Emerging markets have been thrust into the global spotlight as recent elections in South Africa, India, and Mexico have raised questions about political stability and the countries’ economic prospects. In the past two weeks, the political landscapes of these countries have experienced significant shifts, putting pressure on markets and stirring investor concerns.
India: A surprising election outcome
In India, Prime Minister Narendra Modi’s Bharatiya Janata Party (BJP) faced a major setback after it failed to secure an outright majority for the first time since coming to power a decade ago. Despite leading the party to two landslide victories in the past, Modi’s third-term bid will now depend on coalition politics. The BJP secured 240 seats, falling short of the 272 needed for a majority in the 543-member parliament. The main opposition, Congress Party, made significant gains, doubling its seat count from the previous election.
Modi’s loss of parliamentary majority has raised questions about his ability to implement his Hindu nationalist agenda without compromise. Although he declared the results a “victory” and promised continued development, the reality is that his government will now need to negotiate with smaller parties to push through policies. Stocks responded negatively to the election results, with Indian markets losing $386 billion in value—a reaction that some analysts described as “overdone,” considering India’s federal structure. India’s ongoing commitment to fiscal reforms, however, could mitigate any immediate economic disruption.
Mexico: A historic win
In Mexico, the political scene saw a historic shift as Claudia Sheinbaum became the country’s first woman president. Sheinbaum, a close ally of outgoing President Andres Manuel Lopez Obrador (AMLO) won decisively, and her Morena Party approached the congressional majorities necessary for substantial constitutional amendments. Despite AMLO’s controversial policies and his handling of crime, which have often been criticised, his legacy of social programs and increased minimum wages played a crucial role in Morena’s success.
The election outcome in Mexico was largely viewed as a continuation of AMLO’s policies, with a strong emphasis on social welfare and state control over strategic sectors. Investors, while initially wary of AMLO’s approach, appear to be more optimistic about Sheinbaum’s potential to maintain economic stability and foster growth.
South Africa: Coalition conundrum
South Africa’s political landscape was dramatically altered as the African National Congress (ANC) lost its parliamentary majority for the first time since the end of apartheid in 1994. The ANC’s failure to secure over 50% of the vote has led to intense coalition negotiations. Potential partners range from the pro-business Democratic Alliance to the radical Economic Freedom Fighters (EFF), each with vastly different ideologies.
The election results reflect a growing disillusionment among South Africans, particularly younger voters who are increasingly concerned with economic stagnation and high unemployment rates. The ANC’s previous dominance, rooted in its historic role of ending apartheid, seems insufficient to address the country’s current socio-economic challenges. Forming a stable coalition government is critical, but the ideological diversity of potential partners could lead to increased instability and policy gridlock.
The focus now shifts to the next highly anticipated election – that of the United Kingdom (UK), scheduled for 4 July. This election could also see another significant political shift, with opinion polls forecasting an extremely grim outcome for the incumbent Conservative party, a Labour landslide currently looking the most likely outcome.
DIVING INTO THE MARKETS
United States (US) 10-year yields near two-month lows
The yield on the US 10-year Treasury note is hovering around 4.3%, near its two-month low. This reflects growing expectations of a potential rate cut from the US Fed in September. Economic data has shown initial jobless claims exceeding expectations for the second week running and a downward revision in labour costs. The Automatic Data Processing (ADP) National Employment Report also undershot expectations, while the Job Openings and Labor Turnover (JOLTS) report and ISM Manufacturing Purchasing Managers Index (PMI) pointed to weaker economic activity. The probability of a September rate cut has risen to around 69%, with today’s jobs report being a key focus for investors.
The UK’s 10-year Gilt yield rose to 4.2%, following the European Central Bank’s (ECB’s) decision to cut interest rates by 25 basis points and raise its inflation forecasts. This shift tempered expectations for further immediate rate cuts. The Bank of England’s (BoE’s) meeting on 20 June is widely expected to hold back on rate cuts until September, as British inflation, albeit declining, remains higher than initially forecasted. Meanwhile, political uncertainty due to July’s general election is affecting the UK market outlook.
Wall Street awaits further data
US stock futures were flat on Thursday, following record highs in the S&P 500 and Nasdaq. Investors are awaiting further economic data to assess future Fed policies. The rise in initial jobless claims and lower labour costs support expectations of a potential rate cut in September. Athletic apparel company Lululemon saw its shares surge over 4.8% due to positive earnings and computer chip maker Nvidia was set to reach another record high.
Germany’s DAX index increased by 0.4%, with multinational software company SAP leading gains at nearly 3.7%, driven by strength in the tech sector. Conversely, pharmaceutical company Bayer and semi-conductor producer Infineon both fell. The UK’s FTSE 100 remained subdued, with value retailer B&M dropping over 7% on Wednesday due to disappointing earnings and global technology business Ocado falling 7.6% after being removed from the index. In the FTSE 250, engineering and consulting firm John Wood Group saw an 8% rise on news of revised takeover talks.
Japan’s Nikkei 225 was flat this morning, closing at 38,684. Japanese tech stocks, including Disco Corp and Tokyo Electron, posted significant gains on Thursday, along with investment holding company SoftBank Group, which rose on news of investment by Elliott Management.
Oil and gold win back some lost ground
Brent crude futures approached $79/barrel, marking a second day of gains after dropping to four-month lows. Oil prices are recovering alongside broader risk assets as Treasury yields decline and expectations of a Fed rate cut grow. The Energy Information Agency reported an increase in US crude inventories, reversing the previous week’s decline. The expanded Organisation of the Petroleum Exporting Countries, OPEC+, announced continued supply cuts into 2025, although some members will begin easing cuts in October.
Gold prices held at $2,360/ounce, slightly recovering from a recent one-month low. Labour market data suggesting a cooling US economy has increased expectations of multiple rate cuts from the Fed this year. Initial jobless claims rose unexpectedly, adding to the evidence of a softening US labour market and increasing bets on more than one rate cut.
Dollar subdued
The US Dollar Index recovered some lost ground this week, but remained near a recent two-month low. Signs of a softening labour market increased pressure on the dollar, with markets now positioning for two rate cuts from the Fed this year. Meanwhile, the euro was stable around $1.088/$ following the ECB’s decision to cut interest rates by 25 basis points. The ECB maintained a cautious approach to further cuts due to ongoing inflation pressures, which supported the euro.
The pound edged down to $1.28/£ after a strong performance in May. The BoE is expected to hold off on cutting rates until September, and political uncertainty from July’s general election is also affecting market sentiment.
Key Indicators:
GBP/USD: 1.2788
GBP/EUR: 1.1741
BRENT CRUDE: $79.94
GOLD: $2,376.10
Sources: Bloomberg, Reuters/Refinitiv and Trading Economics.
Written by Citadel Global Director, Bianca Botes.
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