While market liquidity typically diminishes in December as year-end approaches, Sinead Colton of Mellon Capital thinks the final weeks of the year could prove interesting.
"The next 12 months is particularly interesting because while elections are usually the [market] drivers, we've got a number of elements that are more politically driven that are outside the election process," Colton told ThinkAdvisor.
Colton is managing director and head of investment strategy at Mellon Capital, one of the largest boutiques within the Bank of New York Mellon stable. Mellon Capital had about $340 billion in assets under management at the end of September.
At Mellon Capital, Colton develops multi-asset solutions designed to provide attractive return outcomes within a clearly articulated risk framework.
During a recent visit to ThinkAdvisor's offices, Colton outlined several events in December and into the coming year that advisors should be aware of as potential market-movers.
Dec. 4: Italian referendum vote.
On Dec. 4, Italians will vote on a referendum to reform Italy's constitution. The proposed constitutional changes aim to curb the power of Italy's Senate and strengthen the power of its prime minister, by reducing the number of senators to 100 from 315, of which five will be appointed by the president and 95 will be appointed by regional bodies.
"The indications from the polls – to the extent that we still look at polls – are that the no vote is going to win," Colton told ThinkAdvisor. Adding, "that's the first thing to watch. It maybe isn't going to generate as much uncertainty as was initially thought, given that the polls are indicating a no vote, given what we saw in the UK [and given] what we've seen in the U.S."
Italy's prime minister, Matteo Renzi, has said that he would resign if there was a no vote, although Colton said that "rhetoric been toned down a little bit."
"It is not necessarily clear that Renzi will step down if there is a no vote. It would be entirely feasible for him to take the view that having continuity in a time of uncertainty is more important for the economy," Colton said.
If he were to resign, the party that would likely gain support in a subsequent election is Italy's anti-establishment Five Star Movement.
And because of this, it's been speculated that a no vote could lead to Italy's exit from the European Union. Because Italy is a "much larger country in terms of EU membership," discussions of an Italy exit could "become much more disruptive," Colton said.
Dec. 5-8: U.K. Supreme Court hears Article 50 appeal
Starting on Dec. 5, the U.K. Supreme Court will hear the government's appeal against the High Court's ruling that Parliament must have the final say on when Article 50 of the Lisbon Treaty can be triggered, formally beginning Brexit negotiations.
"It's interesting because [Prime Minister] Theresa May has wanted to press ahead without Parliament having a view. Many of the MPs are — at least at an individual level — less positive on Brexit," Colton said.
Colton called this a "very notable decision."
"It's going to govern how quickly the timetable for Brexit can move ahead and indeed perhaps some of the decisions around how much of a hard Brexit there will be," she added.
Colton said U.K. growth is being marked down "quite significantly" on the assumption that it's going to be a hard Brexit.
"We have seen a recovery in recent weeks in part due to the outcome of this court case … If you were to see that decision overturned, I would anticipate you're going to see sterling fall back to $1.21, $1.20, that kind of level," Colton said.
Dec. 8: European Central Bank's monetary policy meeting
On Dec. 8, the Governing Council of the ECB has its monetary policy meeting in Frankfurt.
Following the meeting in December, ECB President Mario Draghi is widely expected to announce an extension to the ECB's quantitative easing program, which is scheduled to expire in March.
"It's anticipated you're going to see an expansion of the QE program," Colton said.
In October, Draghi confirmed that the monthly asset purchases of €80 billion are intended to run until the end of March – or beyond, if necessary.
Colton does not think tapering will be discussed at the December meeting, but rather "much farther down the track." Draghi also said in an October press conference that the ECB had not discussed "tapering or the intended horizon … of our asset purchase programme."
"Given that the program is due to end in March 2017, and given where the EU economy is at present, it doesn't make sense to us that they would start to taper at this point," Colton said. "It's much more likely that you're going to see an extension of the program."
