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Just a couple of weeks ago, geopolitics seemed to be the biggest risk: markets (S&P 500, XAUUSD, etc.) reacted sharply, albeit briefly, to any disturbance in the Red Sea, which lately has been living between Houthi attacks on ships and Hezbollah rocket fire on Israel.
It was not just that rising tensions often claimed lives but also that this particular region was crucial to the world economy. Until recently, the Suez Canal-Red Sea-Bab el-Mandeb trade route was considered one of the world’s most vital transport corridors.
The latter route alone carried 17,000 ships or 10 percent of global trade. Any disruption increases costs and creates delays. But more worryingly, it could lead to higher inflation, discounting all the work of central banks.
The impact has eased somewhat, at least in general stock market sentiment and even in commodities: equities are up as usual, while oil prices are rising slowly but not skyrocketing. Investors seem to have gotten used to the tensions in the Red Sea.
At the same time, political events are gaining momentum regarding impact. For example, the recent increase in volatility, especially in the CAC-40, has been triggered by political events, more specifically, the surprise elections in France.
The French Interior Ministry reported on its website that the first round held on 30 June, saw the “Rassemblement National” coalition win 33.4 percent of the vote. In second place was the left-wing coalition “Nouveau Front Populaire” with 27.98%.
Macron’s “Ensemble” coalition came third with 20.76% of the vote. With no candidate winning an absolute majority, a run-off election will be held on 7 July. Investors fear a right-wing victory will lead to budgetary imbalances in the country.
Given that France is one of Europe’s growth engines, the challenges in Paris, including debt financing at favorable rates, could spill over to other members of the bloc and the EUR/USD. And let’s remember that Germany is also struggling, so there is no Plan B.
