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StockBeat: A Pre-Election Bounce or an Apathetic Shrug?

By Geoffrey Smith -- As the world’s largest election in India ends, its second-largest one – to the European parliament - is just getting started. The first has had an enormous impact on local stock markets, but the second has hardly registered.

India’s Nifty 50 has rallied nearly 6% since mid-May, when the scale of Prime Minister Narendra Modi’s election victory became clear. Preliminary results point to an overall majority for his BJP party, creating a measure of political clarity that investors in Europe can only dream of.

By contrast, the Euro Stoxx 600 has largely ignored the EU elections, except in as much as they provide an insight into the strength and probability of a few individual tail risks to the region’s economy, such as Brexit and Italy’s budget dispute with the EU.

It’s up 0.7% this morning, recouping some of Thursday’s losses, while the U.K. FTSE 100 is up 0.7%% ahead of a three-day weekend, Germany’s Dax is up 0.9% and Italy’s FTSE MIB is leading the way with a 1.3% gain.

The Stoxx 600 has been much more at the mercy of the U.S.-China trade dispute, mainly because the EU lacks a common fiscal policy to react to such threats, and its central bank is perilously low on ammunition, having cut interest rates deep into negative territory. Minutes from the ECB’s last policy meeting, released Thursday, suggested its governing council is still deadlocked as to whether or not to relax policy further in the light of growing headwinds from the trade war.

In fairness, it is already reasonably clear that the parliament that will emerge from this weekend’s elections will be dominated by the same mainstream forces that have held control since direct elections began in the 1970s, albeit that mainstream is now divided into three blocs rather than two.

What is less clear is how much ground they will lose to parties that pose a real threat to conventional politics, and what conclusions can and should be drawn. Exit polls from the Netherlands, which voted on Thursday along with the soon-to-depart U.K., gave a surprising victory to the center-left Labor Party, while the combined populist forces of Thierry Baudet and Geert Wilders failed to add to the four seats won last time around by Wilders’ PVV.

If that pattern were to be replayed across Europe over the weekend – especially in Italy and France - there could be a considerable relief rally on Monday morning at the sight of populists failing to make further gains. However, it’s more likely that Dutch Labor owed its performance to personal factors: Dutch MEP Frans Timmermans is the center-left’s preferred candidate to take over as European Commission president.

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