Another Shock to Financial Markets?

Eran Peleg, CIO November 27, 2019

Will the Italian Referendum Deliver Another Shock to Financial Markets?

A constitutional referendumwill be held in Italy on Sunday, 4th December, 2016.Voters will be asked whether they approve of amending theItalian Constitutionto reform the appointment and powers of theParliament of Italy, as well as the partition of powers of State, Regions, and administrative entities. Should the voters approve the bill, it would achieve the most extensive constitutional reform in Italy since the end of the monarchy.

In accordance with Article 138 of the Constitution, a referendum was called because the constitutional amendment had not been approved by a qualified majority of two-thirds in each house of the Parliament in its second voting on the bill. The reform will not become law unless it receives a majority of "Yes" votes in the referendum.

The bill was proposed by Prime MinisterMatteo Renziand his center-left Democratic Party, and is perceived by many as a test of confidence in the current government (to a large extent, due to Renzi's own fault, as he initially declared that he would resign if the reform were to be rejected). In any case, the referendum provides an opportunity for a Brexit or Trump-style protest by anti-establishment, anti-globalization groups – the most notable in Italy being the populist, Euro-sceptic, Five Star Movement.

Has this event the potential to surprise in the way that the results of the Brexit referendum or US elections have, and could it deliver a negative shock to global financial markets? A surprise result is obviously possible. However, a surprise would probably be a positive one -- given that, in contrast to the situation before Brexit and US elections, expectations here are already skewed towards a protest 'NO' vote. See chart below which summarizes polling data. Of those who have made up their minds (around a quarter remain undecided), around 53% are saying they will vote 'NO'. But the exact numbers are not very important. We already had some bad experiences with polling this year. The important thing is that investors are aware of the strength of the 'NO' camp and are not assigning a negligible probability to this outcome. This does not mean that a 'NO' outcome will have no impact, if it occurs, but it does suggest that the potential for a significant negative shock is fairly small.

Disclaimer: Nothing contained herein is investment advice and one should consult with a professional about their investment situation before they make any investment decisions.