Chris Bailey, European Strategist, discusses market reactions to the electoral defeat of Italy’s Prime Minister Renzi.
The big news from Europe on Monday is not that the Italian electorate voted “no” in Sunday’s constitutional referendum, but that at the time of writing, not only were the broader European equity markets up for the day, the Italian stock market was also in positive territory.
While the size of Prime Minister Renzi’s defeat (60% “no”, 40% “yes”) was a little larger than expected, his loss was widely anticipated, and the majority of portfolio managers were already positioned very negatively. There is short-term political uncertainty in Italy, but the country’s President is likely to conclude that either a continuation of Mr. Renzi’s government or – more likely – a technocratic government led by a senior figure in the current government such as the finance minister is optimal for stability. Notions that this is the first in a series of inexorable steps leading to Italy exiting the European Union remain extreme: Italians largely favour staying within the euro and the European Union but saw the referendum as an opportunity to give the ruling classes a bloody nose.
The European Central Banks will have their latest policy meeting and associated press conference this coming Thursday, December 8. Some of the optimism apparent in European markets today reflects an anticipation that the ECB will confirm a continuation of policy stimulus into 2017, underpinning an economic recovery which is apparent even if growth rates remain below the norms of the 1990s. There is also a growing belief that Italian bank restructuring and consolidation with the aim of strengthening this weak link in the European financial system will continue, aided by both European Union and private-sector capital.
In short, Italy is again troubled – as any country with 63 governments in 70 years tends to be – but Europe and the European Union is not inevitably further weakened by the “no” vote. The stock market looked ahead and saw opportunity at a time of depressed sentiment, as is often the case in the financial markets. 2017 remains a year of threat and opportunity in equal measure for Europe.