5 December, 2016
Political risk is showing no signs of escaping the headlines after the European Union was plagued into fresh political turmoil overnight following confirmation that Italian Prime Minister Matteo Renzi suffered a humiliating defeat in the referendum over constitutional reforms, which will lead to the handing of his official resignation to the President of Italy later today.
While political change in Italy is not something that the world is immune towards, there is anxiety that this round of political instability will rock economic confidence and negatively impact the Italian banking industry that is considered to be a danger spot for the Eurozone. It is no hidden secret that the Italian banking industry is plagued with bad debt and it is widely conceived that the Italian Government does not have the money to support the troubled banks, which could run the risk of eventually leading to an EU bailout similarly to what we have seen happen elsewhere in the past.
The market reaction to the events in Italy have not been disastrous, but it has attributed to the negative trading environment to commence the week in Asia and there are concerns over how financial stocks could react when the markets in Europe open in a couple of hours. The Euro has as expected been the major loser to the events in Italy, with the Eurodollar sinking to a fresh 20-month low marginally above 1.05 early on Monday morning.
There is no hiding away from the fact that this represents another victory for the anti-establishment with this also wrapping up events in 2016 that have included unpredictable upsets in both the United Kingdom and the United States. The concern is that the constitutional referendum in Italy was originally seen as a measure to speed up reforms in Italy for the greater good, but it was later turned towards an opportunity for voters to display their unrest with the current economic situation in the country and dissatisfaction towards the Italian government.
When you consider that there are major elections in both France and Germany in 2017, investors will be unable to ignore that there will be further political risks to come next year and that the surprises seen in 2016 could be viewed as a warning shot as we head into the new trading year. The elections scheduled for 2017 represent major event risks and following the political upsets that have caught investors by surprise throughout 2016, the upcoming elections in both France and later Germany provide a reason why many believe that the Euro could head for additional declines over the medium and longer-term.
Pound awaits Supreme Court hearing
While the British Pound is still enjoying a bounce following the comments that it might be possible to purchase access into the single-EU market once the United Kingdom finally leaves the European Union, there is a risk that the currency could begin retracing its gains once the Supreme Court begins a landmark hearing later on Monday on whether Parliaments consent is required before official negotiations can begin on the United Kingdom leaving the EU.
The hearing of 11 different justices is supposed to last four days and while the official outcome is not expected to be announced until 2017, any hint that Prime Minister Theresa May might be able to invoke Article 50 as previously planned for around March 2017 will encourage selling opportunities in the Cable.
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