- Euro holds steady as pro-European parties maintain majority in European Parliament
- Sterling firmer despite Brexit party’s win at Euro elections as focus turns to Tory leadership race
- Stocks edge up but remain weighed by ongoing trade frictions as Trump pressures Japan
Markets calm as EU populist parties make only limited gains
There were significant gains across the European Union for far right and populist parties, with mainstream parties losing ground. However, while the centre-right and centre-left parties were unable to hold on to their share of the vote, the Greens and liberal parties across the union managed to attract as much of the deserting voters as the populists, meaning that overall, parties that are pro-EU will retain an outright majority in the European Parliament according to the latest projections.
The relief was evident in financial markets with the euro advancing above the $1.12 level before easing slightly, while futures for European equity indices were pointing to a positive open. The modest positive sentiment will likely carry through to the rest of the day, which is expected to be extremely quiet due to the absence of any major data releases and a bank holiday in the UK and the US.
Looking further ahead, there could be much bigger political repercussions from the weekend’s election outcome. Greece’s prime minister, Alexis Tsipras, called a snap election after his party lost heavily to the opposition, while in Italy, deputy prime minister, Matteo Salvini’s League party surged ahead of his coalition partners. Far right parties also had a strong showing in France, Germany and Sweden, potentially signalling a difficult road ahead for the mainstream parties and for European unity.
Conservatives and Labour wiped out by Brexit party
As expected, it was a disastrous night for the Conservatives and Labour, with Nigel Farage’s six-week old Brexit party grabbing almost a third of the vote with just two regions left to count. The results could only be interpreted as voters punishing the government and the opposition party for failing to break the Brexit deadlock and taking the UK out of the EU.
But with the outcome already correctly predicted by the polls, there was little panic in the FX sphere and the pound was broadly firmer on Monday. Sterling was last trading near a one-week high at $1.2733 as investors turned their attention to what is appearing to be a crowded leadership race to replace Prime Minister May.
Boris Johnson remains the favourite to win the Conservative vote to take over as party leader, hence, as prime minister, and after the Brexit party’s triumphant performance at the European elections, he is unlikely to back down from his threat of supporting a disorderly Brexit on October 31 if no deal has been agreed by then.
However, remain supporting parties fared equally well at the elections, with the Liberal Democrats and the Greens gaining a combined 32% of the vote, indicating UK voters are as polarized as ever. Investors may also be interpreting this as a sign the UK Parliament would not allow a no-deal Brexit even if a hardline Brexiteer was to win the Tory leadership contest.
Trade concerns continue to undermine market sentiment
Elsewhere in forex markets, the dollar was flat against a basket of currencies, but was higher versus the yen, climbing to 109.53 as the Japanese currency retreated slightly. Shares on Wall Street are expected to open higher, extending Friday’s gains when they were boosted by comments from President Trump that there was “probably a good possibility” of a trade deal with China. But worries of a prolonged and escalating trade war continued to cast a cloud over investors’ mood.
Trump is currently on a state visit to Japan where he is pressing Japanese prime minister, Shinzo Abe, to do more to reduce the country’s massive trade surplus with the US. However, the two leaders have so far put on a united front, easing concerns that the important US-Japan alliance in the region is under strain.
