Action Insight

Following Brexit and Donald Trump's victory in US presidential election, the Italian referendum this coming Sunday is the latest event that could cause huge volatility in the financial markets. Indeed, with the "no" camp leading in opinion polls, Italian shares and bonds have underperformed of late. The banking sector has suffered most with the FTSE Italia Banks Index losing almost -9% in November. Italy's FTSE MIB index has fallen -2.65% this month, compared with a -0.74% drop in the pan-European Stoxx600 index. Meanwhile, the 10-year Italian/German yield spread widened to a 1.5-year high of 1.874% last Thursday. The market's key concern is that a "no" vote leading to resignation of Prime Minister Matteo Renzi would trigger massive selloff in bank shares, forcing the debt-ridden Banca Monte dei Paschi di Siena to suspend plans for a critical 5B euro capital increase and then making other banks, such as UniCredit, to delay similar plains too. Such risks might be contagious, spreading to other peripheral countries and result in another European financial crisis.