In the last year, there have only been two real bouts of risk asset volatility. Both were related to politics, the UK Brexit vote last June and our presidential election in November. Both saw results that seemed unlikely just a few weeks before the votes were cast.
Try as they might, the financial media never really got investors spooked by this weekend’s election in France. Macron had a sizeable lead in the polls, and the likely, and safe outcome occurred. Obviously the polling was a large part of the confidence, but there’s probably also some sort of comfort level on the third go around, with investors accustomed to the downdrafts being bought. The narrative with Europe has already shifted to Germany’s upcoming elections in September, but it seems that barring some sort of shock, that the Germans will vote in favor of Merkel’s agenda and remain in the EU.
Shocks come in all forms. Of course our election saw hacking and released communications of one of the major parties by international (and likely Russian state sponsored hackers), France’s election was upended, first by scandal, and nearly had a similar hacking surprise. These stories are tough to predict.
And of course all of these elections, particularly in Europe, terrorism has been a political shock, as it provides an opening for the more nationalist (and therefore more closed border) campaigns. Predicting terrorism risk is a fairly nasty business and better left for intelligence agencies than market pundits. But two of the largest terror attacks of the last decade occurred on French soil, Paris in November 2015 and Nice in July of 2016. Those attacks provided the opening for Le Pen to make a run, with immigration, refugees and borders becoming a white-hot topic in front of impending elections that might determine the EU’s fate. (never mind that the attackers were born in Belgium and France). Britain’s Brexit took on a similar tone about their border policy being decided in Brussels (and Germany) and certainly a large part of Trump’s appeal was his focus on border walls, travel bans and “law and order.”
9/11 coincided with a protracted bear market here in the U.S. but it also came on the heels of the dotcom crash. Since then, our markets have been very resilient to terror attacks, from Bali, London and Madrid in the immediate aftermath of 9/11 to the most recent spate in Brussels, Germany, France and Turkey (not to mention the atrocities in Syria and what seems like regular suicide attacks on civilians in Afghanistan and Iraq). But none of them directly affected an issue as big as the stability of the EU.
It’s worth noting that two very high profile sporting events will take place in 2018, in two geopolitical hot-spots. First, in February of 2018, the Winter Olympics will be held in South Korea and then in June the FIFA World Cup Soccer tournament in Russia. I know this is a long ways away, but it’s worth considering how North Korea could use the Olympics south of the DMZ to grab some headlines and gain some sort of leverage in how far they are willing to push relations with friends and foes alike. And Putin has this little habit of invading former Soviet bloc states around sporting events. Back in 2008 during the summer Olympics in Beijing, he invaded Georgia. And when Russia hosted the winter Olympics in 2014, he annexed Crimea.