Why European Elections Are Worrying Markets
The days between 23 and 26 May could prove to be historic for the European Union. For the first time in 40 years, the dominance of mainstream political parties in the European Union is expected to end and give rise to anti-establishment parties. Markets are worried as the timing could not be worse with US president Donald Trump leading a worldwide trade war.
In this article, we explain what the European elections are, why they matter to markets and the key issues facing traders and investors. Let's get started!
What are the European elections?
Since 1979, the European elections have served as the chance for citizens from all countries in the European Union to vote who they would like to represent them in the European parliament. Members of the European Parliament (MEP), are made up of lawmakers from established political parties in each member state. However, in the EU parliament, MEPs form alliances and cross-border political factions in accordance with their political stance.
Currently, there are 10 of these political groups. These groups carry a lot of weight as they have a say on who is head of the European Commission which is the EU's executive arm and is in charge of proposing laws. However, in this year's vote, many academics believe the next European Parliament will not have a clear majority, making it more difficult to implement European laws.
What has markets worried is a report from the European Council on Foreign Affairs which shows that anti-European parties are on course to win a third of the seats which would "frustrate activity, undermine the security and defence of Europe, and ultimately sow discord that could destroy the EU over time."
Why are markets concerned?
Historically, the two main political parties, the conservative EPP and the socialist party S&D, both had enough seats to approve any agreed upon legislation. Due to the rise of anti-establishment parties and the fact, there will be fewer MEPs due to the UK's intention to leave the EU, the main parties will have to form agreements with other parties.
Big names such as Matteo Salvini, the Italian deputy prime minister and head of the Lega party, has been travelling across the EU to gather support from other like-minded parties, in an attempt to form a nationalist movement at the European Parliament. France's Marine Le Pen, the leader of the far-right party The National Rally, is hoping to use the recent uproar in France to drum up more votes at the EU elections - although she is not running herself.
What really has markets worried, is who will get the top jobs such as the new European Parliament president, the European Commission president and the new head of the European Council. These appointments are more likely to influence the appointment of the new European Central Bank president, as Mario Draghi leaves his tenure in October.
European leaders are due to make a final decision on roles on 21 June.
Trading the European elections
One of the outcomes of the European elections will be investor sentiment. If the new EU roles have supportive pro-EU candidates that could help boost European markets. However, if the new roles have anti-EU candidates that may cause investors to bail on some European markets.
It is therefore quite interesting that one of the main European markets, the DAX 30 stock market index is trading at historical resistance levels where the battle between buyers and sellers will most likely create higher volatility.
Source: Admiral Markets MT5 Supreme Edition, DAX30, Monthly - Data range: from June 1, 2005, to May 20, 2019, accessed on May 20, 2019, at 12:22 pm BST. - Please note: Past performance is not a reliable indicator of future results.
In the above monthly chart of the DAX 30 Index CFD, price is trading at two historical resistance areas. The first one is the descending resistance line created from the previous highs in the recent move lower. The second is the horizontal resistance line where price has frequently turned from before. As buyers have been the most dominant force in the market in recent months, these levels will be a strong test on just how 'bullish' they are.
If buyers can break through these areas there is a real possibility of a run higher towards the highs of late 2017. However, a failure of buyers to push the market higher may cause more participants to exit the market and encourage short sellers to push the market lower. The trade will depend on your trading style:
- Long term traders may wait for prices to fall lower to initiate buy positions at a cheaper price
- Short term traders may trade the possible fall lower using the lower timeframes
You can learn more with the Trading CFDs on DAX30: A Beginner's Guide. To practice your trading ideas and strategies open your FREE demo trading account by clicking the banner below:
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