QE is not the only thing disrupting markets at present. Outside of monetary stimulus, investors are feeling the impact of increasing political strain. The two most important political developments left for 2016 will be the U.S. elections next week and the Italian constitutional referendum on December 4.
Regardless of the U.S. election winner between Hillary Clinton and Donald Trump, the real determinant of political stability in the U.S. will be the composition of Congress. With government debt hitting $20 trillion and due to breach the ‘debt ceiling’ once again in early 2017, expected negotiations are for February 2017 as the government is projected to run out of funds in mid-March, it doesn’t give much breathing room for a potentially divided Congress to agree on a new ceiling level. At the current time, the most likely election outcome appears to be a Hillary Clinton win with the Republicans retaining their power in Congress, which could easily create a stalemate and instability akin to Obama’s last six years in office.
Italian Referendum Makes Waves
Closer to home, we are also watching as Italian Prime Minister Matteo Renzi’s career is on the line. He insists the problems in Italy are constitutional, and has procured a decisive referendum within Italy to give more power to the Government by reducing the powers of the Senate and amending regional competence.
Renzi’s threat to resign if the referendum does not go his way gives this vote take an extra layer of importance. If the polls are anything to go by, the issue is not so much Renzi, as most people appear to be backing his proposed reforms whilst he is in power. The concern is the populist faction led by the five-star movement party. As it currently stands, if Renzi gets his way – a ‘yes’ vote – Italy could see a period of short-term stability but be open to greater instability in the future as the constitutional changes to the Senate would create a more powerful government for his successor. If Renzi fails, his resignation could mean the five-star movement party would find its way into power sooner than thought possible. Italy is facing its fifth Prime Minister in six years under a ‘no’ vote, and the threat to leave the European Union under a five-star movement government makes the stakes undeniably high.
