We apply Social Media Influence (SMI) to the Italian Election and find out that right-leaning populist parties should outperform polls.  Such unexpected outperformance should be enough to reignite risk for the Euro and Euro Assets.  We expect markets to reevaluate risk / reward and to pause the past year’s appreciation.  The following excerpt is taken from ZettaCap’s recent report Euro Assets to Pause as SMI Forecasts Populist_Regionalist Strength in Italian Election:

Social Media Influence (‘SMI’) ratings measure influence of political candidates, topics, companies, stocks, and products. It was the only forecasting method to forecast Trump would win the 2016 US Presidential Election with the correct number of electoral votes and the first known to forecast that Macron would win the 2017 French Presidential Election.

In March 2017, when the Euro was trading at 1.06, ZettaCap published a Long Euro Asset call based on SMI forecasts showing populists significantly underperforming in the then-upcoming 2017 elections in the Netherlands, France and Germany. At the time, most in the market believed that risks involved with populists winning those elections justified Euro and Euro-Asset underperformance. ZettaCap’s forecast for Euro and Euro-Asset appreciation was well out-of-consensus, but with the Euro currently trading at 1.23 it has paid off handily.

At present, the situation has inverted. Excessive confidence has returned to the Euro and the market has mostly written off populists after their underperformance during the 2017 European elections. The SMI, in contrast, shows that their positions have strengthened in various countries in 2018.

Specifically, the highlighted risk is in the upcoming Italian General Election on March 4, 2018. Betting markets and polls show a mixed race with a variety of potential outcomes likely but with a bias towards the largest three mainstream political groups. SMI forecasts differ in that smaller and lesser well known right-wing parties are seen as outperforming poll expectations. Their expected outperformance of polls and the fact that they have entered the leading coalition should be enough to jumpstart political risk perception.

Appreciation of Euro and Euro-Assets should pause as markets begin to reevaluate risk in this asset category that has handily outperformed due to declining political risk.