Resounding no in Italy to constitutional changes, prime minister to leave

Italian voters reject the constitutional changes by a wide margin. Prime Minister Matteo Renzi plans to step down, caretaker government is likely ECB to extend asset-buying programme.

italy constitutional changes renzi to leaveItalian voters rejected the constitutional changes by a 59-percent majority. Prime Minister Renzi is disavowed and has stated during a press conference that he will submit his resignation.

The European Central Bank is likely to err on the side of caution regarding the continuation of its asset-purchasing programme.

The results of the referendum early on Monday showed a strong no vote of 59 percent versus a 41-percent approval. Voter turnout was massive with around 70 percent going to the ballots. The opinion polls proved correct in this case, so we don’t expect a sharply negative market reaction in the near term (see our Market update “Italian referendum on changes to the constitution – ‘sì’ or ‘no’?” from 1 December). S&P500 futures as well as the Nikkei and the Hang Seng indices are down by -0.2 percent, -0.8 percent and -0.8 percent, respectively. However, the euro took a hit with the euro-dollar exchange rate standing at an 18-month low of 1.0582.

Once Matteo Renzi submits its resignation later today, it will be up to President Sergio Mattarella to nominate his successor. A caretaker government is likely to be formed out of the current centre-left, with one of its key tasks being the implementation of the new electoral law. The likelihood of snap elections looks low, as all the major parties fear a possible victory of the anti-EU and anti-euro party Movimento 5 Stelle (M5S).

However this result and the ensuing political instability will hinder the recapitalisation of Italian banks, it also calls into doubt Italy’s ability to reform itself and raise trend growth, which is an essential prerequisite for government-debt sustainability. As a consequence, the risk premium assigned to euro-zone assets will remain elevated, with Italian bonds and equities (and in particular the banking sector) in the limelight, as well as the euro. Everything else being equal, it will strengthen the European Central Bank’s (ECB) resolve to err on the side of caution. We expect the ECB to announce coming Thursday an extension of its current monthly asset-purchasing programme worth 80 billion euros by another six months beyond March 2017 (or a slightly lower monthly amount for a longer period of time).

Neutral equity stance maintained
While this is a serious matter that can trigger contagion and needs careful monitoring, we believe the no to the Italian referendum will not derail the overall trend towards reflation. We stick to a neutral equity stance, a substantial underweight in government bonds – avoiding exposure to euro-zone “peripheral” debt – and a quite meaningful liquidity reserve. We maintain a significant US-dollar overweight.

Commento a cura di Christophe Bernard, Chief Strategist di Vontobel