Euro bounces back and stock markets weather the storm as the financial world shrugs off Italian referendum result
The euro bounced back today and stock markets across Europe weathered the storm as investors brushed off the resignation of the Italian Prime Minister Matteo Renzi, who lost a referendum on constitutional reform.
Investors had been braced for a turbulent day’s trading as a political crisis hits Italy, the euro zone’s third largest economy.
On the currency markets the euro had hit a 20-month low earlier against the dollar, but it rallied this morning and is now trading higher.
By lunch the euro is up 0.5 percent against the dollar, at .0719, and up 0.47 percent against the pound at £1.1899.
In London, the FTSE 100 was up 6.5 points at 6,737.2 at lunch, while the Dax index in Europe gained 1.5 per cent and the Cac in France moved 1.1 per cent higher.
Mr Renzi went to see Italy’s head of state, President Sergio Mattarella, today to see if they could plot a way forward out of the impasse. Both men were seeking to ease fears of instability and a crisis for Italy’s already troubled banking sector.
It will be up to President Mattarella to decide whether to call fresh elections or just appoint a new prime minister, with Finance Minister Pier Carlo Padoan the favourite if he chooses the latter option.
Renzi’s decision to quit, which echoes David Cameron’s announcement in the wake of the Brexit referendum, is the latest seismic shock in a year of populist uprisings against the political establishment.
Beppe Grillo of the Left-wing 5 Star Movement, and Matteo Salvini of the anti-immigrant Northern League, have both claimed credit for the No campaign’s victory in the referendum and have urged an early general election.
Grillo has also called for a referendum on Italy pulling out of the euro, and bringing back the lira.
Renzi resigned shortly after exit polls indicated a clear defeat, saying: ‘I accept all responsibility for this loss. I’ll say it out loud.’
Grillo, urging a No vote, had told Italians: ‘Go with your gut, not your brain’.
Mark Wills, head of State Street Global Advisors’ investment solutions group for the Asia Pacific, said: ‘It’s not very hard to see a new election on the horizon, and it’s not very hard to see the 5 Star Movement taking power with stated aims to either leave the EU, drop the euro, or both.’
He said: ‘For Italy, establishing stable governance and a plan to guide the nation is of critical importance given the fragility of the economy, challenging policies and the liquidity problems in the banking system.’
EU Economics Commissioner Pierre Moscovici denied the referendum was a vote against he EU or the euro.
He told French television: ‘It’s a solid country with solid authorities and I have complete confidence that Italy can handle this situation.’
Some investors feared the ‘No’ camp’s victory in Italy could cause political instability and renewed turmoil for the nation’s banking sector, which has been hit by concerns over its huge exposure to bad loans built up during years of economic downturn.
‘Forming a stable government in Italy may be difficult, the resuscitation of (ailing lender) Monte Dei Paschi may be impacted, there is some potential that this may create an opening for a secessionist political party,’ said Angus Gluskie, managing director of White Funds Management in Australia.
The European Central Bank meets on Thursday amid much speculation it will announce a six-month extension of its asset buying programme and widen the type of bonds it can purchase.
‘There has been some speculation that the ECB would step and front load purchases of Italian bonds if markets became unsettled by a ‘No’ result, so perhaps it is the thoughts of a central bank liquidity sugar pill driving things again,’ said ANZ economist Jo Masters.