In yesterday’s morning roll call we highlighted the immediate calm market reaction to the Italian referendum vote. Moreover, we suggested that the effects and the potential aftershocks of the NO vote, might not materialise immediately and might take some time to become apparent. We also suggested that dramatically joining up the dots; expecting the immediate descent of Italy into political anarchy and impoverishment as a consequence of the referendum, was perhaps hysterical.
By mid afternoon on Monday our interpretation appeared to be correct. In fact, against the odds, many European markets and indeed the euro rallied. There were many possible reasons for this.
• Firstly, the referendum decision may have already been priced in.
• Italy is not about to suddenly crash out of the Eurozone.
• Mario Draghi (based on his previous actions) will surely not stand by as president of the ECB and let Italian banks fail?
• The referendum vote protected the status quo, it wasn’t a revolution, it was a preservation.
• The Italian banks liquidity and insolvency now has to be addressed and ultimately fixed.
However, let’s be under no illusion, several (possibly eight) Italian banks are in terminal decline, with many on critical life support and whilst the financial markets responded calmly to the referendum result, the political upheaval may make it far more difficult to secure, for example, the suggested €1bn investment from Qatar, on which Monte dei Paschi’ bank’s €5bn capital raising plan hinges. Should this programme of private funding not materialise then state rescuing, or more widely a European bank rescue, could be the only option. An option that is theoretically outside of the ECB’s mandate.
After falling by circa 2.1% shortly after European markets opened, Italy’s FTSE MIB Index, one of the worst performing equity global indices during 2016, closed 0.2% percent down. Euro STOXX closed up 1.6%, CAC closed up 1%, the DAX closed up 1.63% and the U.K. FTSE 100 closed up 0.24%. In the USA the DJIA closed up 0.24%, the SPX closed up 0.58% and the Nasdaq closed up 1.1%. At one point, during the New York trading session, the DJIA printed a record high at 19,274, finally closing out at 19,216.
Gold initially fell 1.3% by percent to $1,162.21, but recovered to advance to $1,179.77 towards the end of the evening session. Copper rallied to its highest level in eighteen months, up 2.65%. Zinc gained by 3.7% and nickel also advanced. Oil fell, after rising as much as 1.4 percent to a sixteen month high, as OPEC prepared to meet non members to secure additional output cuts. However, WTI oil fell to $50.95 per barrel, down 1.41% on the day.
The euro made gains versus the majority of its currency peers. It rose by circa 1.1 percent to $1.7590, reversing an early trading slump (by 1.5 percent) in the European morning session. The kiwi weakened by 0.8 percent as a consequence of New Zealand Prime Minister John Key stating he’s resigning. Finance Minister Bill English is the favourite to succeed him. The Dollar Spot Index, a gauge of the greenback versus its ten major peers, was virtually unchanged over the course of the day.
Economic calendar events for Tuesday December 6th that may effect market sentiment
10:00 EUR Eurozone Gross Domestic Product (YoY) (3Q) – 1.6%. Europe’s final GDP figure for 2016 is published at 10am London time. The expectation is for 0.3% growth over the third quarter, resulting in a 1.6% year on year GDP growth figure. Any serious deviation from this figure could naturally effect euro sentiment.
09:10 EUR Markit Eurozone Retail PMI (NOV) 48.6. The final retail PMI for Europe in 2016 is published, the expectation is for a rise approaching the 50 figure, which traditionally separates growth from contraction.
13:30 USD Trade Balance (OCT) -$39.4b -$36.4b. At 13.30pm London time the USA trade balance for October is published. The expectation is for a slight deterioration with imports rising due to seasonal effects.
15:00 USD Factory Orders (OCT) 1.9% 0.3%. Analysts are expecting to have witnessed a significant rise in factory orders in October, from the relatively low figure of 0.3% last published.
15:00 USD Durable Goods Orders (OCT) 4.8%. The forecast is for a significant rise in durable goods orders. This is the value of orders placed for relatively long lasting goods. Durable goods are expected to last more than three years, such products often require large investments and usually reflect optimism on the part of the buyer that their expenditure will be worthwhile. Because orders for goods have an impact over production levels, this figure serves as an excellent forecast of U.S.A. future output.