All of a sudden, the bogeyman of global risk is coming back.
Investors returning from the long Memorial Day weekend are confronted by a mess in Italy, where an establishment politician blocked an insurgent challenger from becoming economics minister. He wanted to protect business as usual, but the move backfired by creating the possibility of another election in September. And this time, experts warn, it could result in the population voting to drop the euro — something that would make Brexit look like a local school-board vote. Remember, Italy is one of the world’s biggest debtors, so financial markets will focus on the dangers of contagion: What happens to banks holding its bonds if Italy goes back to the lira? What happens to their depositors and other borrowers? What happens to their investors?
Italy isn’t the only international problem. In Spain, Prime Minister Mariano Rajoy faces a confidence vote this Friday, June 1. While political scientists expect him to survive, it’s still a risk to a pro-business, pro-Europe leader in a country that’s had its own debt and unemployment problems. There’s also been trouble on the other fringe of Europe in Turkey, where anxieties of about president Erdogan pushed its currency near a crisis just last week.
In Latin America, Brazil has been shut down by trucker strikes. (These have threatened the country’s huge farming sector, which may impact grain and livestock prices.) Mexico faces uncertainty over a revamp of NAFTA and Argentina is trying to get support from the International Monetary Fund. And, Colombia’s inconclusive presidential vote over the weekend has the potential to re-open the country’s long-simmering guerrilla conflict.
Then on top of all those issues, the U.S. and China are still bickering over tariffs. And, uncertainty remains over the North Korean summit and Iran’s nuclear program.
We don’t want to scare anyone or make too big of a deal of these events. After all, the big news this week will be monthly payroll data in the U.S., where growth remains strong. We just wanted to recap the recent flurry of developments so traders aren’t surprised by what’s happening abroad.