All Posts Tagged: European Union
This weekly report presents insights from our Global Investment Management team.
European politics over the weekend seized the financial markets’ spotlight, as voters took to the polls to elect representatives to the European Parliament, one of the governing legislative bodies for the European Union.
Domestically, mounting concerns over the U.S.-China trade war and uncertainty about economic growth weighed on markets.
Bond yields are reacting to the increasing anxiety, as the 10-year Treasury yield sharply declined over the past week before reaching 2.26% today, the lowest since September 2017. The S&P 500 is down 2.7% during the same period, while European markets bounced higher on Monday after election results.
There were a few new and sizeable factors going into the elections this year, primarily unease from a growing nationalist movement and an associated swell of euroskepticism – the idea that the EU should be disbanded. Secondly, the U.K. was almost excluded from the polling, but was mandated to participate under the terms of the Brexit deadline extension.
Those votes aren’t trivial. The U.K. is tied with Italy for the third-most allocated seats within the European Parliament behind Germany and France. In the end, the two largest political parties lost the most ground as smaller groups made gains. The Socialists and Democrats and the European People’s Party made up more than half of parliament after the 2014 elections, but are now just over 40%. More progressive parties like the Greens and Liberals gained ground. We view these outcomes as mostly market-friendly, but policymaking may turn out to be more difficult from increased political fragmentation and slowing growth may become even more challenging.
The European commotion doesn’t stop there. On Friday, U.K. Prime Minister Theresa May announced she would resign her position effective June 7, citing her own inability to conclude the Brexit process. Former Foreign Secretary Boris Johnson may be the most likely candidate to replace May, but he adds instability to the equation due to his willingness for a no-deal exit and, most recently, has been ordered to testify in court for allegedly lying to sway voter opinion during the Brexit campaign.
There is also the question of Germany’s future leadership. After 18 years of leading her political party, German Chancellor Angela Merkel had announced she would not seek reelection last year. However, her chosen successor seems to have taken one too many political stumbles and Merkel has rescinded her endorsement, which may mean she will need to stay on for the time being.
Our team believes the somewhat foolhardy global growth bump that some economists forecasted from Europe may continue to be more of a wish than a reality. A mix of disappointing U.S. economic data and uncertainty within the Fed has only added to the dark cloud looming over investors as growth forecasts continue to be cut.
A prolonged trade war with China seems to be in the cards, but a recent statement from U.S. President Donald Trump could mean that his sights are now set on the trade deficit with Japan, a potential new front in the trade war. We continue to see risks to the downside in financial markets and the economy. While we aren’t ringing the recession alarm bells right now, indicators like yield curve inversion are pointing to anemically slow growth, or something more ominous ahead.
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