Will Political and Economic Risk Mean Volatility in Europe?
Ironically, politics may still be a source of volatility––just not from the United States. Today, I see a greater potential for volatility emanating from Europe. Populism is now starting to infect northern Europe. In Germany, Chancellor Merkel’s center-right CDU party lost a key state election to both the Socialists and the new right Alt Party. In Austria, a far right candidate is leading in polls for the presidency. In southern Europe, the Italian prime minister is facing a critical referendum which may determine his and his party’s fate, while Spain is still struggling to form a government. Finally, both Germany and France are facing national elections next year with insurgent, populist parties on the rise.
In short, politics may very well disrupt markets, but the shock may not be made in America.
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Market Realist – What should investors consider?
As we discussed earlier, markets generally react to a surprise event. In the US, the largest developed economy, any uncertainty or speculation can cause volatility (XIV)(VXZ) in the world markets (VEU). A stronger US dollar (UUP) over other currencies could reduce the trade deficit. However, irrespective of a Republican or a Democrat president winning the election, investors should focus on the long-term basic fundamentals of investing such as risk, diversification, and market timing.
Market Realist – Europe could face market volatility
German (EWG)(EFA) Chancellor Angela Merkel lost another poll. But the CDU-CSU still leads in all national polls, and at 45%, her approval ratings are stellar compared to European (FEZ)(VGK) peers such as Francois Hollande of France (EFA). From refugees to rising populism, the Brexit vote to struggling Italian banks, the threats to Europe’s economic and political coherence are multiplying. These instability risks may cause market turmoil.
Also, after the US central bank maintained a low-interest rate environment, it underpinned the bull markets for stocks in the United States. However, European shares fell on September 23, 2016, pulling back from two-week highs after the Federal Reserve signaled an increasingly cautious approach to future rate hikes.