After the Italian referendum, attention will turn to the banking sector, where Italian banks are vulnerable. Many Italian banks never recovered from the last financial crisis. They are trading at multi-year lows and are struggling with bad debts. They are in need of refinancing but the uncertainty caused by the no vote will make it more difficult to raise finance.
If Italian banks collapse, this will affect banks in the UK and the US. Nevertheless, UK banks were firmer yesterday, an indication that the market is resilient in the face of the no vote. In a scenario similar to Brexit, the market has brushed aside bad news. This tells me that sentiment is changing to bullish. Bullish sentiment would make sense at this time of the year, as seasonal influence is positive, yet the wave count does not agree with an immediate rally. Wave counts both in the US and UK suggest more downside before the rally starts.
Sometimes the market discounts bad news and rallies after the event. We could be in that situation. Last week, decline occurred on fear of a no vote, now the referendum is over people moved back into position. Yesterday’s rally to 6799.5 carried higher than expected but this is a normal move because it’s a second wave and second waves retrace a large portion of the first wave. Today, we have support near 6680. The FTSE should trade in the range 6680-6760.
