Capital markets greet the election results with indifference

 The results from the European elections came as little surprise to all concerned, including the capital markets. The pound and the FTSE 100 hardly moved, despite the result pushing the UK closer to the possibility of a hard Brexit or a no deal. At 1.26 to the US dollar the pound remains higher than it did immediately after the Brexit vote. There was little to choose from sector performance, no real bias towards those sectors either exposed to the domestic economy or those exposed to more international markets. What was noteworthy is the FTSE 250, the more domestic biased index, had a better day.

A new day may be dawning for the negotiations with Europe as not only will the UK head to Brussels with a new negotiator, it will be all change in Europe.  Several leading European politicians who have been spearheading negotiations from across the water will be leaving their posts. Jean Claude Junkers term comes to an end at the end of October. Donald Tusk will leave as President. The other post up for grabs in Europe will be that of the Chairman of the ECB as Mario Draghi is due to retire later in the year.

Germany could become far more influential in Europe as German ministers could take two of the upcoming top jobs. Manfred Weber could take over as President of the European Commission and Jens Weidmann chairing the ECB. Germany has tended to be on the more hawkish side when it comes to monetary policy. Europe continues to have its internal battles as Italy looks to be fined 3.5bn euros for failing to reign in its debt by the European Commission.

Equity markets across the globe were mixed on the return from the one-day holiday. The S&P 500 will finish the month, most likely, something around 4% down from its highs. Sell in May and go away apparently working for this month at least.

The bears will now point to the weakness in recent economic data, mainly as a result of the breakdown of trade talks with China. With hindsight, it was surprising how convinced equity investors were that two such egotists would not clash at some point. This weakness has not yet been reflected in earnings forecasts as analysts remain behind the curve. Stock market performance is about earnings, so further weakness in equity prices through the summer months could continue. The flip side is equity sentiment has turned bearish delving deeper into the fear territory. We have also noted fund flows out have equities have been continuing.

The performance of the stock market has dominated president Trump's reign. He will not want to see the index enter a major reverse into his time for re-election. He may be starting to feel under more pressure to find a deal as his term comes to an end.

Posted on May 28, 2019 .