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Italian Referendum: Risk for Italian Markets, Euro, World

Italian Referendum: Risk for Italian Markets, Euro, World

John Kicklighter, Chief Strategist

Talking Points:

  • Italy will vote on Sunday on a referendum brought by Prime Minister Renzi to significantly change the constitution
  • For global investors, a 'No' vote is the distressing outcome as it bolsters the risk of a change in government
  • Foreign appetite for Italian assets is direct line-of-site, but the stability of Europe poses a much larger concern

See the DailyFX Analysts' 4Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

The world is facing another critical vote. With the unexpected outcomes for the UK's EU Referendum (Brexit) and the US Presidential election, global investors have grown increasingly aware of the disintegration of the 'status quo'. Italy's weekend Constitution Referendum is the latest in the important milestones along the road of anti-globalization that threatens the shaky value and stability in the world's markets. Like the votes in the UK and US, the implications of the Italian Referendum are complex and offer different pros and cons depending on the audience. However, for global investor or FX traders; the scenarios are pretty black-and-white in a 'Yes' or 'No' vote.

Befitting the complexity of the Italian political system, this referendum holds a number of critical complications. From the perspective of a Euro trader though, a 'Yes' vote is seen as the equivalent of a 'status quo' outcome. This referendum is on whether Italy supports Prime Minister's call to change 47 of the Constitution's 139 articles to expedite changes in law amongst other things. Important for the markets is the reality that the Italian Prime Minister has staked his position at the top of the government on the outcome of this event. If the country decides to vote 'No', it likely means a dive into the unknown with the government facing significant change. In the best of scenarios after such an development, progress on critical factors like recapitalizing Italian banks is paused. In the extreme, an anti-EU Five Star Movement party gains prominence and threatens the stability of Europe and the Euro.

Italian markets and assets stand directly in the line of fire. Yet, the implications are clearly far greater than just FTSE MIB or 10-year Italian government bond yield volatility. If the third largest economy in the Euro-area seems to be on an accelerated path towards withdrawing from the decades-old economic and monetary unions, it would be a clear systemic threat to the region's financial stability. Investment in Europe would be seen as a far more risky endeavor for an increasingly risk-conscious world. Furthermore, the threat of further traction in protectionist agenda and falter of the world's second most prolific reserve currency could permanently change the financial currents. We discuss this important event's potential effect on Italian and global markets in this weekend Strategy Video.

See the timeline behind the Italian Referendum in a special report from Oliver Morrison here.

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Italian Referendum: Risk for Italian Markets, Euro, World

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