December 7, 2016    3 minute read

Renzi Down, Markets Up

The Next Move For Italy    December 7, 2016    3 minute read

Renzi Down, Markets Up

Italian Prime Minister Matteo Renzi clearly lost “his” referendum (by 20 percentage points) and immediately announced his resignation. The single currency plunged to a 20-month low, only to recover by the end of his concession speech.

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What Happened The Day After

International investors were quite pessimistic about the outcome of the Italian referendum (which was about a constitutional reform, not about leaving the EU or the single currency), with the Italian bonds rallying in the final days of the campaign and the spread between the country’s ten-year debt and similar German bunds narrowing by 24 basis points, to 162 points. But were the consequences really that bad? No. Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany, said:

“After Brexit, it took three days for markets to shake it off, with Trump it took three hours, with Italy it took three minutes. […] Markets learned their lessons.”

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On December 6th, the day after the result of the referendum was clear, the FTSE MIB Index closed up by more than 4% – its highest increase since June 24, the day after the British vote on Brexit. With the arrival of US investors in the afternoon, the Milan Stock scored a rally that ranks among the best performances of the year and led the FTSE MIB to close up by 4.15% ,dragged by the banking industry.

Unicredit, the second biggest bank in Italy, gained 12.8%, Mediobanca rose by 9.9% and Ubi by 9.7%. There was some caution regarding Monte dei Paschi (+ 1.1%), with rumours that there will be a public intervention to save the institution.

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On the other hand, Fitch says that there is a chance Italy’s rating will be downgraded from its current BBB+. According to the agency, Italy’s priorities must be “the creation of a stable Government, the revision of the electoral law and the recapitalisation of the banking sector as well as the reduction of the debt/GDP [ration] and new growth prospects'”.

Conclusion

While President Sergio Mattarella asked Matteo Renzi to stay on as Prime Minister to oversee the approval of some urgent laws, it remains to be seen what happens, since the main Italian parties want elections but the Partito Democratico (Renzi’s party) still has a great majority in the Camera dei Deputati.

There is also uncertainty regarding which electoral law to use. Today, there will be a meeting of the leadership of the Partito Democratico and the Budget Law will go up for approval in the Senate. This should pave the way for consultations with the president, which should dispel some of the doubts. But markets will closely watch the ECB meeting tomorrow, which should decide and announce more QE, as well as possible technical adjustments to the purchasing of securities.

At the time this article was written (December 7th) the FTSE MIB Index is at +1.3%, Unicredit at a +6.25% and MPS at a +7.43%. As always, the markets are quite unpredictable, but after all, nobody can predict what markets will do. Except for Warren Buffet.

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