Contracts for difference are a useful tool for trading election results. CFDs give traders access to leveraged trading on major indices and currencies, which tend to react more swiftly to big developments like elections than individual stocks.
Individual stocks may rise or fall depending on whether the underlying company stands to benefit or lose from the winner’s policies. Another key strength of CFDs and forex is that they are available for trading on a 24-hour basis on week days, enabling traders to take advantage of moves in the markets while the votes are being counted, and to respond quickly to the results.
Over the next year, key national elections are expected in France (spring 2017), Germany (autumn 2017) and Italy (winter 2018 or possibly sooner). The results of these elections may not only impact the political direction of the voting countries, but with the rise of populist or Euroskeptic parties, could impact the future of the eurozone and possibly even the European Union.
Because of this, election results may impact the markets through two lenses; the impact on the domestic economy, and the wider impact on the future of the euro. Depending on which trend a trader considers more important, there are a number of different CFD/forex contracts and trading strategies available.
Country indices and the domestic economy
The political attitude of election winners towards business and trade could impact domestic indices. Generally speaking, pro-business parties could spark rallies in national indices while socialist or protectionist parties could be seen as a negative for national indices. National index CFDs that could be active on election results this year include the France 40, Germany 30 and Italy 40.
Traders may also use CFDs to trade national election results against wider EU benchmarks. If a result is expected to strengthen a country’s political standing or make its economy more competitive, its index may climb relative to the Germany 30 or Euro 50.
To capture relative performance following an election, a trader would go long the contract they think will outperform, and short the contract they think will underperform.
Election results and the future of the euro
Results of the upcoming elections may also decide the future of the euro project and therefore majorly impact currency trading. For the first time, serious candidates in several countries are running on a promise of taking their countries out of the euro and returning to national currencies. Even if these candidates don’t win, strong performance by Euroskeptic parties could hobble future efforts at further integration.
For the most part, the impact of pro-euro versus Euroskeptic results may be seen in trading in euro pairs like EUR/USD and EUR/JPY. Because Germany has benefitted more than anyone else from being in the eurozone, the Germany 30 may also be impacted. Generally speaking, a win or strong performance by Euroskeptics could be seen as a negative for the euro and Germany 30.
A win by staunchly pro-euro forces could boost EUR and the Germany 30, while a win by parties who want to stay in the eurozone but perhaps water it down or block further integration could yield a mixed to slightly negative result.
To capture relative performance following an election, traders could go long the contract they expect will outperform, and short the contract they think will underperform.
Election results and the Europe-UK divide
With the UK having triggered Article 50 and the formal Brexit process underway, European election results may also impact the relative performance of continental markets relative to the UK. This could impact trading in the EUR/GBP forex pair and also trading in national indices relative to the UK 100.
Generally speaking, victories by forces looking to take a tough stand against the UK, discourage other countries from leaving and push further European integration could spark rallies in EUR and national indices initially, but an acrimonious Brexit divorce could have a longer term negative impact on the EU.
On the other hand, a victory by Euroskeptic forces could put the EU negotiating stance in disarray and put the UK 100 and GBP into a stronger position relative to the euro and continental indices.
To capture relative performance following an election, a trader could go long the contract they think will outperform, and short the contract they think will underperform.
Election results and general political risk
A victory or strong performance by Euroskeptic parties could send shockwaves around the world and have a substantial impact on political risk. A sense that the eurozone or European union could come apart may turn complacency relative to political stability into fear.
Election decisions that lead to increased concerns about political, economic or financial risk could spark a stampede back into traditional havens (such as gold, the Japanese yen, Swiss franc and US assets) for capital in turbulent times.
In particular, the success or failure of Euroskeptic politicians and parties could impact trading in EUR/JPY, EUR/CHF and EUR relative to gold. Euroskeptic wins could send the euro lower while Euroskeptic defeats could send the euro higher.
To capture the performance in the euro relative to gold, a trader can use two contracts: EUR/USD and gold (XAU/USD), going long one and short the other to mimic the performance.
For example, if a trader thinks gold could outperform the euro they could:
- Short EUR/USD = Selling euro while buying USD
- Long Gold = Buying gold while selling USD
The two USD returns cancel each other out, giving the combined performance of being short the euro and long gold.
Heightened market volatility is likely over the election period, this could result in widened spreads. We recommend that you monitor positions carefully, consider the use of appropriate risk management tools and maintain a sufficient account surplus throughout this period.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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