Is Europe unraveling?
That's a healthy question to ask this morning. In a referendum to change the Italian constitution, the "no" vote prevailed. It was the latest rebuke of European leadership, as the Italian prime minister Matteo Renzi had staked his political career on constitutional reform. With a resounding 59% of Italians voting against those reforms, Renzi is now preparing to formally submit his resignation.
The mainstream media is talking about what this means for Europe. The "no" vote was seen as a victory for the populist Five Star Movement, which led the opposition to the vote and is generally seen as anti-European Union. Speculation about whether Italy would be the next country to leave the European Union ramped up.
Meanwhile, in the Austrian presidential election, pro-E.U. Alexander Van der Bellen beat right-wing rival and Freedom Party leader Norbert Hofer. If Hofer prevailed he would have been Europe's first post-World War II head of state drawn from the far right. (So it wasn't all bad for leftist European leaders this morning who undoubtedly breathed a sigh of relief.)
What should investors watch this morning?
Two words... Italian bonds. After lapping the near-term political risk, investors are refocusing on Italian debt (currently 132% of GDP). Italian credit default swaps – a hedge against default risk – rose +5% above Friday's level (+8 basis points) and is up +27 bps (or +18%) in the past month.
Here's Hedgeye CEO Keith McCullough in this morning's Early Look note to subscribers:
"In addition to the pathetic example of long-term leadership that the Italians have had to endure (63 governments in the last 70 years), now they’re going to have to deal with this thing called credit risk. The yield on the 10-year Italian government bond has popped 11 basis points (that’s a lot, in a day) to 2.01% this morning. While your TV is watching 'stocks,' watch that."
In short, Europe's woes are far from over. Investors are clearly concerned about the prospects of Italy exiting the E.U.
Maybe. If you're looking for a list of market catalysts that could impact Europe, check out, "A Ticking Time Bomb In Europe? What's Next on the Market Catalyst Calendar."