We watched as the Brexit moment looked like it would have a major impact on US markets—and it did not. At the end of the day, the UK economy and the fact that it is a small overall trading partner with the US had marginal impact and no long term consequences. But events and other nations with much larger US involvement may indeed affect US markets this year.
Italy, the third-biggest economy in the eurozone, recently handed former Prime Minister Matteo Renzi a resounding “NO” vote! Slightly more than 60% of the Italian population decided Italy was on the wrong course. The populist movement that started with the Brexit in Britain—and then crossed the pond to America with the election of Donald J. Trump—seemed to be gaining momentum. Italy, unlike Brexit, was no real shocker. The country is $2 trillion in debt, and the entire Italian banking system is, for all intents and purposes, insolvent. Italy’s overall unemployment rate is 12.5%, and among those who are 17 to 25 years old, it’s 38.2%.
The big question in the coming months for the Italian population is, “Do we stay with the euro or leave?” Should they decide to leave the euro and return to the lira, we could start to see the beginning of major changes to our biggest trading partner, the European Union.
This spring, the French will vote for a new president, and this could be the election that determines the faith of the EU. The National Front’s Marine Le Pen is the popular leader of this right wing party, whose platform includes economic protection, opposition to mass immigration and, since its founding in 1972, has opposed the European Union. The latest opinion polls out of France have the National Front as one of the front runners in a close race. Should the National Front get swept into office on this movement, expect major changes out of the second-largest economy in the European Union. Any talk of leaving the EU would throw the euro into total disarray.
All these scenarios will have major impacts on both our markets and the US dollar. Thursday, I will write about the two giants: Germany and China. We may not know how the elections are going to turn out, but one thing is for certain: Expect a lot of volatility in the year ahead.