Markets cheer Dutch election results, but future elections cause concern

Markets have reacted positively to the results of the elections in the Netherlands where the incumbent VVD party won the most seats, but investors focus now turns to future elections in France and Germany.

The pan-European Stoxx 600 was up around 0.6 percent on Thursday, although it also benefited from the Federal Reserve's decision to hike U.S. interest rates on Wednesday.

The Dutch results came as something of a relief to markets, according to Alex Edwards, currency analyst at OFX.

"The euro has reacted positively to Rutte's win, or at least it's been well supported since the result. The Fed decision and statement last night got more of a reaction - Yellen was a lot less hawkish than investors were expecting," he said in a press comment.

"Expect EUR/USD ranges to be fairly narrow over the next month or so in the run up to the much anticipated French elections, arguably the biggest market event of the year."

A woman votes in the Dutch general election in The Hague, Netherlands March 15, 2017.
Yves Herman | Reuters

Currently, the euro is flat against the dollar and yen, but fell against sterling.

However, there was a more muted reaction to the election on the bond markets. Yields on several European government bonds rose by around 5 basis points following the election's results.

"The results of the Dutch election helped to buoy investment markets following a better-than-expected outcome for mainstream parties," said Darren Ruane, head of fixed income at Investec Wealth & Investment, in a press comment.

"Government bond yields in Europe are trading only marginally lower from overnight levels. Bond markets were forecasting a benign outcome from the Dutch elections, with a very strong gain for Wilder's Freedom party required to disrupt markets in a meaningful way."

With the Dutch election out of the way, investors are turning their attention towards the French elections, where a victory by the far-right candidate Marine Le Pen would be seen as destabilizing for the euro zone.

"From a fixed income perspective, the focus is now on France," said Ken Orchard, portfolio manager of T. Rowe Price's International Bond Strategy, in a comment.

"While the probability of a Le Pen victory remains slim, it is a major risk that the markets are wary of and would deal a serious blow to the future of the euro zone."

European assets are likely to experience short-term volatility ahead of French and German elections, according to Jon Jonsson and Andrew Wilmont, senior portfolio managers at Neuberger Berman.

"From a market perspective, many investors will be nervously eyeing the first round of the French election next month, hoping that it too will be relatively benign," they said in a press release.

"In recent months Europe has been enjoying a fragile recovery. But it is highly sensitive to shocks."

A negative shift in sentiment stemming from these upcoming elections could disrupt Europe's recovery, warn Jonsson and Wilmont.

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