The dinner is done, the pots and pans are scrubbed and hopefully there are leftovers for a few more days. Adding to the general good cheer is the prospect of a Trump fiscal stimulus package in 2017. The possibility of lower taxes and more spending on infrastructure and defense is helping to push the stock market to new highs and is raising the outlook for U.S. GDP growth in 2017. The rise in bond yields due to the anticipation of faster growth and higher inflation is a good trade off versus the alternative, lower rates in a recession.
We feel the cheer, yet there are many hurtles still to cross for a happy and prosperous holiday season. The first is Italy’s constitutional referendum on December 4th, which we have written about before. The referendum is about more than just the mechanics of making the Italian government more streamlined and effective, as it has always been viewed as more a reflection of how the Italians feel about their future in the European Union (EU). The monetary union has not been good for the Italian economy, its workers, and especially its banks. It appears at this time the vote will be no, and that Matteo Renzi, Italy’s prime minister, will resign, again sending the government into chaos. Though an Italian government in chaos is customary and usually nothing to worry about, this time may be different.
Like in Britain and the U.S., there is growing political support in Italy for populist and protectionist candidates. It is quite likely any new candidate that follows Renzi could move to push Italy out of the European Union. Italy has three opposition parties, all of which favor exiting the euro. It is quite possible the EU survives without the UK or even Greece, but it is hard to see the EU continuing if Italy wants to leave. It is also hard to imagine stronger U.S. economic growth and higher rates if the EU is again pushed into crisis.
At SNW we are constantly balancing opportunities against risks. Fixed income portfolios should benefit from opportunities in fiscal stimulus and a stronger U.S. economy, and yet we will continue keeping an eye on systemic and geopolitical events like the Italian referendum. These risks do not take a holiday! Ciao!
Source: The Financial Times, Bloomberg