Gridlock-loving markets tussle with ‘super majorities’


If you were minded to think that politics doesn’t matter much to markets, think again. — Reuters

FOR financial markets usually biased toward legislative gridlock over untrammelled government, this election-packed month so far has seen a wild ride around voting landslides and ‘super majorities’.

What’s clear from Mexico and India – and possibly instructive for US and British elections ahead – is not all big majorities are treated equally, not all are necessarily negative for investors and they can deliver seismic price moves.

And if you were minded to think that politics doesn’t matter much to markets, think again.

This weekend’s election results initially threw up two big surprises for markets – not who won the votes in Mexico and India, but the scale of their victories.

Claudia Sheinbaum’s storming win in the Mexico presidential poll was a shockwave to markets mainly because of the near two-thirds parliamentary majority for her left-wing Morena party that could allow it to govern, spend and change the constitution virtually unopposed.

Markets balked at the prospect, sending a super-strong peso into a tailspin of almost 5% and knocking back Mexico’s stock market by more than 6% on Monday.

Some soothing noises from Sheinbaum and Mexico’s finance minister on fiscal restraint have since calmed investor horses, and the initial reaction was perhaps what you would traditionally expect.

But in a stark contrast, India’s rupee climbed and stock markets surged to record highs after weekend exit polls suggested Narendra Modi’s BJP-led alliance would be re-elected and could secure a “super majority” there.

Within 24 hours, as official results showed Modi’s win was far short of that, there was a violent market reversal that saw stocks recoil by about 6% and the biggest one-day withdrawal of foreign institutional money on record.

Such polar opposite treatments of two potential landslides was remarkable.

Reasons cited are rooted in the politics of the respective governments, domestic legal and constitutional sensitivities, market positioning and relative exposure to foreign investment.

But what’s not in doubt is how the dalliance with unfettered government has seen volatility levels surge.

Implied volatility in the Mexican peso over the month ahead, for example, soared back above 16% to its highest since March 2023 and more than twice levels seen two months ago.

More tightly controlled by its central bank, India’s rupee was calmer. But 10-day realised stock market volatility has just jumped to its highest since the pandemic hit in 2020.

And the spike in volatility in both countries, if it were to persist, could well be the biggest negative to overseas investors.

Super charge

Investors’ seeming preference for legislative stasis and split governments is often cited as a given – based on mix of fears about excessive regulation, tax and government oversight along with scepticism about the effect of free-spending on public debt and inflation and crowding out the private sector.

But, much like this week’s examples, it’s not always so clear how that will play out in practice.

In the major western economies going to the polls later this year, super majorities don’t exist in quite the same way.

But there are equivalent outcomes that could unshackle winning parties.

Britain’s snap election, scheduled for July 4, is throwing up some eye-popping estimates from incoming opinion polls.

Although the opposition Labour Party is almost certain to take power for the first time in 14 years on an uncontroversial manifesto, recent polling suggests it could secure a monster 194 seat parliamentary majority – its biggest ever, a larger win than former prime minister Tony Blair secured in 1997 and more than twice the current government’s 80 seat margin.

Labour has been favourite in betting markets all year – and that seems not to bother financial markets that have pushed the pound to its highest since 2016 and FTSE 100 blue chips to record levels.

But it’s a reasonable question about whether a majority of the scale suggested by the latest polls would tempt Labour into bolder moves over the next five years and at least lift UK policy uncertainty to some degree.

Razor-thin margins

As to arguably the most globally influential elections of the year for the US White House and Congress, the razor-thin margins of difference projected in races for the President, House and Senate suggest the issue of super majorities is far from mind.

And yet precisely because all those margins are thin, the equivalent legislative green light of one party getting a clean sweep of all three houses is not inconceivable – even if not the best guess five months from polling day.

Would gridlock-loving markets become restive at the prospect of two-years of one party dominance?

Fund managers and strategists certainly always say they would.

But effective clean sweeps for the Republicans in 2016 and Democrats in 2020 didn’t really turn out so terrible for anyone holding the dollar and Wall Street stocks.

The S&P 500 gained more than 20% and 30% respectively in the 12 months after both those elections and the dollar lost just 4% and 1% over the same periods.

Gridlock matters

Where gridlock matters most, however, is in the bond market and 10-year Treasury yields were indeed higher in the first year after both 2016 and 2020 polls.

And yet, gridlock now likely stymies any form of badly-needed US fiscal consolidation for the next couple of years – so even that’s no longer the panacea markets make it out to be.

Big election wins may involve big market moves – but the direction of those moves is far less obvious. — Reuters

Mike Dolan is a columnist for Reuters. The views expressed here are the writer’s own.

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