Citi Warns of Increased Political Risks in Europe Ahead of German Regional Elections
As the German regional elections kick off on September 1, Citi has raised concerns about potential political risks in Europe. According to Citi European Economics, these elections could bring about significant shifts in regional policies, potentially destabilizing the national coalition, altering national fiscal policies, and reorienting Germany's stance within the EU and globally.
Financial markets have been on edge due to election-related risks this year. Similar events, like the recent French elections, have impacted the euro, leading to a decline in its value and spread widening.
The upcoming German elections are expected to stir market volatility, especially affecting foreign exchange rates. Citi's analysis suggests that the uncertainty surrounding the election outcomes may coincide with a seasonally stronger US dollar and increased volatility leading up to the US election.
Citi advises caution regarding the euro, taking defensive positions against potential downside risks. The firm holds a short position on the euro through a two-month EURUSD put option with a strike price of 1.08 and a short position on in the spot market.
In conclusion, investors should keep a close eye on the developments in the German elections as they could have significant implications for the financial markets. It is advisable to stay informed and consider risk management strategies to navigate potential market volatility.