What to know now that Italy has voted ‘no,’ with Renzi set to step down
Italy’s Prime Minister Matteo Renzi has said he will officially resign Monday, after voters rejected his proposals for constitutional reform. What should investors keep an eye out for after his defeat?
Although the referendum on Sunday was officially on Renzi’s plan for legislative overhaul, it was widely seen in Italy as a vote of confidence in the prime minister and his government. In voting “no” — about 60% of those in the ballot made that choice — the Italians have set the stage for an early election and perhaps given local populist parties the chance to deliver a Brexit- or Trump-style shake-up.
But if the political uncertainty lasts, the fallout from the vote could have an effect not only within Italy — on its already embattled banks, for instance — but also beyond the borders of the boot-shaped country. Read on for what to know now Renzi is about to step down.
Boost for euroskeptics in Italy
The black eye for Renzi is seen as a victory for the 5 Star Movement, which opposed his political and economic reforms. The party, which has campaigned for Italy to abandon the euro and to reject EU budgetary restrictions, has as much popular support as Renzi’s own Democratic Party, polls show.
The vote may be a signal Italians are ready to put 5 Star in a position of more political power — something that could threaten the eurozone’s current makeup.
“Italian problems could theoretically spark a systemic crisis in the eurozone,” Holger Schmieding, chief economist at Berenberg, said last week.
Euro hits 21-month low
Europe’s common currency initially slumped as the exit polls indicated a lead for “no” in the ballot. The euro EURUSD, +0.2344% fell to a 21-month low of $1.0505 in Asia, before regaining some ground to $1.0651 during the European trading day.
“The euro is taking a hit on the back of this news as expected, and we anticipate that this move could continue for some time,” said Naeem Aslam, chief market analyst at ThinkMarket, in emailed remarks late Sunday.
“Although, the selloff is not intense, as there is nothing new or any kind of surprise. The market was expecting this outcome and results have come in line with the expectations,” he said.
Stocks shake off jitters
European stocks initially opened with steep losses, but quickly recovered in early European trade. The Stoxx Europe 600 index SXXP, +0.82% rose 1% to 342.67, with most of the national benchmarks in positive territory. U.S. stock futures also reversed earlier losses to trade higher.
“The European open has been dominated by a massive short-cover and hence an interesting surge. There is change that the rally we have seen will be rapidly fade,” said Ipek Ozkardeskaya, senior market analyst at London Capital Group, in emailed comments.
Italy’s FTSE MIB index I945, -0.68% swung between gains and losses and was down 0.2% at 17,058.37 mid-morning in Europe. The benchmark is now down 20% so far in 2016. Ahead of the vote, J.P. Morgan’s chief European equity strategist Mislav Matejka said a drop in Italian shares would be a good opportunity to snatch them up.
More pressure for Italian banks
Italy’s banks have taken the biggest beating in that slide for stocks, as worries grew that the political upheaval would upset efforts to support the country’s struggling big lenders. The FTSE Italia All-Share Banks Sector Index IT8300, -3.10% lost 2.5%, deepening its year-to-date drop to 49% to become one of Europe’s worst-performing indexes.
But like all stocks in Italy, those bank stocks are now priced so low that any further drop would be unwarranted, Matejka said.
“So we think if there is any knee-jerk weakness, it’s great buying opportunity. We would buy into it, because at the end of the day, contagion would be contained by the [European Central Bank],” he said.
Even so, the referendum does put a big question mark over efforts by Banca Monte dei Paschi di Siena SpA BMPS, -4.10% to raise more than $5 billion in capital to plug a hole in its capital cushion. A pool of investment banks advising Monte dei Paschi on its rescue plan will meet later on Monday in Milan to discuss what’s next after Sunday’s “no” result, according to Dow Jones Newswires.
Bonds and ‘systemic risk’
The problems in Italy could — in theory — “spark a systemic crisis in the eurozone,” said Holger Schmieding, chief economist at Berenberg, in a recent note.
A “protracted period of political uncertainty after a ‘no’ vote could exacerbate the Italian banking issues, unsettle the Italian bond market and weigh on business and consumer confidence,” he said.
The yield on 10-year Italian government bonds TMBMKIT-10Y, +6.28% rose 13 basis points to 2.032%.
Even though markets have been anticipating a “no” vote in Italy, Italian sovereigns bond yields may continue to surge as investors will ask for higher return for the risk they are taking, Aslam from ThinkMarkets said.
“The ECB, which is going to meet later this week, will have to provide more details about their plan in order to address this issue. [The] Italian banking sector may become the direct causality of this outcome, and during the European session we could see some more selling,” he said.
The ECB and Italian banks
If market volatility steps up after the referendum, the ECB could temporarily tilt its bond buying toward more Italian government debt.
The result of the vote is likely to crop up in the ECB’s monetary policy discussions when it meets on Thursday, officials and investors told The Wall Street Journal.
The central bank will debate whether to extend its €1.7 trillion ($1.8 trillion) bond-buying program, set to expire in March.
The “no” vote may be seen as heightening the need to keep purchasing €80 billion a month of bonds. Some policy makers have been calling on Draghi to deliver a clear signal on the ECB’s thoughts on winding down its quantitative easing.
“The ECB might chew on the risk that a ‘no’ vote delays absolutely necessary repair work on Italy’s banks,” said Martin Lück, chief German investment strategist at BlackRock Inc., told The Wall Street Journal. “It wants to make sure that doesn’t happen.”
If the ECB does decide to tilt toward Italian bonds, that move could be made without a formal decision by the bank’s policy makers. The ECB has already said it will front-load its bond buying due to the holidays, so any such move would help the Italian bond market into the new year.
The Eurogroup of eurozone finance ministers meets on Monday and is also expected to discuss what’s next after the vote.
Early election?
Whether anti-EU parties become more politically influential may depend on what happens after Renzi’s resignation.
One possibility is for the Italian president, Sergio Mattarella, to ask Renzi to put together a different cabinet and form a new government — but this is seen as unlikely after the referendum defeat.
Alternatively, Matterella could try to put together a “caretaker government,” with a new prime minister, who would work through next year’s budget.
But he could also call early elections, something that opposition parties such as 5 Star and Berlusconi-backed Forza Italia are reportedly pushing for, to happen as soon as possible.
Read: ‘Another victory for the anti-establishment’ and other analyst takes on Italy’s vote
However, mainstream Italian parties are seeking to change existing voting laws before any election. Those laws could help populist parties take more power, by giving them extra seats in Parliament if they win more than 40% of the vote.
Italy’s Prime Minister Matteo Renzi has said he will officially resign Monday, after voters rejected his proposals for constitutional reform. What should investors keep an eye out for after his defeat?
Although the referendum on Sunday was officially on Renzi’s plan for legislative overhaul, it was widely seen in Italy as a vote of confidence in the prime minister and his government. In voting “no” — about 60% of those in the ballot made that choice — the Italians have set the stage for an early election and perhaps given local populist parties the chance to deliver a Brexit- or Trump-style shake-up.
But if the political uncertainty lasts, the fallout from the vote could have an effect not only within Italy — on its already embattled banks, for instance — but also beyond the borders of the boot-shaped country. Read on for what to know now Renzi is about to step down.
Boost for euroskeptics in Italy
The black eye for Renzi is seen as a victory for the 5 Star Movement, which opposed his political and economic reforms. The party, which has campaigned for Italy to abandon the euro and to reject EU budgetary restrictions, has as much popular support as Renzi’s own Democratic Party, polls show.
The vote may be a signal Italians are ready to put 5 Star in a position of more political power — something that could threaten the eurozone’s current makeup.
“Italian problems could theoretically spark a systemic crisis in the eurozone,” Holger Schmieding, chief economist at Berenberg, said last week.
Euro hits 21-month low
Europe’s common currency initially slumped as the exit polls indicated a lead for “no” in the ballot. The euro EURUSD, +0.2344% fell to a 21-month low of $1.0505 in Asia, before regaining some ground to $1.0651 during the European trading day.
“The euro is taking a hit on the back of this news as expected, and we anticipate that this move could continue for some time,” said Naeem Aslam, chief market analyst at ThinkMarket, in emailed remarks late Sunday.
“Although, the selloff is not intense, as there is nothing new or any kind of surprise. The market was expecting this outcome and results have come in line with the expectations,” he said.
Stocks shake off jitters
European stocks initially opened with steep losses, but quickly recovered in early European trade. The Stoxx Europe 600 index SXXP, +0.82% rose 1% to 342.67, with most of the national benchmarks in positive territory. U.S. stock futures also reversed earlier losses to trade higher.
“The European open has been dominated by a massive short-cover and hence an interesting surge. There is change that the rally we have seen will be rapidly fade,” said Ipek Ozkardeskaya, senior market analyst at London Capital Group, in emailed comments.
Italy’s FTSE MIB index I945, -0.68% swung between gains and losses and was down 0.2% at 17,058.37 mid-morning in Europe. The benchmark is now down 20% so far in 2016. Ahead of the vote, J.P. Morgan’s chief European equity strategist Mislav Matejka said a drop in Italian shares would be a good opportunity to snatch them up.
More pressure for Italian banks
Italy’s banks have taken the biggest beating in that slide for stocks, as worries grew that the political upheaval would upset efforts to support the country’s struggling big lenders. The FTSE Italia All-Share Banks Sector Index IT8300, -3.10% lost 2.5%, deepening its year-to-date drop to 49% to become one of Europe’s worst-performing indexes.
But like all stocks in Italy, those bank stocks are now priced so low that any further drop would be unwarranted, Matejka said.
“So we think if there is any knee-jerk weakness, it’s great buying opportunity. We would buy into it, because at the end of the day, contagion would be contained by the [European Central Bank],” he said.
Even so, the referendum does put a big question mark over efforts by Banca Monte dei Paschi di Siena SpA BMPS, -4.10% to raise more than $5 billion in capital to plug a hole in its capital cushion. A pool of investment banks advising Monte dei Paschi on its rescue plan will meet later on Monday in Milan to discuss what’s next after Sunday’s “no” result, according to Dow Jones Newswires.
Bonds and ‘systemic risk’
The problems in Italy could — in theory — “spark a systemic crisis in the eurozone,” said Holger Schmieding, chief economist at Berenberg, in a recent note.
A “protracted period of political uncertainty after a ‘no’ vote could exacerbate the Italian banking issues, unsettle the Italian bond market and weigh on business and consumer confidence,” he said.
The yield on 10-year Italian government bonds TMBMKIT-10Y, +6.28% rose 13 basis points to 2.032%.
Even though markets have been anticipating a “no” vote in Italy, Italian sovereigns bond yields may continue to surge as investors will ask for higher return for the risk they are taking, Aslam from ThinkMarkets said.
“The ECB, which is going to meet later this week, will have to provide more details about their plan in order to address this issue. [The] Italian banking sector may become the direct causality of this outcome, and during the European session we could see some more selling,” he said.
The ECB and Italian banks
If market volatility steps up after the referendum, the ECB could temporarily tilt its bond buying toward more Italian government debt.
The result of the vote is likely to crop up in the ECB’s monetary policy discussions when it meets on Thursday, officials and investors told The Wall Street Journal.
The central bank will debate whether to extend its €1.7 trillion ($1.8 trillion) bond-buying program, set to expire in March.
The “no” vote may be seen as heightening the need to keep purchasing €80 billion a month of bonds. Some policy makers have been calling on Draghi to deliver a clear signal on the ECB’s thoughts on winding down its quantitative easing.
“The ECB might chew on the risk that a ‘no’ vote delays absolutely necessary repair work on Italy’s banks,” said Martin Lück, chief German investment strategist at BlackRock Inc., told The Wall Street Journal. “It wants to make sure that doesn’t happen.”
If the ECB does decide to tilt toward Italian bonds, that move could be made without a formal decision by the bank’s policy makers. The ECB has already said it will front-load its bond buying due to the holidays, so any such move would help the Italian bond market into the new year.
The Eurogroup of eurozone finance ministers meets on Monday and is also expected to discuss what’s next after the vote.
Early election?
Whether anti-EU parties become more politically influential may depend on what happens after Renzi’s resignation.
One possibility is for the Italian president, Sergio Mattarella, to ask Renzi to put together a different cabinet and form a new government — but this is seen as unlikely after the referendum defeat.
Alternatively, Matterella could try to put together a “caretaker government,” with a new prime minister, who would work through next year’s budget.
But he could also call early elections, something that opposition parties such as 5 Star and Berlusconi-backed Forza Italia are reportedly pushing for, to happen as soon as possible.
Read: ‘Another victory for the anti-establishment’ and other analyst takes on Italy’s vote
However, mainstream Italian parties are seeking to change existing voting laws before any election. Those laws could help populist parties take more power, by giving them extra seats in Parliament if they win more than 40% of the vote.
