Investors may look to ECB
for comfort after high-risk votes
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[December 02, 2016]
By Balazs Koranyi
FRANKFURT
(Reuters) - With Italy's constitutional referendum and Austria's
presidential vote on Sunday both potentially underlining growing anti-establishmentism,
the European Central Bank is preparing to set to try to bring some calm
to the mix.
It is expected on Thursday to extend its already generous asset buys,
emphasizing heightened risk, including from populist movements that
could hijack governments' attention from what it sees as vital reforms.
Polls suggest that Sunday's Italian referendum on what Prime Minister
Matteo Renzi says is a vote about streamlining public administration,
will likely fail, perhaps bringing down the government and prolonging
the county's turbulence.
Austria, meanwhile, may elect the European Union's first far-right head
of state in its presidential vote.
Although markets have mostly priced in a "No" vote in Italy, it still
comes at a sensitive time as troubled lender Monte dei Paschi <BMPS.MI>
is trying to raise 5 billion euros ($5.3 billion) and market volatility
could hamper its effort, potentially reverberating throughout the
banking sector.
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"We expect that under a 'Yes' vote the Italian equity market would have
the potential to rally 5 to 10 percent in the short term, whilst a no
vote might trigger a 5 to 10 percent correction should Matteo Renzi
remain and 10 to 20 percent should the prime minister decide to resign,"
HSBC said in a note to clients.
The ECB will be ready to step up purchases of Italian government bonds
if the referendum drives up borrowing costs but only if the volatility
is temporary and the purchases could effectively support the market,
sources told Reuters earlier.
But waning confidence in the Italian bank sector may be a bigger issue
than sovereign debt yields and policymakers will have little ammunition
to prop up the sector.
Indeed, Italian newspaper Corriere della Sera reported on Friday that
Italy is in talks with the European Commission on a possible state
bailout for Monte dei Paschi, suggesting mixed confidence in the planned
capital hike.
LONGER QE
Austria's presidential campaign pits a far-right candidate with an
establishment pick.
Although the president's role is largely ceremonial, a victory for the
Freedom Party's Norbert Hofer would give the far right an important
platform, heightening concern about European integration and raising the
specter of more gains for populist parties in upcoming elections in
France, Germany and the Netherlands.
Meeting amid the political turmoil, the ECB is likely to argue that
underlying inflation remains stubbornly weak, so its asset buys will
need to be continued beyond March, possibly for another six months, to
prop up growth and inflation.
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![](../images/120216pics/busine45.jpg)
European Central Bank (ECB) President Mario Draghi attends the Euro
Finance Week in Frankfurt, Germany, November 18 , 2016.
REUTERS/Ralph Orlowski/File Photo
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"The Governing Council will also have to consider the implications of
political events, such as the outcome of the Italian constitutional
referendum on 4 December and the sharp rise in global bond yields which
has probably led to an unwelcome tightening of financial conditions in
Europe," UBS said.
Indeed, Germany 10-year yields <DE10YT=RR> are up 35 basis points since
mid-October but yields on the currency bloc's periphery are up even more
sharply, widening the spread and suggesting increased fragmentation.
Money flowed out of Italy for the eighth straight month in October, ECB
data showed, indicating that investors and banks are reluctant to put
money into weaker economies despite higher yields, moving cash into
countries like Germany, despite punitive rates and negative yields.
Still, the ECB is expected to at least debate sending a formal signal
that asset buys will eventually end, a small concession to hawks and an
acknowledgment that stimulus cannot go on forever as the ECB has already
exhausted much of its firepower, sources told Reuters earlier.
It has already spent 1.4 trillion euros to buy bonds, pushing borrowing
costs to record lows, leaving it relatively few assets to buy and
raising concerns that such stimulus loses effectiveness over time.
Its new forecasts will also show inflation returning to target by 2019
while the recent oil price surge could also add to calls to ease back on
the asset buys.
In other key central bank meetings, the Reserve Bank of India is seen
cutting interest rates but the Reserve Bank of Australia and the Bank of
Canada are both seen firmly on hold.
(Editing by Jeremy Gaunt)
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