A vote to reject constitutional reforms in Italy could lead to a period of market volatility, as the euro fell early Monday and money management executives raised concerns over the Italian banking sector.
A constitutional referendum held Sunday in Italy saw 59% of voters reject changes put forward by Prime Minister Matteo Renzi, who tendered his resignation as the result emerged, to alter the balance of power in the country.
The euro fell against the dollar as much as 1.5% to $1.0506 vs. the market close Dec. 2, but recovered over the morning to close at $1.0762, up 0.92%. The Italian stock market, the FTSE MIB, closed down 0.21%.
While the “no” vote did not come as a surprise, and was already broadly priced into markets, it was by a bigger proportion than expected. Maria Paola Toschi, executive director and global market strategist at J.P. Morgan Asset Management, said in a news release: “We may still see volatility given the uncertainty over what happens next — and over the broader political implications of the result. Beyond the immediate market reaction, there may be broader consequences for Italy's financial system, and for the country's banks in particular.”
Should the result trigger “a severe political reaction in Italy, it may cause a run on share of Italy's banks,” said Neil Dwane, global strategist at Allianz Global Investors, in a news release. “This could trigger a run on Europe's banking system and create a euro crisis similar to the one seen in 2010-2011.”
Michael Metcalfe, State Street Global Markets' global head of macro strategy, said in a statement in reaction to the result that markets were already uncertain about European political risk, “and now they will be seriously unsure.”
The “no” vote increases the chances of an election in Italy next year. The popularity of populist party Five Star Movement and their views on Europe therefore “means that Italian assets will now attract an additional risk premium,” added Mr. Metcalfe.
The result is also negative for Italian and European risk assets because the higher political uncertainty has come in the midst of ongoing recapitalization efforts in Italy's banking sector, said Nicola Mai, head of European sovereign credit research at Pacific Investment Management Co., in a separate reaction statement.
However, markets also received good news on Sunday in the form of the outcome of the presidential election in Austria, which saw Alexander Van der Bellen defeat populist candidate Norbert Hofer.