The EU elections held last weekend throughout the EU provided us with some important lessons that could prove to be pivotal in the unfolding drama in the land where Eurocrats, traditionalists, Eurosceptics, nationalists, and populists are embracing the certainty of destructive creation.

Here are in a nutshell some important outcomes and lessons along with latest developments in the markets:

• The traditional center (right and left) lost some ground but together those traditionalists kept the grand majority of the EU’s parliament seats.
• The fear that Eurosceptics, populists and nationalists would gain a lot more seats was not materialized. All of them together gained more seats but they control less than 23% of EU parliament’s seats.
• Liberal and pro-EU parties (in the classical sense and in terms of economics and also in social terms) scored some significant gains and can uplift the hopes of the traditionalists. Their goal is to be the kingmakers.
• The higher turnout than in previous EU elections possibly demonstrates that the threat of seismic challenges to the EU, motivates voters to express their support for the EU idea.
• Three themes seem to emerge as demands from the electorate: Growth, security, and environment. EU-wide stagnation along with lack of opportunities for upward mobility becomes the epicenter of concern of the voters who see the Eurocrats being unconcerned about their well-being and rather exhaust their energies and resources in matters that do not affect their lives directly. The structural rigidities of the EU (including monetary ones) are an impediment to jobs, higher incomes, and growth, and the voters consequently are seeking scapegoats. Security and immigration issues have been elevated due to genuine issues as well as due to the fact that in several countries EU populists use the issue as a scapegoat in order to gain power. The fact that the Green parties gained significant support, demonstrates the reality that EU citizens are becoming more sensitive to man-made environmental degradation which could have important negative consequences for society’s well-being and growth in the medium term.
• Reports emerged on Tuesday that the infighting between Macron and Merkel – for the top four positions in the EU (president of the EU Commission/Executive branch, president of the EU Council, president of the ECB, and Foreign Affairs Commissioner) – is heating up which betrays one more time that the dysfunctionalities of the EU are endemic and undermine its potential.
• Brexit remains an issue that deeply divides the UK, and the traditional place of the two main parties (Tory and Labour) is threatened. The governing Tory party is taking a hard-line position of a no-deal Brexit but desires no new election given that several of its MPs will lose their seats and possibly even the majority in the House of Commons. At the same time the Speaker of the House opposes a no-deal Brexit, hence the possibility for a second referendum. On the other hand, Labour seeks a second referendum, leaning towards a Remain position and hoping that they can strike a governing majority with the Liberal party in the future. Most probable outcome at this point is that the internal dynamics of the two parties will lead to a second referendum on Brexit with the question being asked if the people desire a no-deal Brexit vs. Remain in the EU. If that is the case, then it is premature where things could go, but we wouldn’t be surprised if the Remain vote prevails.
• Following the EU election results, the EU markets had a good day on Monday. However, things turned on Tuesday and especially yesterday (Wednesday) when the trade tensions with China intensified. Chinese official sources openly threatened the US with harsh retaliation and with language that has rarely been used. Moreover, they implied that they will impose trade restrictions on rare earth elements – used extensively for the production of smart phones, electric vehicles as well as in defense systems to name a few of critical sectors – which in turn will have significant consequences for companies that rely on those materials.

In closing we should state that while we are not that concerned at this stage about the breaking of some support levels in the markets as well as the fact that the ten-year Treasury yield keeps dropping, we are becoming alerted to the possibility that fear in combination of boneheaded policies from the EU to China and the US can reverse gains and create significant turmoil.

As we have been recommending in the last month: Happy hedging!