8 December 2016

The March of the Right

With Christmas approaching ever faster and the autumn statement now behind us, we might reasonably expect markets to become a little quieter.

There’s little sign of that happening, though. While the Austrian election bucked the trend towards nationalist, anti-political establishment parties, the Italian referendum showed that the swing demonstrated by Brexit and the Trump victory is still very much in place.

The decision of the Italian electorate to discard a measure designed at streamlining government – and by a big margin – is a little surprising, though it says much about how they view the outgoing premier, Mateo Renzi, and his management of the economy. Italy, the third largest economy in the eurozone, suffered heavily post the financial crisis. But then, Italy has had more prime ministers than any other major European power in the years since the Second World War.
< br /> The concern, though is that its banks are flakey, so added uncertainty could precipitate a few failures. The real question is whether a general election might result, bringing to the fore parties less enamoured with Brussels. But whether this result will precipitate departure from the single currency zone is debatable.

Of more concern must be next year’s elections in France and Germany. Angela Merkel is standing for a fourth term, but could fall foul of an upswing in anti immigration sentiment in Europe’s largest economy. In France, all eyes will be on how the right wing make out, with Marie le Penn likely to give her rivals a good run for their money. If she wins, expect more market turbulence.

So far it has been the currency that has taken most of the strain through these uncertain days. From a high of £1.40 to 1€, we have seen the unexpected result of last June’s referendum take it down to below £1.10. More uncertainty has seen it recover to just short of £1.20. We’ve even reached a recent high against the dollar. Economic indicators in this country continue to look robust, but it is concern over the rest of the world that is driving sentiment.

As it happens, US indices recently broke into new high ground. The expectation is that the incoming President will spend freely to reinvigorate the American economy. Bonds do not look a particularly safe bet in such a scenario, but in the end we are still dealing with rhetoric from the President elect, rather than firm actions. 2017 could be even more interesting than this year.

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