Italian referendum: the markets to watch after the ‘No’ vote

The resignation of Prime Minister Matteo Renzi following a heavy defeat in the Italian referendum on constitutional reform will reverberate around markets. The ones to watch include the euro, the Italian stock market, Italian bank shares and Italian government yields.

The euro

The euro has already been volatile in the wake of Italy’s ‘No’ vote on constitutional reform, and the threat of political instability in the euro area’s third-largest economy as well as potential trouble for its ailing banking system is not a positive for the single currency. It’s not just about Italy. Renzi’s loss after achieving the reverse of his promise to stabilise Italian politics and get the economy going has left populist parties knocking at the doors of power. In the wake of the UK’s Brexit vote, it’s yet another worrying development for an EU facing elections in France, Germany and the Netherlands in 2017.

Those Italian populist parties – Five Star and the Northern League – want to take Italy out of the euro and not the EU, although there appears at this stage to be little appetite among Italians for exiting the single currency. However, none of this is supportive for the euro, and the US dollar is showing little sign of wavering from its long-time uptrend.

The Italian stock market

The FTSE MIB (Italien40 on the IG platform) has underperformed other major European stock indices like the DAX and FTSE 100 so far this year. With a period of political and economic instability beckoning, it doesn’t look like the gap will be closed any time soon. Indeed, the DAX shot higher in the immediate aftermath of the Italian ‘No’ vote widening the gap to the Italian index.

Most Italian companies in the blue-chip index have a high exposure to the Italian economy, which is also heading for a further period of weakness and uncertainty bereft of any government-driven reform or stimulus. The banks and financial services are most exposed, while the pharmaceuticals sector has the greatest amount of revenue coming from outside the country.

Italian banks

The Italian banking system, mired in bad debt, remains extremely fragile to say the least. Banca Monte dei Paschi di Siena, Italy’s third-largest bank, now has to decide whether to continue with an effort to raise €5 billion. Unicredit was expected to follow suit with a capital-raising plan but the referendum vote is not going to make Italian bank debt or equity any more attractive for investors.   

Italian government bonds

As with previous eurozone crises, the market also kept a close watch on Italian government bonds. Rome’s borrowing costs rose by as much as 14 basis points in the early part of Monday’s session, but this sign of risk aversion diminished in line with the bounce in stock markets and the euro. The European Central Bank (ECB) is already buying Italian bonds as part of its QE programme (and had signalled its willingness to step in if turmoil persisted following the referendum).

Yields on bonds such as the ten-year and two-year did spike higher, but this brief echo of the peak of the eurozone crisis in 2011/2012 rapidly faded away. The likely swift installation of a new prime minister to oversee a caretaker government, and the upcoming ECB meeting this week helped to soothe frayed nerves. 

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