The market is expecting a No vote victory of a very tight
race but 20% of the voters were still undecided few days ago. The referendum is
the third opportunity this year, after Brexit vote and Trump’s victory, for
those who want to express the protest against the system and status quo and the
result may be a proxy for upcoming elections in Netherlands, France and Germany.
It seems that the election results this year are a sign of frustration rather
the real call for a change. Hopefully Germany will be the exception link.
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Renzi is planning to change the dysfunctional system
of the government and take some of the powers from regions to be able to
implement the changes and make the governing of the country more flexible
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Italy had already 65 governments since WW2 and
tends more towards populism than pragmatism
-
Senate to become more advisory body to Chamber
of Deputies than decisions stopping one
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The biggest party would have a majority
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Some Italian banks are under pressure as they
have issues with refinancing
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Monte di Paschi is seeking EUR 5 bln few days
after referendum as it needs to increase its capital from EUR 500 mln to be
better position itself and handle the EUR 28 bln portfolio of bad loans
- Unicredit s in talks with potential
investors to increase the capital week after and potential investors may
withdraw from already pre-agreed deal in case of No vote
-
GDP per capita still at the level from ’90, the
economy did not grow over the past 15 years
-
Labour market is frozen, public debt is at 133%
of GDP level and banks are coping with bad loans
What to expect
No vote
-
Means weak government if Renzi decides not to
resign as he had promised
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If he does it will not automatically lead to
snap elections as they may reshuffle the government first
-
If they call for a snap elections populist opposition
leader Grillo may benefit the most and call a referendum on Euro. Even if he
does the outcome will negative for him as 85% of population wants to keep euro.
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Chaos on Italian political scene if Renzi
resigns suddenly and headaches in Brussels
-
Spread between Italian and German 10 year government
bonds reached 186 bps this week and may rise much higher what in turn means
more expensive financing of the state debt
-
Very likely the country rating will be reviewed
with the high risk of downgrade
-
ECB is ready to intervene and buy bonds to
contain the potential selloff and spikes in yields but this step is limited to days/weeks
only as ECB needs an approval from Governing Council to carry such operations
for longer period
Yes vote
-
Brussels will take a breather as populists across
EU would see a rejection of their simple but not working policies and it would
be a positive step on the back of Brexit and Trump’s victory
-
Renzi would have a mandate to go ahead with
constitutional changes and political situation will calm down to certain degree.
Again it will depend also on what margin the Yes will win.
-
After implementing the constitutional changes
the political setup in Italy should be more stable but there is a risk as the
Senators will not be elected but nominated by regions that are the sources of
corruption. That may potentially create an opportunity for so called
politicians to get into Senate without actually being elected.
Market impact
No vote
-
Before going into EURUSD shorts immediately
after No takes the win it would make sense to wait a bit whether Renzi will
announce his resignation immediately and check by what margin the No vote won.
In case of a slim difference the market reaction may not be that profound as in
the case of a decisive No victory.
-
Italian banks and European equities will suffer
but the biggest hit will be taken by Italian banks
Yes vote
-
In case of Yes vote the upside in EURUSD is
quite limited and the underlying trend of USD strength will stay firmly in
place
-
In case of Yes vote, the winner will be Italian banks
and European equities in general. The banks should really benefit also from raising
bond yields due to inflation fears and the fact that the amount of bad loans on
their books has stabilized.
Good luck Champs!
Mr Hawk
DISCLAIMER: This material was created for informational
purposes only and represents the Land of Trading team’s view of the past and
current economic and capital market environment. It is not an investment advice
and should not be viewed that way at all, and the creators of this material
cannot be held liable for any potential losses resulting from trading, where
despite this disclaimer someone would consider this material as an investment
advice. All rights reserved ©2016. Contact: landoftradingATgmailDOTcom
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