Wondering what all the fuss is about? Here’s what traders need to know about the Italian referendum …
They’re voting on pretty narrow constitutional changes, which may not seem like a big deal.
Here’s the question (warning: it’s a little dry):
“Do you approve the text of the constitutional law concerning measures to end equal powers for the upper and lower houses of parliament, the reduction of the number of parliamentarians, the containment of costs in running political institutions, the abolition of (public advisory body) Cnel and the amendment of article five of the second part of the Constitution, approved by parliament and published in the official Gazette number 88 on April 15, 2016.”
However, as we know too well, the question on the referendum paper is only a fraction of what people are actually voting about. In Italy, this comes down to a vote of confidence in the PM, Matteo Renzi – he represents a modernization of Italy, both politically and economically. By contrast, a ‘no’ vote is support for the populist ‘old guard’.
This is Europe’s most important referendum since … the last one in June (you probably remember that one). And for the stability of the EU, it could be even more important.
If the ‘no’ side win, Renzi has promised to resign. This could leave a power vacuum, into which the populist Five Star Movement could swing. Where this would leave Italy’s bailout plan is anyone’s guess – but Italy’s banks are in dreadful shape and very vulnerable to collapse.
The most recent polls show the ‘no’ camp in the lead by 53.5% to 46.5%. But 2016 hasn’t been a great year for pollsters …
Voting closes at 11pm local time on Sunday, at which point they’ll announce the exit polls. Counting starts immediately, and they’ll release results of that count every 30 minutes, so if the result is not close we could get a clear idea of the winner by midnight GMT. If it’s close, then the result will become clear in the early hours of the morning.
The president could appoint a ‘caretaker’ PM, but it seems likely that fresh elections would have to be called next year. And this is where the euro-skeptic Five Star movement could gain power.
We’d have months of uncertainty ahead, and nervousness about the future of Italy in the EU, and the health of its banks.
The main fear is the banks – and repercussions would be felt through the entire European banking sector.
Italian bonds could also see a sell-off, although the ECB are likely to step in with an emergency bond-buying spree.
All in all, there’s no reason for the bottom to fall out of Europe in the next week … but that doesn’t mean that markets can’t be sent into a short-term tailspin of panic.
Spread-bet firms are already hiking their margin requirements – a sure sign that they’re expecting turbulence.
As I said last week, life isn’t so short that we need to trade through big market-moving news events. So, going into the weekend would be a good time to take profits, close out short-term positions and consider hedging any vulnerable long-term positions.
And if you choose to stay in the markets, be aware of the increased risk to your money.
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