What Italy 'No' vote means for U.S. investors
When it comes to financial markets, what happens in Italy doesn't necessarily have to stay in Italy.
Sunday's referendum 'No' vote in Italy, which put the kibosh on a government-backed plan that would have made it easier to pass new laws designed to jumpstart Italy's weak economy, was news that made its way to trading desks from Rome to Tokyo to Wall Street.
While the Italian rejection of its Prime Minister Matteo Renzi -- who says he'll resign after his reform overhaul was voted down -- did not add up to a Brexit moment or a seismic market shock first seen when Donald Trump won the U.S. presidential election, it does inject fresh political and financial uncertainty into global markets.
Italy became the latest developed country to vote against the status quo and reject the political establishment, continuing a wave of populism.
Here's what U.S. investors need to know about the Italian vote:
WHY SUCH A MUTED MARKET REACTION?
When the United Kingdom voted in June to exit the European Union, the Dow Jones industrial average cratered nearly 900 points in two days but fully recovered its losses 10 days after the Brexit vote. Following Trump's win on Election Night, the Dow plunged 900 points in futures trading but rallied when the U.S. market opened on its way to a nearly 600-point five-day gain.
Monday the Dow rose nearly 46 points to reach a new record and Italy's main benchmark stock index closed down just 0.2% despite Italy's 'no' vote. Financial pros say the referendum result was already priced into markets and was anticipated by investors, unlike the shocking results in the Brexit and U.S. presidential votes.
"It's not an Armageddon event," Paul Hickey of Bespoke Investment Group, notes.
WHY SHOULD U.S INVESTORS CARE?
* Populism appears to be spreading. In the big picture, the Italian vote is the latest sign that the post-World War II world order is under assault. While the Italian referendum was not a vote on whether or not to stay in the E.U., it emboldened the populist driven 5 Star Movement in Italy. It also signals that the single currency euro and 19-nation eurozone is in danger of being torn apart.
The worst-case scenario -- while unlikely at this point -- is the "threat of a breakup of the eurozone," says Jeff Kleintop, chief global investment strategist at Charles Schwab. "That's worrisome, as it could prompt another financial crisis." The risk is losses on Italian government bonds held by the world's banks and other investors infecting the financial system.
* Italian bank fix could suffer. Renzi was viewed as a leader that could pass through much-needed reforms to get Italy's moribund economy moving again and help repair its debt-laden banking system. But with Renzi stepping aside that task becomes tougher and could be sidetracked. Italian banks like Monte dei Paschi di Siena in desperate need of fresh capital might have a tougher time getting a much-needed cash infusion from private investors, which could require a rescue at some point.
"In the short-term, it means European bank reform continues at a lackluster pace," says Axel Merk, manager of the Merk Funds. "The Italian banking system will live another day, but it will be weak and a headwind to growth, not just in the EU, but globally."
WHAT'S NEXT?
Upcoming elections next year in Germany, France and Holland could continue the trend towards populism upending the political status quo in Europe.
"I view France as the Big Kahuna," says Sargen. "Because if the French go populist and vote for (far-right candidate) Marine Le Pen, the E.U. and the euro are in jeopardy."