Euro Falls After Italians Reject Constitutional Overhaul: Update

By Jon Sindreu 

The euro fell after Italian voters rejected constitutional reform in a referendum Sunday, but contained losses are a sign that investors had already anticipated an unfavorable result for Italian Prime Minister Matteo Renzi.

As the vote count was under way, the common currency fell to $1.0564, about 0.9% lower against the U.S. dollar from Friday's close. Against the yen -- a traditional haven currency -- it lost 0.7%.

Futures on the S&P 500 and the FTSE 100 pointed to 0.4% and 0.6% opening losses for the U.S. and U.K. stock markets respectively. Japan's benchmark Nikkei 225 was down 0.5% in early trading, while the Australian S&P ASX 200 was down 0.7%. South Korea's Kospi was broadly flat.

As the vote count went on, Mr. Renzi admitted defeat and announced he will resign from office. With more than 90% of votes counted, 59.9% of voters were against the reform, according to Italy's Interior Ministry.

Stephen Gallo, head of foreign-exchange strategy at BMO Financial Group, had already been expecting the euro to lose 1% against the dollar.

"Given the political currents at work in the eurozone, I think it's virtually impossible for pro-integration politicians to finish building the missing architecture of the single currency area," he said. "Eurozone break-up risks are rising."

The euro has been on a steep slide since early November and isn't far from levels last seen in the early 2000s. This increases the chances the euro will soon reach long-awaited parity with the dollar, which hasn't happened since late 2002 -- the euro began life in 1999 trading at $1.17, but spent most of its early life below $1.

While much of its recent drop is due to a stronger dollar, analysts point to the Italian referendum as another key factor.

Indeed, a negative result is a blow to Mr. Renzi and his reformist pro-European government, while bolstering the populist 5 Star Movement, currently Italy's largest political opposition, and possibly other euroskeptics across the Continent.

On Monday, European stocks and bonds will be a key test of how worried investors are about the eurozone. Nevertheless, the euro's early reaction was still muted enough to suggest that financial markets had mostly priced in a negative vote in the referendum and are unlikely to seize up.

"We've been short the euro for quite some time," said Gregory McGreevey, chief executive officer of Invesco Fixed Income, who said his firm's bet against Italian sovereign bonds had also delivered good results over the last few weeks.

The spread between Italian 10-year government-bond yields and German ones has risen to a two-year high, an indication that fears about the integrity of the eurozone are on the rise, but still much below where they were during the euro crisis of 2010 to 2012.

Another key gauge of investor sentiment will be eurozone banks. Their stock prices are down 18% since the start of the year, even after having regained many of the early-year losses over the last five months. Global investors are concerned, however, that a "no" vote could derail Mr. Renzi's plans to nurse Italy's beleaguered banks back to health.

The extent of the political risk facing the European project will become clearer as the fallout from the Italian referendum unfolds, analysts say. Despite Mr. Renzi's pledge to resign, many believe he could be succeeded by a grand coalition, which would keep the 5 Star Movement at bay.

Austria's rejection of populism in Sunday's presidential election is likely to provide some optimism to markets, ahead of a complicated political calendar in 2017. The Nertherlands, France and Germany are all facing key elections with euroskeptic parties on the rise.

Write to Jon Sindreu at [e-mail]

(END) Dow Jones Newswires

December 04, 2016 21:01 ET (02:01 GMT)

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