If Parliament cannot find a consensus on Brexit, then this raises the risk of a General Election with the possibility of a victory for the Labour Party, which would not be perceived as a market friendly outcome. We are already starting to see some symptoms of this with the sell-0ff in National Grid shares this morning.
“National Grid is among the most fragile stocks, with investors pulling out because of fears that the company – alongside other utilities – could end up being renationalized if there is a shift in the UK political landscape that results with Jeremy Corbyn in Downing Street,” says Fiona Cincotta, an analyst with City Index.
With such political fears, you would expect the currency to weaken and UK assets to price in this risk. Oddly they are not. As we are in a period of political chaos and uncertainty the risk to the downside is clear and only when the new leader of the Conservative party is named will that begin to be priced in.
Meanwhile, the EU election looks more dramatic than it is: the narrative was supposed to be a Nationalist surge but, with the exception of Italy, this has not happened. There will be a battle for the top jobs but expect them to go to solidly pro-European officials who can create a working consensus. The most important position for the markets is the new head of the ECB. The appointment of the president of the Bundesbank, Jens Weidmann, would create uncertainty and fear, in particular for Italian debt spreads and the banking industry.
After the dust has settled on the European election, we could see a return to other pressing issues.
“There is a major industrial/manufacturing slowdown that is persistent and broad.,” says Michael Browne, portfolio manager for European long/short strategies at fund manager Martin Currie. “Many think this is caused by the USA/China trade wars but as it started in the second half of 2018, it pre-dates this. If this spreads to the service sectors, then a greater slowdown than we are already seeing will emerge. This will put real pressure on the politicians in the high-debt nations of Europe to try to offset it via fiscal means, that the EU may oppose.”
It will put pressure on the ECB to renew Q/E, Browne reckons, which would be opposed by Germany. The risk of a significant recession (2008/9) is not great and we may already be in a mild one. However, the risk of policy mistakes making it deeper via monetary, fiscal or banking is real.
“So for now we remain very cautious: in fact, the risk (and thus for us the opportunity) is to the downside,” Martin Currie’s Browne observes. “So, if markets pull back substantially, there will be an opportunity to buy. Then we will have a view of a new cycle emerging. June is historically the worst month of the year for European equities and all the evidence is it will live up to expectations.”