What comes after the Italian referendum? - December 11, 2016

What comes after the Italian referendum?

The referendum in Italy last week swept away Matteo Renzi but what else might change because of his loss? Investors expected the prime minister to lose the vote, so there were no big changes on the markets so far. The EU stays intact, it may even start to rise again, but Italy will have problems in the future.

The main goal of the Italian referendum was to limit the power of the Senate and to start some well-needed reforms in the country. Matteo Renzi however played with even higher stakes: he said that if people vote for the current system, he resigns. He lost and resigned. This may count as a shock to some like the Brexit or Trump’s win, but investors expected this to happen.

Therefore, the markets fell a little after the referendum and the Euro went to a low last seen in March 2015, but things soon turned around. This was a typical fear trade before the referendum, the "sell the rumour, buy the fact" phenomenon. Namely, the markets expected a "no" vote and potentially Renzi's resignation and they were selling the stocks and Euro, then after the event, they were able to buy cheap assets.

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The problems are not over, however. Italy’s Eurosceptic Five Star Movement is getting stronger and stronger. They were the opposition for Renzi on the referendum as well. They want new elections and they are even eyeing with leaving the Eurozone. There are also problems with Italy’s banking sector. There are billions in bad debt in the country and banks may need some serious help from investors or the government.

But these are also well-known among investors and the referendum doesn’t change Italy’s already bad situation. A new election and the Five Star Movement may bring new uncertainties, but it’s not at all sure they would really try to leave the Eurozone. For now, everything is as it was for years in Italy.

On the other hand, the European Union may have reasons to be optimistic. If central banks leave their low interest policies behind and governments start to spend more, economies can get a new boost and growth can be around the corner. This may also mean that this is a good time for investing in European instruments and that's why German stock index (DAX) and the major asset classes like banking and auto industry and other similar sectors have been climbing up since Monday, profiting from the optimistic investor mood.

Disclaimer: This analysis is for general information and is not a recommendation to sell or buy any instrument. Since every investment holds some risk, our main business policy is based on diversification to minimize threats and maximize profits. Innovative Securities’ Profit Max has a diversified portfolio, which contains liquid instruments. This way, our clients can maintain liquidity, while achieving high returns on their investments.