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The future of Europe in question: APAC brief 27 May

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Global political economy in focus: International diplomacy, politics and global trade are at centre of attention to begin the new week. Indeed, that’s in part due to the corporate and economic calendar appearing relatively lighter, being the final week of the month; as well as the fact the UK and US are off on public holidays on Monday. But even in the absence of other hard-hitting, high impact news, the confluence of politics-related headlines merits attention in their own right. And it spans the globe: Trump is talking trade in Japan, the Europeans are voting in their Parliamentary elections, and the UK is now searching for a new Prime Minister.

Markets watching for surprises: The overarching narrative hasn’t fundamentally changed. Generally speaking, a level of bearishness characterizes market activity, as the US-China trade war continues to rattle nerves. Nevertheless, global politics and international relations is bringing-about some shifting gears within the broader economic machine. On balance, there’s been little fall-out from the handful of political events unfolding across the globe. If anything, though not game-changing, they’ve collectively proven to be a net-positive for market sentiment. Of course, this could turn-around rapidly: traders ought to be used to expecting the unexpected by now. Hence, the least that can be said is “so-far”, so good.

The future of Europe in question: European Parliamentary elections was where most interest lay over the week. For market participants, the vote is being viewed, and has been positioned for, through the lens that this election is a measure of public-sentiment towards the European Union as a political structure. Voting is in the process of wrapping-up currently, but from the available early indicators, the outcome of the poll looks to be in favour of pro-European parties. It must be said, there seems to be a sustained growth in Euro-sceptic parties. However, for the time being, such anti-establishment forces remain in the minority, and look broadly contained.

Euro-sceptic parties grow, but stay in minority: Whether that proves to be a good thing or not is a value judgement. Of even greater import: whether, in the long-term, the continuation of the status quo is desirable is a more profound issue. In the here and now though, fewer uncertainties within the European political system will inevitably be welcomed by investment markets. This is especially so given Europe’s precarious economic position. European growth is anaemic, in the truest possible way, with policymakers possessing very few options in terms of monetary and fiscal policy. Europe’s problems won’t disappear with this election result, but at least it keeps one risk at bay for now.

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Leadership tussle begins in the UK: Across the English Channel, and the UK is facing its own political challenges. UK Prime Minister Theresa May has tended her resignation, and the jostling now begins for the Conservative Party leadership. In what will probably be another little test of liberal internationalism, market participants are watching the Tory leadership contest closely, in order to judge every candidates credentials and positions on Brexit. It’s very early days, however Boris Johnson is emerging as the favourite to achieve his long-held ambition to wrest the party’s leadership. And markets aren’t taking kindly too that, given the man’s “hard-Brexit” sympathies, and general populist-streak.

Trump in Japan: For the next 24 hours, the interest of market participants will turn to US President Trump’s visit to Japan, as he chats trade and regional security. Japanese Prime Minister Abe and his team are apparently on the charm-offensive with Trump – treating him to games of golf, and all the other spoils of high-diplomacy. At-the-moment, risk-appetite is dwindling in financial markets, as the trade-war escalates and the White House hurls threats to its trading partners about imposing higher trade barriers. Market action will be in some-way determined by what commentary comes from Trump after this little summit, and whether he cools his anti-trade rhetoric.

The lead-in for Australian markets: Despite the heightened nervousness brought about geopolitics, price action was relatively limited, and market activity was quite low, on Friday. The S&P500 edged modestly higher, while US bond yields lifted slightly. SPI Futures are indicating a follow through of this sentiment, pointing to a narrow, two-point drop in the ASX200 this morning. The AUD is back into the 0.6900 handle too, courtesy of a weaker greenback, after US Cored Durable Goods orders data disappointed on Friday – and comes despite a major drop in Australian bond yields, which saw the 10 Year note’s yield fall to par with the current cash rate of 1.50 per cent.

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Written by Kyle Rodda - IG Australia

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Regarding UK European vote, new prime minister and Halloween.  Brexit party is a reworking of UKIP which took 25% of the vote back in 2014 and less than 2% 2019, but without the obvious racist bias. Tory vote disintegrated  due to inability to get a deal, which still looks nigh on impossible as cooperation and compromise are profanity and anathema to the 2 principle parties. Brexit party wants a hard Brexit (WTO rules) and has no creditable plan for the future barring bland paper promises and rhetoric.  Tory party see the success of Brexit party and want some of that populist vote so will vere toward the cliff that is hard Brexit. So it will come down to a binary choice come Halloween: Brexit without a deal (10% tariffs and all) or Revoke article 50. The May deal negotiated  with the EU being dead as a Dodo. There is still time for an election and a referendum (the results of which will be disputed by whomever loses). In short; more chaos, division and uncertainty.

Then we look at the shy and reticent President Trump and witness  his weakness for tariffs again. Not content with 25% on China he is now threatening Mexico with escalating tariffs which will please all of those vehicle manufacturers no end, having just completed the new NAFTA, well more NATA without the "free".  His penchant for tariffs knows no bounds. Blaming immigration or foreigners for ones ills is classic psychology. He wants America to go back to the 50's of his youth it would seem, even if  most the youth of the 21st century have no interest in going back to a time they never knew.  Old man thinking. 

Combine that with some old fashioned Gun Ship diplomacy in the strait of Hormuz and we have the potential for genuine uncertainty/war in the middle east again. The markets will love that.

What is the correct strategy?  Considering the fundamentals of the global economy are in pretty good shape were it not for inconveniences such as trade wars, unnecessary tariffs  and potential oil wars in the gulf and the world's most powerful leaders being  complete narcissists. Strategy#1: buy low, sell high. How low will the Dow go? That depends on how determined administrations are to appear completely **** minded, atm they are very determined...

 

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