Political events and stock market

Posted: January 16, 2017 in Uncategorized

2016 may have tricked you in thinking there is a low correlation between political events and the stock market.

Two main unforeseen events happened and the market did not crash.

It is important that one understands which effect does have the political event on the market.

Brexit was a surprise, but the market realized that the effect will be felt at the earliest in 2017 (tomorrow there is the Theresa May speech on leaving the EU), but most likely until 2019/2020 nothing will happen. So calm was re -established.

Trump victory was a surprise, but the markets loved the idea that the Congress is “all Republican” and so the gridlock that, to be fair, hampered Obama so much disappeared.

On top of this event, the low level of inflation allowed the Central Banks to intervene at will in the market without any collateral issue.

In this light let’s examine 2017.

President Trump will have to walk the walk, after having talked the talk. As doing is much more difficult than talking at least we need to pay more attention.

Netherland election should be too small to rattle the market.

German election will probably see the fall of Merkel, but the Alternative for Germany will have difficulties to form an alliance – so even this event will not rattle excessively the market.

The French election, in case of a Le Pen victory, have a great potential to rattle the market as Le Pen wants a Frexit referendum that could really spell the end of the Euro as the end of the Euro would have a definite impact on capital markets and companies.

A potential Italian election again would be disruptive as Italy is weak and too big to let fail and the Italian banking system is too integrated with Europe.

A Greek potential election would rattle the market, but is too little and too “considered already out” to create a crisis – there are many fail-safe switches that isolate Greece from Europe

So it is not that political event do not influence the markets, it is more about understanding the consequences of an event.

Specially in 2017 this will be very important.

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