A December to Remember

On December 4th, an Italian constitutional referendum and the Austrian presidential election will be held. Should Italians vote No, and Eurosceptic Norbert Hofer achieve victory, say hello to risk-off with a vengeance.

Bunga Bunga

Prime Minister Renzi stated that he will resign if the new constitution is not approved. Like most governments, needless complexity is created to confuse, distract, and discourage normal citizens from challenging their overlords. The Washington Post provides an excellent summary of what Italians will vote on:

Why Is There a Referendum?

The highly contested bill finally passed through parliament earlier this year, but it didn’t receive the qualified two-thirds majority of votes needed to change the constitution. So, Renzi had to seek a referendum. [WP]

The Issue in a Nutshell

There are other aspects of the proposal that are also important, however. One major one would attempt to clarify the balance of power between the regions and the central government, largely granting the former more control. Then there’s also the separate, but deeply intertwined, issue of Italicum, Renzi’s new electoral system for the Chamber of Deputies. [WP]

Italicum Huh?

The system effectively means that a party will be able to hold a majority in the Chamber of Deputies without winning a majority of seats. It seems designed to create a true two party system, like that of the United States or Britain. [WP]


Renzi is tired of minority parties causing trouble for his government. He is stripping them of power by reducing the threshold needed to capture and hold a government, and increasing the power of the Federal government at the expense of more autonomous regions and states. It is understandable that many voters are chafing at the possibility that their voice in any government will be sharply curtailed.

Why Are the Markets Spooked?

Renzi went for broke by declaring he will resign if the referendum fails. Bebbe Grillo’s Five Star Movement (5SM) is waiting in the wings. 5SM’s popularity has surged since 2012 on the back of virulently anti-establishment and anti-EU rhetoric. If elected into power, Grillo plans to force a vote on Italy’s EU membership.

As always, the problem leads back to Italian banks. They are broke. The willingness of the private capital markets to keep them afloat is wearing thin. Absent a bail-out from the ECB, which must be voted on by the governing council, a bail-in will happen.

A bail-in consists of senior debt holders or depositors taking a haircut. Both means of capital replenishment will cause harm to small retail investors and or savers. This is political suicide, and will commence an Italian and European bank run.

Europeans looked the other way when wealthy Russians lost their Euros in Cypriot banks, and when their feta eating brothers and sisters were pick pocketed. But if Italian savers get bagle’d, it will be impossible for Europeans not to run for the exits. The bail-in rules not only apply to Italy, but to every EU country.

Italian sovereign credit spreads blew out, and Italian bank equity prices are collapsing. If Renzi is not at the helm to appropriately fluff Draghi, then all bets are off. Super Mario and Frau Merkel will punish Italy for electing an anti-EU party by denying the country the funds it needs to fix its banks.

Hofer vs. Van der Bellen

Norbert Hofer is described as a far-right Eurosceptic candidate. Alexander Van der Bellen is a centric Euro-friendly candidate. Hofer narrowly lost to Van der Bellen in a presidential run-off earlier this year. However, the results were annulled due to voting irregularities.

Polls indicate that Hofer will take the prize. He is widely known for his stance that Austria should leave the EU. Post Brexit he walked back his rhetoric when it appeared that many Austrians were not so pleased that Britain vacated the sacred union.

EU bureaucrats are terrified that Hofer will call a referendum on Austria’s continued membership in the EU. European president Drunker Junker, known for his vino consumption habits, voiced grave concerns about a Austrian EU membership vote.

Jean-Claude Juncker has urged EU leaders not to hold referendums on their membership of the bloc because he fears their voters will also choose to leave. The European Commission president said giving people a vote would be ‘unwise’ as they could seek to replicate Brexit. [ZH]

After Brexit, another chink in the armour from a continental European country exiting could prove fatal for the EU. When the future of the EU is questioned, all eyes turn to the member banks. Bond holders fear redenomination of their debt assets into greatly depreciated national currencies.

Le Pineapple Pen

The French presidential election is not until 23 April 2017. The two front runners are Eurosceptic Marine Le Pen, and former Prime Minister under Nicolas Sarkozy, François Fillon.

Le Pen is adamant that France should not be an EU member. She advocates a return to the Franc, and pursuit of nationalistic economic and immigration policies. Many elites regard her and her daddy as soft-core Nazis. However, her brand of French nationalism continues to gain adherents.

A rejection of the Italian referendum and a win by Hofer, will increase Le Pen’s chances of victory. After Brexit, France is the second largest economy in the EU. It is obvious to see why its exit would be catastrophic for European risk assets.

Let’s Trade

The obvious trade is to take a position long or short on the Euro. After the SNB debacle, retail FX brokers learned their lesson. Spreads and fees will rise on Friday night before FX markets close for the weekend.

Bitcoin is the only asset that trades 24/7. During the weekend Greek votes in the summer of 2015, Bitcoin reacted in real-time as Greece inched closer to leaving the Euro. The events set in motion by an Italian No vote, and or a Hofer win are positive for market volatility and instability. Bitcoin thrives in these situations. As such, expect Bitcoin to creep and then explode higher if one or two of these events occur. My upside target price is $800.

Should Italy affirm the new constitution and Hofer lose, expect Bitcoin to dip. A test of $700 and then $680 is warranted as a portion of risk-off premia vacates the Bitcoin price.