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As Cool As A Cucumber

02 December 2016 by lberuti

The results of the referendum held in Italy on Sunday could decide whether we are about to start a new chapter in the European crisis saga. Polls suggest that Italian voters will reject the constitutional change to streamline the legislative process, a decision that could lead Prime Minister Matteo Renzi to resign. Should he quit, Italy may enter a period of political and market turmoil, possibly shaking the whole European union. It was therefore not surprising to see equity markets in what could only be described as a prudent mood, most of the European benchmarks losing roughly 0.5%. Credit markets fared much better. Credit investors appeared largely unphased by the potential upset. If anything, they felt too short risk going into the week-end, and the whole session turned into a grind tighter for European credit indices. Clients were mostly looking to trim hedges, and the risk premia of Italian banks ended up the main beneficiaries. The spread differential between iTraxx Main and CDXIG which shot up to 7bps a few days ago was back to 5bps at today’s close (78bps for iTraxx Main vs 73bps for CDXIG).