Meanwhile, Across The Rest Of Europe

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Includes: EWG, EWI, EWN, EWP, EWQ, FXB, FXE, GREK, SPY
by: Eric Parnell, CFA

Summary

All eyes are focused on Thursday's 'Brexit' vote.

But other important political events that threaten to challenge the fate of the European Union are also currently unfolding.

In the end, the real story is not about the outcome of 'Brexit'. Instead, it is just the latest symptom in an increasingly festering disease plaguing the Euro Zone.

Investor emotions are running high ahead of the long anticipated United Kingdom European Union membership referendum scheduled for Thursday. And now that the voting has begun, financial media coverage remains transfixed on what the final outcome will be once the final votes are tallied and reported in the early morning hours before the market open on Friday. But despite all of the concentrated media coverage, 'Brexit' in the U.K. s not the only event taking place in Europe right now that warrants investor attention.

Italy

A notable transformation to the political landscape continues to unfold in Italy (NYSEARCA:EWI). The third largest economy in the Euro Zone held local elections last Sunday with the upstart Five Star Movement (M5S) landing some important victories and establishing its legitimacy among the Italian electorate.

In Rome, which is Italy's largest city, Virginia Raggi of the M5S won second round voting in a landslide with 67% of the vote over Roberto Giachetti of the Democratic Party, which under Prime Minister Matteo Renzi is currently the ruling party in Italy. Moreover, the M5S won a decisive majority in the Rome City Council landing 29 of the 48 seats. While the M5S prevailed in Rome running primarily on an anti-corruption and reform platform, it remains notable that the anti-establishment and populist, far left party that has pushed for a move away from the European Union and the euro currency was able to perform so well in Italy's largest city.

The success of the Five Star Movement was not limited to Rome. In Turin, M5S mayoral candidate Chiara Appendino scored an upset victory over incumbent Piero Fassino for mayor in Italy's fourth largest city. And in smaller Carbonia, Paola Massidda prevailed over another Democratic Party challenger in Giuseppe Casti.

Although the next general elections in Italy are still a couple of years away in May 2018, the potential always exists for a snap election to be called in the meantime. And with Matteo Renzi's Democratic Party fading in the polls (currently at 31.1% based on the average of the last five major general election polls) at the same time that the M5S is ascending (currently at 28.4% by the same measure), the far left political party founded in October 2009 and led by comedian Beppe Grillo is trending toward potentially even greater influence over Italian politics going forward.

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In addition to the rise of the Five Star Movement, also worth monitoring in Italy is the rise of the populist and federalist North League party, which has reached its highest polling numbers in its nearly thirty year history, along with the demise of the mainstream center-right Forward Italy party led by former Prime Minister Silvio Berlusconi.

Spain

Moving from last weekend to this upcoming Sunday, Spain (NYSEARCA:EWP) is set to vote this weekend in a general election to establish its leadership after a ruling majority could not be formed following the voting back in late December of last year. The mainstream conservative People's Party under acting Prime Minister Mariano Rajoy maintains its narrow lead in the polls with 29.1% of the vote based on the last five major general election polls, but the anti-establishment and Eurosceptic far left Unidos Podemos party that was first formed under leader Pablo Iglesias just over two years ago in May 2014 continues to close the gap in the polls after recently consolidating support among a number of left wing parties including the communist influenced United Left and the green Equo parties. At present, Unidos Podemos has surpassed Spain's other mainstream social-democratic PSOE party in the polls and is currently in second place with 24.1% of the vote based on the five most recent polls versus 21.6% for PSOE.

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The key to watch with the Spanish elections will not just be the outcome of the vote on Sunday but also the action that follows in the days and weeks ahead as various sides work to secure a majority government. The challenge facing the People's Party today as it did in December is the ability to form a coalition of sufficient size to establish a majority. On the opposing side, the prospects for Unidos Podemos doing so with its more center leaning brethren on the left in PSOE are better, but discussions between the two parties have been turbulent thus far with both sides showing unwillingness to yield to each others leader as Prime Minister and objections to some of the key principles and policies upheld by the other. But policy fences often have an uncanny way of mending themselves when political opportunity presents itself. Such will be worth watching as we move into next week.

Bottom Line

The unfolding political situation not only in the United Kingdom, Italy and Spain highlight an important point facing financial markets today. Despite all of the fuss, the outcome of the 'Brexit' vote today is not the real issue, for it is essentially the difference between either slowly peeling away a Band-Aid or quickly ripping it off. Instead, the bigger issue is that the 'Brexit' vote is even taking place at all and with so much fanfare, for it is representative of the increasingly festering wound that lies underneath the bandage.

The European Union and the euro currency experiment are simply not working. And they haven't been working for some time. It's problem not just in Greece (NYSEARCA:GREK), but also in the United Kingdom, Italy, Spain, France (NYSEARCA:EWQ), the Netherlands (NYSEARCA:EWN) and pretty much everywhere else across the continent including giant Germany (NYSEARCA:EWG). And it is a problem that is almost certain to face far greater and more extreme political opposition before it is all said and done regardless of what the British decide on Thursday.

So while we may see a rush back into European stocks along with the pound (NYSEARCA:FXB) and euro (NYSEARCA:FXE) currencies resulting from a 'remain' outcome, do not view it as an all clear that the problems facing the global economy associated with the European Union or anywhere else for that matter are suddenly over. The same holds true for the United States and its stock market (NYSEARCA:SPY) too.

The underlying state of the global financial system remains highly fragile, and Thursday's 'Brexit' vote is merely a symptom of the larger problem. So while a 'remain' vote might bring some temporary relief for investors, it will do little to nothing to provide the global marketplace with a final cure.

As a result, the best opportunities emerging from the 'Brexit' vote, particularly if 'remain' wins the day, may not be found in stocks but instead in the various safe haven assets that may be cast off in the immediate aftermath of the vote. For these are the types of holdings that investors are bound to migrate back toward as the slowly rolling crisis facing the European Union continues to unfold.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.