European markets are not afraid of politics, but for how long?

Financial markets work at their own pace: that’s not just a nice phrase; it is a reality. For example, there were many reasons for a market crash in the last two years, but optimism remained.

And that’s still true today, even though experts claim the S&P 500 is “overbought.” The situation in Europe is very similar: despite the challenges, the DAX has once again reached an all-time high.

As for reasons for different market behavior, the underlying picture may be more promising. In Germany, for example, consumer confidence is being undermined by the relocation of production abroad.

Since 2019, the country has lost around 20% of its industrial growth potential due to poor strategic decisions, such as closing nuclear power plants and over-reliance on export-led growth.

Meanwhile, the problems in France are not so much economic, although there are problems such as a massive budget deficit, but rather political instability, which could even be described as a crisis.

The French government is facing a motion of no confidence, which could come as early as Wednesday. Barnier’s government could potentially fall by the end of the week.

As a result, the risk premium for French government bonds has reached a 12-year high. However, the EURUSD currency pair, like the market in general, does not seem to be paying too much attention to these negative developments yet.

France’s CAC 40 index fell just 1.8% last month, making it significantly undervalued compared to the DAX, which is up more than 3.8%. Still, there are no signs of panic. The problems don’t end there.

The EU is once again facing the threat of an energy crisis after the US imposed sanctions on Gazprombank, making it difficult, if not impossible, to buy gas from Russia, which remains one of its main suppliers.

As expected, natural gas futures in Europe rose sharply. If a solution to the crisis is not found before December 20, price increases could continue, posing a risk to households and businesses.

The forecast cold winter further complicates the situation, which will lead to an increase in gas consumption. In short, another perfect storm could hit the EU economy hard.

Making matters worse is that the bloc is still grappling with geopolitical crises within its borders and Trump is now threatening new tariffs. Despite all this, markets don’t seem too worried.

The reason for the great indifference is probably due to the general “risk appetite”. In other words, if a correction occurs in the US, European markets are likely to follow suit.