MORNING BID EUROPE-Italy inches towards new elections

* A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own.

LONDON, Dec (Shanghai: 600875.SS - news) 7 (Reuters) - Next (Frankfurt: 779551 - news) step in Italy's unfolding political saga is the expected approval of next year's budget in parliament later today, a move which will then clear the way for Matteo Renzi to hand in his resignation. The prevailing wind seems to be in favour of holding new elections but it looks as though the country's president, Sergio Mattarella, will first seek to set out a new electoral law -- thus heading off the possibility of a victory by the anti-establishment 5-Star Movement. The most urgent concerns, however, continue to surround the banking sector. It is still not clear how the uncertain politics will affect a mooted state rescue of the ailing Monte dei Paschi (Milan: BMPS.MI - news) bank; and in the meantime, the Italian Treasury has denied a report in La Stampa daily that Italy is set to ask the European Stability Mechanism for a loan of 15 billion euros to cover not just Monte dei Paschi but other struggling banks in the sector.

If you want a sign of how much European politics has shifted in the last year, you could do worse than look at Angela Merkel's call at a party congress yesterday for a ban "wherever possible" on full-face Muslim veils in Germany. Last year, her CDU rejected such a ban; this year it gave her an 11-minute standing ovation after the speech in which she proposed it. Critics will see this call as an opportunistic attempt to shore up her standing, badly damaged by the migration crisis, ahead of next year's election where the anti-immigrant AfD is seeking to win seats in the Bundestag assembly. Even Europe's most powerful mainstream politician is not, it seems, immune from the lure of populism.

MARKETS AT 0755 GMT

The shape of an Italian bank support are emerging, with Italian sovereign yields falling further early on Wednesday on reports the government is preparing a 2 billion euro controlling stake in Monte Dei Paschi and seek a 15 billion euro loan from the European Stability Mechanism to help re-capitalise other ailing banks. The near 9 percent surge in the Italian banking index on Tuesday showed some resolution was being priced in - with European banking stocks more broadly up more than 4 percent. European stock futures, helped by new record highs on Wall St overnight and ahead of Thursday's ECB meeting, are up almost another 1 percent - adding to this week's hefty gains. The ViX 'fear index' of US stock volatility is now back below 12 percent to its lowest since August. And the economic numbers coming through continue to beat downbeat forecasts in the face of all the political uncertainty that some investors are starting to view as a distraction rather than the 'quiet strength', as Standard Life Investments dubs it, of the underlying global economy into yearend. Citi's Economic Surprise Indices for the Euro zone, UK, U.S., Japan and emerging markets are all now in positive territory at the same time - an extremely rare occurance in the 20-year history of the series. Sterling has backed off recent highs, meantime, as the UK Surpreme Court hearing on Brexit enters its third and final session, the government claims it will produce some sort of plan for Brexit and the EU indicates negotiations on leaving should be completed by October 2018. Asia bourses are all up smartly, Brent crude oil prices retreat back below $54. The biggest currency mover overnight was the Australian dollar, which fell on bigger-than-expected GDP contaction in Q3. The Bank of Canada, which is meeting later in the day and is expected to leave rates unchanged but could flag a an expansion of monetary policy next year.

Upcoming events/data/ themes for market reports on Wednesday:

* India interest rate decision

* Europe corp events: Stagecoach H1s,

* France Oct trade balance

* Germany industrial output

* Germany auctions 2-year notes

* UK Supreme Court hearing on Brexit enters third day

* UK Oct industrial/manufacturing output; UK Nov house prices;

* UK auctions 2047 gilt

* UK Treasury Committee holds hearing on housing policy

* Poland interest rate decision

* Ireland (Other OTC: IRLD - news) statistics agency publishes Brexit-related data

* Ghana elections

* Iceland Q3 GDP

* Norway current account

* Bank of Canada interest rate decision

* US Oct consumer credit (Editing by Ralph Boulton)