The elections in Sweden actually proved to be not that unexpected, but surely disappointing for many, except the right wing Sverigedemokraterna. The little country in northern Europe with great exports, may face months of political gridlock as forming a government will most likely be a hard job.
Non of the two blocs, the Social Democrat coalition and the Alliance bloc, managed winning enough votes to form majority governments. It is basically a 40/40/20 elections, where almost 20% of the votes will be represented by the Swedish Democrats, riding the wave of anti immigration politics.
Mr Lofven seems unwilling to step down (power is a sweet thing) and will face a confidence vote in parliament two weeks after the elections. Should he lose that vote, the speaker of the parliament needs presenting the new candidate for the prime minister job. If that person then fails forming a government, there are actually possibilities for new elections to be held within three months.
The votes from Swedes living abroad are to be counted by Wednesday. This group has historically voted more blue than red. These “few” votes could actually be what makes the difference.
Below is the image of new slightly confused Sweden.
Moving from politics to markets. The SEK turned right on those April levels we pointed out on August 31st. Back then we wrote:
Note the big trend channel since 2012 on a weekly chart. We are trading right in the upper part of the channel. Maybe time for a breather and a contrarian trade leading into election?
Since then the SEK has managed gaining almost 3%. Note how we are approaching the 10,40 level, which is the first support to watch. 50 and 100 day moving averages are right at the 10,40 ish level. If you played the contrarian into the elections trade, it’s probably wise to shave that off.
We also outlined the 3 month atm EUR/SEK vol had gotten ahead of itself:
EURSEK 3 month implied volatility is up over past weeks and trades at levels last seen in 2016. Not overly surprising given we are approaching uncertain elections, but levels here look a bit stretched.
The short term trade played out well, but the long term effects for Sweden have just begun.
Source: charts by Bloomberg