Trump shift puts euro
markets back on edge as elections loom
Send a link to a friend
[November 14, 2016]
By Dhara Ranasinghe
(Reuters) - Anti-establishment votes in Britain and the United States
have roiled markets twice this year and investors are determined not to
be caught off guard again.
In 2017, voters in the Netherlands, France and Germany - and possibly in
Italy and Britain too - will vote in elections that could be colored by
the triumphs of Donald Trump and supporters of Brexit, and the politics
that drove those campaigns.
A litmus test for Europe is around the corner in Italy's referendum on
constitutional change on Dec. 4. On the same day, Austria holds a re-run
of a presidential election in which one of the two candidates is from
No wonder then, that in a general bond market sell-off since Tuesday's
U.S. election, some of the heaviest selling has hit France and Italy as
investors brace for the potential of another anti-establishment drubbing
in two big regional economies.
Top-rated German 10-year bond yields <DE10YT=TWEB>, which move in the
opposite direction to the price, have risen about 17 basis points this
week as investors bet protectionist policies and extra spending under
President Trump will boost inflation.
But French and Italian equivalents have soared roughly 25 bps as
investors also price in greater political risks. French yields are
poised for their biggest weekly rise since June 2015 when a euro zone
bond sell-off was at its peak.
"We've had an anti-establishment vote in the UK, one in the U.S. and now
everyone's looking at the euro zone and thinking, where do we have
elections next year? Yes, France, so people are trying to zoom in on
those countries that may be at risk," said Martin Van Vliet, a senior
rates strategist at ING.
France has a presidential system and the chances of Marine Le Pen,
leader of the far-right National Front, winning are seen as slim. But
polls suggest she will win more support than any other politician in the
first round of the election.
Having been caught out by Britain's shock decision to leave the European
Union in June and Trump's surprise election win, markets are unlikely to
take polls for granted in the future.
Investors are also waking up to the fact that a populist tsunami that
seemed unthinkable a few months ago has potentially huge consequences
for Europe's political landscape.
French 10-year bond yields, at 0.72 percent <FR10YT=TWEB>, are near
their highest levels since January.
In a sign that investors have turned more bearish toward French debt,
the gap or spread between French and German bond yields has widened to
around 44 bps - levels last seen in July 2015.
As this graphic http://tmsnrt.rs/2fItTCG shows, similar moves have been
seen in the Netherlands and Italy - other euro zone countries where the
rise of populism risks upsetting the traditional order in looming
It is not just bond investors that feel uneasy about a change in the
political climate away from the status quo that often equates with
stability for financial markets.
[to top of second column]
U.S. President elect Donald Trump speaks at election night rally in
Manhattan, New York, U.S., November 9, 2016. REUTERS/Mike Segar/File
While any immediate fears over a rise in populism and protectionist
policies in Europe have so far been overshadowed by a scramble to get in
on the ‘reflation’ trade, European equities saw $1.64 billion of
outflows in the week ending Wednesday, according to data from Bank of
America Merrill Lynch.
Some analysts also argue that a recovery for the currency market's 2016
whipping boy, sterling, points to growing concerns about upcoming
elections in Europe.
"The UK Brexit vote will no longer be viewed as some kind of outlier
vote but perhaps the beginning of a global shift toward more populist
voting," said Derek Halpenny, European Head of Global Market Research
with Bank of Tokyo-Mitsubishi UFJ.
"The fall in the euro should then be viewed as a sign of a shift of the
political risk premium from the UK to Europe."
SPOTLIGHT ON ITALY, AUSTRIA
In addition to France, Italy -- the euro area's third biggest economy --
is also feeling the heat of rising political uncertainty.
Trump's unexpected victory in the U.S. presidential election is likely
to make it even harder for Italian Prime Minister Matteo Renzi to win
next month's referendum on constitutional reform .
Renzi has said he will resign if he loses the ballot and almost every
opinion poll over the past two months has put the 'No' camp ahead.
Against this backdrop, Italy's borrowing costs at auction jumped to
their highest in more than a year on Friday.
The gap between Italian and Spanish 10-year bond yields - a bellwether
of political risk - is at 45 bps at its widest since the 2012 debt
"We really have to consider that the consensus and the conventional
wisdom of the past two big elections have gone against the conventional
wisdom and the expectations of the majority, and so that could certainly
happen in Europe," Chris Dyer, director of global equity at asset
manager Eaton Vance, said.
(Additional reporting by Patrick Graham and Kit Rees in London, Noah
Barkin in Berlin; Graphic by Nigel Stephenson, Editing by Angus MacSwan)
[© 2016 Thomson Reuters. All rights
Copyright 2016 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.