market remains cautious."

Asian stocks eked out some minimal gains after a sluggish end to last week on Wall Street while China's yuan currency neared 6.80 per dollar, levels not seen in six years and which Beijing intervened heavily to defend in January.

MSCI's broadest index of Asia-Pacific shares outside Japan inched up 0.2 percent. Japan's Nikkei moved in a tight range and was last up 0.2 percent while Shanghai outperformed, rising over 1 percent.

"It feels to us like 'China' has taken a back seat in discussions amongst market participants. We are wary about this apparent complacency," Citi macro strategist Jeremy Hale said.

"We suspect part of the reason is renewed optimism regarding all things emerging markets. To a large degree China has ridden this wave and 'hard landing' fears have ebbed away. But on closer inspection we're not so sure much has changed."

(Additional reporting by Alistair Smout; Editing by Andrew Heavens)