European stock markets have tumbled after Italian Prime Minister Matteo Renzi was dealt a crushing defeat over his referendum on constitutional reform.
Mr Renzi immediately confirmed he will resign on Sunday night after 60 per cent of the public voted against his proposed changes.
Investors are worried over the possibility of new elections in the third-largest euro economy and the impact that the ongoing political instability will have on the fragile banking system.
The pan-European Stoxx 600 began Monday 0.05 percentage lower with bank stocks leading the losses, falling more than 1.2 percent.
The Italian MIB was 2 per cent lower, but political concerns were spreading to other bourses with Germany’s Dax, France’s CAC, and UK’s FTSE all down between 0.8 per cent and 1.3 per cent.
However, the markets reaction was more muted than expected. Despite slipping into the red, most European shares, with the exception of the benchmark Italian FTSE MIB index, were beginning to move back to positive territory.
The euro plunged to a 20-month low immediately after Mr Renzi’s announcement as investors feared that another chapter of eurozone debt crisis drama was opening up. 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 per cent.
“The first reaction to Renzi resigning is euro selling, but the more important event is parliament’s dissolution and the general election in Italy,” said Daisuke Karakama, chief market economist in Tokyo for Mizuho Bank Ltd. “Elections in the Netherlands, France, Germany and Italy next year will keep the euro pressured. The euro could reach $1.02 in January-March period.”
Meanwhile, Italy’s main banking index slid by 3 per cent, hit by fears that the ongoing attempts to strengthen several lenders could be at risk.
Shares in Monti dei Paschi, Italy’s oldest bank, which is trying to raise €5bn in new capital and offload €28bn of bad loans, have slumped by 6 per cent in early trading before rebounding
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, analysts remained concerned about Italy’s banking industry.
“Risk sentiment has taken a hit from rejection of the Italian referendum,” Citigroup analysts said in a report.
“Italy’s Prime Minister Renzi has resigned after accepting defeat in the referendum. This raises the political risks in Italy and may weigh on its troubled banking sector. This also casts significant doubts over Italy’s membership of the European Union and the future of Eurozone.”