Fra BN Paribas:
Market View:
European bond markets: We expect the European Parliament election results to tend to put
flattening pressure on euro rates curves in coming months and renewed widening pressure
on peripheral spreads. Our reason: although the results demonstrate support for ‘more
Europe’ mainstream parties, which is positive, waning support for populist policies reduces
the likelihood that mainstream governments will increase fiscal stimulus.
In our view, therefore, given markets’ perception that the ECB lacks the willingness (or ability) to provide effective monetary stimulus, markets’ perception of nominal growth prospects will fall further, flattening the inflation curve and suppressing real yields. Initial bond market reactions so far reflect this argument.
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While the traditional centrist parties lost their overall majority, eurosceptic parties did not do as well as markets feared. Overall, votes appeared to support more ‒ not less ‒ Europe.
However, the election results leave a more fragmented parliament, which will make policymaking more complex in coming years.
The first victim of the results could be the Spitzenkandidat system used to elect the president of the European Commission: Manfred Weber’s chances of being appointed president of the Commission have fallen, while Jens Weidmann’s chances of being appointed president of the ECB have risen, in our view.
The results have significant implications for national politics especially in Italy, the UK and Germany. However, it may take some time for the full repercussions to be seen.
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The elections had become a de-facto referendum on the future of the European project itself – this galvanised voters and led to the highest turnout in more than 20 years. Although the centre-right EPP remains the largest parliamentary group, its vote share was much lower than in 2014. This, combined with the fall in seats held by the centre-left Socialists, means the traditional centrist parties have lost their overall majority.
However, the centrists’ loss of majority was not due to a groundswell of support for eurosceptic parties, which fell short of the third of the seats that some polls had suggested. Instead, the increased turnout appears to have benefitted Liberal and Green forces
significantly. The new grouping of Guy Verhofstad’s ALDE with French president Emmanuel Macron’s party will be the third-largest in the European Parliament.
Meanwhile, support for Greens rose from 6.9% in 2014 to 8.9%. Indeed, the Liberal pro-EU combination of the Socialists, ALDE and Greens has 323 seats (short of an outright majority, but still holding the balance of power in the European Parliament) with the centreright EPP only having 180 seats, less if Hungary’s Fidez (13 seats) ends up leaving the group.
At the national level, the highlights are Marine Le Pen’s National Rally’s albeit marginal lead on President Macron’s Renaissance list in France, and the success of Matteo Salvini’s League in Italy and Nigel Farage’s Brexit Party in the UK.
