Markets stabilise after Italian referendum

Financial markets have rebounded after initial falls following Italian Prime Minister Matteo Renzi's heavy defeat in Sunday's referendum.

The euro was hit after Mr Renzi announced his intention to resign. At one stage the euro hit $1.0505, its lowest level against the US currency since March 2015.

But it rebounded from that low to stand at $1.0634, a fall of just 0.3%.

Shares in Italian banks opened lower before recovering ground.

The troubled Monte dei Paschi was down by more than 5% in the first few minutes of trade, but then rebounded and had edged into positive territory. Shares in Unicredit and Intesa also fell sharply at first before recovering.

Analysts say Mr Renzi's defeat was already priced into the market.

Kathleen Brooks, research director at City Index Direct, said there was caution among investors but not panic.

"While the markets are likely to remain nervous as we start a new week, they haven't fallen off a cliff, so far," she said.

"Either markets are becoming immune to political risk, or they are taking the view that the Italian issue will be a slow-burner, even if the president can't form a government, he still has 70 days to try, and that seems quite far away at this stage."

However, the Italian economy is in a fragile state and a period of political uncertainty could do it further damage.

'Beleaguered' banks

Analysts are particularly concerned about Italy's banking industry, which is seen as vulnerable to a loss of confidence.

Many banks are struggling with a burden of bad debt and are in need of refinancing.

That finance would be harder to come by amid a political crisis.

"Italy's banks don't have time to waste to try and boost their capital buffers. A win for the Yes camp in this referendum could have seen investors help to recapitalise the banks. However, it is unknown whether investors will do so now that the No camp has prevailed," said Ms Brooks.

"Without a sitting government, will there be official help for Italy's beleaguered banking sector?"

The size of Italy's government debt is also a concern. Government borrowing, depending on which figures you look at, is one of the largest in the eurozone. 

Italy's cost of borrowing rose sharply in early trading on Monday. The country's 10-year government bond yield was up from 1.896% at the end of last week to 2.0516%. Yields rise when the price of bonds fall.

However, the yield then fell back below the 2% mark to stand at 1.988%.

Analysts said yields appeared to be bearing up despite the fact that the European Central Bank had not stepped in to buy bonds.

'Critical importance'

Mr Renzi's defeat adds to pressure on the European Union following June's Brexit vote in the UK.

"It's not very hard to see a new election on the horizon, and it's not very hard to see the 5-Star Movement taking power with stated aims to either leave the EU, drop the euro, or both," said Mark Wills from State Street Global Advisors.

"For Italy, establishing stable governance and a plan to guide the nation is of critical importance given the fragility of the economy, challenging policies and the liquidity problems in the banking system."