Mama Mia! Italy’s Woes Tank Global Markets
Tuesday marked a stock market sell-off, Italian style. The Borsa Italiana plunged amid political turmoil in Italy, sending the euro to its lowest levels of the year. Global equity markets across the U.S., Europe and Asia plummeted as well.
Wall Street traders returned today from the three-day weekend to confront a host of worsening geopolitical worries. Investors are getting agita not from tin-pot dictatorships but from democratic allies in the developed world.
The 24/7 news cycle has been feeding you a steady diet of headline risk. At the top of the menu today: Italy. The country may boast an inimitable sense of style, but right now it’s an economic basket case. Strife in this sun-splashed Mediterranean country weighed heavily on stocks everywhere.
Italy is the third-largest national economy in the euro zone and the eighth-largest in the world. The country is the second-largest manufacturer in Europe behind Germany.
Italy also happens to be on the verge of collapse. The rest of the European Union could follow. The big winner in this debacle? Russian President Vladimir Putin, who has been doing his best to foment discord in the west. The authoritarian Putin, an ex-KGB colonel, must be smiling today. Western Europe is estranged from America and seems to be unraveling.
Italy’s political gridlock has put the country onto the path of a new “snap” national election. Since Italy became a republic in 1946, the country has voted into power 66 governments. It’s about to get its 67th.
Let that sink in: 67 governments in only 72 years. It begs the question: can Italians govern themselves?
This time around, Italian voters are likely to install far-right firebrands who would say ciao to the euro zone. Coming on the heels of Britain’s exit from the EU (aka “Brexit”), the advent of “Italexit” would be a disaster for the post-World War II economic order.
The chaos in Italy today was triggered when the Five Star and League political parties jettisoned their attempts to form a ruling coalition with President Sergio Mattarella. Five Star and League are anti-establishment; Mattarella is what they derisively refer to as “globalist.” The government faces an almost certain parliamentary vote of no confidence.
Italy is plagued by severe unemployment and huge debt. If the populists get into power, they’ll probably make good on their threat of walking away from the country’s massive debt.
Italy is infamous for red tape, private- and public-sector corruption, low worker productivity, and sclerotic bureaucracies that make life hell for ordinary citizens. Bribery is a way of life.
Illegal immigration has been a flashpoint, too. It shouldn’t come as a surprise that angry populist parties are on the verge of taking over Italy, with a possible domino effect throughout Europe.
Spain is beset by political troubles of its own. The country’s Prime Minister Mariano Rajoy is scheduled to face a vote of confidence in his leadership on Friday, amid a corruption scandal involving influence-peddling.
Italy’s disintegration and Spain’s turmoil come on top of the escalating trade war between the U.S. and China.
The Trump administration announced Tuesday that it will continue pursuing protectionist tariffs against China, throwing cold water on hopes that trade tensions would ease.
Washington stated today that it will release a list of $50 billion worth of Chinese goods that will be subject to a 25% tariff. The administration also vowed to pursue legal action against China at the World Trade Organization, for alleged trade rule violations.
The threat of military war, not just trade war, looms large as well. Investors remain aghast at the continuing exchange of personal insults between President Trump and North Korean leader Kim Jong-Un. Trump last week canceled his planned summit with Kim.
America’s neighbors aren’t being spared. Trump is twisting the arms of Mexico and Canada during current re-negotiations over the North America Free Trade Agreement (NAFTA). Corporate leaders fear that the unraveling of NAFTA would cause supply chain disruptions and dampen global growth.
Trump also is ramping up pressure on longtime ally Japan. Trump has withdrawn America from the multinational Trans-Pacific Partnership, a trade pact supported by Japan’s Prime Minister Shinzō Abe. What’s more, the White House last week launched a national security investigation into auto imports that could lead to new U.S. tariffs. Motor vehicles comprise about 30% of Japanese exports to the U.S.
To quote my favorite blues singer, Mose Allison: “You know, this world’s just one big trouble spot.”
I’ve repeatedly warned you that headline risk is the biggest enemy right now to your portfolio. As the unfolding crisis in Italy shows, this risk typically comes from unexpected places.
Tuesday Market Wrap
- DJIA: -1.58% or -391.64 points to close at 24,361.45
- S&P 500: -1.16% or -31.47 points to close at 2,689.86
- Nasdaq: -0.50% or -37.26 points to close at 7,396.59
Tuesday’s Big Gainers
- Acorn International (NYSE: ATV) +32.89%
China-based marketing company offers special dividend award.
- Jupai Holdings (NYSE: JP) +9.22%
Wealth management provider posts strong earnings.
- ZTO Express (NYSE: ZTO) +7.88%
Express courier set to receive $1.38 billion investment from Alibaba Group Holding (NYSE: BABA).
Tuesday’s Big Decliners
- Infinera (NSDQ: INFN) -10.53%
Telecom equipment maker caught in trade war between U.S. and China.
- Revance Therapeutics (NSDQ: RVNC) -10.19%
Biotech announces departure of CFO.
- T2 Biosystems (NSDQ: TTOO) -9.13%
Analysts turn bearish on in vitro diagnostics firm.
Letters to the Editor
“Can investors count on global growth to provide a tailwind for stocks?” — Richard G.
Not this year. In its most recent World Economic Outlook, the International Monetary Fund (IMF) warned about the “jarring” contradiction between growth momentum and a “similarly broad-based conflict over trade.” The IMF predicted that global economic growth would slow this year, in large part due to the emergence of protectionism.
Questions about headline risks? I’m here to help: firstname.lastname@example.org
John Persinos is managing editor of Personal Finance and Radical Wealth Alliance, as well as chief investment strategist of Breakthrough Tech Profits.