Italy's constitutional referendum fails, Prime Minister Renzi resigns, Bitcoin does not rise as expected

According to the data from Huobi.com, a blockchain asset trading platform, on December 5, the opening price of Bitcoin on Huobi.com was 5420. As of 10:00, the highest price was 5480 and the lowest price was 5390. Although the media paid great attention to the Italian referendum, the reaction of the capital market was not as obvious as expected. The price of Bitcoin on Huobi.com fluctuated slightly and did not rise as expected. On the one hand, it was due to the early release of the news, and on the other hand, the failure of the referendum was still far from Italy's true exit from the EU. From the overall market perspective, the fluctuations of the US dollar, the euro, and the RMB were all within 1%, so it was normal for Bitcoin to fluctuate slightly.

Bitcoin market screenshot from Huobi.com

In June this year, the British people voted themselves out of the European Union, and in November the US election also elected Trump as president. All uncertainties have been realized, and impossible results have become possible. Today, the Italian referendum has begun. Will the black swan happen again?

According to Huobi's editor, the voting period for the Italian constitutional referendum was from 7:00 on December 4 to 6:00 on December 5, Beijing time. At 10:00 this morning, the third black swan in the global financial market this year finally flew out - the Italian constitutional referendum ended in failure. The latest exit polls and preliminary result forecasts show that Italian Prime Minister Matteo Renzi lost the constitutional reform referendum by a large margin.

This not only affects the efficiency of Italy's reform, but will also set the tone for a series of European elections in 2017. Some even speculate whether this will be the beginning of the collapse of the euro zone?

Italy's Brexit referendum

As we all know, the EU is the world's largest economy. As the saying goes, a big ship fears high waves, so why are European countries jumping off the same big ship one after another? In fact, the EU is far from being as bright and glamorous as it seems. Due to the EU's poor performance in dealing with debt crises and refugee crises in recent years, people's trust in the EU has declined, the halo of integration has faded, and Euroscepticism has continued to rise.

As for Italy, since joining the eurozone, Italy's unit labor cost competitiveness has fallen by 30% in the 15 years since 2000. Italy's productivity has fallen by a staggering 5.9%. Italy's GDP has fallen by 9% since the economic crisis, and its industrial output has fallen by 25%.

Italy's banking industry is also gradually sinking into a quagmire: the bad loan rate of banks is 10 times that of the United States, the stock price continues to collapse, and the government cannot inject funds due to EU policy restrictions. Italian Prime Minister Renzi is also ready to "go all out" to save the banks. Due to the restrictions and intervention of the EU treaty, Italy cannot take effective countermeasures with normal sovereignty to get out of the predicament. In order to avoid catastrophic deindustrialization, leaving the EU may be Italy's last straw.

Why are markets worried?

Renzi has said he will resign if the referendum fails, which would lead to early elections and a possible rise in support for the populist Five Star Movement, which has called for a referendum on Italy's continued membership of the eurozone. Some investors have begun to expect the European Union, not to mention the single currency, to break up.

Jim Smigiel, currency manager at SEI Investments Co., said:

“We believe the European Union will break up and Italy will leave the eurozone. Not long ago this was unthinkable and unlikely, but now we are at least starting to see signs of it.”

Italian Prime Minister Renzi

How anti-Euro is the Five Star Movement?

The party has been actively campaigning for a referendum on leaving the eurozone. Luigi Di Maio, the party's vice president in the lower house, said that if the party came to power, it would push for a referendum on euro membership. Di Maio did not specify whether it would replace the euro, saying in an interview that he supports "two different rates of the euro or a national currency."

Why are investors' concerns considered excessive?

Because leaving the eurozone takes time and lengthy negotiations. As the UK is facing with the triggering of Article 50, leaving Europe, or parts of it, is not as simple as imagined.

"The idea that Italy will leave the eurozone the day after the referendum or soon after is too exaggerated," said Antonio Villafranca, European analyst at the Italian Institute for International Political Studies. Even if early elections are held immediately after Renzi's defeat, whether Five Star can take power will depend on changes to the electoral system. Winning the election may not be enough because the party "may have difficulty finding enough allies to form a parliamentary majority," Villafranca said. Finally, Brexit faces legal obstacles.

What are the legal obstacles?

Italy's constitution prohibits a referendum to repeal international provisions, so a constitutional amendment may be needed before a referendum can be held. Amendments would require a two-thirds majority in both chambers, and another referendum might be needed to clear the way for leaving the eurozone. Even if Italians support Brexit, the Constitutional Court could block that outcome.

How badly would markets react to leaving the euro?

Political intentions themselves could face a market backlash, according to JPMorgan economists. "Any credible noise about exiting the eurozone triggers capital flight and severe market turmoil, so market pressures could force parties calling for an exit from the eurozone to quickly revise their plans," Gianluca Salford and Marco Protopapa, economists in London, said in a note. Markets were already under pressure even before the Dec. 4 referendum on concerns about the ultimate consequences. The euro has fallen more than 3% this month to its lowest level since March 2015, and Italy's 10-year bond yield climbed above 2% for the first time in more than a year, also suggesting that risks are high.

Italians want to leave the euro?

Apparently not. A poll published on November 21 showed that only 15.2% of the population was in favor of leaving the eurozone, while 67.4% of respondents supported the euro.

The impact of Italy's exit from the EU on financial markets: global financial markets may face another "storm"

The timing of the UK's withdrawal from the EU shows that if Italy really withdraws from the EU, it will cause a complete collapse of the eurozone in a short period of time, which may trigger the most serious economic shock in history, deal a heavy blow to the euro, and then threaten the EU. Although the British pound will suffer the most due to the UK's withdrawal from the EU, in fact, the euro will drop significantly due to the withdrawal time.

With Italy's exit from the EU, the euro has not yet recovered from Brexit, and the euro will fall further. The euro may face a heavy blow or even collapse. The end of the year also happens to be the time when the results of the US election will be announced. The two major risks go hand in hand, which will intensify market panic, and risk aversion will heat up, and a series of safe-haven assets will soar.

Meanwhile, Italy will hold a referendum on constitutional reform, the result of which may determine the future of Prime Minister Renzi, and polls show that the result is unpredictable. Some market participants said that if the Italian referendum fails, it will continue to pose a risk to Italy's bond yields, and the bond yields of core eurozone member states will also rise, which means that global investors are more nervous about the eurozone.

Worse still, if the result of the Italian referendum repeats the result of the British referendum, it is likely that Italy will follow the "old path" of the United Kingdom - the populist party "Five Star Movement" may replace the Democratic Party led by Renzi and become the ruling party in Italy. The "Five Star Movement" has previously stated that it will hold a referendum on Italy's membership in the European Union.

Once the Italian domino falls, the calls for withdrawal from the EU from countries such as France, Sweden and Belgium will become louder, the EU will face the risk of disintegration, and a new round of storms will be brewing in the global financial market.

France and Germany will both hold general elections in 2017. Given the instability of the eurozone, the evolution and complexity of the impact of the Italian referendum may exceed expectations. Therefore, Italy's constitutional reform referendum may be the biggest risk event in Europe after the UK's Brexit referendum.

In June this year, Brexit caused the price of Bitcoin to surge by 20% on the same day. Under the risk of depreciation of the euro and euro assets, gold and the digital currency Bitcoin, known as digital gold, can be said to be a good hedging tool. At the same time, the uncertainty of Europe's economic recovery and the instability of the political situation in the future will increase the region's demand for safe-haven assets such as gold and Bitcoin.