8@eight: Italian vote another hard lesson for markets

1. Italy: The Italian referendum has added to the schooling that market participants have had to endure this year around what's expected, what's priced in and the sheer reality of what actually happens in price action around events. Perhaps the magnitude of the loss for Matteo Renzi's initiative was the biggest factor here, but still the President of Italy has urged him to push back his resignation and we still await details of the make-up of a new government.

2. About turn: Fear not though, as markets have done another huge about turn, with EUR/USD trading to $1.0506 before hitting a high of $1.0796 in US trade. We even had a super strong US services ISM data release (the index printed 57.2) and the USD still found no love, with the broader USD index falling 0.7%. Emerging markets will naturally like this. EUR/JPY had an even more impressive 3.2% rally from the low point and despite the Italian banks rather predictably finding sellers, the Italian MIB closed down just 0.2%. There was no real stress in the bond market either with the premium demanded to hold Italian debt over German bunds (10-year paper) increasing a mere three basis points, but of course everyone is saying 'don't worry Mario has got this', in reference to Thursdays' ECB meeting.

3. MIB: Keep an eye on the MIB (daily chart) though, as the 17,500 to 16,000 trading range it's found itself in since July is still in play and price tested the upper bounds of this range overnight. A break of this range (in either direction) could be very telling indeed. One for the radar.

Clearly the market is saying that while this Italian drama may have much more to play out it is probably contained for now and is largely an Italian issue, in isolation. US markets have pushed higher, with the S&P 500 reclaiming the 2200 and financials, tech, consumer discretionary and energy all working quite positively. Dips in US equities are being sought, but it's a fairly slow moving ship and participation is still quite poor, which can be construed as a negative.

4. Currencies: The USD selling seen overnight seems like a good old fashion position squaring, with everyone long USD's and a rate hike in December fully priced in. AUD/USD also had a good rally from $0.7414 in Asian trade, pushing to $0.7498, helped by further buying in bulk commodity futures. The fact iron ore and steel futures have gained 4.6% and 2.9% respectively should also help out the ASX 200 materials sector, which as most of us know is where the traders have generated some really good profits this year, with the sector up 36% year-to-date.

5. Rates: AUD/USD will remain in focus today, with the Q3 balance of payments at 11:30 (AEDT) enlightening economists with the contribution net exports provide to the Q3 GDP calculation. As things stand the consensus is that net exports will provide no contribution at all, and thus we will see fairly lacklustre growth on the quarter of around 0.2%, when we hear the Q3 GDP tomorrow. Yesterday's 0.8% increase in Q3 inventories should mitigate a contraction on the quarter though as with inventories providing around 20 basis points to the quarterly growth figure. The RBA also meet later in the session at 14:30 (AEDT), but markets are just perfectly neutral on potential monetary policy changes over the coming 12 months, that there really seems little the RBA can say to spur any real volatility today.

6. Equities: Our call is for the ASX 200 to open around 5445, or 0.8% higher. Looking at the various ADR's we can see BHP likely to open 2.8% higher, with CBA (as a proxy of the banks) pushing up close to 1%. Technically, we saw good buying support coming into the market off the 10 November of 5384 yesterday, but I cannot get enthused by the upside until we can see a close above 5523. This represents both the downtrend drawn from the April 2015 high and the 25 November high. For anyone hoping for the traditional rally into the New Year then a close above 5523 would be a red rag to a bull for the momentum-focused traders.

7. Today's diary: 

• Local data: Balance of Payments, RBA rate decision
• Overseas data: Euro zone GDP, Germany factory orders; US trade balance, factory orders, durable goods

8. Market highlights:

• SPI futures up 44 points or 0.8% to 5441
• AUD +0.3% to 74.83 US cents
• On Wall St, Dow +0.2%, S&P 500 +0.5%, Nasdaq +0.9%
• In New York, BHP +1.8%, Rio +1.4%
• In Europe, Stoxx 50 +1.3%, FTSE +0.2%, CAC +1%, DAX +1.6%
• Spot gold -0.3% to $US1173.65 an ounce
• Brent crude +0.9% to $US54.95 a barrel
• Iron ore up 83 cents to $US78.62 a tonne
• Comex copper +2.7%
• 10-year bond yield: US 2.37%, Germany 0.33%, Italy 1.98%, Australia 2.79%

  This column was produced in commercial partnership
   between Fairfax Media and IG.