By IG, a UK CFD and spread betting provider.
Last month, votes took place across Europe to determine who would represent the European Union’s (EU) constituent countries in the European parliament. Victories for fringe anti-Europe parties in several countries heralded uncertainty in the future of the organisation, as it became clear that voters across the continent were becoming disenchanted with the prospect of a united Europe.
But what impact does that have for investors? It’s often said that international risk presents great opportunity for traders, as any news that disrupts the status quo can be taken advantage of. Was there such an opportunity surrounding the election results last month, and is there more change to come? Taking a look at the impact of European policy on key country’s domestic markets can offer some insight into the relationship between stocks and politics.
United Kingdom
The UK was home to a significant victory for the heavily eurosceptic UK Independence Party (UKIP), with poor performances from all of the leading parties: Labour beat the Conservatives into third place, whilst the Liberal Democrats faced an unmitigated disaster.
The days surrounding election saw poor performances on domestic indices, but the market rallied after the result was announced on the 25th. It appears that any uncertainty caused by an unpredictable result (especially after UKIP’s victory in local elections) was resolved when traders learnt of the full results. The reluctance of the FTSE to break as high as counterparts in Germany (where European scepticism largely failed to materialise) or the US, though, is indicative of a market lacking a bit of self-belief.
France
Much of the comment following the UK’s election upheaval centred on how much further to the right other countries had swung: in particular the French, where the Front National had a significant victory against the socialist party in power. The Front National is situated far enough on the right that UKIP’s Nigel Farage saw fit to distance his party from any affiliation with Marine Le Pen’s.
The relationship between France’s flagging economy and political agitation is, as always, hard to fully measure. The CAC 40 has been cautiously on the rise for a while now, but is still fragile and losing ground on Germany. The European Union’s importance to continued growth should not be underestimated, as moves towards nationalism take hold. If political disruption causes lasting damage to the strength of the European Union, major upheaval should be expected.
Germany
If, as their website proclaims, the European elections allowed ‘voters to pass judgement on EU leaders’ efforts to tackle the Eurozone crisis [and] express their views [on] closer economic and political integration’, then Germany’s assessment appears to be largely positive.
As with the UK and France, it’s hard to truly assess the impact Germany’s economy had on the performance of traditional parties. The DAX continues to prosper, however, performing strongly and displaying little of the caution seen in France and the UK.
That is indicative of the current position that Europe’s economy is in: Germany’s strength has ensured that traders’ faith has not been too shaken. The recent poor performance of EUR/USD and the rallying of gold, however, do indicate a clear lack of real belief in Europe’s larger economy at the moment, and there is a sense that more rocky times may be ahead.
In just a few months, the Scottish public will take to the polls to decide the future of their country, with a vote for independence promising major fallout in the makeup of the EU, as well as for sterling and the FTSE. Albania is the latest ‘controversial’ country to embark on a campaign to join the union, a move that adds fuel to the Front National and UKIP– if it looks like they may succeed. Meanwhile, tensions between EU and Russian leaders are not yet cooled. Finally, Europe’s black sheep – Greece – may yet revolt against austerity and give increased power to its dangerous right wing Syriza party.
The impact of uncertainty in Europe plays out globally; across indices, commodities, bonds and forex markets. 2014 has already been a shaky year for the continent, and the signs of life in Europe’s economy have not yet been reflected in a return to the political status quo. Times of heightened risk – and the opportunity that comes with it – do not appear to be over just yet.
Courtesy IG, a UK CFD and spread betting provider. (EconMatters author archive here)
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