Italy: Unsurprising surprises - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, takes a note that in the end it wasn’t the victory of the ‘no’ vote in yesterday’s Italian referendum that surprised the markets but the extent of PM Renzi’s loss. 

Key Quotes

“The ‘no’ camp won with nearly 60% of the vote with the swing most obvious among younger voters.  While the result in part reflects a protest against Renzi and his policies, a number of different forces contributed.  Among the factors was a desire to stop the structure of power in Italy more amenable to a ‘strong man’ leader particularly in this era of nationalism.  Italy’s anti-establishment Five Star Movement now favours bringing elections forward from early 2018.  However, it is considered more likely that President Mattarella will ask another member of Renzi’s centre-left Democratic Party, such as Finance Minister Padoan, or the President of the Senate Grasso to form an interim government.  In the circumstances, this would be the most favoured outcome by the markets.  Having skidded overnight to a 20 month low on the Italian referendum result, EUR/USD has been climbing back to Friday’s levels since the European open.” 

“For Italy’s banks the referendum result will mark a huge disappointment.  A decision will be forthcoming as to whether the EUR5 bln recapitalisation of Monte dei Paschi will go ahead.  If a private recapitalisation were to fail it is likely that the government will step in to prevent the spread of contagion.  However, its involvement would be limited by bail-in rules.”