"It was expected, so it's okay".....

Monday 5th December 2016

"It was expected, so it's okay"..... a remarkably sanguine reaction to Italy's referendum result

ref:- "The Markets Are Keeping Their Cool Over Italian Referendum", Bloomberg Markets

There's one group who will be relieved by the news that the Italian people have thrown out PM Renzi's plans for constitutional reform, and that's the pollsters ..... they've got one right, at last. Actually, the margin of victory for the "NO" camp was even more comprehensive than predicted. In a high turn-out (nearly 69%), almost 60% of voters rejected the planned reforms. It would be uncharitable to wonder whether Mr Renzi might have been tempted to hang around if the vote had been a close one, so let's just say that as a man of his word he duly fulfilled his promise to resign in the event of a referendum defeat.

Cue market meltdowns? Er .... not exactly. Not for the first time, we have sympathy for the printed media who have to commit their immediate reactions to paper in the early hours of the morning. Many front page articles openly wonder what dark ramifications such a result might portend for all kind of European issues, and they suggest that at the very least the Euro would be subject to a wave of selling. They must already be wishing that they'd had the chance to study market reactions a little more leisurely.

One trader is quoted this morning as saying that the shock of the Brexit vote took 3 days for the market to absorb, Trump took 3 hours and the Italian referendum 3 minutes. It's true that a couple of night owls traded EUR / USD at a 20-month low of just above 1.05 during the night, but it's now pretty much unchanged from Friday's close at around 1.0650. European stocks are actually trading higher (apart from certain bank shares!) and measures of volatility, remarkably, are lower. Yields on Italian 10yr bonds (BTPs) may be 11 basis points higher (and prices therefore lower), but just about all bond yields globally are higher this morning, and yields on BTPs did drop 19 basis points last week. All in all, a "muted response" would seem to be the appropriate cliche. 

Of course, to a large degree we suffer from the same problem as the morning papers and all this could change very quickly. At some point near or far, the markets may be less relaxed about what this might mean for the Euro, the Italian banking system and Europe as a whole. When the now triumphant leader of the populist Five Star party, comedian Beppe Grillo, urged Italians to vote with their hearts and not with their heads, cold-hearted market commentators might have been thinking that from a soulless, economic point of view, that's the Italian problem in a nutshell. Time for a "Lazy National Stereotype !" alert, but they might argue that it's the kind of passionate but impractical approach to politics that has seen Italian governments turn over at a rate of almost one a year since WW2, and that makes the likelihood of necessary economic reforms more remote.

Still, that's for another time (or not, as the case may be). For now though, the calm reception given to the referendum result is being put down to the fact that it was expected (Well done those polls ! How could we ever have doubted them?), and that investors had positioned themselves accordingly. Perhaps even more pertinent is the fact that even if the vote does turn out to represent the first step of a slippery slope for Italy, the Euro and the EU, such are the political and legal processes in Italy that it would be a very long time before any fundamental change could be brought about  --  unlike in the UK, for example.

In effect, that would mean that it's the flaws in the system that are buying time. That's irony, isn't it? We can see the validity of the argument in that things would happen slowly for sure ..... but you've got to wonder if assets being supported by flawed processes represents the kind of logic that would survive serious scrutiny.

Still, we're a long way from all that yet ..... well, a bit away, anyway ..... okay then, we're not there yet.

It's refreshing to speak freely when you're no longer in the hot seat .....

ref:- "OPEC Deal Can Work, But "We Tend to Cheat," Al-Naimi Says", Bloomberg Markets 2/12/16

Just quickly ..... You can call it scepticim even if borders on rather unattractive cynicism, but whatever it is it's not surprising that so many are affected by it when it comes to faith in the discipline of members of OPEC. Former longtime Saudi Oil Minister Ali al- Naimi had some interesting things to say about the organisation when he spoke at a do in Washington last week. If the truth of his comments was not exactly a surprise, Mr al-Naimi's candour made a nice change :

"The only tool they have is to constrain production ...... The unfortunate part is we tend to cheat".

When he says "we", Mr al-Naimi is of course referring to OPEC as a whole rather than Saudi or its close allies, but such frankness is welcome from someone who was probably the most important figure in the oil industry for over 20 years. In 2014 he was principal architect behind Saudi's pump-at-will policy designed to crush other competitors, but reveals that the option of production cuts was examined, only to be abandoned due to the inability of OPEC to ensure the cooperation of members. Frankly, the revelations do little to reinforce confidence in certain members' commitment to self-compliance on production quotas.

Mr al-Naimi also sounded less-than-entirely convinced by non-OPEC Russia's stated intent to cut production by 300,000 barrels per day. When it comes to sticking to promises, "In the past, they didn't" he said.

The market's not too bothered, though ...... Brent crude up over 1% again this morning, trading at over $55 per barrel.