HSBCAfter the election of Donald Trump as US president, market attention is likely to shift to the next big political event, the Italian constitutional referendum on 4 December. The "no" vote continues to lead in the polls, and has led to a significant widening of the spread on Italian government bonds in recent weeks. However, we think that the implications of a 'yes' or 'no' vote in Italy are smaller than the market seems to believe. A 'no' does not necessarily mean early elections. And also the positive implications of a 'yes' in terms of future political stability and ability to make reforms might be diminished now that PM Renzi has opened up to the possibility of diluting the new electoral law (even though the dilution might also reduce the chances of a populist party getting into power).Equita«Will youapprovethe Constitutionallaw text regarding: the overcomingof the equal-weightedbicameralism, the reductionof the numberof Parliamentmembers, the containmentof institutions’ costs, the cancellationof Cneland the revisionof ChapterV of the Constitution»… «Yes or No»Italianelectorsentitledto vote: 47 mn
Italianelectorsexpectedto vote : 30 mn
Stilluncertainelectors: 4.5 mn
Avg. NO –YES spread : 6% = 1.8 mn
Predictingthe referendum outcomestilla closecall giventhe high numberof uncertainvoters. Asof tomorrowno pollswillbe allowedin the press. Ourbase case isfor electionsin early2018 in bothcases, yes or no win.There are 3.5 mnItalian voters resident abroad who have not been captured by polls, 1.1mn of them voted in 2013 national elections as follows:-29% voted for PD, 18% for Monti, 15% for Berlusconi PopolodellaLibertàand 10% for 5Star.
In case of YES winthe ruleson howto appointthe new Senatestillto be defined.Incase of NO weseea verylowprobabilityof Renzistaying. WithinEurope hiscredibilitywouldbe hit. Furthermorein case of NO earlyelectionswouldlikelyleadto a lame parliamentBofA-ML• Polls suggest a "No" vote in the Italian referendum, but market reaction depends on other factors too. Yes vote = risk-on.• A narrow "No" where Renzi stays on and bank recaps are unaffected is ok, but risk-off if big "No", Renzi goes and recaps fail
• We cut Banks to neutral. Risk-reward now more balanced given Italy event risk, positioning, valuations & toppy bond yields.Yes vote=risk-on, narrow no=maybe okay, big no=risk-offOur European Strategists think a yes vote in the referendum would be a risk on event as it would reinforce PM Renzi’s position and probably make bank recaps easier. A narrow
no, which could see Renzi stay in office, may allow bank recaps to go ahead, while we think a large no which could see the Prime Minister resign would probably be a risk off
event. That would be particularly the case if it cast doubt on the bank recaps.