Europe is in rally mode. Plain. And. Simply.
Following Geert Wilders’ defeat in the Dutch elections on Wednesday, markets are more than a little relieved that voters seem to have cooled on the whole angry, xenophobic populist uprising thing which, as a reminder, looks like this in terms of “then and now” polling:
As Bloomberg notes, “the VStoxx plunged 23% as the Euro Stoxx 50 rallied 1% after the Dutch voted to back pro-European parties.” The VStoxx at 12.05 would be the lowest since July 2005 on a closing basis.
At a more granular level, 15 out of 19 Stoxx 600 sectors rose early on with real estate the most active 0.8% on 122% 30-day average volume followed by utilities 0.6% on 109% average volume. 479 Stoxx 600 members gain versus 111 decline.
As we’ve said for two months, the Dutch vote was a barometer for the European electorate’s appetite for populism and Wilders’ relatively poor showing suggests the chances of Marine Le Pen winning the French presidency may have receded.
“Markets are being allowed to ponder the potential for less populist French and German political outcomes in the months to come, while further U.S. stimulus supports both U.S. growth and Fed policy normalization, in turn helping global growth,” Mike van Dulken and Henry Croft, analysts at Accendo Markets, wrote in a note.
Needless to say, you’d think this would bode well for French bonds. But not so fast. Markets are still acutely aware that the risk may have diminished, but it hasn’t by any means disappeared.
“French bonds will probably be supported following the defeat for Geert Wilders’s Freedom Party in the Dutch election,” Nordea’s Jan Von Gerich said Thursday, before cautioning that “it’s more than a month until the French vote, and that campaign may still have many turns in store.”
Indeed. “The relief rally in OATs could be short lived,” ABN’s Kim Liu adds, underscoring the point.
And Liu was right. French 10-year bond yields rose by as much as 5bps, after being 6bps lower, and have now erased all of Wednesday’s gains.
Here’s a look across regional equity markets:
- FTSE 7437.44 68.80 0.93%
- DAX 12112.39 102.52 0.85%
- CAC 5018.55 33.07 0.66%
- IBEX 35 10143.50 160.30 1.61%
Meanwhile, as Bloomberg recounts, “the euro gave back part of its gains fueled by the outcome in the Dutch elections as Treasuries fell, pushing yields higher and helping the Bloomberg Dollar Spot Index rebound from a six-week low.” The single currency had hit $1.0746, it’s highest level since early February “as investors added longs in the spot market and unwound short exposure in the options market, European traders said.
Summing things up is SocGen:
A gradualist Fed, a bad electoral result for the far-right PVV in the Netherlands, and French polls that show Francois Fillon drifting to 18.5% while Marine Le Pen and Emmanuel Macron slug it out for first place, and the softer tone to bond yields, have all boosted the Euro. Long EUR/JPY and EUR/GBP are very attractive trades. Our fear of the downside for the Euro is decreasing, which isn’t the same as being negligible, unfortunately. There will be twists and turns but in the end, the Euro will be higher.