May 2014: Why European Elections Could Trigger Global Equities Correction

stormfrontLike many investors, I have been trying to identify developing themes and key trades for 2014. And, after a very bullish 2013, I have been trying to find the right time to keep the party going. I have been vocal about some of my ideas via my Twitter account, but I wanted to take the time to review some of my deepest convictions for the next 6 to 9 months.

My biggest worry for 2014, by far, is linked to the upcoming European elections in May and the rise of all populist, far-right and far-left parties around Europe: The Italian 5-star, the French Front National, Greece’s Syriza & Golden Dawn, and the extremes in the Netherlands and Austria. If the recent Swiss referendum on limited immigration is a preview of things to come, the extremes are going to triple or quadruple their presence in the European Parliament, from 27 seats in 2009 to 90-110 in 2014 (out of 751). And these numbers could be closer to 200 by adding existing populist officials in “majority” parties and the ECR group. This makes watching the European elections a must for investors. In short, this could represent a major shift in EU politics going forward.

While this potential group of 120 to 200 extremists is fragmented and unlikely to unite between far-left and far-right, it would nonetheless create ripples in May that could spike the Volatility Index (VIX) and rock global equities. Here’s a closer look:

  • These newly appointed officials will most likely be anti-EU, anti-Euro, anti-solutions, and believe in noise and fear and show of power… they could rock the EU (until, of course, they get perks, bodyguards, cars, apartments, salaries and benefits and start liking the EU… because power & greed affect all equally!)
  • Along those lines, the Greek Syriza party (radical left) should win the municipal and EU elections and they will demand a debt renegotiation, that will revive “Grexit” fears for a while and spike in EU fear.

If this scenario unfolds immediately following the European elections, expect turmoil and outlandish calls on EU policy, on exits, bail-outs, EU-bonds, and EU devaluation. Coupling this with May seasonality, I’ll likely find myself buying VIX calls & EURUSD puts in mid-April dated for June/July! european elections extremists

Sign up for our FREE newsletter
and receive our best trading ideas and research

OK… so I’m looking for a rocky May for global equities. Fine, but what else?

Here’s where my natural optimism starts kicking in: the rise in anti-EU extremists is likely to see the birth (in June?) of a huge EU Parliament coalition, a parliament of crisis linking most socialists, democrat-socialists, centrists, conservatives and greens to unite into a vast majority of 400 members or more and finally craft a future vision for a more stable and stronger European Union.

Let’s imagine, and hope, that they will finally adopt a grand, smart EU Energy policy (EU-Energy bonds?); the birth of a united fiscal blueprint; a deeper integration of all member States.

In terms of trading, I guess my road map is akin to S&P 500 touching 1900 before May, only to revisit 1700 by late May (is it time for “that” taunting and evasive yet uber-expected 10% correction?). This “shakeout” across Europe (and throughout global equities) would then open up a road of stronger EU opportunities, leading global equities higher yet?

Recap:  Bullish for now, bearish in May-June for European elections, then bullish again afterward… sounds like the “market as always” to me!  Trade safely!

No positions in any mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.