U.S. stocks rose on Monday, helped by gains in McDonald's and technology stocks, but Italian shares and bond prices sank after Prime Minister Mario Monti's decision to resign stoked concern about who will lead the euro zone's third biggest economy out of its debt crisis.
The euro had earlier weakened, but it managed to rebound against the dollar and pared most losses versus the yen as some analysts said the reaction to Monti's resignation may have been overdone.
Sentiment in financial markets was cautious as investors awaited any sign of progress in budget talks in Washington to avert looming tax hikes and spending cuts that could push the economy back into recession.
The heightened rhetoric and lack of substantial progress has handcuffed the equities market. The benchmark S&P 500 index has yet to see a move greater than 0.5% in either direction for December, and hasn't moved more than 1% either way since Nov. 23.
"What we have been seeing is any headline that emanates from anywhere in the world will drive the market pretty quickly one way or the other," said Keith Bliss, senior vice president at Cuttone & Co, in New York.
"People are out of the market if they have already got their gains (for the year), and the other thing is anybody that is in the market is just kind of sitting around waiting."
U.S. President Barack Obama met with Republican House of Representatives Speaker John Boehner on Sunday, but the two sides declined to provide details about the unannounced meeting. Obama was expected to make remarks at 2 p.m. (1900 GMT) from Michigan where he is touring an auto plant.
The Dow Jones industrial average gained 31.72 points, or 0.24%, to 13,186.85. The Standard & Poor's 500 Index rose 2.65 points, or 0.19%, to 1,420.72. The Nasdaq Composite Index added 12.76 points, or 0.43%, to 2,990.80.
Shares of McDonald's rose 1.4% to $89.71 after the fast food chain reported stronger-than-expected sales in November, marking a rebound after a rare decline in October.
Technology stocks were the S&P 500's best-performing sector, helped by a 3.6% climb in Hewlett-Packard Co to $14.30 on rumors that activist investor Carl Icahn is building a stake in the PC maker. The stock is down 44.5% for the year and ranks as the Dow's worst performer.
Cisco Systems also buoyed the tech sector after the company laid out its mid-term growth strategy on Friday. Its shares were up 2.2% at $19.77.
Gains in U.S. stocks helped European markets erase losses sparked by the concerns about Italy. The FTSEurofirst 300 index rose 0.2% to end at 1134.53 points, led by STMicroelectronics after the French-Italian company announced plans to quit a loss-making joint venture.
The MSCI global stock index rose 0.2% to 335.21 points.
Monti announced over the weekend he would resign once the 2013 budget is approved, potentially bringing forward an election due early next year. Monti has become an investor favorite over the last year as he spearheaded a reform agenda in a bid to rescue Italy from the threat of a Greek-style collapse.
The news pushed Italy's benchmark 10-year bond yield up to 4.83%, the highest in roughly more than three weeks. Italian shares fell more than 2%, with banks hit hard because of their hefty domestic government bond holdings.
Against the yen, the euro dropped as low as 105.94 yen, its weakest in about two weeks, before recovering to trade at 106.61 yen, little changed on the day. Against the dollar, the euro rose 0.1% to $1.2939.
CHINESE DATA
Commodities markets rose on data from China that showed factory output in the world's number two economy accelerated to an eight-month high in November.
Copper prices hit their highest level in almost two months, gold rose to around $1,712 an ounce, and Brent oil snapped five straight days of losses to climb back around $108 a barrel.
Brent futures jumped to $108.54 before easing back to trade at $107.98, up 96 cents. U.S. crude rose 32 cents to $86.25.
China's implied oil demand broke through the 10 million barrel per day barrier for the first time ever in November, and crude imports also rose, providing more evidence of economic recovery.
"The figures are another confirmation that Chinese oil demand is accelerating again, and there are good reasons to expect that it will carry on growing strongly next year," said Carsten Fritsch, senior oil analyst at Commerzbank in Frankfurt.
U.S. Treasury debt prices rose on concerns over the protracted budget negotiations in Washington, political rumblings in Italy, and expectations for further monetary policy easing by the Federal Reserve when it meets this week.
The benchmark 10-year U.S. Treasury note was up 1/32 in price, with the yield at 1.625%.
The Fed is expected to announce a new round of Treasury securities purchases at the end of its two-day meeting on Wednesday, according to a Reuters poll. The bond buying would replace the "Operation Twist" stimulus, which expires at the end of December.
