The Centre can't Hold

Taking a break from the US-China trade war, the nationalist streak in EU elections may have faded but dissatisfaction with the status quo continued, and that could have long and short-term implications for markets. Both equity indices trades in the Premium Insights remain open and the lone cryptocurrency trade remains open and up 49% in the green. CFTC positioning showed a late shift into GBP shorts.

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It's a slow slow start to the week with the UK and US on holiday Monday so it's a chance to digest the EU election results. This is traditionally a forgotten vote in markets but it took on special meaning with euroskepticism, nationalism and anger running high as growth in the region continues to disappoint. Turnout surged to hit 50% for the first time in at least 20 years.

The short-term story is that the grand coalition of the centre-left and centre-right has lost the combined majority for the first time in the past 40 years. A surprise is that it wasn't because of a swing to nationalists but because of surprise strength in green and left-wing parties.

In the short-term, this will leave EU parliament less effective and more fragmented. That's a small negative for the limited growth levers that the EU can pull. Yet, the market will quickly move on.

The long-term is the more interesting development as these results crystalize the trend in the developed world away from the mainstream. What looked like a right-wing shift in parts of the world a few years ago is increasingly looking like voters dabbling with different ideas.

The message is especially stark in the UK where another vote shows support bleeding away from Conservatives and Labour. Nigel Farage won a seat for the Brexit party and his comments afterwards were salient: “There's a huge message here. Massive message here. The Labour and Conservative parties could learn a huge lesson tonight but I don't suppose they actually will,” he said.

He wants the lesson to be about Brexit but it's really about wanting change. Voters might not yet be sure of what they want but they're looking for something or someone to believe in. For more details on Ashraf's take on GBPUSD, please see Friday's piece here.

Another trend is the rise of green parties. If mainstream parties can't deliver progress then some voters are increasingly turning to people who will take dramatic action on the environment. This is a trend that market participants must watch extremely closely. Many environmentals leaders are practical but others are dogmatic and prepared to take dramatic action at any cost, especially if costs are borne by neighbouring states rather than at home. Today Trump is using national security as a justification for tariffs but we can easily envision someone citing the environment for a similar tactic.

It may be no coincidence that Bitcoin is back at a one-year high at $8940. The same dissatisfaction with the status quo is a part of the financial system as well. At the same time , tech, pot and fake meat companies are reaching lofty valuations.

The lesson is that everywhere people are looking for something to believe in. Ultimately, the fundamentals are what determines winners and losers but at the moment the currencies, companies and people who are selling big dreams are winning. There's no sense fighting it.

CFTC Commitments of Traders

EUR -101K vs -95K prior GBP -26K vs -3K prior JPY -55K vs -62K prior CHF -37K vs -40K prior CAD -42K vs -48K prior AUD -66K vs -66K prior NZD -11K vs -11K prior

The sudden jump in GBP sales is a red flag. Specs have been wrong-footed repeatedly and piling into shorts in the pound at this point feels like chasing a horse that left the barn a few weeks ago. May was a thorn in the side of the pound for months but the political risks are suddenly two-sided with many names entering the race for PM and the chance of a Boris win and/or no-deal Brexit meaningfully lower than the bookies and newspapers suggest.

Another interesting one is the Australian dollar. Scott Morrison's surprise win led to some short covering this week but it will take a resolution – or at least an improvement – in US-China talks to lead to a short squeeze.