European Politics and Economics Create Volatile Times Ahead

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European Politics and Economics Create Volatile Times Ahead

By Andrew Hecht / TFNN.com

 

Markets across all asset classes are a reflection of a myriad of factors. Supply and demand fundamentals tend to determine the path of least resistance for asset prices on a microeconomic basis. There are times when weather, natural disasters and other events that transcend human control can impact the prices of stocks, bonds, currencies, and commodities. When it comes to macroeconomics, politics, and economics can drive market values, and the biggest moves tend to occur during periods of significant change. 2016 was a watershed year for political and economic change in Europe and the United States, and the effects of events are still rumbling through markets like a tsunami. If 2016 taught market participants anything, it was that expecting the unexpected could yield the best investment results and that volatility in markets has become the norm, rather than the exception.

Brexit and the U.S. election set the stage

The first shoe to drop in 2016 came on June 28 as the citizens of the United Kingdom went to the voting booths to decide whether or not to remain within the European Union. The polls and market pundits admitted that the election would be close, but in the end, the U.K. would remain part of the Union. The results came as a shock to markets in Europe and all over the globe as Brexit from the E.U. became a reality. The Prime Minister resigned, and market volatility increased dramatically.

British Pound / U.S. Dollar (^BGPUSD)

Source: Barchart

As the chart of the British Pound-U.S. dollar relationship highlights, the pound sterling declined from over $1.50 to around the $1.323 level in the wake of the vote and has since continued it descent and is currently trading around $1.23 against the dollar.

Euro Fx / U.S. Dollar (^EURUSD)

Source: Barchart

As Brexit weakened both the U.K. and the E.U. politically and economically, the euro currency fell from over $1.14 to under $1.10 in the wake of the U.K. referendum. The euro currency continued its decline and is currently trading at around $1.07 against the dollar.

The second shocking political and economic event came on November 8 in the United States as voters rejected the status quo and gave an outsider candidate enough electoral votes to capture the Presidency. Pollsters and pundits had predicted an easy victory for the candidate from the Democratic Party but, as with Brexit, they turned out to be dead wrong. President Donald Trump ran on a populist platform that included promises to curb illegal immigration and increase domestic security, improve health care, negotiate beneficial trade deals, decrease regulations, rebuild infrastructure, among many other issues in his nationalistic agenda. While many pundits and prognosticators predicted that a victory by the Republican candidate would result in carnage in markets across all asset classes, precisely the opposite occurred.

S&P 500 E-Mini Mar '17 (ESH17)
Source: Barchart

As the chart above of the E-Mini futures contract illustrates, the equity index rose to all-time highs after Election Day in the United States, along with other equity indices, and has continued to make new highs since most recently trading close to its peak level.

Brexit and the U.S. election of 2016 set the stage for dramatic political and economic change, and in the coming weeks and months, citizens in three nations in Europe will face decisions that could shake the status quo to the core.

Three elections could change the face of Europe

Over coming weeks and months, the Netherlands, France, and Germany will go to the polls to elect leaders. In each election, nationalistic anti-globalist candidates are standing for the highest office in each nation. These three countries represent the perhaps the strongest economies within the European Union, and in many ways, the elections will be a referendum for the future of European harmony. Europe continues to face serious economic and political problems. The immigration stance of the E.U. likely led the U.K. to Brexit. Terrorist attacks in France, Belgium, and Germany weigh on the minds of many voters in the three upcoming elections as does economic conditions that have been weak following the global financial and sovereign debt crisis of 2008 and beyond. A rejection of the status quo by one or more of these countries will change the political structure and economy in Europe and will likely threaten the future of the euro currency. A continuation of the political trend that began in 2016 could cause the dollar to continue its ascent against the euro as the U.S. dollar has fundamental support from interest rate differentials.

Strong dollar- Higher U.S. interest rates and uncertainty creates opportunity

The dollar is already very high, in January it traded at the highest level since 2002. The Fed hiked interest rates on Wednesday, March 15 in a sign that economic growth in the U.S. is buoyant and the threat of inflation is on the rise. Elections in Europe are on the horizon. A new administration in Washington DC is seeking to renegotiate all trade agreements on a bilateral basis. A trend of rejection of the status quo around the world has become the norm rather than the exception. All these factors add up to an undercurrent of uncertainty about the future, and that means that markets, across all asset classes, will likely be volatile in the weeks and months ahead.

NADEX products could be the perfect solution for volatile markets

Nadex, the North American Derivatives Exchange, offers binary options and spreads on many different asset classes including foreign currencies, equities, and commodities. These products are ideal for those trading in volatile markets who wish to limit risk. 

Binary options are a yes-no proposition where your risk and profit are known in advance of the trade. The settlement payout is always either $100 or $0 per contract; it is all or none at expiration, but one can close out positions before expiration if they so choose.

The Nadex spreads slightly differ, offering trading exposure with various price ranges of the underlying that have a variable settlement at $1 risk per tick. Both products have risk, which is always limited to the initial cost. As these markets tend to move fast, another benefit is that very short durations available.

Volatility is a trader’s paradise, and at the same time, it can be an investor’s nightmare. When it comes to approaching markets in the current changing political and economic environment, it is of paramount importance to protect capital and limit risk. Nadex products are tools that could enhance and diversify your portfolio as you navigate through period of treacherous volatility.

 

Nadex Risk Disclaimer

  • Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for information and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Any trading decisions that you make are solely your responsibility. Past performance is not indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.
  • Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC. 
Lt Crude 46.44
Nat Gas 2.908
Corn 394 4/8
Cotton #2 68.29
Gold 1253.3
Copper 2.7400
Euro 1.16670
USD Index 93.895
SP500 E-mini 2468.25
DJIA E-mini 21497
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