Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

Once the dust from the longest election campaign in living memory settles stateside, the emphasis in Europe will shift very much back onto Europe, and its own substantial problems. The looming Italian referendum on Dec. 4th, ongoing Greek debt talks, Brexit wrangling and whether the European Central Bank extends government bond purchases at its Dec. 8th meeting are just the known knowns.

The practicality now is that the markets are over-hedged on a Trump victory -- the S&P 500 Index has fallen for nine straight sessions, and according to Bank of America Corp. cash holdings of fund managers are at a 15-year high. A Clinton win initially means a stock relief rally and a firmer dollar -- but the flipside of that, with a 76 percent likelihood baked in, is that the Federal Reserve hikes in December.

Were this to actually happen, a less-nervous Fed will be able to lift its sights to the future instead of near-term risks, and that means higher yields and a steeper curve. No matter who wins, the bond market's the long-term loser. Both candidates are promising big spending, and that spells big borrowing -- regardless of what either do on taxes.

This will be mirrored in Europe for sure, but the effect will be muted, particularly if the euro weakens, and there is the help of weaker crude too. Core bond markets have cheapened substantially already, but risk still remains in the region's peripheral bond markets. 

Referendum Puts Risk on for Italian Bonds
Spread over German government debt marches wider before December vote
Source: Bloomberg

Italian Prime Minister Matteo Renzi was the future once, but if he loses this signature attempt to reform Italy's sclerotic political system, the country may also lose the political leadership needed to tackle its daunting budgetary woes. This vote is a sizable credit event, and with investors already having put risk off for the U.S. election and pulled back liquidity to such an extent that they look set up for year-end, there's no point trading off of headlines ahead of the fact.

The real variable is what the ECB decide to do next month. It's not clear how a Renzi loss will affect the ECB's thinking on tapering their support. One outcome is that they may adjust the capital key to allow a greater share of purchases in the periphery. That would suggest some support for that debt, but even so, this may amount to only a near-term fillip when the broader pressures are for peripheral spreads to head wider.

The Fun's all in Mexico While Germany Plods On
Currency volatility is considerably more active than in benchmark government bonds
Source: Bloomberg

Volatility is now expressed more in currency markets than rates or credit. Just look at what's been happening with the Mexican peso. For peripheral bond markets, the higher risk doesn't seem worth a potential short-term kill in the hunt for yield.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Marcus Ashworth in London at

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Jennifer Ryan at