Markets react to European elections

Forex
Indices
Morning Note

European equity markets are on the front foot again, building on yesterday’s gains, as investors breathe a collective sigh of relief following the European parliamentary elections.

European bourses have firmed as it looked like the political centre ground is holding in the EU despite pressure from right and left, whilst we have some upbeat spin on trade to contend with as we hear about a possible US-Japan trade deal. London and Wall Street will be playing catch up today. Futures in the US point to gains today. 

Euro elections: the centre holds, barely

European elections returned gains for a number of right-wing, Eurosceptic parties as expected, but not enough to really shake the ground from under the centrists. The main blocs have held on to remain just about in control, although for the first time they have lost their combined majority.  

The gains for the right continue to point to a problem for Brussels. But there were also big gains for the Greens. The political landscape is shifting, but it wasn’t a Brexit-like earthquake.

The strength of the League in Italy and National Rally in France is noteworthy and will exert domestic pressure more than at a European level. Expect further confrontation between Rome and Brussels. Indeed, on that note, Italian bond yields spiked, with the 10yr BTP above 2.7% again, amid reports the EU is mulling a $4bn fine for Italy for failure to control debt. For France it simply highlights that Macron’s reformist agenda is under a lot of pressure.

The euro though has been pretty well unmoved although London and New York were shut yesterday and we might see traders coming back in today. EURUSD was steady at 1.1180.

Brexit looms over pound

Ain’t no party like a Brexit Party: In the UK the centre has given way completely, and the pressure on the pound remains firm. The Brexit Party won the day, although the overtly Remain parties did very well with the LibDems and Greens enjoying a strong bump in support. European elections are entirely meaningless of course in terms of the Westminster arithmetic, but the impact on the ruling Tory party is key. 

For markets, we should expect the result to impact the leadership race and already a number of leading candidates have upped the no-deal rhetoric. One can only argue that this will, on the margins at least, push candidates more towards the fringes and see the party go more to the right. Given the Tory membership’s pro-Brexit feelings there is an ever-increasing risk of a no-deal exit at this stage. A lot is priced in but a no-deal would see further downside for the pound.

GBPUSD has found support again around 1.2670 and while there is still a lot of pressure, Thursday’s reversal on the 78% Fib retracement on 1.2610 looks to have placed something of a floor under the pound for the time being.  

Bitcoin 

Cryptos have rallied hard again on strong volumes, taking another leg higher over the weekend. Bitcoin is testing the $9k round number resistance, before a tilt at the 38% retracement around $9640 and then the April 2018 high on $10k. Once this market builds up a head of steam, it’s hard to stop. As previously argued, this is a big momentum play and the more buzz the more traders will pile in behind the rising wave. Standing in front of a steamroller springs to mind, if you are a natural bear. Better to wait and let it fizzle out, which it will eventually. The more it rallies, the bigger the blow-up when it comes. However, we should expect some pullbacks and retracements along the way, so watch for those whenever the rally looks overextended – 14-day RSI approaching 90 has been a pretty good indicator in the past.