European markets steady on tenterhooks
Whether or not the rebound of European markets can last depends on how well a political fix in Italy supports the country’s banks, as they remain the fulcrum of financial pain from the referendum.
Whether or not the rebound of European markets can last depends on how well a political fix in Italy supports the country’s banks, as they remain the fulcrum of financial pain from the referendum.
For now, the impact from Prime Minister Matteo Renzi losing the vote has been contained, allowing European stock markets outside of Italy, the euro and the pound, to recoup rapidly from Monday’s whipsaws.
More pointedly, bank shares in the UK and most of Europe were lodged in the black for most of Monday.
Whilst Renzi’s resignation will not necessarily trigger a European political crisis that sends markets into a tailspin, European bourses are now on tenterhooks because the shape of the government that emerges in Italy will go a long way towards deciding the fate of the country’s lenders.
We note at least one of the biggest bears stalking Italian assets retreated on Monday. Allianz Global Investors (AGI) said it would reduce its short on Italian bonds which helped lifted bearish open interest to the highest since Europe’s sovereign debt crisis. AGI is lightening up as the spread between yields of Italian and German benchmark bonds holds well away from the most distressed breadth seen in recent history, and a recent 2-½ year peak of 190 basis points.
Risks have increased that we will see the less-favourable plan ‘B’ of state underwriting for the lender in the most perilous health, Banca Monte dei Paschi di Siena. The move will require bondholders to be roped in. That will leave less cash (and goodwill) among investors for UniCredit, which wants to reduce the size of a cash call— by means of asset sales—of as much as €13bn.
However, assuming a gruelling few weeks for markets has gone some way to over-pricing the risk of contagion, so long as the Italy’s political fudge sticks for the requisite two years before general elections, bank shares are unlikely to crater much further.