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A Stock Market Risk That Comes From Afar Lombardi Letter 2018-07-23 11:09:41 black swan financial crisis stock market crash italian election 2018 milan stock exchange european central bank ECB EU The results of the Italian election could cause a stock market crash and, unless the center-left parties can pull off a miracle, constitutes one of the potential "black swans" of 2018. Analysis and Predictions 2018,Bitcoin,News,Stock Market,U.S. Dollar,U.S. Economy https://www.lombardiletter.com/wp-content/uploads/2018/02/Stock-Market-Risk-150x150.jpg

A Stock Market Risk That Comes From Afar

stock market risk

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The Italian Election Is a Potential “Black Swan” That Could Trigger a Stock Market Crash in 2018

There is a stock market risk in 2018 that comes from afar: Italy. Italy has been struggling to improve its economy. In 2017, there were favorable signs of recovery. Growth (i.e. GDP) reached 1.2%, a figure not seen since before the 2008 financial crisis. The results of the Italian election and the markets’ highly probable retraction—unless the center-left parties can pull off a miracle—constitute one of the potential “black swans” of 2018.

While the Dow Jones hesitates to return to its record highs set in January, many investors are ignoring one specific risk in 2018. Concerns over the U.S. dollar, interest rates, and oil prices have been explored. Analysts and investors have debated the problems related to Trump’s tax reforms, like inflation, at length. And then, there’s the impact of Bitcoin and other cryptocurrencies on so-called safe-haven assets like gold and silver. In 2018, the financial market—and the economy, in fact—are more difficult to read than ever.

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There’s simply too much “choice.” But more choice means more risk; the simple risk of making the wrong choice. But most Americans limit their understanding of risk to what they know. They pay little attention to what’s happening beyond their shores, which could impact the markets in general and, of course, their savings.

The so-called Brexit—the U.K.’s decision to leave the European Union—was one such case. It had a minimal effect on the markets. But, for the record, the U.K. is still in the EU now, thus the effects of this departure remain speculative.

The Hidden Source of Market Turmoil in 2018

There’s another risk brewing in 2018, however, which could have both a more immediate and more longstanding effect. Bluntly, it’s not going to be a favorable effect. The source of this hidden trouble is Italy. Specifically, an Italian election. Now, why would that be an issue?

Italy is a small boot-shaped country in the middle of the Mediterranean Sea. Well, in the 1970s, the U.S. spent considerable resources influencing the Italian elections—to prevent the expected victory of leftist parties—in ways far more intrusive than any of the worst “Russiagate” scenarios imply for the 2016 U.S. election, according to a prominent former CIA agent. (Source: “Russiagate Suddenly Becomes Bigger,” The Unz Review: An Alternative Media Selection, February 20, 2018.).

This time, however, the risk is that a populist and anti-EU coalition could win. Until recently, Italy has been one of the most pro-European Union countries. It has borne the brunt of the migration crisis, acting as a barrier against unregistered (illegal) migrants from reaching northern Europe. But, if an Italian exit from the EU remains unlikely, the markets will react badly to a populist win in the short term.

Watch the Milan Stock Exchange

The Italian stock exchange has been one of the best-performing exchanges in Europe thanks to the accommodating policies of the European Central Bank (ECB). Like the Fed, the ECB is looking for the right moment to start raising rates. Higher inflation is one indicator. But a more convincing return to growth (two percent or higher) in all of southern Europe might be the trigger.

The Italian election results could lead to a government that deters investment and slows growth. It would constrain the ECB and cause internal tension. Germany, by far the largest economy in the EU, and other northern European States want higher rates. The South still needs lower. But, a political conflict at the heart of the EU compromises agreements at the ECB level.

Such a scenario would contrast with the U.S. Federal Reserve’s plans to raise interest rates. The result from the markets would be a sustained series of corrections—and even a systemic collapse—that could prompt a financial crisis in Europe, which would surely spread to the United States. The problem is that the markets long ago stopped operating according to logic.

Nobody understands where logic ends and risk begins. Add to that the Bitcoin bubble, which makes the Dow Jones records look positively conservative and disciplined by comparison, and you see the problem. The ECB needs a political equilibrium to ensure the continuation of the current rate policy. A shift will alter the balance, fueling uncertainty and volatility, starting from the Milan stock exchange.

Editor’s Note: Hi, Alessandro Bruno here. If you enjoyed this article, you can get more of my opinions and commentaries in our popular newsletter, Lombardi Letter. Published daily, it’s FREE! Join us when you click here now.

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