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Stocks Rally, Euro Recovers As Investors Shrug Off Italian Referendum Results
European and U.S. stocks were climbing on Monday as investors shrugged off the results of the Italian referendum that cost Prime Minister Matteo Renzi his job and thrust the nation into a period of uncertainty.
The Euro, which had fallen to its lowest level in more than a year against other major currencies overnight, also recouped its losses.
The market reaction suggests that investors had been prepared for the referendum results and don’t believe the fallout in the Eurozone’s third-largest economy will have a wide impact.
European stocks were all higher on Monday, with Germany’s DAX climbing 1.3% heading into the close. U.S. stocks also opened in the green, with the Dow adding more than 75 points in morning trading in New York.
The referendum defeat marks a resounding win for the anti-establishment Five Star Movement and follows the startling shows of populism that delivered the Brexit vote and the election of Donald Trump as the next U.S. President.
While the polls had pointed to a victory of the “no” vote, investors have grown increasingly skeptical of such polls, given the major surprises in both the United Kingdom and the United States this year. This time, the polls were right.
“Unlike both Brexit and the election of Trump, a “No” vote in Italy wasn’t a major surprise,” noted David Lafferty, chief market strategist at Natixis. “As a result, the markets have had a much more muted response to the referendum.”
The referendum was meant to streamline the government through constitutional reforms and was backed by Renzi, 41, who announced he would resign early Monday morning when it became clear that it would be defeated.
Bank stocks were getting a beating on Monday, however, on renewed concern about their solvency. The nation’s big banks are already facing large capital shortfalls and the referendum results introduce additional uncertainty about their ability to shore up their balance sheets. Shares of Banco Popolare di Milano plunged 7%, UniCredit fell 6% and Banca Monte dei Paschi di Siena skid 4%.
“We see a strong ‘no’ vote delaying any fixes to the country’s sick banking system,” wrote Richard Turnill, BlackRock’s global chief investment strategist, in a note to clients before the referendum.
Asian stocks closed largely in the red on Monday, with the Nikkei 225 sliding 0.8% and the Shanghai Composite falling 1.2%.
Oil extended its gains, with a barrel of brent crude rising above $55 for the first time in more than a year, following last Wednesday’s decision by OPEC to cut production. Last week, oil prices climbed more than 11%.