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Market Chaos in Europe Hurts Now but the Long-Term Picture Is Still Strong

This market expert explains why Italy's sudden political crisis is weighing on markets Tuesday.

What's the price of another European Union exit? On Tuesday, it was significant downturns across global equities markets.

Downward pressure appeared Tuesday, May 29, as Italy teetered on the edge of a major political overhaul. Italian President Sergio Mattarella appointed former International Monetary Fund official Carlo Cottarelli to lead a caretaker government charged with passing a budget and getting the country to its next election. Those elections, expected as soon as late July or early August, have suddenly come to be viewed by many as a referendum of sorts on Italy's membership in the European Union.

"That has markets a little bit concerned. When you have one of the biggest countries in the eurozone potentially exiting the euro, the viability of the euro bloc gets called into question," said Alec Young, managing director of global markets research for FTSE Russell.

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As the third-largest economy in the European Union started to beget questions of the bloc's existence, global stocks tanked. The Dow Jones Industrial Average sold off as much as 1.79% Tuesday afternoon, while the broader S&P 500 declined about 1.32%. Italy's benchmark FTSE MIB Index fell 2.6% to a 10-month low. At the same time, the euro fell to a six-month low against the dollar.

But according to Young, should "cooler heads prevail" in upcoming Italian elections, "The current volatility that we're seeing, it would be logical to see that wind down a little bit."

Volatility as measured by the Cboe VIX Volatility Index surged more than 20% Tuesday, registering gains to the tune of nearly 50% year-to-date. But given the incredibly low-volatility year markets enjoyed in 2017, "This is more of a mean reversion back to historical norms," Young noted.