What Does Italy Referendum Mean for These ETFs?

Now that Senate reform is off the agenda, the new government’s main task will be to rewrite legislation governing elections to the Chamber of Deputies (the lower house). Flawless bicameralism was introduced in the first Republican Constitution, right after the end of Fascism, as a way to prevent the possible rise of a new dictator. The bond purchases aim to boost growth and inflation but also effectively help keep low government borrowing rates. About 60 percent of Italians voted against a plan for constitutional reform favored by Renzi. European stocks were mostly higher, but Italy’s market fell after Italian voters rejected constitutional changes and the country’s premier said he would resign.

Renzi is expected to meet Wednesday afternoon with the top rung of his centre-left Democratic Party (PD) to discuss what decisions need to be taken in the short and medium terms – such as whether he will remain party head.

Upon receiving Renzi’s resignation, the Italian President Sergio Mattarella will have two options.

“With a lot of noise and fact-free politics you can win elections”, he said. The other is to set up an interim government and eventually call for new elections if this attempt fails. Banks put up some of the biggest gains, as did technology companies, which have been mostly left out of a post-election rally. This raises very tough questions in Italy over political will.

Some people see Mr Alfano’s forecast for a February election as unrealistic as a ruling by the constitutional court on the legitimacy of the current electoral law is not expected until 2017.

Elly Schlein, an Italian member of the European Parliament, said the proposed reforms would have transferred too much power into the hands of the ruling party.

“The next steps are far from clear for Italy and traders are not panicking yet”, said Craig Erlam, senior market analyst at Oanda.

That could see the likes of finance minister Pier Carlo Padoan take over as prime minister or even Pietro Grasso, the Senate leader. Since 1945, Italy has had 65 different prime ministers, not a great track record and certainly a hard environment for economic policymakers. Then he or some other figure, perhaps from his Democrats, parliament’s largest party, could be asked to lead a government focused on electoral reform.

“After the Brexit and the US election, I think financial markets have learned that even if they see a result that is not necessarily in line with their values, markets will quickly recover as its economic impact is either negligible or will take time to appear”, said Tatsushi Maeno, senior strategist at Okasan Asset Management.

The banking system in particular requires some immediate attention. “The times have changed – sovereignty belongs to the people”. He sought to calm nervous markets before Sunday’s vote saying that there was “no risk of a financial earthquake” if the reforms were voted down, although he did acknowledge there may now be “48 hours of turbulence”.

Holger Schmieding, at the Berenberg private bank, said the risk that Italy could choose to leave the euro, while still remote, had increased.

And the storm isn’t over yet: Europe’s unity and common currency face growing uncertainty in a raft of upcoming elections, notably in the Netherlands and France, where the far-right looms large. In the past, its representatives have indicated they would call for a popular referendum to decide whether or not Italy should stay in the monetary union.

“Now we look to the future and we will want to work closely with the Italian government”.

Both major European currencies weakened against the dollar during the session, with the pound falling by around 45 points to 1.2718 and the euro dropping by around 50 points to 1.0724.

“We expect the European Central Bank to extend its asset purchase programme by six months, which I believe is in line with market expectations”.