NEW YORK U.S. stocks ended higher on Monday, led by gains in McDonald's and in technology shares, but Italian equities and bonds 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 initially weakened on the news out of Italy, 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.
Investors remained cautious as they awaited any sign of progress in budget talks in Washington on averting looming tax hikes and spending cuts that could push the economy back into recession. Concerns that lawmakers will not broker a deal have kept a lid on optimism in the equity market.
"There is a general sense that if a deal is struck, that we could have a further advance in the market at the end of this year as well as the first part of next year," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.
The White House and House of Representatives Speaker John Boehner's office held more negotiations on Monday, but Republicans said they were still seeking a new offer from President Barack Obama.
The Dow Jones industrial average .DJI gained 14.75 points, or 0.11 percent, to close at 13,169.88. The Standard & Poor's 500 Index .SPX rose 0.48 points, or 0.03 percent, to end at 1,418.55. The Nasdaq Composite Index .IXIC added 8.92 points, or 0.30 percent, to 2,986.96.
Shares of McDonald's Corp (MCD.N) rose 1.1 percent to $89.41 after the fast food chain reported stronger-than-expected sales in November, marking a rebound after a rare decline in October.
Gains in technology stocks were led by Hewlett-Packard Co (HPQ.N), which rose 2.6 percent on rumors that activist investor Carl Icahn is building a stake in the PC maker. Cisco Systems (CSCO.O) advanced 2.4 percent after the company laid out its mid-term growth strategy on Friday.
The FTSEurofirst 300 index .FTEU3 rose 0.2 percent to end at 1,134.53 points. The MSCI global stock index .MIWD00000PUS edged up 0.2 percent to 335.07 points.
Monti announced over the weekend he would resign once the government's 2013 budget is approved, potentially bringing forward an election due early next year. Monti became an investor favorite over the past year as he spearheaded a reform agenda to rescue Italy from the threat of a Greek-style collapse.
Italy's benchmark 10-year bond yield rose to 4.83 percent, the highest in roughly more than three weeks. Italian shares .FTMIB fell more than 2 percent.
The euro fell to 105.94 yen, its weakest point in about two weeks, before recovering to trade flat at 106.58 yen. Against the dollar, the euro rose 0.1 percent to $1.2942.
Commodities markets rose on data from China that showed factory output in the world's No. 2 economy accelerated to an eight-month high in November.
Copper prices hit their highest level in almost two months, gold rose to around $1,711 an ounce, and Brent oil snapped five straight days of losses. <O/R><GOL/><MET/L>
Brent futures rose to $108.54 before easing back to settle at $107.33, up 31 cents. U.S. crude fell 37 cents to settle at $85.56.
China's implied oil demand broke through the 10 million barrel per day barrier for the first time in November. 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, the 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 2/32 in price, with the yield at 1.6164 percent.
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.
(Additional reporting by Gertrude Chavez-Dreyfuss, Chris Reese, Leah Schnurr and Caroline Valetkevitch; Editing by Leslie Adler; and Peter Galloway)