Fra Zerohedge:
Blink, and you missed the “sell off” from Italy’s failed referendum vote.
In the initial hours after yesterday’s vote which has cost Italy’s PM his job and ushered in a period of political limbo and potential chaos, markets were jolted by the scale of Renzi’s defeat which, as Reuters put it, “pointed to further turbulence and political crisis in the euro zone’s heavily indebted third-largest economy and particular uncertainty was focused on the country’s fragile banks.” The euro fell to a 20 month low, as low as $1.0508 and the Milan bourse shed as much as 2% while Italian bond yields spiked sharply higher.
As confirmed by the following headlines, there was a palpable sense of panic about how markets would react:
- Renzi Quits as Italy Referendum Defeat Deepens Europe’s Turmoil
- Shares of Monte Paschi, UniCredit don’t immediately set opening price, limit down
- Pop. Milano drops as much as 6%, Banco Popolare as much as 5.9%
- While ‘No’ outcome shouldn’t be major surprise, “margin of rejection and news of Renzi’s resignation will spook the markets”
- Spread on Italian government debt seen widening further when markets open, stock market down
- Italy ‘No’ a Lost Opportunity; Won’t Impact Utilities: Bernstein
- Markets to Correct on Italy Vote, EU Survival in Spotlight: Citi
And then, just before the European open, everything changed on a dime, or rather in “three minutes” as Guillermo Hernandez Sampere, head of trading at MPPM EK put it: “After Brexit, it took three days for markets to shake it off, with Trump it took three hours, with Italy it took three minutes.The fast money, who expected markets to fall further with this outcome, are now covering their positions.”
Well, maybe not exactly three minutes but, well see for yourselves: the rebound was enough to prompt questions if the ECB now has its own plunge protection team.
What happened was the following: after global stock futures slid on Sunday night, European equities shrugged off the outcome of the Italian referendum to rally the most since the U.S. election, with the Stoxx Europe 600 rising as much as 1.4% in early London. In fact, European shares soared the most since the Trump presidential victory, even as Italian banks sustained losses and the cost of insuring their bonds against default jumped. Gold erased earlier gains to head for the lowest close since February, while equity volatility indices slid in Europe and the US.
Italian financials rose 0.5 percent having fallen more than 4 percent and shares in the world’s oldest bank, Monte dei Paschi were flat on the day after being suspended at the opening.
Political risk from Italy hasn’t spread beyond its borders as markets were correctly positioned for the anti-establishment mood sweeping around the world. This was a departure from the Brexit referendum and Donald Trump’s surprise election, when traders were caught out by populist votes.
The Euro, likewise, after falling to 20 month lows, rebounded strongly, and was trading virtually unchanged from its Friday levels, as the dollar and gold sold off, while 10y Treasury futures dropped to session lows, with the March contract touching lows of 124-09+ after block trade.
To be sure, not everyone was a winner on the news associated with Italy’s political limbo, and Italian namls Banca Popolare di Milano Scarl and UniCredit SpA both slid at least 2% as the outcome of the referendum raised questions about the nation’s plans to plug holes in the banking sector. Renzi’s reforms were aimed at simplifying the legislative process in a nation that’s seen 63 governments since the end of World War II. However, even Italy’s banks seemed ready to forget anything ever happened on Sunday night and were poised to move into the green at the first possible opportunity.
Bonds remained under pressure though. Italy’s benchmark 10-year bond yield jumped 11 basis points (bps) to 2.01%, widening the premium investors demand for holding Italian bonds over safer German bonds to 175 bps, before easing slightly.
“What the market is watching for is not so much the vote itself,” but the potential fallout from a Renzi resignation, said Ric Spooner, chief market analyst in Sydney at CMC Markets Asia Pacific Ltd. Payrolls “showed an improvement in the U.S. labor market and it’s all moving in the right direction for the Fed to continue raising rates.”
This is where we stand as US traders walk in: The Stoxx Europe 600 Index climbed 1.3 percent at 10:05 a.m. in London. Italy’s FTSE MIB Index, one of the worst-performing stock indexes in the world this year, rose 0.3 percent. Futures on the S&P 500 Index were up 0.4 percent, after the underlying benchmark ended Friday up less than 0.1 percent.
Credit-default swaps on Italy jumped 14 basis points to 186 basis points, the highest since June. The cost of insuring Banca Monte dei Paschi SpA’s senior bonds against losses for five years jumped 27 basis points to 482 basis points, the highest since July, according to data compiled by CMA. Credit-default swap contracts insuring UniCredit’s senior bonds against losses rose 13 basis points to 224 basis points.
However, while there was some Italy-focused risk, 10Y Treasury yields rose two basis points to 2.40% after shedding seven basis points on Friday, as concerns about a short covering squeeze in US Treasuries quickly faded.
As a result of the price action, a favorable narrative was quickly spun: “Our base scenario is a caretaker government which could be in place before Christmas, and no new elections before 2018,” Indosuez Wealth Management chief economist Marie Owens Thomsen said. “If indeed things pan out according to our base scenario, there would be little reason for any broad-based turmoil. It is still utterly unlikely that Italy would leave the EU or the euro.”
Others jumped on the bullish bandwagon: “Rather than fretting about political risk, companies appear to be gearing up for further expansion. Employment is rising at one of the fastest rates seen over the past five years,” said Chris Williamson, chief economist at Markit.
In short, it is as if Italy’s referendum not only never happened, but was a good thing all along, and with that S&P is set to rise back to new all time highs.
