Currencies

Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Banks

Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Currencies, Equities

Scary movie sequel beckons for eurozone markets

Just as horror movies can spook fright nerds more than they expect, so political risk is sparking heightened levels of anxiety among seasoned investors. Investors caught out by Brexit and Donald Trump are making better preparations for political risk in Europe, plotting a route to the exit door if the unfolding story of French, German […]

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Currencies

Dollar rises as markets turn eyes to Opec

European bourses are mirroring a tentative Asia session as the dollar continues to be supported by better US economic data and investors turn their attention to a meeting between Opec members. Sentiment is underpinned by US index futures suggesting the S&P 500 will gain 3 points to 2,207.3 when trading gets under way later in […]

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Archive | Economy

Donald Trump’s infrastructure plans win backing from OECD

Posted on 28 November 2016 by

Donald Trump’s economic plans received strong backing from the Organisation for Economic Co-operation and Development on Monday, with the international organisation predicting the president-elect’s infrastructure plans would increase US growth, combat inequality and energise discouraged workers.

In contrast to its support for US policy, the Paris-based OECD’s twice-yearly economic outlook is cool on the UK outlook, marking down Britain’s economic prospects on the view that the UK is heading for a hard Brexit in 2019.

Equity markets have already rallied on the expectation of a boost to US growth from looser fiscal policy and the OECD’s support marks the first leading international organisation to validate financial market bets.

The OECD’s support highlights how views of US prospects have altered over the past two months. Before the US election, international financial institutions, such as the International Monetary Fund and World Bank, feared a Trump presidency and officials discussed him as a sort of Voldemort for the global economic order — like the villain in Harry Potter, his name spoken only in hushed tones and behind closed doors.

Having long been a staunch supporter of budgetary prudence, the OECD has performed a U-turn over the past year, as it has become concerned that if governments do not use low interest rates to boost capital investment, advanced economies will become stuck in a low growth trap.

Catherine Mann, chief economist of the OECD said: “We are concerned about the extent to which asset prices are underpinned by low interest rates — so monetary policy has been over-burdened and there is now a premium on getting fiscal levers pulled in the right way”.

The latest OECD forecasts in its economic outlook show improvements to growth forecasts for 2017, which are directly caused by the organisation’s positive view of US tax and public spending policy after the election.

The US is expected to be the best performing large advanced economy in 2017, growing 2.3 per cent with the eurozone growing 1.6 per cent, 1.2 per cent in the UK and only 1 per cent in Japan.

“[The Trump fiscal effect] is an important part of our projection,” Ms Mann told the FT. “We don’t think anything will happen over the next six months, but we expect [a stimulus worth] 0.25 to 0.5 per cent of national income in the second half of 2017, mostly spent on public infrastructure and 1 per cent or so in 2018 coming from tax cuts.”

The outlook says US policies might even help get the world out of a rut. More active fiscal policy, it says, “should revive expectations for faster and more inclusive growth, thus allowing monetary policy to move toward a more neutral stance in the United States at least, and possibly other countries as well”.

“The boost to [US] spending on infrastructure and other investments (such as improving skills and facilitating job-finding success through more active labour market policies and the provision of child care) will combat inequality and counter the steady decline in labour force participation rates, both by prime-age men and women,” the report says.

Amid the praise for Mr Trump’s policies, the OECD warns that if he carries out his threats to raise trade barriers, the gains would disappear. “Trade protectionism shelters some jobs, but worsens prospects and lowers wellbeing for many others,” says.

It is similar concerns that have led the organisation to double-down on its dim view of Brexit, producing forecasts based on Britain moving to trade with the rest of the EU on World Trade Organisation rules from 2019, a so-called “hard Brexit”.

“The unpredictability of the exit process from the European Union is a major downside risk for the economy. Uncertainty could hamper domestic and foreign investment more than projected and the pass-through of currency depreciation to prices could be larger, deepening the extent of stagflation,” the OECD warned.

The OECD said there was room for fiscal expansion also in Britain, Germany, France, Belgium and Russia, but recommended that China, Hungary and Israel should move to a much tighter budgetary stance.

Donald Trump’s economic policy gets thumbs up from OECD

Posted on 28 November 2016 by

Donald Trump’s economic plans received strong backing from the Organisation for Economic Co-operation and Development on Monday, with the international organisation predicting the president elect’s infrastructure plans would increase US growth, combat inequality and energise discouraged workers.

In contrast to its support for US policy, the Paris-based OECD’s twice-yearly economic outlook is cool on the UK outlook, marking down Britain’s economic prospects on the view that the UK is heading for a hard-Brexit in 2019.

Equity markets have already rallied on the expectation of a boost to US growth from looser fiscal policy and the OECD’s support marks the first leading international organisation to validate financial market bets.

The OECD’s support highlights how views of US prospects have altered over the past two months. Before the US election, international financial institutions, such as the International Monetary Fund and World Bank, feared a Trump presidency and officials discussed him as a sort of Voldemort for the global economic order — like the villain in Harry Potter, his name spoken only in hushed tones and behind closed doors.

Having long been a staunch supporter of budgetary prudence, the OECD has performed a U-turn over the past year, as it has become concerned that if governments do not use low interest rates to boost capital investment, advanced economies will become stuck in a low growth trap.

Catherine Mann, chief economist of the OECD said: “We are concerned about the extent to which asset prices are underpinned by low interest rates — so monetary policy has been over-burdened and there is now a premium on getting fiscal levers pulled in the right way”.

The latest OECD forecasts in its economic outlook show improvements to growth forecasts for 2017, which are directly caused by the organisation’s positive view of US tax and public spending policy after the election.

The US is expected to be the best performing large advanced economy in 2017, growing 2.3 per cent with the eurozone growing 1.6 per cent, 1.2 per cent in the UK and only 1 per cent in Japan.

“[The Trump fiscal effect] is an important part of our projection,” Ms Mann told the FT. “We don’t think anything will happen over the next six months, but we expect [a stimulus worth] 0.25 to 0.5 per cent of national income in the second half of 2017, mostly spent on public infrastructure and 1 per cent or so in 2018 coming from tax cuts.”

New Basel banking rules’ impact on European economy

Posted on 28 November 2016 by

The coming days will be crucial for the future of the European economy. The Basel Committee on Banking Supervision will officially present its final set of proposals on capital requirements for the banking sector, known as the Basel IV framework.

The Basel Committee is targeting the degree of variability in how banks define the risks that ultimately determine their capital requirements. The highly technical nature of this topic should not divert attention from the fundamental question that lies behind the review: how, in the future, will European banks be able finance the economy and hence foster growth and raise employment?

Three points that the Basel Committee does not seem to have taken into account in its assessment need to be stressed.

First, it is important to emphasise that the opposition of European banks to this set of proposals is not down to their supposed readiness to ignore or disguise structural weaknesses. No doubt certain shortcomings still remain, but the vast majority of European banks have significantly reinforced their balance sheet and capital levels since the beginning of the crisis. Moreover, since the adoption of the Basel III rules, all large internationally active banks have met minimum and core equity capital requirements. At the same time, we have seen the establishment of a truly Europe-wide system for bank regulation and supervision, managed collectively by the European Banking Authority, and for the eurozone by the European Central Bank.

Second, there are important differences between the US and European banking sectors. The European economy, unlike that of the US, is largely bank-financed. In fact, more than three quarters of Europe’s businesses and households are today financed by banks.

There are also differences in portfolios and in markets. US banks have tended to keep the riskiest part of their commitments — often also the most profitable — on their balance sheets. Securitisation and deeper financial markets help them to take the remainder off their balance sheets. And they can rely on two government agencies, Freddie Mac and Fannie Mae, to reduce their exposure to residential mortgages. On the other hand, favourable weights for well-rated and well-secured credits have encouraged EU banks to keep these loans on their balance sheets.

Third, it is time to put to rest the idea that the risk-weighted models used by European banks are excessively sophisticated and therefore less reliable. The relatively low risk profile of European banks in comparison to US banks is explained by the high risk discrimination of their portfolios. Moreover, every model in use by European banks has been approved and authorised by both national and European regulators. The desire of the regulators to harmonise existing risk-weighted systems and reduce disparities between different banking systems is understandable. But this should not come at the expense of the European system or disrupt the financing of the real economy.

Beyond a greater impact on the EU banking system and the financing of the European economy due to increases in the cost of lending, the revision of risk evaluation by the Basel Committee could potentially discourage good risk management and well-diversified portfolios. The committee should therefore commit itself to making sure that the final set of proposals will not have a significant impact on the capital requirements for banks in any region.

The European project relies on the capacity of its institutions to bring prosperity and security to the peoples of Europe. While the Basel IV rules and the future of the European economy might seem like two different and separate issues, the reality is that the revision of the present framework for banks’ capital requirements could have very important consequences for Europe as a whole.

The writer is president of the European Banking Federation

ECB’s Cœuré stresses barriers to Greek QE inclusion

Posted on 28 November 2016 by

Policymakers at the European Central Bank will have to make a series of judgements about the sustainability of Greece’s debt and the trajectory for its economic growth before deciding on whether to include the country in its bond-buying measures, one of its senior officials has said.

Stressing the hurdles that still exist before Greece can be eligible for the ECB’s quantitative easing measures, Benoît Cœuré, executive board member, said that any decision would be taken “in full independence”.

The ECB has said that any move to buy Greek government debt as part of its stimulus measures would be partially dependent on political decisions made by EU creditors on Athens’ bailout progress.

With the International Monetary Fund due to deliver its verdict on the thorny issue of Greek debt, Mr Cœuré said the ECB would likely carry out its own analysis of the country’s 180-per-cent-of-GDP debt pile before giving any green light for QE.

“The debt sustainability assessment of the institutions are an important input, but they are not the only ones”, said Mr Cœuré, speaking in Athens on Monday.

“The Governing Council will base its assessments also on internal analysis and will take into account other risk management considerations before making its final decision”.

Eurozone finance ministers will be meeting with IMF creditors next month to try and bridge their differences over the level of austerity demanded by Greece’s three-year bailout programme and to pin down measures to restructure the country’s debt after 2018. The IMF has been a fierce advocate of bold debt relief and less stringent budgetary surplus targets for the debtor economy.

In its latest economic outlook, the Organisation for Economic Co-operation and Development joined the calls for debt relief for Greece, arguing its liabilities “undercut confidence in the Greek economy”.

Earlier today, European Commission vice president Valdis Dombrovskis said talks with Greece’s left-wing Syriza government remained “on track”.

Brexit will be tougher for UK than for eurozone, warns Draghi

Posted on 28 November 2016 by

Mario Draghi has warned that Britain, rather than the eurozone, will “first and foremost” feel the pain of Brexit, as he called for clarity over the negotiation process that will govern the UK’s departure from the EU.

The European Central Bank president, speaking at the European Parliament in Brussels on Monday, said that it was impossible to estimate the full economic impact of Brexit at this stage, but noted that the single market had been “a fundamental asset” for the UK, allowing its banks to make “sizeable savings in terms of capital and liquidity”.

“If, in the long run, the risk of a less open UK economy in terms of trade, migration and foreign direct investment were to materialise, there would be a negative impact on innovation and competition and, thus, productivity and potential output,” he said.

Mr Draghi’s intervention comes at a time of intense debate about the impact of Brexit on the British economy between government economists in London and Brexit advocates. An interim budget statement from the UK Treasury last week was based on independent official forecasts that were sharply criticised as overly pessimistic by Brexit advocates.

Mark Carney, Mr Draghi’s counterpart of the Bank of England, has taken particular heat from Brexiters, who believe that the BoE governor improperly inserted the central bank into a political debate over EU membership and unjustifiably warned that Brexit would lead to economic crisis.

Bernard Jenkin, a Conservative MP and vocal supporter of Brexit, dismissed Mr Draghi’s warnings as empty threats. “This is all pre-positioning and jungle drums,” said Mr Jenkin, chairman of the public administration select committee. “It possibly bears no relation to the outcome of the negotiation and people should keep calm and carry on.”

Reflecting growing impatience in the EU over London’s approach to Brexit talks, the ECB chief called for “clarity on the negotiation process as soon as possible in order to reduce uncertainty”.

He said that the British vote raised questions of eurozone “sovereignty”, a reference to efforts by the currency bloc to concentrate certain types of trading activity on its territory rather than in the City of London.

“Following the outcome of the British referendum, there will certainly be issues of sovereignty in various parts of our payments framework, infrastructure framework, clearing systems and so on,” he said.

He referred to a previous legal struggle between the UK and the ECB, when Britain thwarted a bid by the central bank to push clearing of euro-denominated securities away from London and into the euro area. The ECB lost the case, with the court deciding that such restrictions were impossible under existing EU law.

“If one wants to change that, it’s basically the legislators, you, who might do that,” Mr Draghi said.

The ECB president described a cocktail of political risks hanging over the global economy, including the Brexit vote, Donald Trump’s election as US president, and a potential No vote in a looming Italian referendum, saying that the world was facing “quite profound changes” that would take years to play out.

He sought to assure lawmakers that the ECB would continue to pursue expansionary policies to underpin growth through uncertain times.

The central bank’s governing council will, at its December meeting, assess “various options” for maintaining “the very substantial degree of monetary accommodation necessary to secure the sustained convergence of inflation towards levels below or close to 2 per cent over the medium term.

At an ECB meeting next week, policymakers are widely expected to announce an extension of their landmark bond-buying purchases.

Mr Draghi also made a plea for governments to stick to the road of financial reform they have embarked upon since the 2008 financial crisis, saying that they should not be deterred from it by populism.

He said that the international community would get a signal in the coming months of the Trump administration’s stance on regulatory co-operation, with several key gatherings of global standard setters, such as the Basel committee, due to take place.

These meetings will show “exactly what the regulatory stance of the new administration will be,” he said.

Draghi hints at changes to eurozone funding market rules

Posted on 28 November 2016 by

Policymakers at European Central Bank are aware of a funding squeeze resulting from its landmark bond-buying programme, Mario Draghi said, hinting the central bank could move to ease problems being created in the smooth functioning of financial markets as early as next week.

In the wake of reports that the ECB was willing to tweak its collateral re-lending rules to alleviate funding stresses faced by some market participants, Mario Draghi told a committee of MEPs the central bank’s operations were “falling short of what was optimal” in recent weeks.

The ECB’s landmark QE programme – which has snapped up €1.1tn of government debt since March 2015 – has led to a shortage of high-quality collateral needed by banks to secure loans in the single currency area’s short-term funding (“repo”) markets.

In order to ease the crunch, the ECB has been lending the bonds it buys back to investors since 2015.

This Securities Lending Programme was “very, very important for the well-functioning of the financial markets” said Mr Draghi.

The Italian said policymakers frequently revisited the framework to loan out its stockpile of debt on a 12 to 18 month basis. Hinting at looming changes, he added that recent limitations meant the framework was being “gradually upgraded”.

“It’s recognised as a need to do”, Mr Draghi said, speaking ahead of the ECB’s December meeting next Thursday, where policymakers are expected to extend their €80bn-a-month bond-buying measures beyond March 2017.

Benoît Cœuré, a member of the ECB’s executive board, said earlier this month that securities lending could be “scaled up” and that it was “well within central banks’ operational capacity to play a more structural role in supplying safe assets to the financial system”.

The liberal elite’s Marie Antoinette moment

Posted on 27 November 2016 by

Some revolutions could have been avoided if the old guard had only refrained from provocation. There is no proof of a “let them eat cake” incident. But this is the kind of thing Marie Antoinette could have said. It rings true. The Bourbons were hard to beat as the quintessential out-of-touch establishment.

They have competition now.

Our global liberal democratic establishment is behaving in much the same way. At a time when Britain has voted to leave the EU, when Donald Trump has been elected US president, and Marine Le Pen is marching towards the Elysée Palace, we — the gatekeepers of the
global liberal order — keep on doubling down.

The campaign by Tony Blair, former UK prime minister, to undo Brexit is probably the quaintest example of all. A more serious incident was the forecast by the Office for Budget Responsibility in the UK, which said last week that Brexit would have severe economic consequences. Coming only a few months after the economics profession discredited itself with a doomy forecast about the consequences of Brexit, this is an astonishing reminder of the inadequacy of economic forecasting models.

The truth about the impact of Brexit is that it is uncertain, beyond the ability of any human being to forecast and almost entirely dependent on how the process will be managed. “Don’t know” is the technically correct answer. Before the referendum, Project Fear was merely a monumental tactical miscalculation. Today it is stupidity. One of the debates was whether people should be listening to experts. We have moved beyond that. Because of a tendency to exaggerate, macroeconomists are no longer considered experts on the macroeconomy.

Out-of-touch former leaders and the economic establishment are not unique. In Italy, the political establishment is considering amending recently modified electoral law solely to keep Beppe Grillo’s rebellious Five Star Movement from power. This is intertwined in a complex way with next Sunday’s referendum on constitutional reform.

The electoral law that came into force in July gives the strongest party quasi-dictatorial powers. It was a stitch-up agreed in 2014 between Prime Minister Matteo Renzi’s Democratic party and former prime minister Silvio Berlusconi’s Forza Italia. Neither man then believed the Five Star Movement would ever be in a position to shake the cosy duopoly. No matter how the referendum on constitutional reforms ends, expect to see one of the most glaring efforts of gerrymandering in modern politics. But Mr Renzi’s problem is not the Five Star Movement. It is the voters.

The EU itself, too, is doubling down whenever it can. The trade agreement with Canada, and the yet to be concluded Transatlantic Trade and Investment Partnership, are about as popular today as the stationing of medium-range nuclear missiles in the 1980s. A popular insurrection is under way against them because people fear a reduction in consumer protection and a power grab by multinationals.

Why is this happening? Macroeconomists thought no one would dare challenge their authority. Italian politicians have been playing power games forever. And the job of EU civil servants is to find ingenious ways of spiriting politically tricky legislation and treaties past national legislatures. Even as the likes of Ms Le Pen, Mr Grillo and Geert Wilders of the far-right Dutch Freedom party head towards power, the establishment keeps acting this way. A Bourbon regent, in an uncharacteristic moment of reflection, would have backed off. Our liberal capitalist order, with its competing institutions, is constitutionally incapable of doing that. Doubling down is what it is programmed to do.

The correct course of action would be to stop insulting voters and, more importantly, to solve the problems of an out-of-control financial sector, uncontrolled flows of people and capital, and unequal income distribution. In the eurozone, political leaders found it expedient to muddle through the banking crisis and then a sovereign debt crisis — only to find Greek debt is unsustainable and the Italian banking system is in serious trouble. Eight years on, there are still investors out there betting on a collapse of the eurozone as we know it.

Mr Renzi could have used his ample political capital to reform the Italian economy instead of trying to cement his power. And imagine what would have been possible if Chancellor Angela Merkel had spent her even larger political capital on finding a solution to the eurozone’s multiple crises, or on reducing Germany’s excessive current account surpluses. If you want to fight extremism, solve the problem.

But it is not happening for the same reason it did not happen in revolutionary France. The gatekeepers of western capitalism, like the Bourbons before them, have learnt nothing and forgotten nothing.

munchau@eurointelligence.com

French consumer confidence sticks at nine-year high

Posted on 25 November 2016 by

The French consumer is showing few signs of jitters ahead of the presidential election next year.

Consumer confidence in the eurozone’s second largest economy remained at a nine-year high this month at 98 – the same level hit in October – on the back of a healthy outlook for living standards among French households.

The survey, carried out by stats agency Insee, found households fears of unemployment fell from 40 to 29, while inflation expectations over the next 12 months also slipped, compared to October.

Consumer confidence remains below its long-term average of 100 but climbed above its post-financial crisis high earlier this year.

It comes after Europe’s largest economy Germany saw one of its closely-watched consumer confidence gauges climb stronger than expected this month.

Consumers have been driving the eurozone’s moderate economic recovery over the past 12 months and are set to enjoy the benefits of still low inflation well into next year, according to calculations from the European Central Bank.

France heads for a key presidential election in April next year. The country’s opposition centre-right Republican party will be nominating its presidential candidate at a second round vote between two former prime ministers on Sunday.

Irish PM says Brexit ‘impossible’ within two years

Posted on 25 November 2016 by

The Irish prime minister has said it will be “impossible” to agree Brexit within two years, in the strongest rejection so far of the UK’s negotiating timetable by an EU leader.

Enda Kenny, who is seen as one of Britain’s allies in the process, said “there’s a growing feeling in Europe that there should be a transition period, and that the transition period will be longer than those two years — I think it will be.”

Earlier, Joseph Muscat, Malta’s prime minister, suggested that Britain’s departure from the EU could be delayed “at the very end of the process”, citing a possible veto by the European Parliament as a possibility. “It will get complicated. Divorces are never easy, I think,” Mr Muscat said.

The warnings are a potential headache for Theresa May, who has insisted that Britain will trigger Article 50, the EU’s official exit clause, by the end of March. That would begin a two-year negotiating period that could only be extended by the unanimous agreement of other member states.

The prime minister’s approach has been criticised by some hardline Brexiters, who argue that Britain should be prepared to abandon the Article 50 process and trade with the rest of the EU on World Trade Organisation rules. Some pro-EU politicians, meanwhile, argue that Britain should delay triggering Article 50 until after the French and German elections next year in order to make best use of the two-year period.

A British general election is due by May 2020, providing a potential complication should Brexit talks extend beyond two years. The governor of the Bank of England, Mark Carney, has also said he will leave his post in mid-2019, a decision that appeared to assume that Brexit would have been completed by that date.

Since the referendum in June, diplomats have expressed scepticism that Britain could negotiate the terms of its exit from the EU and a new trade relationship with the bloc within two years.

In contrast, Guy Verhofstadt, the European parliament’s head negotiator, said that Brexit must happen before the next parliamentary elections in May or June 2019. “I can’t imagine we start the next legislative cycle without agreement over UK withdrawal,” he said in September. François Hollande, the French president, has also said that “everything must be completed by 2019”.

Mrs May has not ruled out a transitional post-Brexit agreement, or continued contributions to the EU budget. In an interview with the Financial Times, Wolfgang Schäuble, the German chancellor, said that Britain might have to keep paying in until 2030.

Questions have been raised about the readiness of Britain’s civil service for Brexit negotiations.

In this week’s Budget, Philip Hammond, chancellor, announced up to £412m in additional funding between now and 2020 for the three main departments — the Department of Exiting the EU, the Department of International Trade and the Foreign Office. Other departments, including the Department for Environment, Food and Rural Affairs, are also expected to need increased resources.

Four things to watch out for in Italy’s looming referendum

Posted on 25 November 2016 by

The clock is ticking.

Italians will be heading to the polls on December 4 in a referendum to reform the country’s constitution.

On paper, this is an arcane poll to shake up Italy’s parliamentary democracy and shore up government stability, but the referendum has become a proxy for the leadership of centre-left prime minister Matteo Renzi and is being seen as a one of the first major tests of Europe’s establishment in the wake of Donald Trump’s election.

The question on the ballot will ask Italians whether they are in favour of cutting the number of senators and reducing the costs of its political institutions.

Mr Renzi, who came to power in an internal party coup two years ago, has promised to step down and not lead a technocratic government should the ‘Yes’ campaign fail.

The reform proposals would, among other things, see the number of Italian MPs fall and more centralising powers handed to the executive over the country’s bicameral parliament.

As it stands, the polls give the ‘No’ vote a narrow lead of 5-7 percentage points. The Yes camp has fallen back significantly on the back of turbulence returning to Italian banks and electoral momentum for populist parties such as the left-wing Five Star Movement.

Here are the four most important things to watch out for:

1. Super central bank December

The referendum will come a week ahead of two major central bank meetings of the European Central Bank (Dec 8 ) and the Federal Reserve (Dec 14).

The December decisions are expected to highlight divergent policy paths for the world’s two major central banks. The ECB, which has held its rates and asset purchases at their current rates since March, is expected to announce a six-month extension and tweak to the rules of its QE programme to carry on its asset purchases beyond March 2017.

In its latest Financial Stability Review, the ECB warned that Trump-induced volatility could trigger a rout in European markets and lead to surging eurozone government borrowing costs.

Meanwhile, markets think the Fed will opt to carry out its first rate hike of the 2016 at its latest meeting of the year.

2. Watch banks, not bonds

Any immediate financial stress from a No vote is likely to be seen in the Italian bank stocks rather than government bonds, according to analysts at Goldman Sachs.

With the ECB’s measures set to keep a lid on bond yields until at least March 2017, political upheaval in Italy is set to concentrate investor focus back on the country’s troubled financial system.

Should Mr Renzi fall on his sword, the task of cleaning up the country’s lenders, who are lumbering under the highest bad loan mountain in the eurozone, is set to stall.

In an already turbulent year, Italy’s main banking index has already shed nearly 50 per cent of its value. In the immediate term, a No vote it could throw into jeopardy a planned €5bn recapitalisation plan for Italy’s most troubled bank Monte dei Paschi, potentially forcing Rome to take a stake in the lender and for creditors to undergo a debt-for-equity swap that would see investors endure losses.

“Should the No vote prevail, we see a weakened centre-left government muddling through until early 2018, possibly without Mr. Renzi at the helm” says Francesco Garzarelli at Goldman.

“In these circumstances, we believe the likelihood of successful market-driven recapitalisations of the weaker Italian retail banks – which are already likely to be pushed into 2017 – would diminish substantially” he adds.

3. Spain > Italy

European government bonds have endured a tough time in the wake of Mr Trump’s election, sparking fears over rising global inflation and concerns his victory could embolden eurosceptic populists in Europe.

Italy’s 10-year government bond yields have climbed above 2 per cent for the first time since 2015 this month but a major bond tantrum may not be on the cards, according to Goldman, who think Italy will remain a riskier bet than Spain for bond investors following a No vote.

Both Goldman and UBS expect Italian government debt yields to stay above their Spanish equivalents after Madrid broke a near 12-month political deadlock and appointed a new minority government last month.

“The political backdrop in Spain is currently more favourable than in Italy, and we maintain our preference of being long 10 year bonds of Spain versus Italy”, says Nishay Patel at UBS.

4. After a Yes or No vote: shades of grey

Even in the event of a victory for Mr Renzi, the aftermath of the referendum may not prove to be a game-changer for the struggling Italian economy which has had its growth forecasts slashed and lumbers under a 130 per cent of GDP debt pile.

Economic growth is expected to hit just 0.8 per cent this year and 1 per cent in 2017, according to the government’s most recent economic forecasts.

Analysis from Bank of America Merrill Lynch shows the reformist Mr Renzi has lost much of his verve this year, with progress on implementing new reform measures slipping as troubles in the banking system have come to dominate the domestic political agenda.

BAML highlights a landmark competition law and a revamp of public administration as two key measures that have all but stalled in recent months.

Should Mr Renzi scrape through the referendum, expect him to keep muddling along until a general election in 2018, says Barclays:

We expect the government to remain in office but do not anticipate the implementation of additional meaningful structural reforms, as we would expect the government to avoid costly political decisions before the next round of general elections is held.

Unless the Yes camp wins with a strong majority and very high turnout, we expect the government to be mindful of risks stemming from precipitating a political crisis.

Should the No side prevail, an immediate snap general election or even an upsurge for the populist Five Star Movement – Mr Renzi’s most potent political challengers – is unlikely, notes Fabio Balboni, European economist at HSBC.

Mr Balboni thinks Italy’s president will be reluctant to call an election in the aftermath of the referendum and instead will hold off until late 2017, which will be “only a few months before when [an election] would become due anyway”.