Halister News

(Bloomberg) -- Italian bonds, European equities underprice the risk of Italy’s upcoming constitutional referendum, Morgan Stanley analysts and economists including Daniele Antonucci write in a research note.

• Morgan Stanley assigns a 35% chance to the ‘Yes’ camp winning the referendum
  • Sees markets too complacent about the vote outcome and its impact; govt losing the referendum would further delay urgently needed economic and banking reforms that have proved difficult even under Prime Minister Renzi’s pro-business agenda
• SPGBs, EU credit and EUR are pricing the risk more fairly compared to govt bonds and equities
• Economists expect a period of uncertainty, which would negatively affect sentiment and activity, but not a period of instability deep enough to lead the protest parties to take power within the next 3-6 months
• Reform to progress slowly, including any repair to the banking system
• Morgan Stanley advices selling BTPs vs USTs, selling EU stocks vs U.S. counterparts and buying 3m vs 12m volatility in EuroStoxx as too little political uncertainty is priced in
• NOTE: Italy referendum won’t stop euro from rising: MS