Elections are overrated, both by the public and by investors. As 2024 has turned out to be a super-election year, expectations are flying high. Half of the world will vote for their political leadership this year. This represents 76 countries that 4.2 billion people call home. Yet to expect any groundbreaking changes in the respective countries is rather daring, if history is any guide. This is what we mean by ‘overrated’.

 Being Swiss, we prefer to celebrate the sturdiness of the political system as a source of stability. In India, Mexico, and South Africa, voters who have recently returned from the ballot boxes are also unlikely to see groundbreaking shifts in their countries as a result of the election outcomes. Ironically, for investors, the biggest impact comes from major misperceptions about new governments. However, we can only name a handful of these in the past decades. Funnily enough, this occurred mostly when leftist governments failed to wreak the expected havoc in the economy. At the start of Mitterand’s presidency in the 1980s, for instance, capitalists feared that communism would send France to its ruin. Yet the new government gave a decent performance, in the end.

Similar fears were allayed in Brazil at the start of the century, when new rulers did not derail the commodity boom; and in Germany, former Chancellor Schröder introduced rather corporate-friendly labour reforms and healed the ‘sick man of Europe’, to the dismay of his earlier critics.

What does election noise mean for markets?

Thus, politics remains a wonderful talking point, but most often lacks relevance for investments. The same is true for the de-dollarisation theme, which is just an extension of the political election topic. According to this narrative, the Global South is tired of US supremacy and will make the greenback redundant in the near future.

While this argument is easy to follow, it shows up everywhere but in the data. As a result, investors are best off acknowledging the economic facts instead of double-guessing election outcomes. There is growing evidence that the global economy outside the US is gaining traction. Central banks easing interest rate headwinds and China supporting the economy at home are convincing elements. We thus upgrade Chinese stocks on a tactical basis, raise German stocks to Overweight, and highlight attractive technical patterns with semiconductor stocks.

What will the ECB rate cuts mean for investors?

Last Friday’s flash estimate for the eurozone’s May consumer price index (CPI) showed slightly-stronger-than-expected inflation readings, with headline and core inflation, excluding volatile energy and food prices, edging up to 2.6% and 2.9%, respectively.

This data, released shortly ahead of the recent ECB meeting on Thursday, showed that inflation is still above the European Central Bank’s (ECB) price stability goals.  The inflation outlook still shows disinflationary trends. Companies’ selling price expectations, for example, continued to decline in May. And now, our expectation that the ECB would cut rates by 25 basis points this Thursday materialised with its afternoon meeting.

What has changed lately, due to improvements in economic momentum and positive surprises in eurozone data, are expectations for continued monetary policy easing following the June cut. The market-implied probability of another cut in July has gradually diminished and remains fully priced out as of now. We still expect another rate cut in July, but see a substantial risk that the next cut will be delayed to September.

The earlier kick-off of ECB policy rate cuts, with two cuts ahead of the expected start of the US Federal Reserve’s easing cycle in September, is the reason why we continue to expect a short-term restrengthening of the US dollar. The increase of interest rate differentials in favour of the US dollar may provide sufficient tailwinds for the greenback and head winds for European currencies, where central banks have and will cut earlier. We stick to our forecast of EUR/USD 1.04 in three months, with the risk of delays in the ECB’s rate cuts, which would favour the euro and counteract a short-term USD strengthening.