Eoin Treacy's view

“No taxation without representation” might be an old catchphrase but it encapsulates the argument for why the European Union and especially the European Commission and parliament are in urgent need of reform. If decision makers are not subject to the polity for the laws they implement then we can only conclude that standards of governance are in decline which raises the risk premium attached to markets. 

The Brexit vote is a major flashpoint and highlights the increasing polarisation in the political establishment. This is a phenomenon increasingly present across Europe and the USA. On one hand the feeling of many people that they have been left behind by the recovery from the credit crisis and that governments no longer represent their needs is a motivation for supporting change. On the other the inability of governing elites to translate lofty ideals into improving standards of living for their voters represents a significant challenge but not an urgent one. A lack of imagination and reliance on polling rather than vision appears to continue to distance politicians from their constituencies.  

While June 23rd is major decision date for UK voters, these issues will not be resolved by the result. The rise of Eurosceptic parties and those suspicions of the motivations of establishment politicians suggests that the political equilibrium is shifting and we can expect additional flashpoints that contribute to future volatility. 

The role of central banks in bailing out problem private institutions with public money and dropping rates to previously unimaginably low levels has robbed savers to benefit speculators. The lack of progress in broadening the demographic of who benefits from these policies remains a significant challenge. Meanwhile the pace of technological innovation and automation represent additionally deflationary factors which contribute to a lack of wage growth. 

Mario Draghi has made no secret of his opinion that fiscal policy needs to play a significant role in helping to revitalise economic growth. It could be argued similar polices are needed in the USA. While Eurozone politics might curtail the ability of governments to achieve the deficit spending they need to reignite growth, whoever wins the US election might be in a more favourable position to do so depending on which party has control of the House and Senate. 

Meanwhile the FTSE-350 bounced today on increasing optimism the UK will stay within the EU. However a sustained move above the trend mean currently near 3460 will be required to signal a return to demand dominance beyond the very short term. 

Over the last week the Russell 2000 Index pulled back from the 1200 area, which also offered resistance between September and December. The progression of higher reaction lows, evident since February, remains intact and a sustained move below 1100 would be required to question the near-term upward bias.