We had to double-check our calendars a few times today to make sure we hadn’t somehow traveled back to the summer of 2012. Back then markets were riding the risk on/risk off roller coaster thanks to fears that Greece’s elections would deal a catastrophic blow to Brussels’ efforts to hold the Eurozone together. Less than a year later, and we find ourselves watching the recent relative calm in the markets turned on its head thanks to the same fears – but this time, it’s thanks to Italy’s election.
As a quick recap: after former Italian Prime Minister Silvio Berlusconi (of bunga-bunga infamy) was essentially forced out of office last fall, the technocratic (and unelected) government of Mario Monti arrived. After few months spent implementing “Brussels consensus” policies to stabilize Italy’s (and by extension, the EU’s) debt crisis, Monti was extremely unpopular with a huge swath of the Italian public.
As a result, this weekend’s election had 3 major players: the center-left party of Peir Luigi Bersani; the center-right party of Berlusconi; and the populist anti-elite movement created by the comedian Beppe Grillo. Most of the world was hoping for a Bersani victory, which would essentially signal a continuation of Monti’s reforms. The morning’s news suggested a big win for Bersani, but that optimism was shattered once the vote counts started rolling in, and it quickly became apparent that Italy was probably headed towards an ungovernable gridlock.
And the ripples throughout the markets were enormous. The early morning rally collapsed into the biggest single-day loss of the year for US equities:
Chart courtesy Finviz.com. Disclaimer: past performance is not necessarily indicative of future results.
We witnessed a huge spike in the VIX while setting a new one-day volume record for VIX futures contracts:
Disclaimer: past performance is not necessarily indicative of future results.
The stalwart of safe-haven currencies – the Yen – saw a huge spike before settling back down somewhat:
Chart courtesy Finviz.com. Disclaimer: past performance is not necessarily indicative of future results.
We could go on (and on and on). The point is, Europe came roaring back into relevance thanks to Italy’s election results, and with it reminded us of those risk on/risk off news driven markets which per our recollection were disliked by nearly all market participants.
It will be a few weeks before we know whether Italy will be able to form a government, and if so, what that government will look like. But we don’t really care if they do or not. What we’re looking at is what this may do to the markets managed futures track. If this brings back the news-driven highly correlated market moves, that could spell trouble. If it is the start of a more substantial crisis, well – managed typically love a crisis and the outlier moves they bring.