Stock Markets have a tendency to price in most part of good or bad news in advance. Especially bulk of the bad news in advance. Thats what is happening with the fear prospects of Anti Euro coalition winning the Italian elections again.
Italian Bond Rout
Political Crisis in Italy has triggered sell off in Bonds and Bank stocks
Italian 2 year yields see biggest rise since 1992
Italy-Germany Bond Yield Spread widest in last 5 years
We all remember what happened during the Brexit time, Pound nosedived, there was sharp correction in the stock markets though we saw gradual recovery after some days but as markets are sentimental, they did react at that time. Now, UK was not full integrated with European Union. But Italy’s significance is more because it is fully integrated and is the third largest economy. Yields are spiking and Stock markets corrected because markets are worried about the possibility of Anti Euro block winning Italian elections.
What is the risk here if Anti Euro Block coalition wins?
Possible down move of Euro towards 1 – 1.05 levels
This itself would push Dollar towards 98-100 levels, thereby pressure on emerging market currencies
Global Stock Markets seeing 4-6% correction
Sudden Dollar Rally and Rush to safe haven will create volatiity in equity markets
More complications cant be predicted at present since Exit of Italy can have unknown volatility impact on the European financial markets for a brief period.
ECB is well equipped to handle it but disruptions create volatility and therefore, volatility risk is for real.
What if nothing happens ?
Markets will start settling down, S&P 500 will anyways reverse bullish trend only on drift below 2530 levels. At present, early volatility, news flow is important and thats what we should be following up. Investors and Traders should not commit themselves to aggressive leveraged positions since event risk is beyond their control.