The euro has continued to hold firm after recovering from its early falls in the wake of the Italian referendum. Against the dollar, it is currently at $1.076, its highest level since the middle of November. Meanwhile the pound is down around 1% against the single currency, at €1.1812.
Italian bond yields, which initially spiked higher, fell back from earlier highs and are currently up around 6 basis points at 1.97%.
On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.
Bank of England governor Mark Carney has called on governments to tackle the problem of inequality around the globe. Katie Allen reports on his speech in Liverpool:
The governor.. has issued a rallying cry to policymakers across advanced economies to tackle the causes of a growing sense of “isolation and detachment” among people who feel left behind by globalisation.
Mark Carney used his first big speech since Donald Trump swept to power in America, to warn that open markets are under threat and that politicians must do more to share out the gains of global trade and the rise of technology.
Carney reiterated the Bank’s stance that monetary policy could not be held accountable for rising inequality. He gave no new hints on the direction of interest rates in the UK and said rate-setters would continue to trade off the opposing forces of rising prices and uncertainty stemming from the Brexit vote.
The main focus of his last speech of an eventful year, was inequality and he described current times as “the first lost decade since the 1860s”.
Carney noted the rise in living standards around the world in recent decades and said technological progress had lifted more than a billion people out of poverty. But he recognised those advances had not been felt equally.
The full report is here:
European markets close higher
Despite initial falls after the result of the Italian referendum and the subsequent resignation of prime minister Matteo Renzi, European markets have recovered to end the day higher. Apart that is from Italy itself, which fell back slightly. Earlier we listed six reasons why markets did not drop sharply after the Italian news. The final scores showed:
- The FTSE 100 finished 16.11 points or 0.24% higher at 6746.83
- Germany’s Dax jumped 1.63% to 10,684.83
- France’s Cac closed up 1% at 4574.32
- Spain’s Ibex ended up 0.67% at 8664.7
- In Greece the Athens market added 1.03% to 620.29
- But Italy’s FTSE MIB fell 0.21% to 17,050.21. In the struggling bank sector, Monte dei Paschi lost 4% ahead of news of the fate of its rescue plan, while Unicredit dropped 3%
On Wall Street, the Dow Jones Industrial Average hit a new record high of 19,274.85 but is currently off its best levels, up 0.33% at 19233.
Italy’s bonds are likely to continue to come under pressure despite the - relatively - muted response to the referendum, says Simon MacAdam at Capital Economics:
The rejection of the Italian government’s constitutional reforms in Sunday’s referendum is not in itself a game-changer for the bond markets of Italy and the rest of the euro-periphery. But it may represent Italy’s first step along a path towards the euro-zone’s exit door. As a result, we think that the risks for Italian bond yields are skewed to the upside.
The outcome prompted little reaction in financial markets. The euro’s fall proved short-lived and the yield of 10-year Italian government bonds rose by just 10bp or so to around 2.0%. This is hardly surprising given that a “No” vote and subsequent resignation by Prime Minister Matteo Renzi had largely been discounted, and that the risk of an imminent Italian exit from the euro-zone remains very small.
So what happens now? Despite doubling in recent months, the 10-year yield is not abnormally high and is a far cry from its level at the height of the euro-zone crisis in 2011. In fact, if anything, it – and the yields of other bonds – have been kept artificially low by the ECB’s asset purchases in the past two years. So there is plenty of scope for it to climb as political events unfold against a backdrop of renewed economic stagnation and ongoing concerns about the country’s banking sector...
Admittedly, any substantial rise in the yield will probably depend on a snap election being called, which would give the anti-euro Five Star Movement (M5S) an opportunity to seize power. While we doubt there will be an early election, we cannot rule out the possibility altogether...
Granted, the euro-zone authorities are far better equipped to deal with upward pressure on yields today than they were back in 2011/12. However, such support would probably be conditional on certain commitments being made by the Italian government, especially regarding continued membership of the monetary union. This would be a difficult condition to satisfy if M5S, potentially along with eurosceptic allies in other political parties, were to form a government and pledge to hold a referendum on euro membership. So in this case, we think Italian bond yields would surge.
Even if the “best-case scenario” for bonds came to pass – where a new Prime Minister were asked to head the existing government relatively quickly and an early election were avoided – we expect that it would only provide temporary respite for Italy’s bond market given the country’s troubles.
The market may not have gone into meltdown after the Italian vote, but there could be some weakness ahead, not least because of the latest European Central Bank meeting later this week. Chris Beauchamp, chief market analyst at IG, said:
They came, they saw and they voted. Italy’s decision to reject Renzi’s constitutional reforms has not produced the feared apocalypse in global markets. Instead, we have seen European markets trade in positive territory, aside of course from the Italian index, which is still under pressure thanks to its embattled banking sector.
Europe’s bounce today definitely has the ‘relief rally’ feeling to it, so in the face of a rising euro and pre-ECB nerves it will be interesting to see whether gains can be sustained in coming sessions. No-one really expected Brexit or Trump, but here the result was priced in, and as a result we may well have to endure some extended weakness now that the initial excitement is out of the way.
Back with Italy, and Reuters is reporting the fate of struggling Monte dei Paschi may not be known for a few days yet:
Decision On Monte Paschi's Recapitalisation Plan To Be Taken In 3-4 Days After Political Situation Becomes Clearer – RTRS Sources
— Livesquawk (@Livesquawk) December 5, 2016
Potential investors in the bank’s cash call are reportedly waiting to see the political developments before making any commitments.
Updated
More on the ISM figures:
strong production and employment the standouts within a robust non-manuf ISM report pic.twitter.com/JqzSVclS7T
— econhedge (@econhedge) December 5, 2016
The US data is likely to increase speculation of an interest rate rise next week. Dennis de Jong, managing director at UFX.com, said:
An above-expectations uptick in ISM non-manufacturing PMI for November suggests that the US services sector – which accounts for two-thirds of the country’s economic activity – has remained a robust proposition in the weeks since Donald Trump’s surprise election victory...
The most immediate implication of today’s data is its impact on next week’s FOMC meeting, where Fed Chair Janet Yellen is expected to finally pull the trigger on the first interest rate hike for a year.”
Strong performance from US services sector
Despite the worries about Europe and the surprise election of Donald Trump as US president, the country’s service sector put in a strong performance in November.
The ISM non-manufacturing PMI came in at 57.2, up from 54.8 in October and better than the forecast 55.4. This is the highest figure since October 2015.
Earlier there were also PMI figures from Markit which came in broadly in line with expectations:
US Markit Services PMI Nov F: 54.6 (est 54.7; prev 54.7)
— Livesquawk (@Livesquawk) December 5, 2016
-Markit Composite PMI Nov F: 54.9 (est 54.9; prev 54.9)
Ireland’s finance minister, Michael Noonan, has told reporters in Brussels that the European Central Bank won’t let Italy’s banks failed.
Speaking before this afternoon’s eurogroup talks, Noonan said:
It’s always a concern when you hear about banks being weak, and some Italian banks are weak.
But the president of the European Central Bank, Mario Draghi, is Italian and I can’t envisage a situation in which the ECB under Mario Draghi will let the Italian banks get into difficulty.
Draghi won’t be around for ever to save the Italian banks, though - his term expires in October 2019.
This reliance on poor old Mario has to end sometime https://t.co/hkkFJfrZBm
— Brenda Kelly (@Brenda_Kelly) December 5, 2016
Updated
Dow Jones hits new record high
Over in the US, the post election market rally continues. The Dow Jones Industrial Average has hit a new peak of 19,261 lead by banking stocks and - with the continuing rise in the crude price - energy companies.
The index has slipped back from the record high but is still up around 73 points or 0.3%.
The S&P 500 opened 0.4% higher and the Nasdaq Composite 0.5%.
Eurogroup finance ministers are now holding talks about Greece’s bailout, and Athens’ repeated calls for debt relief.
However, we’re not expecting any major breakthrough today, as the latest review of its bailout programme isn’t finished yet.
Yikes! Italian banking shares are falling again as the markets watch anxiously for signs that the plan to recapitalise the sector is at risk.
The morning bounce back of Italian bank shares has been reversed: pic.twitter.com/B9E7giMSDd
— Ben Chu (@BenChu_) December 5, 2016
Italian banks -50% this year, on course for a bigger fall than 2011 at the height of the euro debt crisis. pic.twitter.com/5LqqAlpXLE
— Jamie McGeever (@ReutersJamie) December 5, 2016
There’s no word yet about Monti dei Paschi’s €5bn capital raising plan, following the meeting of investors who had been planning to back the cash call.
The eurogroup is also calling on Germany, the Netherlands and Luxembourg to boost their spending to help Europe’s economy grow.
In a statement, they say that the three countries are “over-achieving” their medium-term objectives (ie, running fiscal policy that is too tight).
“The Eurogroup acknowledges that these member states could use their favourable budgetary situation to further strengthen their domestic demand and growth potential, depending on country specific circumstances, while respecting the medium-term objective, the national budgetary prerogatives and national requirements.”
Asked if Sunday’s vote is a blow to European reform plans, Dijsselbloem says
The referendum took place, the Italian people said no, that’s clear.
On a wider level, all European counties need to ensure they have modern judicial systems, political systems capable of taking difficult decisions, and efficient public administrations.
The next Italian government will have to consider whether constitutional reforms are needed, he adds.
Economist Megan Greene isn’t surprised that Italy can’t commit to new budget cuts or privatisations today, as the eurogroup would have liked.
Well yes, it's tough to commit to stupid extra budgetary measures when the govt has no head and is staring down a banking crisis! https://t.co/YotxL4vWuW
— Megan Greene (@economistmeg) December 5, 2016
Updated
Eurogroup: Italy must take steps to get its budget in line
Ouch! Jeroen Dijsselbloem singles out Italy as one of eight eurozone members whose 2017 budgets aren’t up to scratch.
Today’s meeting agreed that Belgium, Italy, Cyprus, Lithuania, Slovenia, Finland, Spain and Portugal have submitted budget plans that risk non-compliance with the eurozone’s budget rules, the eurogroup chief tells today’s press conference.
For seven of those countries, their respective finance ministers all agreed to take new steps to ensure their budgets are in line.
But obviously Italy’s Pier Carlo Padoan has ducked out of today’s meeting to address domestic matters.
And Dijsselbloem admits that “it’s impossible’ to expect Italy to commit to new measures right now.
We agreed that at this juncture, it’s difficult for the Italian government to commit now to new additional measures. The eurogroup invites Italy to take necessary steps in the near future to ensure that its budget is compliant, he concludes.
Spoke to Italian minister Padoan today. Due to political situation impossible for Italy to commit now to take extra budgetary measures
— Jeroen Dijsselbloem (@J_Dijsselbloem) December 5, 2016
Updated
Heads-up. The eurogroup are holding a press conference now, following this morning’s talks (they’re spoiling us with a SECOND press conference tonight).
Eurogroup president Jeroen Dijsselbloem says ministers have been discussing the draft budget plans for 2017.
He says the eurozone economy is continuing to recover.
Growth is forecast in every member state, and will continue to strengthen. And “almost all member states” are expected to achieve the target of keeping their deficits below 3% of GDP.
Renzi resignation and Greek bailout dominate eurogroup meeting
Several eurozone finance ministers have played down the dangers posed by Italy, as they gathered in Brussels for today’s eurogroup meeting -- where Greece’s call for debt relief will be discussed.
Germany’s Wolfgang Schäuble said he didn’t see a crisis looming, but insisted that Rome must press on with economic reforms.
He told reporters that:
“There is no reason to talk about a euro crisis”
“I think we have to take this with a dose of serenity.
Italy urgently needs a government that is ready to act.”
France’s Michel Sapin argued that Italian voters hadn’t rejected the EU yesterday:
“The referendum was a question on domestic Italian politics... not about Europe, on European policy, or on the place of Italy in Europe.”
Eurogroup ministers didn’t seem too distraught by Renzi’s fall, either, judging by these photos:
Thanks to AFP for the quotes.
Updated
No wonder City veterans talk about “playing the Forex”:
From a 20-month low to a 2-week high in the same day - the euro is all over the place https://t.co/zWJdXbYBae pic.twitter.com/00jikYWJFd
— Bloomberg (@business) December 5, 2016
Writing in the Economist, John Hooper explains why the rescue of Monte dei Paschi bank is now in trouble:
Many observers had expected a No vote, if a narrower one, and markets have already priced in some of the risk. But the defeat worsens the problems of Italy’s banking system, and particularly of its shakiest bank, Monte dei Paschi di Siena (MPS), the country’s third-largest. The government has solicited institutional investors to recapitalise MPS, but many had made investment conditional on a Yes vote. Some will see the result as proof that Italy is incapable of reform, and may pull back.
Italy could soon face an agonising choice between three options. One would be to nationalise MPS. The second would be to rescue it under new European Union rules that would heap losses on to investors, among them retail investors who hold most of MPS’s subordinated debt. Or, faced with the prospect of having to impoverish these voters, the government might simply decide to break the rules, whatever the cost to the credibility of the single currency and its nascent banking union.
My take on a "mortifying" defeat for Matteo #Renzi. https://t.co/ZTNMmzFYyW
— John Hooper (@john_hooper) December 5, 2016
Italy’s referendum result isn’t the trigger for a new eurozone crisis, insists Dutch finance minister Jeroen Dijsselbloem.
Arriving in Brussels to chair today’s eurogroup meeting of finance chiefs, Dijsselbloem told reporters in Brussels that:
“I don’t believe it is (the start of a new crisis). There is no reason for that. Political instability makes it more complicated for Italy and the euro zone. But it is a new reality we have to work with.”
“Italy is a large economy, one of the largest in Europe, it has strong institutions. You can see that market reaction so far has been moderate.”
Oh dear, and it was all going so well. https://t.co/PLu3qZahkN
— James Mackintosh (@jmackin2) December 5, 2016
The euro has also rallied against the pound this morning.
It’s up around 0.3% today, pulling sterling down to €1.189. It had been as high as €1.20 in overnight trading, as Asian markets reacted to the Italian vote.
Euro hits two-week high
Boom! The euro just hit its highest level since mid-November, as the single currency shakes off Italy’s referendum result.
It just hit $1.07 against the US dollar, or almost 1.5 cents above Sunday night’s lows.
City analyst Louise Cooper has a few theories as to why:
- A lot of the political risk of Italy voting No was already priced in. Unlike Trump and Brexit, this was an outcome the pollsters expected.
- Secondly Italy has a long history of political instability. Today’s resignation and the possible creation of a technocratic government is not that unusual.
- Thirdly, Traders and investors learnt from Tump and Brexit, to buy on short term weakness. You could have made 10% out of the FTSE100 and the S&P500 if buying at the bottom and selling just a couple of weeks later.
- And fourthly no one quite knows where this referendum vote takes us. It maybe could take us eventually to Italy leaving the Euro. But we are a long way from that eventuality.
Updated
This Bloomberg screen grab shows how some Italian bank shares were hit this morning:
UniCredit is biggest loser among Italy's banks. It will be difficult to raise €12bn of fresh capital after referendum defeat. pic.twitter.com/RwJO9un4Mv
— Holger Zschaepitz (@Schuldensuehner) December 5, 2016
City investors are watching Italy nervously for signs that the programme to strengthen its banks is still on track, or veering off course.
Matteo Renzi’s resignation increases the risk that the banks can’t be rescued with private sector money, and will need an official aid package.
And that would be politically awkward, as bond holders must be ‘bailed in’, meaning losses for some investors. It’s not clear if those losses would extent to retail investors (individual households).
We’re expecting to hear news within hours from the crucial meeting of investors who had been planning to join the €5bn cash call for Monte dei Paschi. If that deal falls apart, Italy’s oldest bank might be part-nationalised, says the FT.
Italian markets volatile ahead of key decision on banks https://t.co/ZnxHmpWs04
— fastFT (@fastFT) December 5, 2016
G+ economist Lena Komileva believes Renzi’s defeat could accelerate the push to recapitalise Italy’s banks, and encourage Brussels to approve any plan.
#italy No vote ups chance of Italian bank recapitalisation deemed "systemic" and EU approval of government support https://t.co/lKqE8KTVAs
— Lena Komileva (@komileva) December 5, 2016
Markets recover as investors bet against early elections
Matteo Renzi can take some credit for calming the markets today, by promising to resign so swiftly last night.
That pledge diluted the uncertainty created by the referendum result, says Carlo Alberto De Casa, chief analyst at ActivTrades:
“Renzi’s quick decision to resign was the best thing in this situation for Italy. “The next few hours will be crucial for the country, trying to understand if they will go to vote or if there will be a technocrat government to reform the electoral law.
Indosuez Wealth Management chief economist Marie Owens Thomsen dismisses talk of a new eurozone crisis.
“Our base scenario is a caretaker government which could be in place before Christmas, and no new elections before 2018.
“If indeed things pan out according to our base scenario, there would be little reason for any broad-based turmoil. It is still utterly unlikely that Italy would leave the EU or the euro.
So this has helped the euro claw back last night’s losses (it’s now worth €1.065 again).
CNBC’s Gemma Acton points out that the European Central Bank meets on Thursday, and could reassure the markets by extending its QE scheme by another six months (it expires in March 2017).
#ECB lookahead post-#italyreferendum https://t.co/9vFG9qTU59 pic.twitter.com/IVclmD1rOW
— Gemma Felicity Acton (@GemmaActon) December 5, 2016
Italy’s finance minister, Pier Carlo Padoan, has pulled out of today’s meeting of eurozone finance ministers.
That may mean he’ll be involved in the post-Renzi talks today:
Padoan has cancelled a planned trip to Brussels. He could be the next PM
— Steph Kirchgaessner (@skirchy) December 5, 2016
6 reasons why the markets aren't plunging today
Here are a few reasons why the financial markets aren’t having an almighty tantrum over Matteo Renzi’s resignation.
1) Renzi’s defeat was priced in.
After a bad year, opinion pollsters can celebrate getting one vote right. They’ve been predicting for months that the No campaign would win Sunday’s referendum, so investors have had plenty of time to prepare.
Lee Hardman, currency analyst at MUFG, explains:
“The broader financial market impact has, so far, been relatively limited as evident by only modest gains for traditional safe haven currencies like the yen and Swiss franc. Investors are not expecting financial market stability to be disrupted significantly in the near-term.
“The rejection was signalled in advance by the opinion polls – one likely reason for the limited initial financial market reaction.
The euro is now recovering from earlier losses, digesting the #Renzi exit. Markets adopting a 'I've seen worse' attitude. This is so 2016. pic.twitter.com/fPdAA8pWAi
— Maxime Sbaihi (@MxSba) December 5, 2016
2) Italy isn’t about to crash out of the eurozone.
Greece proved last year that it’s very hard to check out of the single currency, even if relations with your creditors have hit breaking point. Italy isn’t facing funding problems, and the public aren’t clamouring for a return to the lira.
Quick recap #italyref
— Ferdinando Giugliano (@FerdiGiugliano) December 5, 2016
Yes,Renzi will resign
Yes,several banks are in trouble
No,unlikely there will be an election
No,Italy isn't leaving €
3) Super Mario is standing by
The European Central Bank has weapons on hand to help Italy, if needed.
If borrowing costs spike, the ECB can step in and mop up some bonds. That’s only a short-term fix, but it might deter speculators from taking on Mario Draghi and trying to profit from the political instability.
.@PoliticoRyan: Renzi’s resignation is no earthquake: Italy will have its 65th government since 1945 — it’ll likely manage
— Andy Langenkamp (@AndyLangenkamp) December 5, 2016
4) Yesterday’s vote was (partly) about preserving the status quo
Renzi was defeated by a broad-ranging coalition which included respected former PM Mario Monti, as well as the radical Five Star Movement.
City analyst Marc Ostwald argues that we shouldn’t see it as just a populist revolt:
Their argument that the Italicum would concentrate too much power in the hands of the PM, and thus heightens the risk of the emergence of a Mussolini type figure, while technically undeniable, is still a smokescreen for the preservation of Machiavellian modus operandi that has seen have 64 governments since World War II - it has therefore precisely nothing to do with either the Brexit referendum or Trump’s presidential victory
And it’s also possible that whoever succeeds Renzi as PM will push through electoral reforms (unless a snap election is called).
5) This might speed up the task of fixing Italy’s banks.
No-one doubts that the Italian banking sector needs serious repair, to tackle the bad loans that have been lingering since the financial crisis struck.
So Renzi’s defeat could spur banking bosses into taking tough action, such as ‘bailing-in’ bondholders and merging with rivals.
Claudio Scardovi, managing director of AlixPartners, says “urgent restructuring and consolidation is needed”
There must be a radical restructuring plan for ailing banks, some of which could entail a partial “bail in” and liquidation, potentially accompanied by a pre-emptive government recapitalization for an estimated Euros 10-20 billion.
“These restructurings are likely to be followed, or accelerated in parallel, by a long overdue consolidation of the Italian banking system through mergers and acquisitions of small and mid-sized banks.
6) Investors could be too complacent, and not thinking of the long-term
Many commentators are pointing out that Italy goes through a lot of prime ministers, so Matteo Renzi’s defeat isn’t all that important.
I’m not totally convinced -- Italy doesn’t have a stockpile of reforming politicians to dip into, so Renzi (once seen as The Man to tackle its problems) may be sorely missed.
Alberto Nardelli of Buzzfeed (an Italian politics expert) argues that the anti-euro forces have been strengthened:
There are lots of smart (and influential) commentators who saying "no big deal" in Italy. They're wrong:
— Alberto Nardelli (@AlbertoNardelli) December 5, 2016
The next time Italy goes to the polls you have a 3 horse race: 1) M5S 2) PD (in disarray) and 3) centre-right/Lega - they all could win
— Alberto Nardelli (@AlbertoNardelli) December 5, 2016
Unlike in other countries, you have two viable populist (and anti-euro options). The "no big deal" brigade should chew on that for a moment.
— Alberto Nardelli (@AlbertoNardelli) December 5, 2016
But in the short term, investors have more immediate issues -- like Britain’s exit from the EU, and Donald Trump’s imminent arrival in the Oval Office.
European Central Bank Governing Council member Ewald Nowotny says we shouldn’t panic about Italy’s banking sector:
He told a news conference in Vienna:
“These are problems of individual banks. It is not a problem of the entire banking system. It is therefore important to tell the difference and these are in my view problems that can be solved.”
This chart from Sky News’s Ed Conway shows how the euro has recovered from its tumble on Sunday night, when the Italian exit polls showed that Renzi had lost:
The euro is now almost back to where it was before the referendum result emerged. Here it is vs US$: pic.twitter.com/ql6OLala7v
— Ed Conway (@EdConwaySky) December 5, 2016
Ed also agrees that we shouldn’t panic about the selloff in Italian bonds this morning:
Italian bond yields are up. But no higher than a few days ago. Contrary to some of the over-excited headlines, markets NOT panicking pic.twitter.com/0WpKsNWV1O
— Ed Conway (@EdConwaySky) December 5, 2016
European economics commissioner Pierre Moscovici has urged investors not to turn Italy’s political drama into a crisis.
Moscovici told France 2 television that:
“It’s a solid country with solid authorities and I have complete confidence that Italy can handle this situation.
There is some political instability but the country is extremely stable and it’s also a big economy.”
Moscovici also denied that the result was another snub to the European Union:
Nothing to do with it....It’s a domestic constitutional amendment in Italy which has not managed to get through.
(thanks to Reuters for the quotes)
Updated
The cost of insuring Italian debt against default has hit a three-year high today, but it remains well below crisis levels.
Reuters has the details:
Five-year Italian credit default swaps rose nine basis points from Friday’s close to 180 bps, their highest since December 2013, according to data from Markit.
Renzi has said he will resign and this may open the door to early elections next year and the possibility of an anti-euro party, the 5-Star Movement, gaining power.
Italian banking shares are bouncing back from their early losses.
Even Monte dei Pasche has jumped -- perhaps a sign that its €5bn rescue plan is still on course?
Lol. 30mins into trade, Italian stocks now in the green. FTSE MIB up 0.35%. #italianreferendum @CNBC @CNBCi
— Louisa Bojesen (@louisabojesen) December 5, 2016
Markets shrug off Renzi's defeat (for now, anyway).
As feared Italy’s main stock market has fallen at the start of trading.
But it’s just rebounded, following other European markets higher!
Germany’s DAX has jumped by 1%, and the FTSE 100 is showing solid gains too:
This is partly because many investors had expected the Italian public to reject Renzi’s constitutional reforms -- which would have weakened the Senate and given the prime minister more power.
And if Renzi’s administration is succeeded by a coalition, rather than by immediate snap elections, the immediate impact of his defeat may be limited.
But in the long term, Italy’s deep-seated economic problems remain.
Maria Paola Toschi, global market strategist at JP Morgan Asset Management, fears “negative implications” for the Italian economy.
Structural issues in Italy have contributed to a prolonged period of low growth and declining competitiveness in recent decades. Renzi and his government pursued a very ambitious programme of reform aimed at addressing some of these issues—of which the Senate reform that has been voted down in the referendum was a crucial part.
The referendum was therefore seen as a political test for the government—and the No victory was considered a vote of no confidence, putting at risk the survival of the current coalition.
Updated
The euro is continuing to claw its way back from last night’s dive, as investors digest Renzi’s defeat.
The euro is now almost back to where it was before the referendum result emerged. Here it is vs US$: pic.twitter.com/ql6OLala7v
— Ed Conway (@EdConwaySky) December 5, 2016
Neil Wilson of ETX Capital dubs it a “fairly ordered response”:
A ‘No’ vote had already been priced in although the scale of the defeat for Matteo Renzi has surprised and leads to the prospect of fresh elections next year.
Shares in Monti dei Paschi, Italy’s oldest bank, have slumped by 6% in early trading.
Traders are clearly concerned that Renzi’s defeat has put the bank’s rescue plans in doubt.
Italian media are reporting that investors will meet this morning to decide whether to back Monti Dei Paschi’s efforts to raise €5bn in new fundraising.
Analysts at RBC Capital Markets say:
Attention now turns to Monte di Paschi, which was due to do a €5bn recap this week.
It will meet the two underwriters this morning to decide whether to go ahead. If they pull out, the expectation is the bank would be nationalised.
Banks in Monte dei Paschi's cash call consortium to meet at around 11:00 GMT following PM Renzi's referendum defeat, RTRS reports. pic.twitter.com/Wa2QqbThgn
— Holger Zschaepitz (@Schuldensuehner) December 5, 2016
Updated
Italian banks shares take a dive
Shares in Italian banks have fallen sharply at the start of trading in Milan.
The main banking index had slid by 3%, hit by fears that the ongoing attempts to strengthen several lenders could be at risk.
Unicredit has lost 4%, with many smaller lenders badly hit too:
#Italian banks open lower- Banco Pop dn 5%, BPM dn 5%, Intesa San dn 4.5%, Ubi banca dn 3.5%.. remember they're pretty much all penny stocks
— Louisa Bojesen (@louisabojesen) December 5, 2016
There are particular fears about Monte dei Paschi, Italy’s oldest bank, which is trying to raise €5bn in new capital and offload €28bn of bad loans.
Kathleen Brooks of City Index says that rescue plan could be at risk:
The No result in the referendum has undoubtedly made it harder to attract private sector capital to fill Monte dei Paschi’s gaping capital hole, and bring it back up to a standard where it could pass under the low bar of the ECB’s stress test, which it failed in the summer.
The risk is, that investors lose faith that it will be able to do this, which triggers a run on the bank and a full blown financial crisis that starts in the currency bloc, but could emanate around the world.
Italian bonds weaken
Italian government bonds have been hit in early trading, following Mattei Renzi’s defeat in last night’s referendum.
But the losses aren’t massive, and we’re not looking at a full blown crisis here.
The interest rates on Italy’s 10-year government bond has jumped to 2.01%, up from 1.9% on Friday.
That means that investors think the debt is riskier, so are demanding a bigger return for holding the bonds. However, this is still a pretty low level -- five years ago, Silvio Berlusconi was forced to resign when Italy’s 10-year bond yields smashed through 7%.
AFS Group analyst Arne Petimezas points out that the gap between Italian and German borrowing costs has widened, but not too dramatically:
Italy 10Y Bund spread. Could have been much worse. pic.twitter.com/ReGLJtEzRc
— Arne Petimezas (@APetimezas) December 5, 2016
This may show that investors had ‘priced in’ Renzi’s defeat, as recent opinion polls had predicted the No side would win.
The agenda: Renzi resignation hits euro
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It’s going to be a volatile day in the European stock markets, after Italy’s prime minister announced his resignation after losing yesterday’s referendum on constitutional reforms.
Matteo Renzi fell on his sword late last night, deepening Europe’s political turmoil, after nearly 60% of the public voted against his proposed changes.
The PM declared that:
I take full responsibility for the defeat,
He’s expected to hand in his resignation to President Sergio Mattarella today:
The euro plunged to a 20-month low after Renzi quit, as investors feared that another chapter of eurozone debt crisis drama was opening up.
BUT.... the single currency has been clawing back some ground since, and is currently down just 0.5% at $1.053.
European stock markets are expected to fall when trading begins at 8am GMT, led by Italy’s main stock index, the FTSE MIB.
Financial shares are likely to be hit hardest, on fears that Renzi’s resignation will scupper efforts to recapitalise the Italian banking sector.
Our European opening calls:$FTSE 6695 down 36
— IGSquawk (@IGSquawk) December 5, 2016
$DAX 10449 down 65
$CAC 4498 down 31$IBEX 8485 down 122$MIB 16639 down 448
Renzi’s failure is being painted as another triumph for anti-establishment, populist parties.
But my colleague Stephanie Kirchgaessner explains that many voters had serious concerns about Renzi’s plan to shake-up the constitution:
The proposed reforms, in effect, neutered the senate and would have given much more power to Renzi and future prime ministers.
The prime minister, who started his political career as the mayor of Florence and was the youngest-ever prime minister when he assumed office in 2014, made constitutional reform a central plank of his premiership and argued for months that the changes would make Italy more stable and likely to adopt tough-but-needed economic and labour policies.
But the prime minister did not overcome the steep decline in his own popularity and the mistrust of voters who were disappointed that he could not or did not do more to improve the economy and cut unemployment. For many the plebiscite ultimately became a vote of no confidence in the premier. Renzi’s personality – jovial but verging on arrogance – made him seem far removed from the worries of ordinary Italians, some said.
Our liveblog has full coverage of the Italian result, which came hours after Austria’s presidential election was won by former Green Alexander Van der Bellen, who defeated the far-right Norbert Hofer.
Italy isn’t the only issue today either. Eurozone finance ministers are due to meet this afternoon to discuss Greece’s bailout programme.
Germany’s finance minister, Wolfgang Schauble, has already fired a warning shot against those pushing for Greek debt relief.
He told the newspaper Bild am Sonntag that:
“Athens must finally implement the needed reforms.”
“If Greece wants to stay in the euro, there is no way around it – in fact completely regardless of the debt level.”
Today’s market action will show us if investors are seriously worried about the eurozone, or can take these latest bouts of turmoil in their stride...
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