European stocks open lower after Italy government's referendum defeat

Despite slipping into the red, most European stock markets rebounded in positive territory

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, markets have recovered to end the day higher.

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 $1.0724, a rise of 0.5 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.

“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, shares in Italian banks have have been dragged down by fears that a rescue of the troubled Monte dei Paschi bank might fail.

Shares in Monti dei Paschi, Italy’s oldest bank, which is trying to raise €5bn in new capital and offload €28bn of bad loans, plunged by 5 per cent before recovering some losses. They dropped again, trading down by 4 per cent by 3pm.

Meanwhile, shares in Unicredit, Italy's largest bank, dropped by more than 5.5 per cent – forcing its shares to be suspended in early afternoon trading.

Kathleen Brooks of City Index says: "We've seen very volatile trading in Italian bank stocks this morning. Shares rallied but then reversed those gains, and Unicredit has dropped by more than 5 per cent which caused it's circuit breakers to kick in. Trading will probably be suspended for the next few hours."

Analysts remained concerned about Italy's banking industry.

Economists at Citi point out that Italian banks hold €400bn of Italian government bonds.

They warn that if traders mark down the value of these bonds in the coming weeks due to renewed political and economic uncertainty, it could prompt further falls in Italian banks' stock prices, creating a "vicious spiral" of lower bank lending and weaker GDP growth.

"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."