The Impact of Politics on Global Financial Markets

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As fundamentals deteriorate, markets become more vulnerable to political risks, which have a greater capacity to cause market-wide volatility. Those who support free trade and integrated capital markets are under attack on a global scale by nationalist and populist movements, and uncertainty-driven volatility is a common result. 

Political risk is dangerous and elusive because investors have limited ability to price it in. Traders may become hot under the collar as the global political landscape continues to evolve in an unpredictable manner. 

Markets are less concerned with political classifications and more concerned with the economic policies enshrined in the agenda of whoever holds the reins of the sovereign.

Economic growth policies typically act as a magnet for investors looking to park capital where it will yield the highest return. 

These include the implementation of fiscal stimulus plans, the strengthening of property rights, the free flow of goods and capital, and the elimination of growth-stifling regulations. If these policies generate enough inflationary pressure, the central bank may respond by raising interest rates. This raises the underlying return on local assets, attracting investors and strengthening the currency. 

At the same time, a government with underlying ideological biases that run counter to the globalisation gradient may cause capital flight. Regimes that seek to unravel the threads that have woven economic and political integration usually create a chasm of uncertainty that investors are unwilling to cross.

The subjects of ultranationalism, protectionism, and populism have all been displayed to have market-disturbing impacts.

Dealers will survey what is happening on the off chance that a state goes through philosophical realignment to check whether it fundamentally adjusts their gamble reward set up. If so, they might redistribute their capital and once again figure out their exchanging systems request to move the gamble reward balance in support of themselves. In any case, as reformulated exchanging methodologies are reflected in the market-wide reallocation of capital across different resources, instability is stirred up.

Lets talk about europe, and the growing eurosceptic populism in italy

The 2018 election in Italy roiled regional markets and eventually reverberated throughout the entire financial system. The rise of the anti-establishment right-wing Lega Nord and the ideologically ambiguous 5 Star Movement was built on a populist campaign with a built-in rejection of the status quo. The uncertainty that accompanied this new regime was quickly priced in, resulting in significant volatility. 

The risk premium for holding Italy’s assets increased, resulting in a more-than-100 percent increase in Italian 10-year bond yields. This demonstrated that investors demanded a higher return in exchange for tolerating what they perceived to be a higher level of risk.

This was reflected in the dramatic widening of the spread on credit default swaps on Italian sovereign debt, as investors became increasingly concerned that Italy would be the epicentre of another EU debt crisis. 

Following this, the US Dollar, Japanese Yen, and Swiss Franc all gained against the Euro as investors redirected their capital to low-risk assets. The Euro’s woes were exacerbated by a disagreement between Rome and Brussels over the former’s fiscal ambitions. The government’s fiscal exceptionalism was a feature of their anti-establishment nature, which created more uncertainty and resulted in a weaker Euro.

While in brazil nationalist-populism is on prowl

While President Jair Bolsonaro is widely regarded as a ferocious nationalist with populist underpinnings, investors welcomed his election with open arms. His appointment of Paulo Guedes, a University of Chicago-trained economist who favours privatisation and regulatory reform, boosted sentiment and investor confidence in Brazilian assets. 

From June 2018 to the Covid-19 global market rout in early 2020, the benchmark Ibovespa equity index rose more than 58 percent, compared to a little more than 17 percent for the S&P 500. During the October election, the Brazilian index rose more than 12% in a single month as polls revealed that Bolsonaro would defeat his left-wing opponent Fernando Haddad.

Since Bolsonaro’s election, the ups and downs in Brazilian markets have mirrored the level of progress on his market-altering pension reforms. Investors predicted that these structural changes would be strong enough to pull Brazil’s economy away from the brink of a recession and toward a strong growth trajectory free of unsustainable government spending.

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