By Padraic Halpin
DUBLIN (Reuters) - After a year of huge shocks to the market, investors' nerves will be tested twice more in the coming week as OPEC debates an oil output cut and Italy provides the first of several upcoming major European electoral tests.
By far the greater unknown of the two, investors fear Italy could be plunged into political uncertainty if pro-euro Prime Minister Matteo Renzi fails to pass his Dec. 4 constitutional referendum as polls suggest.
Renzi's statements that he will resign if the ballot - which is designed to streamline Italian government - fails has markets concerned that this might open the door to the opposition 5-Star Movement, which has denounced the single currency.
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The risk of instability returning to Italy, the euro zone's third-largest economy and second-most indebted, has sent jitters through financial markets and led the European Central Bank's vice president to say that it would react to any "economic shock" from the vote.
"The outcome of this referendum could result in serious difficulties for the euro zone in the medium term," said Commerzbank economist Marco Wagner, citing the possibility that it could bring the euroskeptic 5-Star to power.
"Its spending policies would probably push up Italy's sovereign debt even further, and there would then be a serious risk of a 'buyers strike' by investors, a sharp rise in yields on Italian government bonds, and the euro zone sliding toward a second government debt crisis."
If Renzi's near-three year premiership comes to an end, many observers expect a temporary government to be formed, possibly of technocrats without party affiliation, charged with drafting a new electoral system ahead of a potential early election.
Some reforms could even see the anti-establishment 5-Star's chances of winning power recede rather than grow.
EUROPEAN MOOD MUSIC
Regardless, a referendum defeat would see rumbling uncertainty in Rome bleed into the big European set pieces of 2017 where elections in the Netherlands, France and Germany could transform the political landscape.
The populist successes of Donald Trump and Brexit may first be repeated in Austria's presidential run-off, also on Dec. 4, where Norbert Hofer could become the European Union's first far-right head of state.
"Whilst it may garner less attention than Italian events, the prospect of right-wing president may provide a reminder of the mood music of European citizens ahead of the more important elections," said Investec economist Ryan Djajasaputra.
By Sunday, a week before Italy's vote, French conservatives will also have decided whether unexpected front-runner Francois Fillon or rival Alain Juppe will face a likely battle with far-right leader Marine Le Pen in May's presidential election.
While the referendum in his native country may form the main backdrop when ECB President Mario Draghi gathers council members days later, data next week on sentiment, credit, flash inflation and manufacturing activity will also be closely monitored.
Sources have told Reuters the ECB's rate setters are all but certain to decide to keep buying bonds beyond their March deadline when they meet on Dec. 8, changing the terms of the program to ensure they find enough paper to buy.
Friday's U.S. non-farm payrolls for November provide the key data for the week and should reinforce the consensus view on Wall Street that the Federal Reserve will hike interest rates at its December meeting amid a strengthening U.S. economy.
OPEC OUTPUT CAP
After agreeing in Algeria two months ago to limit supply, the Organization of the Petroleum Exporting Countries (OPEC) gather in Vienna on Nov. 30 for a meeting that is meant to finalize details of the proposed cap on production.
Doubts remain over whether consensus will be reached on what would be the group's first supply-limiting pact since 2008, with the deal hinging on agreement from Iraq and Iran, which are far from certain to give full backing.
While most analysts believe that some form of cut will be agreed, it is uncertain whether it will be enough to prop up a market that has been dogged by a supply overhang for more than two years, according to the International Energy Agency (IEA).
Markets will nevertheless be paying close attention.
"An agreement to a large production cut could send oil prices closer to $60 per barrel before year's end, while failure to reach an agreement could cause oil prices to fall back to the low $40 per barrel," Nordea economists wrote in a note.
(Editing by Mark Heinrich)