EU markets stumble then rebound, after Italy rejects constitutional changes
Europe’s stock markets recovered some of their initial declines and the euro also recovered from its early losses on Monday, as investors shrugged off the Italian voters’ rejection of constitutional reforms put to them by their prime minister, Matteo Renzi.
As he said he would, Renzi resigned as soon as the fact of the “no” vote became known in the early hours of Monday, Italian time. He is due to formally submit his resignation to Italian president Sergio Mattarella Monday afternoon.
At noon in London on Monday, the FTSE 100 index was little changed from Friday’s close, at 6743.02, while the DAX was up 1.56% at 10677.58, and the CAC 40 was up 1.09% at 4578.03. The FTSE 100 had closed 22.21 points lower, or 0.33%, at 6,730.72 on Friday, as investors took a cautious stance ahead of the pending Italian referendum.
Among the shares most volatile in the wake of the vote, predictably, were those of Italy’s troubled banks. Shares in ailing Monte dei Paschi di Siena, for example, Italy’s third-largest bank, were roughly 4% lower around noon Milan time. The bank’s managers were due to decide today whether to go ahead with a plan to raise as much as €5bn.
The Italian electorate was said to have rejected the proposed constitutional changes, which had been designed to make the country’s notoriously unwieldy political system more functional, by a relatively wide margin, with 59% voting against it. Turnout was described as high, at around 69%.
Michael Metcalfe, global head of macro strategy for State Street Global Markets, echoed other commentators in observing that if markets were “uncertain about European political risk before the vote”, they will be “seriously unsure” now.
“With an Italian election [due] in 2017, and given the popularity of the Five Star movement and their views on Europe, this means that Italian assets will now attract an additional risk premium,” Metcalfe added.
“The only potential good news in the near term is that, partly in anticipation of this result, Italian equities and bonds have already under-performed significantly in the past month. The euro itself is likely to weaken further, however, with the prospect now of four major elections next year, most of which have the potential to surprise or produce disruption.”
Banking crisis looming?
Other observers warned that the referendum result could yet still trigger another European banking crisis.
Joakim Bornold, financial economist at Nordnet, the Scandinavian banking group, explained that the risk some see now is that because of the political uncertainty resulting from the vote, Italy’s banks will be unable to raise the capital they need from investors. And if a banking crisis is sparked in Italy, it could end up spreading a broader crisis across the region.
Azad Zangana, senior European economist and strategist for Schroders, said the referendum defeat and Renzi’s resignation would “[increase] pressure on the ECB to maintain stimulus”, and represented “a major blow for Italy’s medium to long-term outlook”.
“The question posed in the referendum was related to voting reforms, which would have given the ruling party more power to enact legislative change. Italy’s equal system of power between the Chamber of Deputies (lower chamber) and the Senate (upper chamber) has created gridlock, and is a key obstacle to greater economic reforms,” Zangana added.
“Renzi’s government has already changed the voting system for the Chamber of Deputies to give additional bonus seats to the party that wins the largest number of seats; this is designed to reduce the need for coalition governments. A ‘yes’ vote in the referendum would have completed the reform process in harmonising the system in the Senate, and would have changed the Senate’s role to an advisory role of checks and balances – similar to the UK’s or Germany’s upper houses.
“Instead, with the result of the referendum, Italy now has an incomplete and incompatible electoral system. This will need to be resolved before the next election in 2018, meaning that Italy’s next leader will be lumbered with this task instead of working on boosting growth.”
About the market’s reaction to the news, Zangana said the relative calm observed thus far was due to the fact that “opinion polls had been flagging a defeat for Renzi for some time, and so investors have been reducing their holdings accordingly”.
“The Italian FTSE MIB equities index is currently trading a little lower today, but year-to-date, the index has fallen just over 9%. This represents a substantial under-performance compared to the German DAX 30 (up 13.6%) or the French CAC 40 (up 13%) over the same period.”