European markets ended an eventful week dominated by OPEC’s oil price fix with a familiar word being bandied about: contagion.
The euro returned to centre stage and Italy in particular, where the consensus is a referendum defeat for the government could see it fall, and progress in economic reforms stall. That might trigger a banking crisis that might make Italy’s sovereign debt situation look untenable.
“There is the famous danger of contagion. Should Italy be in trouble, for example because elections are required, there is a virus that could also affect other countries: Greece, Portugal, Spain and even France. Yields for government stocks are going up and bank risks are increasing again. There will be a renewed call on one institution to save everything: the ECB,” says Baader Bank’s head of Capital Markets Analysis Robert Halver.
Traders lost their last two big political bets, not expecting Brexit or the Donald Trump victory, so they’ll be hoping its third time lucky and have already priced in a win for Austria’s far-right presidential candidate on Sunday, and a referendum defeat for Italy’s Matteo Renzi.
Bond yields in both Italy and Austria have been trimmed ahead of the votes.
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