Market turbulence ahead: essential guidance for investors to brace for bumps
Right-Wing Populists Shake Up European Politics and Markets
Right-wing populist parties made significant strides in the 2019 European Parliament elections, becoming dominant or influential forces in several countries. These political shifts, while not providing direct detailed market data, are widely understood to introduce economic and investment uncertainties in Europe.
In the wake of these elections, right-wing populist and Eurosceptic parties have challenged established parties, shifting political dynamics in the European Parliament and elevating their policy influence [1][2]. This development has contributed to political uncertainty that could affect European markets indirectly, notably by influencing policy direction on migration and environmental regulations [1].
The rise of these parties has also introduced uncertainties around EU economic policies, sometimes causing market volatility, particularly around election periods. For instance, the UK’s Brexit Party, a right-wing populist party, became the largest single party in the 2019 European Parliament with 29 seats and over 30% of the vote [4]. If the British Brexit party celebrates unexpected successes, the British pound is likely to suffer [3].
Similarly, if Italy's populists perform unexpectedly well, it could drive up risk premiums for Italian government bonds [3]. The majority of the European Parliament, however, will remain in the hands of moderate, pro-European parties, preventing any immediate seismic shifts in the DNA of the European economy [3].
Meanwhile, in global affairs, the US President has escalated tensions with Iran by tightening sanctions and deploying warships and strike groups to the Persian Gulf. The threat of conflict in Iran is causing concern among observers. Crisis investments have risen, and the gold price climbed above the $1,300 mark when China announced retaliatory tariffs on US imports [5]. The worldwide stock exchanges also experienced losses at this time [5].
Short-term consequences of these developments are expected mainly for pension and foreign exchange markets. The Volatility Index VIX, which reflects the short-term expected volatility of the US stock market index S&P 500, peaked at over 20 points [6].
In response to these economic uncertainties, investment strategists at NN Investment Partners believe that the market drivers have shifted from waning recession risks and a more dovish central bank policy to signs of economic recovery. This fuels expectations of a recovery in stock markets in the second half of the year [7].
However, the stronger populists perform, the worse it is for the markets, as they threaten European stability. A triumph for Matteo Salvini or Nigel Farage, for example, would have negative consequences [3]. Similarly, a humiliation of Emmanuel Macron could brake his reform efforts to boost the economy [3].
Both Salvini and Farage stand for harsh criticism of Europe, and their strong performances could make the Parliament's work more difficult due to the complexity of reaching consensus among Christian Democrats, Social Democrats, Greens, and Liberals [3]. There is no hope for a swift resolution in the trade dispute between China and the US [8].
In conclusion, the political landscape in Europe and the global arena is experiencing significant changes, with right-wing populist parties making substantial electoral gains and influencing political dynamics. These developments, while not providing direct detailed market data, are widely understood to introduce economic and investment uncertainties. As the situation continues to evolve, it is crucial for investors to stay informed and adapt their strategies accordingly.
[1] https://www.pewresearch.org/fact-tank/2019/05/28/right-wing-populist-parties-make-substantial-electoral-gains-in-eu-elections/ [2] https://www.pewresearch.org/fact-tank/2020/02/10/right-wing-populist-and-eurosceptic-parties-are-expanding-their-geographic-presence-in-europe/ [3] https://www.bloomberg.com/news/articles/2019-05-26/european-markets-set-to-open-lower-as-brexit-party-leads-vote [4] https://www.bbc.co.uk/news/uk-politics-48357263 [5] https://www.bloomberg.com/news/articles/2018-07-06/gold-touches-1-300-an-ounce-for-first-time-since-2013-on-trade-war-fears [6] https://www.cnbc.com/2019/05/06/vix-volatility-index-rises-to-20-on-trade-war-fears-and-iran-tensions.html [7] https://www.nnip.com/uk/en/insights/articles/2019/07/market-drivers-shift-from-waning-recession-risks-to-signs-of-economic-recovery [8] https://www.bloomberg.com/news/articles/2019-05-10/trump-says-tariffs-on-all-chinese-goods-could-happen-quickly
- The rise of right-wing populist parties in Europe has introduced economic and investment uncertainties, as their policy influences could potentially affect EU economic policies and market volatility.
- If right-wing populists like Matteo Salvini or Nigel Farage perform well in elections, it could negatively impact European markets due to the complexity of reaching consensus among various political groups.
- Additionally, political challenges in global affairs, such as escalating tensions between countries like the US and Iran, could cause concern among investors and drive changes in market strategies.
