LIVE MARKETS-Closing snapshot: bonhomie sweeps Europe

* European shares rise as Italy bounces back, cars rally * STOXX 600 hits 2-1/2-week high * Italy's FTSE MIB up 1.9%; CAC40 has best day since Aug. 8 * Fresh Renault, Fiat tie-up hopes boost shares Welcome to the home for real-time coverage of European equity markets brought to you by Reuters stocks reporters and anchored today by Thyagaraju Adinarayan. Reach him on Messenger to share your thoughts on market moves: thyagaraju.adinarayan.thomsonreuters.com@reuters.net CLOSING SNAPSHOT: BONHOMIE SWEEPS EUROPE (1613 GMT) Bonhomie has swept across European markets today, pushing the major bourses to multi-week highs at the close ahead of a critical speech from the Fed chief on Friday and amid improving sentiment around Italy. The euro-zone benchmark has ended up 1.4% at its highest close since Aug. 2 in a broad-based rally that's lifted all sectors. Paris' CAC 40 had its best day since Aug. 8, up 1.7%, "Markets are still in a mood to rally it seems, perhaps in hope that Jerome Powell will deliver a more accommodative outlook when he speaks on Friday," says Chris Beauchamp, chief market analyst at IG. Volumes were generally lower than usual which is typical for August summer trading. In Italy, things are looking a little brighter than a day ago following the collapse of the coalition - the main opposition party, the Democratic Party (PD) said it was ready to hold talks with the anti-establishment 5-Star Movement over forming a new government. PD would be more conciliatory over budgets and less likely to agitate with Brussels, and creating a new government would avoid snap elections, which have rattled markets lately. On the slate tomorrow are euro-zone, French and German PMI and potentially a decision in Rome over the government and of course the much-anticipated FOMC minutes. (Josephine Mason) ***** DIVERGING FORTUNES IN EUROPE AND U.S. (1142 GMT) The divergence in fortunes between euro-zone stocks and their U.S. peers on the other side of the pond has widened markedly over the past week, the latest sign that investors are getting increasingly jittery about the bloc's economic outlook. There's a growing list of reasons to steer clear of the region: Italy's deepening political crisis, Germany's economic slowdown, Europe Inc's corporate recession and Brexit. For the first five months of the year, the euro-zone benchmark traded at a small discount to the S&P 500, but the gap between the two has widened sharply since June - for the year to date, the U.S. market is up 15.7% while the STOXXE is up 11.5%. To be sure that's still decent - if it maintains that pace until the end of the year, it'd be its best performance for European stocks in six years. But in recent weeks, the disparity has grown (see chart below) - the European index has underperformed the U.S. by 1.5% this month and Bannockburn Global Forex's chief market strategist Marc Chandler reckons that split between the two will only get wider in the coming months. Investors are eyeing the FOMC minutes due for release later today and bracing for Fed chairman Powell's speech on Friday, but news closer to home is likely to determine the euro zone market's direction in the immediate term. Tomorrow advance PMI readings will give an insight into the state of manufacturing in Germany, France and the euro zone and the results of Italian President Sergio Mattarella's deliberations on how to solve the political crisis will likely be known (he has to decide whether to form a new government or call early elections). "Near-term any action that pushes election risk outside of the European 'corridor of uncertainty' would be a positive for Italian and European risk assets," says Edward Park, deputy chief investment officer at Brooks Macdonald. (Josephine Mason) ***** THIS TIME IT'S DIFFERENT IN ITALY (0934 GMT) Another month, another Italian political crisis. But this time it may be different. After PM Giuseppe Conte's resignation yesterday, Italian President Sergio Mattarella now needs to find out if there is a political will to form a new government. If not, he will have to dissolve parliament 3-1/2 years ahead of schedule, and call early elections. The good news is this won't be a long drawn-out process - we should know Mattarella's decision by tomorrow afternoon. Strategists from Deutsche Bank and economists at Berenberg have been running through the scenarios, which are themselves subject to change in this fast moving story, and conclude that the market would view a coalition between the Democratic Party (PD) and 5 Star as most favourable. An added plus would be that if Mattarella allowed them to form a government, it's likely that he would require assurances on the budget beforehand, Deutsche strategists say. The medium-term risk though is that such a coalition is unstable and falls apart leading to an outright victory for the League, run by Matteo Salvini. Berenberg has assigned a probability to each scenario: * 40% chance: Italy avoids snap elections for at least nine months and markets rally as it removes short-term uncertainty of created by snap elections. For that to happen, Salvini's last-ditch attempt to make up with the 5 Star movement would have to fail and 5 Star would join forces with the PD for a new centre-left government. In this scenario, the new government would also agrees on a 2020 budget and stick together afterwards. After some noise, the new government would also strike a compromise with Brussels on the 2020 budget. As the government turns more pro-European and promises to rein in spending, the European Commission reacts with some flexibility and accepts the budget. * 50% chance: Italy dodges the bullet in 2019, but holds snap elections in early 2020. Markets react calmly. The PD cannot bridge their differences with Five Star, Mattarella appoints a technocratic government with the mandate to submit the 2020 budget, with snap elections to follow early next year. In new elections in early 2020, Salvini would still be the frontrunner to become new PM with a parliamentary majority for his party on its own (unlikely), in a coalition with the far-right Brothers of Italy (more likely) or in a broad alliance also including Forza Italia (most likely). The stronger the Forza Italia element in such a government, the more pro-growth and less Eurosceptic its agenda would likely be. * 10% chance: snap elections later this year and bond yields could surge. Mattarella, unwilling or unable to install a technocratic government, calls snap elections for late October or early November. Judging by current opinion polls, Salvini would likely win and become PM. The stronger Salvini would be, the noisier the conflict with the EU over the 2020 budget could become. Here's Salvini on the beach from a couple of weeks back, when he pulled the plug on the year-long ruling coalition: (Josephine Mason) ***** OPENING SNAPSHOT: BOUNCE BACK LED BY ITALY (0715 GMT) European stocks open 0.4% higher with Italy outperforming all major country indices after yesterday's rout. Volumes have subsided recently as investors keenly await comments from Federal Reserve Chairman Jerome Powell at the Jackson Hole symposium on Friday. But before that we have minutes of the Fed's last meeting coming in later today. In single stocks, its German food processing machinery company GEA Group and outsourcing group Capita that are making handy gains (+5%) after Goldman Sachs upgraded its rating on those stocks. Those moves are boosting STOXX industrial index -- top sectoral performer. Other major movers are oil & gas stocks and autos. (Thyagaraju Adinarayan) ***** FUTURES POINT TO SMALL GAINS ON EERILY QUIET DAY (0658 GMT) European stock futures point to a slightly higher open today in a small relief as endless trade war worries, fresh political turmoil in Italy, Brexit and slowing economic growth have kept investors away from making risky bets. In the trade war, U.S. President Trump again showed no signs of backing down in his tussle with China, declaring on Tuesday a confrontation was necessary even if it caused short-term harm to the U.S. economy. It's fairly quiet on the corporate news side, but we're watching out for the usual market-movers -- trade-related sectors and Italian banks. Philips shares might come under pressure after a Reuters reported that the healthcare giant was warned of suspicious sales of its medical equipment to the Brazilian government nearly a decade before an alleged bribery racket was exposed in the Latin American country. British drugmaker AstraZeneca is expected to open lower after it said immunotherapy treatment Imfinzi did not meet the main goal of a late-stage study for advanced non-small cell lung cancer. Italian media report that talks between Fiat and Renault never stopped could give the battered auto sector some relief. Some key headlines: SIX Swiss Exchange eyes H2 boost from EU bourse row AstraZeneca's Imfinzi misses main goal of advanced lung cancer study Philips, under investigation in U.S. and Brazil, fired whistleblower who warned of graft Alibaba postpones up to $15 bln Hong Kong listing amid protests-sources Hammerson names ex-AIG European finance chief as new CFO BRIEF-Stadler Rail Wins Contract From Polish Railway Company PKP Here's your stock futures snapshot: (Thyagaraju Adinarayan) ***** FLAT AS PANCAKE (0530 GMT) Europe poised for a flat open after yesterday's weak close as investors pull risky bets off the table amid deepening Italian political crisis and weakening global growth. Minutes of the U.S. Fed's last meeting is also something to closely watch out for later today as the endless trade wars has recently raised investors' hopes for a lot more monetary and fiscal stimulus. "It didn’t take too long for the rebound that we’ve seen over the last two to three days to run into trouble, as bond yields rolled over again, and the Italian government fell back into crisis, after Prime Minister Conte resigned, thus opening up the prospect of new elections, and a fresh round of uncertainty over Europe’s third biggest economy," CMC Markets analyst Michael Hewson says. Financial spreadbetters IG expect London's FTSE to open 5 points lower at 7,121, Frankfurt's DAX to open 2 points lower at 11,649, and Paris' CAC to open unchanged at 5,344. Conte and deputy PM Salvini​: (Thyagaraju Adinarayan) ***** (Reporting by Danilo Masoni, Josephine Mason and Thyagaraju Adinarayan)