Referendum decisions only signal the beginning of the process
The Italian referendum NO vote market moves were subdued in comparison to that witnessed in the wake of the Brexit vote and Trump’s victory. Shortly after the markets opened on Sunday evening, gold was up 0.6% and yen had risen by 0.3% versus the dollar, safe haven assets were being bought. Euro was down 1.2% versus the dollar and the S&P 500 futures had dropped by 0.4%.
Now Italy has made its resounding 59% versus 41% “NO” referendum decision and prime minister Renzi has offered his resignation, it must be noted that it’s only the start of a process which can take months, if not years to completely ratify.
There will be a temptation to immediately rush to the bleakest of conclusions; Renzi resigns – Italian banks collapse – Italy leaves Eurozone – Eurozone experiences a Greece 2.0 crisis – a new version of the 2008 domino effect, global banking crisis ensues.
The effect on the economy of Italy and wider Europe after the NO vote could be a long term issue, once the shock of the vote is absorbed by the markets. As an example, we need to look no further than the U.K. which voted for Brexit in late June.
The impact on the markets in June was immediate and dramatic; sterling collapsed versus it’s major peers, whilst the main U.K. equity market, the FTSE 100, lost over ten percent in a relative heartbeat shortly after opening. Then calm and order began to be restored.
Sterling clawed back some of its initial losses versus the USA dollar over a five month period, it’s currently down circa 15% as opposed to the maximum 25% fall witnessed shortly after the referendum decision. Versus the euro sterling is now down circa 7% from its trough.
Similarly the U.K. FTSE 100 actually recovered to reach record highs in October and is still circa 1200 points up from its yearly low, witnessed shortly after the Brexit referendum result. The reason why the FTSE recovered wasn’t that complex; the majority of the 100 companies listed on the index are not UK entities, most are American, therefore a fall in sterling made these companies more valuable, in dollar terms.
Since the decision in June the sky hasn’t fallen in, economic Armageddon has not enveloped the UK. Commerce, life and the markets have taken a collective shrug and moved on. Retail numbers in the UK are up; suggesting Mr & Mrs Joe Public are content to spend and feel confident in the economy, construction hasn’t collapsed and manufacturing hasn’t shrunk. Now the obvious retort from many analysts and market commentators is; “we haven’t left yet!” And there is some truth in that, as until the UK govt. invokes article 50 and finally turns its back on Europe and leaves (and on what terms) then the UK economy is likely to remain largely unaffected.
Just as an example as to how (six months later) the referendum issue and fallout is still being felt in the UK, on Monday the supreme court, the highest in the UK legal system, will begin hearing arguments from the UK government, who want to overturn a previous court decision. The court ruled that the elected members of parliament must make the decision on such a matter and not the people, or the government in power – by way of their royal prerogative.
This court decision moves us neatly onto discussing high impact news events as the case is expected to last four days until Thursday, December 8th, therefore traders would be advised to proceed with caution, in relation to their sterling positions, as a consequence.
Monday sees both the UK’s and Europe’s final 2016 services PMI published by Markit. The prediction is for the eurozone data to remain static at 54.1 with the UK’s falling from 54.5 to 54.2. ISM non manufacturing PMI for the USA is predicted to come in at 55.3, from the previous print of 54.8.
Thereafter we’ve identified a snapshot of potential high impact news events for our clients and (as is our habit) we’ll discuss these in more detail with each morning roll call bulletin throughout the week.
Monday, 5 December
01:45 – China Caixin services PMI
09:00 – Eurozone final services PMI
09:30 – UK services PMI
15:00 – US ISM non-manufacturing PMI
Tuesday, 6 December
03:30 – Reserve Bank of Australia interest rate decision and statement
07:00- German factory order
10:00 – Revised Eurozone GDP
13:30 – US revised non-farm productivity, trade balance
15:00 – US factory orders
Thursday, 8 December
02:30 – China trade balance, imports, exports data
12:45 – ECB interest rate decision
13:30 – ECB press conference with Mario Draghi
13:30 – US weekly unemployment claims
Friday, 9 December
00:01 – RICS UK housing price balance
01:30 – China PPI and CPI inflation
06:00 – Japan preliminary machine tool orders
07:00 – Germany imports, exports, current account and trade balance figures
09:30 – UK consumer inflation expectations, trade balance figures
15:00 –US preliminary University of Michigan consumer sentiment