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Referendum result adds additional risk premium to Italian assets

In reaction to Italy’s referendum result, Michael Metcalfe, global head of Macro Strategy, State Street Global Markets and Antoine Lesné, EMEA head of ETF strategy at SPDR ETFs, part of State Street Global Advisors, offer their views…

Metcalfe says: “Markets were uncertain about European political risk before the vote and now they will be seriously unsure. The no vote increases the chances of an Italian election in 2017, which given the popularity of the Five Star movement and their views on Europe, means that Italian assets will now attract an additional risk premium. The only potential good news in the near term is that, partly in anticipation of this result, Italian equities and bonds have already underperformed significantly in the past month. The Euro itself is likely to weaken further, however, with the prospect now of four major elections next year, most of which have the potential to surprise or produce disruption.”
Lesné says: “We expect this to trigger a sharp widening in Italian spreads to the tune of potentially 10bps followed by the hope of a tightening around 150-160bp vs German 10 year bonds in the medium-term. This vote paves the way for further rejection vote in Europe though and reminds us of the political headwinds that 2017 will bring. Volatility management remains necessary for long term portfolio construction in face of such events.

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