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Why May Elections in Europe Could Trigger a Global Equities Correction


Increased volatility could have an impact on US equities.

Like many investors, I have been trying to identify developing themes and key trades for 2014. And, after a very bullish 2013, I have been trying to find the right time to keep the party going. I have been vocal about some of my ideas via my Twitter account, but I wanted to take the time to review some of my deepest convictions for the next six to nine months.

My biggest worry for 2014, by far, is linked to the upcoming European elections in May and the rise of all populist, far-right and far-left parties around Europe: The Italian 5-star, the French Front National, Greece's Syriza and Golden Dawn, and the extremes in the Netherlands and Austria. If the recent Swiss referendum on limited immigration is a preview of things to come, the extremes are going to triple or quadruple their presence in the European Parliament from 27 seats in 2009 to 90-110 seats in 2014 (out of 751 total seats). And these numbers could be closer to 200 by including existing populist officials in "majority" parties and the ECR group. This makes watching the European elections a must for investors. In short, this could represent a major shift in EU politics going forward.

While this potential group of 120 to 200 extremists is fragmented and unlikely to unite between far left and far right, it would nonetheless create ripples in May that could spike the Volatility S&P 500 Index (INDEXCBOE:VIX) and rock global equities. Here's a closer look:
  • These newly appointed officials will most likely be anti-EU, anti-euro, anti-solutions, and will believe in noise and fear and show of power. They could rock the EU (until, of course, they get perks, bodyguards, cars, apartments, salaries, and benefits and start liking the EU -- because power and greed affect all equally!).
  • Along those lines, the Greek Syriza party (radical left) should win the municipal and EU elections, and it will demand a debt renegotiation that will revive "Grexit" fears for a while and cause a spike in EU fear.
If this scenario unfolds immediately following the European elections, expect turmoil and outlandish calls on EU policy, on exits, bailouts, EU bonds, and EU devaluation. Coupling this with May seasonality, I'll likely find myself buying VIX calls and EUR/USD puts in mid-April dated for June/July! I'm looking for a rocky May for global equities. Fine, but what else?

Here's where my natural optimism starts kicking in: The rise in anti-EU extremists is likely to see the birth (in June?) of a huge EU Parliament coalition -- a parliament of crisis, linking most socialists, democrat-socialists, centrists, conservatives, and greens into a vast majority of 400 members or more. This parliament would finally craft a future vision for a more stable and stronger European Union.

Let's imagine, and hope, that they will finally adopt a grand, smart EU energy policy (EU energy bonds?); the birth of a united fiscal blueprint will lead to a deeper integration of all EU members.

In terms of trading, I guess my road map is akin to the S&P 500 (INDEXSP:.INX) touching 1900 before May, only to revisit 1700 by late May (is it time for that taunting and evasive, yet uber-expected 10% correction?). This shakeout across Europe (and throughout global equities) would then open up a road of stronger EU opportunities, possibly leading global equities higher yet.

To summarize, bullish for now, bearish in May-June for European elections, and then bullish again afterward.

Sounds like markets as usual to me! Trade safely!

Twitter: @Alex_Salomon

This article was originally published on See It Market.
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