How might the Italian Referendum impact markets?

In this week’s video update:

  • As U.S. markets acclimate to the likely policies of a Trump administration, bonds see some volatility while equities experience some sector rotation.
  • Europe’s good economic news this week (a revised Q3 GDP of 1.6%) could be tainted in the coming weeks by the outcome of the December 4 Italian referendum.
  • Emerging markets decline this week due, in part, to increasing strength in the U.S. dollar, and we expect to see more volatility in the weeks ahead.

On this week’s update, Regional Director, Consultant Relations Rob Cittadini interviews Chief Investment Strategist Erik Ristuben to discuss the week’s market events with a keen eye on the U.S., Europe and emerging markets.

Volatility and rotation: Looking ahead for U.S. markets

Ristuben starts by noting that, as U.S. markets acclimate to the likely policies of a Trump administration, the bond space saw some volatility this week, while equities experienced some sector rotation.

The U.S. equity market did reasonably well this week with the S&P 500® Index up about 0.8% for the week and the NASDAQ up about 1.5%. But this part of the market saw  some rotation with the financial sector performing relatively well and the tech sector appearing to be impacted by speculation on President-elect Trump’s potential foreign trade agreement changes (as more than half of the U.S. tech sector’s revenue is generated outside of the U.S.).

The bond space, on the other hand, saw some sell off this week, as Ristuben notes seeing the market increasing rates as it prices in expectations of growing inflation due to anticipated Trump policies. The spread between the U.S. 10-year Treasury yield and the German Bund is over 200 basis points this week. While Ristuben expects rates to go up somewhat over the long-term, investors would be wise to expect ongoing volatility in the near-term.

What the Italian referendum could mean for European markets

Next, Ristuben turns to European market performance this week and expectations for the next few weeks. This week’s strong indicators for the region include the STOXX 600® Index, up about 1% on the week, and the 3rd quarter European gross domestic product (GDP) which was revised to a solid 1.6% with inflation ticking up just 0.5% year on year (helping reach towards the European Central Bank’s inflation goals).

While this week was relatively positive for European markets, the bigger issue in Ristuben’s view for the next two weeks is the December 4 Italian Referendum. Prime Minister Matteo Renzi has promised to resign if he doesn’t win this constitutional referendum and the latest polls indicate he is likely to lose. Ristuben reminds us that these kind of political events (like the recent U.S. election and Brexit vote), have triggered market volatility in the past and the same could happen as this Italian event unfolds.

Emerging markets react to volatility and a stronger U.S. dollar

Lastly, Erik notes that while the Russell Emerging Markets Index is off by about 0.5% this week (an actual improvement over last week) he still finds emerging markets (EM) attractive, despite the volatility he expects to see in those markets. The big impact of the U.S. elections so far has been a stronger U.S. dollar and an increase in treasury yields and inflation expectations which dampens emerging markets consumers’ buying power and therefore expectations of EM market performance.

Editorial Note: Market Week in Review will not be filmed next week and will return Friday, December 2, 2016.