No Earthquake: Investors Not Daunted by Rise of Anti-EU Vote

Investors took the electoral success of nationalist and anti-EU parties in the EU Parliament in stride. The early results project these parties will secure around 130 of the 751 seats.  Some partisans are claiming it is a "political earthquake", but this is not immediately clear.  

It may be an exercise in hyperbole.  The duopoly of the center-right and center-left will persist and still dominate the EU parliament.  This will likely become clearer when the new EC President and Commission are put together.  The first such discussions will be on May 27.  The anti-EU vote is far from a unitary bloc. They are a disparate collection of national parties.  

In addition, the voter turn-out of a little more than 43% of the eligible voters raises questions over the validity of drawing strong national implications.  Moreover, it is difficult to tell determine how much of the anti-EU vote was a protest vote and how much was a genuine endorsement of their platforms.  For example, it appears that the majority of those that voted for the UKIP actually favor the UK remaining in the EU.  

The anti-EU vote appears to be the strongest in three countries:  France, the UK and Greece.  The National Front in France did a little better than expected, drawing 25% of the vote and topping the other parties.  Still, the immediate impact on French policy is likely to be minimal.  The Socialist government is terribly unpopular, but it is not even halfway through its mandate.  

On the eve of the election, the French government asked Germany to boost infra-structure spending by 50 bln euros over the next three years.   The government was also moving toward more stimulative measures and this likely means targeted tax cut.   The electoral results may hasten the efforts of the center-right UMP to put aside their internecine rivalry.  Out of the ashes, Sarkozy may see his opportunity.  

In Greece, which has local and regional elections alongside the EU parliament election.  While the anti-EU Syriza did well, the government's 2-seat majority appears safe.  It will be able to rebuff pressure to hold snap elections.  Investors seemed unconcerned.  Greek 10-year bond yields dropped 25 bp to 6.1%.   Greek stocks rose 2.3%, compared with a 0.5% gain in the Dow Jones Stoxx 600 (which was up for its 4th consecutive session and at new 6 year highs).  The gains built on last week's 9.6% pre-election rally. 

A little more than 1 in 3 eligible UK voters participated in the elections.  The UKIP drew more votes than the other political parties.  While this is notable, it is not clear how UKIP is going to be able to convert its strong showing into political influence.   In local elections, it did pick up 161 seats in local elections, but failed to win any councils.  

On the other hand, support for the Lib Dems evaporated.  In local elections, it lost 307 seats and two councils.  There is an effort to replace Clegg, the deputy Prime Minister, but it likely will not be successful, and even if it is, unless the Lib Dems are prepared to quit the government, which at this juncture, would expedite their political demise, it may be of little significance to investors.  

Italy's Renzi may be among the largest winners.  Recall Renzi become the fourth consecutive unelected Prime Minister when a party putsch forced out the former Prime Minister Letta.  This was the first national vote and Renzi carried the day.  His center-left PD drew about 41% of the vote; almost twice what the votes that anti-EU 5-Star Movement.    

Italy's 10-year bond yield fell 16 bp to push the benchmark yield back below 3.0%. Italian shares were snapped up, and the FTSE-MIB led major European bourses higher with a 3.4% gain.  Italian banks were the strongest sector. 

Investors also liked the results of the Ukrainian election that appeared to show Poroshenko win the presidency in the first ballot.  Ukraine's PFTS index rallied almost 5% and brought the year-to-date gain to 45%.  With the passing of the Ukraine election, it may be difficult to get the US and EU to agree on more sanctions on Russia and Russian shares advanced by about 0.7%, which pares its year-to-date loss to about 3.6%. 

With the two largest financial centers, the UK and US closed for national holidays, full liquidity was lacking and this helped keep the major currencies mostly within their pre-weekend ranges. The main focus remains on ECB meeting on June 5.  That first week of June features four central bank meetings and the May US employment data. 

Since at least last July, the rally in the peripheral European bonds coincided with the euro's appreciation.  However, that relationship appears to have loosened and the direction of the Spanish and Italian premium over Germany has not been a particularly good guide to the euro recently.