Italy: What the future has in store for the troubled nation? - Westpac

Tim Riddell, Research Analyst at Westpac, notes that the Italy has rejected Renzi’s Constitutional reforms while Renzi kept to his word and resigned.

Key Quotes

“The current most likely scenario is that President Mattarella will call upon Pier Carlo Padoan, Economy and Finance minister, to form a new coalition Government to steer Italy until scheduled elections in early 2018.”

“Market bias into the referendum was for Renzi to lose. The scale of the loss (60:40, NO:YES with a solid 70% turnout) may have been a surprise, but investors appear to have been “short”. Consequent position covering and the realisation that the result will most likely lead to a replacement government of a similar mould is causing an effective risk positive reaction.”

“However, given that uncertainty will continue and concerns over Italy’s banking system persist, the ECB, which meets on Thursday (8th December), is likely to extend their QE plans beyond the current March 2017 end date.”

“Conclusion

• The potential that the Italian Referendum might generate a widespread period of risk aversion has proved to be greatly overplayed. Even the more conservative profiles we envisaged (outlined in “Uscita”) have failed to transpire.
• The Italian system is well versed in dealing with political crises and this is merely another example.
• Markets have proved to be resilient and the key risk now is whether the forming of a new Government and the refinancing of Monte dei Paschi can occur quickly.

Market Impact:

• EUR/USD has affirmed technical range support and yields spreads look set to consolidate
• The likelihood of an ECB extension of its APP remains high, but debate will be over what form of extension of purchasing beyond March 2017 will be outlined at Thursday’s ECB policy meeting
• Australasian and global yields are now more likely to be governed by US and domestic factors into year-end once the profile of ECB policy is confirmed
• AUD and NZD may lose some ground as EUR short covering continues, but the longer term prospects for EUR gains will be limited by the extension of ECB accommodation.”