HALISTER1: MACRO VIEW: A ’No’ in Italy May Trigger Memories of Greece

MACRO VIEW: A ’No’ in Italy May Trigger Memories of Greece

(Bloomberg) -- Italy’s referendum on Sunday is the biggest risk for markets going into year-end, according to a poll of Citigroup clients. But European stocks and bonds don’t appear to be stressed about it, looking at current markets.
  • Should Italy vote “no” -- as polls forecast -- PM Renzi may quit. The Italian bank recapitalization would then be in jeopardy and we could be looking at a Greece-like market reaction on steroids
  • Europe’s Stoxx 600 Banks index could be a lead indicator of trouble ahead as a major head-and-shoulders pattern is developing. If there’s a bearish reaction after the vote, the pattern implies a drop of around 30% toward the 120 area; chart here
  • Currency investors may watch EUR/GBP, which is unwinding its post-Brexit spike higher. The FX pair may have further to slide if euro comes under downward pressure; chart here
  • The 10-year yield spread between Italian and German bonds is at 171bps, close to this year’s high, but a far cry from around 500bps when Greece was the word in 2011-2012
  • Investors who don’t manage to unload Italian risk before Sunday don’t need to fret. If markets turn pear-shaped next week, the ECB is likely to temporarily step in to buy bonds. Let’s hope the ECB has big trading limits for Italy, as its debt market is several times larger than Greece.
  • NOTE: Mark Cranfield is an FX strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.
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Source: BFW (Bloomberg First Word)

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