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Chris Wylie, Iveagh

Italian election (non)result could prompt market correction

Chris Wyllie (pictured), CIO, and William Beverley, head of macroeconomic research, at Iveagh, offer their investment commentary in the wake of Italy’s election [non]result…

Back in January we identified the elections in Italy as a short term potential smoking gun for markets, which might derail progress made since the ECB stepped in to protect the euro in 2012. In addition, the near term risks of a market correction continue to rise in 2013 after the best January rally in world equity markets since 1994, with signs of investor complacency emerging, and profit forecasts also under pressure.
Nevertheless, our macro outlook - including Europe - is relatively positive over the next three to six months. So we have preferred to use tactical positioning to manage what we perceive to be shorter term risks, including overweighting cash, trimming but not cutting European equities, and increasing exposure to negatively correlating assets like longer dated Treasuries and the dollar.
Given the undesirable election outcome which most likely reverses the recent fiscal discipline in Italy under Monti, as well as ushering in a period of policy uncertainty, it’s perhaps no surprise to see Italian equities down almost 5% yesterday, with European equities down over 3%.
This could just be business as usual in Italian politics but it may well provide the excuse the markets were looking for to have a correction. We will be monitoring the bond markets closely for clues about how far this might go.

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