[Italy flag jets]Reuters/Giampiero Sposito “THE biggest risk in Europe is the Italian referendum,” said Gianfelice Rocca, of Milan's chamber of commerce (source: The Economist) ITALY VOTED LAST WEEKEND ON THE REFERENDUM ON CONSTITUTIONAL REFORM. PRIME MINISTER RENZI STAKED HIS POLITICAL REPUTATION ON THE PROPOSALS THAT SEEK TO STRENGTHEN WHAT IS WIDELY REGARDED AS A (CONSTITUTIONALLY) WEAK AND INEFFECTIVE GOVERNMENT. HE HAS SAID HE WOULD RESIGN IF THE COUNTRY VOTES ‘NO’ (AND DID), LIKELY TRIGGERING AN ELECTION WHERE THE EUROSCEPTIC FIVE STAR MOVEMENT WOULD FEATURE STRONGLY AND, IF THEY HELD THE BALANCE OF POWER, RAISE THE PROSPECT OF A FURTHER REFERENDUM TO LEAVE THE EUROPEAN UNION. Did Renzi raise the stakes too high? Probably. Regardless whether the proposals were sound, – Italy’s record in passing laws is no worse than most – or whether Renzi needed to raise the stakes so high is largely irrelevant to market participants in the shorter term_. Siamo dove Siamo_. We are where we are. Many have similarly likened an Italian NO to the successful ‘nationalistic’ Brexit Leave and US Trump votes. But a Machiavellian could argue those votes were for _change._ YES was the constitutional change even but NO was for real change. The similarity to previous key votes (Greece, Brexit, Trump) in the last 18 months was and is too close to ignore and continues to provide sound templates going forward in this self made Italian _fiasco. _ WHAT MARKETS ARE GENERALLY SAYING FOR NEXT 5-10 DAYS Is there an overwhelming conclusion about the impact of the Italian Referendum that can be deduced from the major markets? The outlook for many (70%) markets was positive (risk) over the next 5-10 day time frame. DAX: New Highs before deep retracement SPX: New Highs before retracement FTSE: Bullish consolidation Nikkei: Deeper Correction before uptrend resumes Gold: Grinding out a major base Oil: Threatening major consolidation break higher EURUSD: Final upswing within bearish mangled consolidation EURGBP: Setting base for large [corrective] rally. GBPUSD: Nasty spike higher to end correction. USDJPY: Toppish for larger correction to near term uptrend EURJPY: Toppish for larger correction to near term uptrend AUDUSD: Bearish consolidation The outlook is not uniform and either implies a (typically European) unclear Italian resolution or that Italy will not be as big a deal as the market is making out. After all we have the UK Supreme Court meeting about Brexit this week, ECB on Thursday whose QE outlook may well be influenced by Italy and the US Fed’s interest rate decision the following Wednesday. ITALIAN MARKETS The NO vote is politically destabilising and hit most related markets in the very short term and Italian markets at least in the short to near term, particularly the Italian stock market (MIB]) and most notably the fragile Italian banks (which comprise 20% of MIB). Whether these moves are sustained depends on subsequent events and the extent to which contagion is limited by political and central bank action. Given ECB’s role as rescuer of last resort and interconnection of Italian bank ownership with France and Germany, there would be a medium risk of contagion. A Yes vote would clearly have had the opposite effect, not least because Renzi sought to reform the Italian banks and would have seen related markets rally immediately until other factors become more pressing eg December US rate hike. DO THE ITALIAN MARKETS TIP A RESULT OR SUBSEQUENT REACTION? The Italian stock market appears currently stable after an 18 month decline. Even allowing for further volatility (weakness) within the range, I would have said the end of a trend sequence would allow a much larger recovery if only later. Many analysts are also citing the 50% devaluation of Italian banks in the last year as overdone and offer a good if not dangerous return. [Italy MIB]Reuters/Giampiero Sposito However, many said the same of Greece around the July 7th 2015 Greek Bailout Referendum and MIB now can be compared to the Greek market back then: THE GREXIT VOTE [GREXIT]REUTERS/GIAMPIERO SPOSITO Can they be compared? Both represented a vote which appeared to promise a possible resolution or a sudden deepening of a crisis. Yet the prevailing debt crisis in Greece was far more prolonged and deeper at the time of the apparent knife edge vote, indeed banks were already closed. Moreover the subsequent events nullified the impact of the poll (even though the Greek stock market was shut for a month and fell sharply after). Nothing is black and white it seems in European politics. See Greek Timeline. If a comparison can be made it is worth noting how EURUSD, the German stock market DAX and the 10 year German Bund-Italian BTP reacted to the vote. The EURUSD spiked down and then rallied in a very sharp but short-lived ramp. DAX rallied sharply after an initial spike down but failed to sustain the move while (and because?) Bunds and the 10 year differential collapsed. This is pretty much our overall view and working. [Italy]Reuters/Giampiero Sposito BREXIT A similar scenario happened on the Brexit vote. The EURUSD spiked down and then rallied in a strong but short-lived ramp. [Italy]Reuters/Giampiero Sposito As Sterling was obviously the feature of the market’s reaction to Brexit, if there is a similarity to Brexit in other markets could that (unbelievably) translate to Sterling despite the GBPUSD break higher on Friday? [Italy]Reuters/Giampiero Sposito This last rally is clearly slower but it is worth bearing in mind should it break back down. Obviously a Sterling hit on the Italian Referendum would have to be corroborated by similar EURGBP price action going into the vote. [Italy]Reuters/Giampiero Sposito GULP! However, Sterling did not react this way in the US Election. US ELECTION As the US Election was a carbon copy of Brexit for the EURUSD SPX and DAX, it is also worth a comparison. The DAX cash market into the vote is following the SPX cash market closely. A positive outcome, yes? [Italy]Reuters/Giampiero Sposito However, although SPX cash only opened 0.5% down on the day of the result and then resumed the uptrend, it had traded 5% down overnight. Interestingly, the SPX spike down came from a higher and later position closer to the equivalent of Thursday’s ECB meeting. [Italy]Reuters/Giampiero Sposito OUR CONCLUSIONS ARE * EUROPEAN POLITICS RARELY PRODUCE CLEAR CUT IMMEDIATE RESOLUTIONS. * AN UNEXPECTED YES VOTE WOULD HAVE CAUSED THE MARKETS TO RALLY BUT NOT BE SUSTAINED – ULTIMATELY A FADE IE A SELL. BUNDS WERE AN EXCEPTION TO THIS AS ECB COULD HAVE REACTED TO ITALY IN A WAY THAT THE MARKET SAW AN END TO QE. * A NO VOTE PRODUCED A SPIKE DOWN IN RELATED MARKETS THAT WOULD ALSO NOT BE SUSTAINED AND THEREFORE A BUYING OPPORTUNITY AGAINST KEY SUPPORT, WITH POSSIBLE EXCEPTION OF A GREEK INSPIRED MIB ‘BANK’ DECLINE. * THE INITIAL NO VOTE SPIKE DOWN WAS SO QUICK THAT IT DOES NOT APPEAR ON A DAX CASH CHART LIKE SPX. * STERLING SUPREME COURT EUPHORIA COULD BE BROKEN EITHER BY ITALY OR THE COURT’S DECISION ITSELF. THE ITALIAN JOB. A STORY ABOUT GOLD BEING A STEAL. YES OR NO. WE THINK IT IS – EVEN IF IT SITS OVER A CLIFF EDGE FOR A WHILE. _GREEK TIMELINE 2015_ _25 Jan 2015 - Greek election, Syria win_ _20 Feb 2015 - EU agree to extend current bailout by 4 months_ _27 June 2015 - Tsprias calls referendum, parliament approves_ _5 July 2015 - Referendum votes no, markets close_ _16 July 2015 - Part of bailout 3 approved despite vote_ _23 July 2015 - Bailout finally approved after cabinet reshuffle_ _3 Aug 2015 - Markets re-open - 22%_ _14 Aug 2015 - Parliament agrees new bailout._ _20 Aug 2015 - Tsipras resigns, calls new election_ _20 Sep 2015 - Syriza win election by narrower majority, NOC, form coalition with ANEL_ _19 Nov 2015 - Govt passes new austerity package. Tsipras still PM, but bailout now in place_. NOW WATCH: The pros and cons of drinking protein shakes after exercising
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