Euro rallies from 30-month low as ECB’s might trumps turmoil

The euro, which fell in value overnight as Italy’s prime minister decided to quit when voters rejected his pitch for constitutional reform, rallied in midday trading on Monday as investors turned their thoughts the European Central Bank’s ability to stem contagion.

News that Italian voters had defeated Italian premier Matteo Renzi’s referendum sent the euro falling as much as 1.5 per cent to a 30-month low against the dollar, at $1.0506. It also pushed the single currency down to 83.05p, a level not seen since the end of June, a week after the UK’s shock Brexit decision.

The euro had risen to $1.073 and 84.36p by 12.23pm in London as the market focused on the ability of the ECB to step up purchases of Italian bonds to contain any fallout from the result of the plebiscite. Unlike the UK referendum and Donald Trump’s election last month as US president, the result was widely expected by pollsters.

Speedy outcome

“After Brexit, it took three days for markets to shake it off. With Trump, it took three hours. With Italy, it took three minutes,” said Guillermo Hernandez Sampere, head of trading at MPPM EK in Eppstein, Germany. “The fast money, who expected markets to fall further with this outcome” have been caught off-guard, he said.

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However, Italian bonds and shares, led by banks, were heavily sold off in Milan, as investors fretted about the political upheaval caused by voters rejecting Mr Renzi’s plans to streamline government powers. He was defeated by 60 per cent to 40 per cent, with almost all the vote counted.

“While the result is far from a ‘Brexit’ moment for Italian politics, with voters endorsing the status quo, it could embolden populist parties in the next election,” said David McNamara, an economist with Davy in Dublin. “The risk remains that an immediate election will be called, at which the populist Five Star Movement may gain ground.”

Bonds drop

A drop in Italian bonds sent the market interest rate, or yield, on its 10-year securities up to 2.02 per cent from 1.89 at the end of last week. The tone was similarly negative across the European government bonds market, with the yield on Ireland’s 10-year securities rising by 0.06 percentage points to 0.88 per cent.

While the referendum has raised concerns over Italy’s future in the euro region, the nation’s political and legal system mean a “no” vote is unlikely to trigger a quick exit.

Over on the equities markets, Italy’s benchmark FTSE MIB index was down 0.7 per cent in early afternoon trading, with banking stocks heavily sold off as investors fretted about the implications of the vote on ailing lenders’ ability to raise capital.

The Iseq index edged 1.1 per cent higher to 6,241.62 in Dublin, though Bank of Ireland was off 0.9 per cent. The broader Stoxx Europe 600 index gained 0.75 per cent. – (Additional reporting: Bloomberg)