The German stock market closed today at its lowest level of the year. That may sound surprising, given that that the European economy is showing clear signs of improvement. ECB Chief Mario Draghi said the European recovery was "resilient." The Eurozone PMI rose to its highest level in 69 months.
Yet there it was: The German DAX down 1.2% to a new low for the year, with the rest of Europe down as well.
What gives? It's obvious that political fears are trumping economic optimism.
Now they are beginning to realize that they could be wrong on the direction of European politics, and they are trying not to get surprised again.
No one is laughing anymore at the populist candidates who have been making provocative statements for years.
No one is laughing anymore when Marine Le Pen, the leader of France's populist National Front party and one of the front-runners in the upcoming French election, says she will pull France out of the eurozone.
If they leave, what does it do to the eurozone experiment? That is a clear negative for bond prices. Right now, sovereign debt is priced with an implicit backstop from the ECB. But under Le Pen's plan, the French government would be the sole backstop, with a bunch of Socialists in charge! How would you price the credit spread? I bet you'd cut the price of French bonds.