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Update: Italy bonds gain, stocks sink as populists hit roadblock to government

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Update: Italy bonds gain, stocks sink as populists hit roadblock to government

Italian bonds and stocks gained before the FTSE MIB index plunged after Prime Minister-designate Giuseppe Conte gave up on efforts to form a government May 27 following President Sergio Mattarella's rejection of his pick for the economy ministry, potentially paving the way for new elections.

Mattarella summoned Carlo Cottarelli, a former IMF official, for a May 28 meeting after Conte resigned the task of forming a government that would have consisted of populist Five Star Movement and League parties. The Italian president rejected Conte's pick for economy minister, Paolo Savona, who has been a vocal critic of the euro and the European Union and wrote in his most recent book that Italy should draw up a "plan B" to leave the eurozone if necessary, according to media reports.

Cottarelli is expected to be asked to form a stopgap government, but is unlikely to receive parliamentary support, potentially leading to new elections, Reuters said.

The 10-year yields on Italy's government bonds plunged nearly 20 basis points around 3:30 a.m. ET, before recovering to around a 7 basis-point drop to 2.487% as of 4:51 a.m. ET. The FTSE MIB index was initially up 0.49% in Milan, but later sank 2.40%.

The Italian parliament has been in a stalemate since the general election March 4, after Mattarella dissolved the previous parliament in December 2017. The League and Five Star Movement parties had agreed to form a governing coalition and proposed Conte, a law professor with no political experience, as prime minister May 21.