Today we take a look at politics and the influence and effect this has on the markets.
Politics and Trading
British politics is in turmoil. The expenses scandal has tarnished Parliament's image around the world. And Gordon Brown's authority looks shakier than ever after some of the worst European and local election results a sitting Prime Minister has ever suffered. Commentators have been swift to link any wobble in the UK markets to these upheavals. But are they right to do so?
Whereas Gordon Brown's approval ratings are at rock bottom, Barack Obama is widely hailed as the new messiah in the US. Since the expenses scandal erupted in early May, however, sterling has actually strengthened against the dollar by more than 9 per cent. Likewise, long-term UK government bonds have fallen by less than half as much as American ones over the same period.
Still, this isn't to say that politics has no influence over financial markets. The effects can be especially pronounced in developing countries. The recent re-election of business-friendly governments in India and Turkey resulted in sharp stock-market rallies. The decisions that governments take about tax, spending and regulations can have a big impact on the economy and in turn on financial markets.
In the US, the four-yearly Presidential election cycle does appear to affect stock-market behaviour. The Dow Jones index has tended to do markedly better in the two years before the election than in the two years after it. One theory is that politicians seek to boost the economy in the run-up to the election in order to improve their re-election prospects, and then retrench once they are in office.
For most of the 20th century, the UK stock market did much better under Conservative regimes than under Labour. But New Labour's pro-business stance has made party politics less relevant to investors. The FTSE 100 rose on the day after each of the party's last three general-election victories.
Until next week, happy trading
The Tradefair Spreads Team
The above comments do not constitute investment advice and neither Tradefair Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
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'Trading and Politics' edited by DB, updated 20-Jun-09
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