On Wednesday the Dutch voters went to the polls in the first of a series of elections across Europe this year. France follows with the first round of the Presidential election in April and a runoff between the two leading candidates in May and then the German election takes place in September. Given the rise of populist politics, the UK voting for Brexit and the Trump Presidential election victory, markets have been paying more attention to politics.
Pleasingly, for the pollsters at least, the later polls were accurate in the sense they picked the VVD as taking the most seats, although Rutte’s liberal party took more than projected at 33 out of 150 parliamentary seats possibly helped by support for his tough stance in the recent spat with Turkey. Geert Wilders’ anti-establishment, anti-immigration, anti-euro far-right Freedom Party (PVV) although leading in the January polls with the campaign slogan ‘Reclaim The Netherlands For Us’, gained 20 seats.
However, the Dutch election, due to the proportional representation system, delivered a fragmented outcome with 13 parties gaining parliamentary seats. The Labour party (PvdA), the Liberal Party’s previous coalition partner, suffered heavy losses gaining only 9 seats (down from 38) meaning a coalition will need at least four parties for a majority. Potential coalition partners include the Christian Democratic Appeal (CDA) which did well gaining 19 seats, the liberal progressive Democrats 66 (D66) party with 19 seats or the GroenLinks (Green Left) with 16 seats. History suggests the process of forming a coalition will take some time: seemingly it has taken an average of 72 days since the Second World War to form a coalition government.
The Dutch bond market has remained pretty sanguine throughout the process, even when Wilders had a stronger showing in the polls, as the need to form a coalition government would temper scope to implement radical policies: the Dutch 10 year has remained in a 10-20 bps spread range over bunds (since mid-2016) until February when it has widened closer to 32 bp, but still within the five year range, and ahead of and post the vote it was ~25bp.
Elsewhere, the French election has delivered on drama and intrigue and looks like it could still be a ‘nail-biter’ to the close. Emmanuel Macron and Marine Le Pen look the most likely candidates to win the initial round of voting and face each other in the run-off. An Opinionway Poll for 16 March put Macron at 25 percent of the vote behind Marine Le Pen at 27 percent and Francois Fillon, the rightwing candidate, lagging at 19 percent. In a second round run-off the poll forecasts Macron beating Le Pen taking 60 percent of the vote. If Fillon reached the second-round it would be a much closer call with a 56 percent win for Fillon against Le Pen at 44 percent. However, this week Francois Fillon has been placed under a formal investigation for the misuse of public funds following allegations he made large payments to his wife and children for ‘fake jobs’. While it is not illegal to hire family members, the size of the payments and allegations that the jobs were not genuine, has prompted an investigation and severely damaged his chances of being elected as the next President, although he continues to press on with his campaign.
The next televised debate is due on March 20 and is likely to be closely watched. The uncertainty is reflected in the government bond yield with the 10 year OAT trading at a yield of 1.14 percent and the spread over bunds at 66 bp, while off the high of 80bp in February, it is nevertheless at the higher levels seen over the past 3 years.
Political risk is, and is likely to remain, a key factor driving European bond markets. Moreover, a higher rate scenario in the US is likely to be an unwelcome scenario for the ECB as it will increase pressure to adopt a less accommodative stance, particularly given inflation is picking up in Germany. This is potentially a toxic combination given the negative yields that a lot of European bonds at the shorter end trade on. For us, these risks are easy risk to avoid as we still struggle to find European credits that screen attractively on our valuation models or that offer a better alternative to the US dollar denominated issues we already own.