Italy: PM Renzi suffers heavy defeat as constitutional reforms rejected - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the euro has weakened sharply in the Asian trading session following the Italian publics’ decision to reject the constitutional reforms proposed by Prime Minster Renzi.

Key Quotes

“It resulted in EUR/USD falling to an intra-day low 1.0506 overnight although it has since recovered some lost ground. The next key support level for the pair comes in at 1.0458 which is the cyclical low from March 2015. A break below would open the door for a test of parity which we are expecting to take place in the first half of next year. The broader financial market impact so far has been relatively limited as evident by only modest gains for traditional safe haven currencies like the yen and Swiss franc. It highlights that investors are not expecting financial market stability to be disrupted significantly in the near-term.”

“It was not a surprise that the Italian public rejected the proposed constitutional reforms as signalled in advance by the opinion polls which is likely one reason for the limited initial financial market reaction. However, the scale of the rejection was larger than expected with 60% voting against and 40% in favour. Voter turnout was high as well with 68% of eligible voters casting their ballot. It sends a strong signal that the Italian public were not happy with the performance of the government alongside the proposed constitutional reforms. The result will be viewed as providing further evidence of the rising popularity of anti-establishment and eurosceptic parties given that both the Five Star Movement and Northern League parties campaigned for the public to reject the reforms. As a result it will heighten investor concerns ahead of next year’s Dutch, French and German elections.”

“However, there has been some relief for Europe’s mainstream parties as Austria voted against the far-right nationalist becoming president. Alexander Van der Bellen, a Green politician who ran as an independent won 53.3% of the vote while his farright opponent Norbert Hofer won 46.7% of the vote.”

“The strong public rejection of the proposed constitutional reforms in Italy could also increase the likelihood of early elections in Italy next year. Prime Minister Renzi has already stated that he will tender his resignation to President Mattarella this afternoon honouring his pledge in the build up to the referendum.”

“The main initial focus will be on the impact of Italian banks. Unfavourable market conditions will threaten plans for Italian banks to raise private capital. The FT has reported that Monte dei Pasch di Siena and its advisors JPMorgan will meet as early as today to decide whether to pull a plan to go ahead with a EUR5 billion recapitalisation. If the private recapitalisation plan fails, Italy is expected to undertake a precautionary recapitalisation of the bank to avoid it being wound down under new EU rules. It would reportedly involve burden sharing by junior bond holders but with indemnification for investors up to a maximum of EUR100k. Further strains on the Italian banking sector and a slowdown of reforms would increase downside risks for Italy’s economy going forward.”