May 28, 2019

Markets Today: EU election aftermath

There are repercussions being felt across the continent following the election.

Today’s podcast

Overview: Song for a future generation

  • European election aftermath the focus with US and UK on holiday
  • Bunds close lower as EC considers fining Italy for breaching debt rules
  • USD a tad stronger with GBP the underperformer- Poor EU election results sees Conservative candidate push for hard Brexit while Labour promises a second referendum
  • German and US consumer confidence the highlights today

It’s easy to dismiss the “what’s it all about” crowd. There is no doubt. it’s this, here, now – R.E.M

It has been a relatively quiet night given the US and UK had a Monday holiday. European equity markets closed modestly stronger, but the move lower in Bunds reflected some risk aversion on the back of reports the European Commission was considering fining Italy for breaching its debt rules while Deputy PM Salvini promised to make tax cuts a priority. GBP is the G10 underperformer with poor EU election results driving Conservative Leadership candidates to push for a hard Brexit while Labour promises a second referendum.

The results from Sunday’s European parliamentary election has been the focus for markets while news of a merger proposal between Fiat and Renault has seen automotive shares ( 1.4%) lead the gains within EU equities. The broad but modest gains in European shares can also be attributed to some sense of relief that populist parties failed to gain as much support as many had feared. The long held coalition of Conservatives and Social Democrats lost their majority, but once Liberals and Green seats are considered, Pro-Europeans still hold a majority, albeit more fragmented than before.

That being said, although Eurosceptic and antiestablishment parties didn’t win as many seats as expected, their influence has increased significantly. This could have implications for the political colour of key EU positions including Presidents of: the EU Commission, the Eurogroup and the ECB. The Parliament composition is also likely to have implications on the priority agenda for future EU reform, particularly with respect to things like immigration, fiscal spending and fiscal union.

The aftermath of the election is also having some significant repercussions on politics at a country level. For instance, Italian BTPS sold off ( 10y +12bps to 2.67%) after Deputy Prime Minister Salvini said the next budget will focus on tax cuts and the election result is a mandate to oppose austerity. Meanwhile the EU Commission is considering disciplinary measures over the Italy’s failure to restraint its debt levels last year. Thus a messy fight looks set to be in the offing. In contrast, 10y Greek bonds were the outperformers (10y -24bps to 3.085%) following news that PM Tsipras called a snap election in light of its party’s poor EU election results.

US Treasury bond futures point to a 2bp decline in the US 10 year rate, in sympathy with moves in core European bond yields.  The 10 year Bunds fell 3bps to -0.145%, its lowest level since mid-2016 (the all-time low is -0.20%), reflecting safe-haven demand on the back of concerns over Italy’s tensions with Europe.

GBP has been the big underperformer within G10 currencies  (-0.25% and now trading at 1.2679) with politics again the big driver. The results from the European parliamentary elections confirmed a strong showing for Nigel Farage’s Brexit party, which topped the vote share with 32%.  The Conservative party was the big loser coming fifth and with just 9% of the votes. Conservative leadership hopefuls have pounced on the election result, suggesting that the electorate wants Brexit to be delivered. It seems that Conservative candidates will campaign to take the UK out of the EU without a deal unless the EU makes substantial concessions, in order to appeal to the mainly Eurosceptic party membership which will decide the next leader. This makes new elections a growing risk.  If the new Conservative leader makes it clear they are willing to leave without a deal, there are likely to be sufficient numbers of moderate Conservative MPs who are willing to abstain in a vote of no confidence in the government, as Chancellor Hammond hinted at over the weekend.

Clear as mud? Well not quite,  although Pro-Brexit parties took a bigger share of the vote than remainers,  more people voted for a second referendum than for a no-deal Brexit. This detail in the results appears to be behind Labour Leader Jeremy Corbyn promise to give the public a vote on any Brexit deal before the UK leaves the European Union. So it seems that in addition to an increasing risk of a General Election, the risk of a second referendum is also increasing.

AUD and NZD have essentially been bystanders with both antipodean currencies drifting lower over the course of the overnight session amid a broad based USD recovery ( DXY +0.15% at 97.743). AUD now trades at 0.6919, after trading down to 0.6904 and NZD trades at 0.6547, after dipping down to an overnight low of 0.6540.

We haven’t had much news on the US-China trade front. Trump is currently playing golf in Japan with PM Abe. The president noted that China would like to strike a trade agreement, but “we’re not ready to make a deal.”  Then he added thart  “I think sometime in the future China and the United States will absolutely have a great trade deal, and we look forward to that.” So for now it seems that neither China or the US are keen on making a reconciliatory move, markets remain hopeful of a G20 Presidential handshake at the end of June, but as the clock ticks downs there is an increasing risk the next move in the conflict will be the US imposition of 25% tariffs on the remaining $300bn of Chinese imports alongside banning of China tech companies, with China likely to retaliate.

Coming up

It’s another quiet day in terms of data releases with German GfK Consumer Confidence, US Conf. Board Consumer Confidence and US Dallas Fed Manf. Activity (both for May) the highlights.

Market prices

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Markets Today – It’s oh, so quiet

Markets Today – It’s oh, so quiet

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Markets Today – It’s oh, so quiet