Italian Referendum has Little Impact on Stocks and Euro

The initial take following the Italian referendum was to sell stock and the Euro, and purchase bonds, which was reversed during the European hours and the fallout seems to be limited. European stocks are rallying, underpinned by expectations that the European Cantal Bank will extend and possibly expand its asset purchase program beyond March of 2017.  The DAX is currently higher by 1.6%, but Italy’s FTSE MIB index is underperforming, down 0.6% on the day. S&P 500 futures are pointing to a higher opening while the yield on Italy’s 10-year benchmark bond has fallen from the highs.

The 10-year Bund yield is presently up 2.5% at 0.30% and Spain’s is up 1.6. Austria’s 10-year yield is up 2.1% and its ATX stock index moved lower following the victory of the pro-EU candidate at the weekend’s presidential election. The Euro hit a fresh 20-month lower but surged higher generating a potential outside day as it recaptured the 1.07 handle.  Crude oil prices are higher trading above $52 following last week’s OPEC production cut.

Eurozone Service PMI Was Revised Lower in November

The November Eurozone services PMI was revised lower, to 53.8 in the final reading, down on the provisionally estimated 54.1 reading. That’s still up on the 53.5 figure for October and is the best level in a year. Markit, the compiler of the survey, report that the PMI surveys for November are consistent with Q4 GDP growth of 0.4% quarter over quarter, up on Q3’s 0.3% quarter over quarter growth. Even Italy’s PMI suggest that the economy is expanding at the quickest rate in nine months, despite concerns leading up to the referendum on constitutional reform.

S&P said Italy’s No vote won’t impact the sovereign rating it ascribes to Italian sovereign debt, which is BBB- with a stable outlook. The BBB- is already the lowest investment-grade rate the agency gives. S&P noted that the referendum outcome “does not have immediate implications for Italy’s economic of budgetary policies beyond likely near-term changes in Italian politics,” adding that the current parliamentary structure has still produced some structural reforms to the labour, education and banking sectors.

Italy’s 10-year bond yield is up 10.0 basis points at 1.999%, having settled around 2.0% after showing a gain of 13 basis points at the high. Expectations for the ECB to buy Italian paper following the resignation of PM Renzi are limiting fallout following the weekend election. The ECB has already been buying Italian bonds under its QE program, but can temporarily increase these purchases if it deems it necessary. If they abandon the plan, Italian pundits are saying that a government bailout would take place. Italian politicians are now in process of forming an interim technocratic government to bridge the gap between now and a general election, the timing of which remains uncertain. The anti-EU Five Star movement would have to win a general election and achieve a constitutional change before it could hold a referendum on EU membership.