Crisis Lite

December 5, 2016

The Italian referendum on constitutional reform saw voters reject the proposals in front of them, in a fairly decisive manner. As such, Italian PM Renzi will tender his resignation today and this became part of the issue, with some voters using this vote as a means to express their dis-satisfaction with the current administration. So whilst the result was expected, the extent of the loss (No around 59%, Yes 41%) was not, hence the fall in the euro during early Asia trading. EURUSD made a new low for the year at 1.0506 before recovering quickly to just below 1.06 at the European open. Equities look set to open lower as well, but only modestly so. Naturally, this is not of the same scale as the Brexit referendum in the UK or the Trump victory in the US, but there are other implications. The first is for the banking sector, which is fairly crippled in Italy and political instability will not help. If another government cannot be formed, then snap elections remains a possibility. The rejection of reforms, even if imperfect, also sends a message regarding the political tone in Europe ahead of further elections in France and Germany next year.

Elsewhere, the NZ PM resigned, but not because of a referendum, but largely because he’s had enough after 8 years. The kiwi was down by nearly 1%, as the announcement came as a surprise, but the currency was also weakening on a risk aversion move in the wake of the Italian referendum result. Talking of referendums, the Supreme Court in the UK hears on the case of the legality of the UK vote, although the outcome won’t be known until the new year.

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