A No vote had largely been priced into the market and, for once in 2016, the polls represented the reality; Italian government bond spreads initially widened but moved quickly back toward last week’s levels.
“There is clearly no panic or strong flight to the safest assets,” said Hans van Zwol, senior portfolio manager global fixed income at NN Investment Partners, “Due to worries about some weak Italian banks, spreads of financials are wider, but also here we do not see a very strong move.”
David Simner, fixed income portfolio manager at Fidelity International agreed that financials will remain in the crosshairs as the vote will have a bearing on the upcoming recapitalization exercises by Montepaschi and Unicredit.
“We expect volatility ahead, until more details become available. However, it will be equities, rather than fixed income investors who will bear the burden of further rights issues on the horizon,” he added.
Unlike in the case of the Brexit vote, the Italian electorate’s decision means the status quo remains for now, albeit with a likely change in prime minister, as Renzi had pinned his future to a ‘Yes’ vote. This of course raises the prospect of early elections in the country, although many analysts expect instead to see a caretaker government set up to tide things over.
Market attention will undoubtedly shift first to the banking system and then to the ECB meeting on 8 December for any signs of change. But, many are also expecting to see some buying opportunities as a result of the increase in volatility.
As Jon Jonsson, senior portfolio manager, global fixed income, Neuberger Berman, said the decision will not only reduce confidence in the recovery of the Italian economy: “It will also likely increase uncertainty stemming from rising euro scepticism across the euro area.
“Indeed, it will likely negatively impact Italian government bonds and risky assets in Europe. As we saw after the US election and the Brexit vote, however, markets could fully price these developments sooner than expected and reach oversold levels. We believe patience is key and that there may be opportunities to use any substantial sell-off to buy attractively priced assets.”