Friday, 17 August 2018

Political turmoil risks extend beyond Greece

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Divyang Shah on hedging against election uncertainty from Finland to the UK.

Greece is set to have an anti-establishment government led by Syriza following the weekend election. Whether it’s a sign of how out of tune ruling governments are with the electorate or just sheer frustration, there is no denying the impact of populist parties. 

Political uncertainty is likely to be a theme this year and a victory for Syriza highlights the dangers of ignoring populist parties in other countries where there is no clear outright winner. Estonia, Finland, Spain and Portugal all face parliamentary elections this year.

What these populist parties offer are simple/extreme solutions to complicated and difficult questions. For financial markets the pockets of political uncertainly will help fuel volatility. 

But uncertainty will not be confined to the euro zone. The UK also faces a general election on May 7. We have highlighted how the combination of a record c/a deficit and what could be a messy election will see GBP bear the brunt of uncertainty. 

We expect broad based GBP weakness, particularly against the USD and EUR. Cable is likely to trade below the 2013 lows around 1.48 to 1.45 making it attractive to hold OTM GBP puts/USD calls. 

Specifically we have suggested holding:

1) 6-mth 1.40 Cable puts as well as

2) 6-mth 1.40-1.45 Cable put spreads.

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