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The week’s big news started again with geopolitics, but it wasn’t about a new flare-up in the Middle East this time. We seem to have gotten used to that by now.
What unexpectedly shook the markets was Europe, or more precisely, the preliminary results of the European Parliament elections. Investors were spooked by the voters’ swing to the right.
The real surprise was the crushing defeat of Macron and Schultz. Macron went so far as to announce the dissolution of the French National Assembly and call for new elections.
Are we back to those seemingly forgotten dark times?
It is too early to tell. The European Parliament elections will not exactly turn the tables, nor will they change parliamentarians’ minds on key issues.
Like last time, the European People’s Party has again won the most seats in the Parliament and even increased its number (184 seats according to the latest estimates, up from 176).
But here’s the catch: for Ursula von der Leyen to secure a second five-year term, she needs the backing of a majority of EU national leaders and a working majority in the European Parliament.
How did the markets react?
The Euro Stoxx 50 index fell by more than 1%, while the Stoxx Europe 600 fell by 0.6%. Among the domestic indices, the French CAC 40 was the most brutal hit, down 1.7%.
The bond market fared no better: ten-year bond yields in Germany, Spain, France, Italy, and other countries shot up. In short, there is a clear sense of unease in the air.
But why is there this downturn if not much is changing in the bloc’s politics? The main concern is that the shift to the right will have repercussions at the national level.
In other words, markets fear instability, or rather, uncertainty. On top of that, there is concern that the Federal Reserve will be hawkish on Wednesday.
What’s next?
The European Parliament elections will take a back seat as the Fed meeting approaches. The big unknown is whether we will get any indication of future rate cuts.
If the hawkish tone persists, especially given the better-than-expected labor market data, we could see a drop in demand for risky assets, and EUR/USD could plunge further.
Remember to always do your own research before making any investment decisions.
