The Markets Are Keeping Their Cool Over Italian Referendum

  • Expectations for euro volatility plummet after referendum
  • ‘This is not going to be a major disruption,’ strategist says

Ian Bremmer: Europe, as a Construct, Is 'Failing'

When it comes to political shocks, it seems the third time’s a charm for markets.

Blindsided by the Brexit vote and Donald Trump’s surprise election win, traders appear to have learned their lesson, if the reaction to Italy’s plebiscite is any guide. One big card in their favor: this time, the polls gave them a heads-up.

While the euro touched a 20-month low in the wake of Prime Minister Matteo Renzi’s resignation announcement, the currency has dialed back its slump along with high-yielding currencies. An initial jump in haven assets evaporated. Unlike with the U.K. referendum and U.S. vote -- when investors and betting markets alike were convinced the establishment side would prevail -- this time traders were disabused of such illusions, and it shows. Gauges of equity-market volatility are sliding, as are bets on future swings in the euro.

“This was first time polls got it right this year,” said Ken Peng, an Asian investment strategist at Citi Private Bank in Hong Kong. “Markets -- especially institutions like banks -- they were all ready, they were prepared for this. This is not going to be a major disruption in financial markets.”

The euro climbed against most of its major peers on Monday and bets on further tumult in the common currency are being reversed, with one-week implied volatility on the euro versus the yen falling by 6 percentage points. A similar measure on the euro-dollar pair is down 4 points, after reaching its highest level last week since the June U.K. referendum.

A similar sense of relief has descended over the equity market, where the S&P 500 and Stoxx Europe 600 advanced. Italy’s stock market closed down just 0.2 percent, rebounding from a drop of as much as 2.1 percent.

A measure of 10-day volatility in the MSCI All Country World Index has fallen back near its lowest level since August, having wiped out its spike in the aftermath of Trump’s victory. The Euro Stoxx 50 Volatility Index, which tracks expectations via the options market for future swings in European shares, slid 16 percent Monday, the lowest level in more than five weeks. Likewise, the Nikkei 225 Stock Average Volatility Index fell 7.6 percent.

“Either markets are becoming immune to political risk, or they are taking the view that the Italian issue will be a slow-burner,” said Kathleen Brooks, a research director at the City Index brokerage in London. “While the markets are likely to remain nervous as we start a new week, they haven’t fallen off a cliff so far.”

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