Markets expecting that Italian referendum will not be approved - BBH

Research Team at BBH, notes that the expectations that the referendum will not be approved are widespread. 

Key Quotes

“The key unknown is what follows.  Although Renzi has threatened to resign if the referendum fails, his signals have been ambiguous.  If he resigns, the idea is that the PD would select a caretaker, perhaps a current minister, that would attempt to complete the political reforms and hold the parliamentary election as scheduled in 2018.”

“However, Renzi could force an early election.  It is a scenario he played down but it came back to the fore last week.  The most important point is that investors' anxiety over the possibility that 5-Star Movement is swept to power is getting ahead of events.  However, a weak government or a caretaker government means that the reform efforts slow.”

“Italian assets have underperformed recently as the referendum drew near.  The Italian 10-year premium to Germany widened nearly 50 bp over the past month, and at 1.85%, is the largest in more two and a half years.  The rising sovereign yield (Italy's 10-year yield has risen 63 bp over the past month, the most in Europe) is one of the factors that have weighed on bank shares.  The Italian bank share index is back to its lowest level since early October.”