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Euro sinks on Italy worries

This article is more than 12 months old

Italian PM's quick exit helped drive the euro and equity markets forward

LONDON European stocks and the euro rebounded sharply as of press time yesterday as investors were reassured by the speed of Italian Prime Minister Matteo Renzi's resignation after losing a crunch referendum.

The region's markets began the day in negative territory, with Milan tumbling 2 per cent, but recovered somewhat with sentiment soothed also by the defeat of the far-right in Austria's presidential election.

"The Italian referendum is the major story that will dominate market moves throughout Monday... after Mr Renzi left his position after a bruising defeat," said GKFX analyst James Hughes.

"The initial market reaction was to the downside, but his decision to leave so quickly meant that added clarity drove the euro and European equity markets to the upside."

Mr Renzi stood by his promise to resign after his attempt to change the constitution was overwhelmingly rejected in Sunday's poll, leading to fears about the future of one of the eurozone's biggest economies.

The verdict sent the European single currency crashing to $1.0506 - the lowest level since mid-March last year - before recovering slightly yesterday.

Equities also recovered. Frankfurt won 1.5 per cent, Paris gained 1.1 per cent and London added 0.3 per cent, reversing initial losses.

"European markets have been surprisingly resilient... as initial fears of another eurozone crisis have been largely brushed aside," said IG analyst Joshua Mahony.

"Sharp depreciation in the euro and European indices have been swiftly reversed, bearing more than a passing resemblance to the UK referendum and US election results."

European markets have been surprisingly resilient. IG analyst Joshua Mahony.

Populists in Italy and throughout Europe rejoiced at Mr Renzi's downfall, in the wake of anti-establishment poll shocks in both Britain and the US. The Britain voted to leave the European Union and Mr Donald Trump winning the US presidential election.

"This referendum was seen more as a judgment call on Mr Renzi's premiership than the reforms on offer.

"By rejecting the Prime Minister, Italy has displayed the same kind of anti-establishment populist sentiment that has defined 2016 for the UK and US," said Spreadex analyst Connor Campbell.


He also cautioned it presented another blow to Italy's fragile banking sector.

Investors were a little comforted after Austria's anti-immigration and euro-sceptic Norbert Hofer was defeated in a bid to become the European Union's first far-right president over the weekend.

Greens-backed independent candidate Alexander Van der Bellen won on Sunday.

"The defeat of Mr Hofer provided a chink of light for the euro, preventing its more excessive losses from sticking around for too long," noted Mr Campbell.

Italy's referendum result also sent the yield on the country's 10-year government bonds jumping to 2.057 per cent from 1.902 per cent on Friday.

Analysts remain concerned that political instability could scupper Italy's efforts to resolve a bad loan crisis in the banking sector and spark fresh eurozone turmoil.

"Italy has taken the first step along a path that could lead it out of the eurozone," said economist Jack Allen at London-based research firm Capital Economics.

"There are still many obstacles to an Italian exit. But as long as the country's future is uncertain, bond yields are likely to rise and the government might need to recapitalise some of the weaker banks."

The worry over defaults and contagion looms in the background, with Italian banking stocks having halved in value this year.

"Fears over the future for Italian banks will persist, with recapitalisation plans thrown into doubt," added Mr Mahony.

"However, this morning's recovery is a clear sign that market perception is that despite causing uncertainty, this result is unlikely to spark a major crisis for the banks."