So How Did It Turn Out (updated 4-3-17)
The following events will very likely create a lot of volatility in both the political landscape as well as the global marketplace. Any one of these events would be sufficient to create reverberations, but put together, they should create a high degree of uncertainty. Two of the four of the events below happened.
- The Federal Reserve meets next week on March 14-15 and will raise interest rates
- Dutch Elections will be held on March 15th
- The UK plans to trigger Article 50, which will actually exit the EU
- French Elections are April 23rd
There looks to be an almost 90% certainty that the Federal Reserve will raise interest rates, (they raised them .25 points) which normally means the USD will go up and the stock & bond market will go down. This will cause borrowing in the US to become more expensive and businesses may choose to hold back expanding, mortgage payments will rise and consumers may not want to take on more debt at higher rates. It also makes US debt (US bonds & treasuries) rates rise which increases the debt service payments that the US Treasury has to make on the now $20 trillion it owes the rest of the world, creating even a greater deficit. This is especially true since a vast majority of the $20T is short term debt, a year or less which means it automatically goes up with interest rates like an ARM-mortgage.
On the same dates next week, the citizens of the Netherlands will be voting in their parliamentary elections, the results of which will not only decide which party will be in the majority, but also whether the Netherlands will stay or exit the EU. Gerritt Wilder and the freedom party are currently leading in the polls and the same dire predictions which were made against Donald Trump and the UK exiting the EU are being made against him. Wilder’s party didn’t win the majority, but his party came in second in the amount of seats. In a parliamentary system, if one party does not win an outright majority, it must form a coalition government which means they must work with other parties to achieve the number of seats necessary to form a working majority under one prime minister; if this can’t be achieved in 90 days they have to have new elections. The winning party may or may not achieve this as they have already vowed not to work with Wilder’s party. So what happens next? We’ll have to wait and see for the next 90 days, which continues to create uncertainty in the EU. The EU is scared to death that another country may have a referendum and exit, but this would be the first exit of an EU nation currently using the Euro, which means it would go back to its original currency. The Netherlands along with Germany is the only other solvent nation in the 19 Euro nations. Their exit would hurt the European Central Bank (ECB) making them less solvent than they are already.
Prime Minister May, wants to trigger Article 50 before the end of March, which will mark the UK’s formal departure from the EU. The only question is whether that will be a soft/negotiated exit or a hard/complete expulsion from the EU markets. A soft/negotiated exit could take years, a hard exit with no negotiations would be immediate and would completely close EU markets to the UK. Either option will create problems for both the EU and UK. However, realistically the chances of a deal are not good. In my opinion, the UK is in a no win situation and it would be in their best interest to do a hard Brexit. They should ignore the EU, who want to make an example out of Britain, because they want to scare off other EU nations planning on exiting. The UK’s future may be bumpy this year, but the EU’s prospects look much worse, and they are not in very good negotiating position because they are going to have to focus their attention on other potential exits of major members such as the Netherlands, France and Italy. If these nations exit, the EU is over.
In April, French elections will determine the final two candidates who will run against each other in the final election a few months later. Currently, another Trump-like candidate, Marie Le Pen, is leading all the polls. If she is elected, she has promised to have a referendum to exit the EU. Just like with Trump, Wilder and Brexit, all kinds of dire predictions and consequences are being pronounced if Le Pen wins. Following the April elections, there will be an additional three months of uncertainty which will continue to rock world markets. Although elections are not currently scheduled after the resignation of Italy’s prime minister in December, the leading candidate and party is another Trump-like figure who has promised an EU exit referendum. Also three-time Prime Minister Berlusconi is proposing to bring back the Lira, the former Italian currency.
So hold on, as a whole lot of shaking is coming our way in the coming weeks. For those of you waiting to exit before a lot of expected shaking, this may be one of those times.
Fulton's Perspective on Global Economies, Markets & Political Events 