Global markets are both sensitive and tentative, often reacting to the slightest changes in economic and political circumstance. The UK election last week saw the British public divided, with neither major party winning an overall majority. This type of event can cause significant shifts in global markets, so here are some of the reasons for this.
One aspect of the political elections which excites forex traders in particular is the volatility they introduce to the markets. Elections usually translate to significant changes in the way a country is run, which leads to people speculatingover the potential effects this could have on the economy.
Currencies tend to have much larger swings in value, which can have repercussions for businesses as well as the overall economy. Commodities which that country produces, such as oil, can often be affected by volatility too, as a ruling political party usually has the ability to make changes to almost any aspect of the economy.
Arguably the most significant effect of any political election is the resulting changes which it inevitably brings about. With the public voting for policies they wish to see implemented, huge changes can be introduced through government legislation, especially if a new party/leader takes power.
Such legislation can serve to heighten or relieve volatility in the market, and will nearly always see some sort of reaction from investors. The nature of the reaction depends entirely on the economic and political changes which are brought in, as well as how far reaching their effects could be on other global economies.
It is usually after an election that the position of global markets becomes clear, and it is true that some results can have longer term effects. If Marine Le Pen had won the French election, for instance, the euro may have seen a long term volatility since her policies were more radical and had less predictable economic effects (compared to Emmanuel Macron’s).
It is worth noting, however, that market volatility usually dies down quite quickly after results have been announced, once businesses and markets have had time to assess and adjust to the implications of the result. Whilst the run up to an election is a frantic and unpredictable period for the markets, the aftermath usually sees worldwide stability make a swift return.
Political elections are one of the major causes of short term market volatility, as they create uncertainty over the future of any given economy. Whilst the biggest shifts in market behaviour are often temporary, the government which is elected can significantly impact global markets through legislation and policy.