Market overview


Do European Parliamentary elections matter for investors?

• Yes, they do! European elections are a matter of concern for investors considering the rise of non-mainstream parties and the potential adverse market implications associated with the rise of right-wing populism.

• While polls currently suggest a contained rise in anti-establishment parties, it is worth recalling that they have caught investors off-guard in recent years, i.e. Brexit referendum or U.S. presidential election. Moreover, for the first time since 1979, polls indicate that the two largest political groups (EPP and S&D, see appendix) will not gain a majority of seats (i.e. 353 seats in the next term). Pro-EU parties would nonetheless still hold a majority, due mainly to the likely gains of the liberal ALDE group.


What is the likely market outcome?

• The elections will be a non-event for markets if the polls get it right and Europhiles can secure a majority.

• Expect some turbulence in currency and EMU bond markets if right-wing Eurosceptic parties (ECR, ENF, EFDD) outpace expectations and/ or form a coalition. While this scenario is unlikely given the parties’ diverse views, they could become the second largest group in the European Parliament – though still far from forming a majority even if they receive support from leftist groups (GUE/NGL and Greens/EFA). The EU would, however, face a crisis of confidence. This would probably translate into a weaker EURUSD and widening sovereign spreads in the eurozone periphery.

• Another source of uncertainty is the participation, or not, of the UK in the election. If the country exits the EU after May 22nd, it would be compelled to participate in the election, making the outcome more uncertain.


Where is the EU heading to?

• According to current polls, right-wing Eurosceptic parties could obtain 25% of all seats (a near 40% including left-wing Eurosceptic/Nationalist groups). This could lead to a stalling of the EU project. The EU budget could be more constrained and national interests could return to the forefront. Supranational authorities would also be potentially less powerful. Ultimately, fiscal rules could be challenged, and this would probably translate into higher refinancing costs for countries such as Italy, Greece and Portugal, which bear a heavy public debt burden.

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