Saturday 17 August 2019

Markets relieved as EU centre holds in election

Trading: The euro was little changed against the dollar as sterling steadied against it (stock photo)
Trading: The euro was little changed against the dollar as sterling steadied against it (stock photo)

David Chance

Markets breathed a sigh of relief on Monday as a much-anticipated nationalist surge failed to emerge in elections to the European Parliament with stock markets and some peripheral bond markets rallying.

The European STOXX 600 added 0.4pc, although trading was thin as both the UK and United States were closed for market holidays, while the euro was little changed against the dollar.

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Even sterling - the whipping boy in recent trading sessions as fears of a hard Brexit grew - held its ground against the euro.

"Losses for the Social Democrats and Conservatives - which lost their absolute majority for the first time since 1979 - were amply offset by gains for the Greens and Liberals, meaning that overall sentiment in parliament will remain pro-EU," investment bank Danske said in a research report.

Provisional results for the EU Parliament put the European People's Party on 182 seats, ahead of the Socialists & Democrats on 147. The Liberals gained 41 seats to 109 and the Greens 17 to 69 while the far-right, two groups had over 100 seats, a 40pc jump from 2014, according to Reuters.

Relief that the centre held may however evaporate in the battle for the EU presidency, with French President Emmanuel Macron lining up allies to oppose Germany's Manfred Weber.

Also at stake is the presidency of the European Central Bank and there is a risk that political infighting could derail economic reform attempts within the eurozone.

If Germany were to lose out on the EU presidency, Berlin would aim for the ECB post and its candidate, Jens Weidmann, is an inflation hawk who has criticised the bank's bond-buying programme

It would effectively mean Germany would be setting fiscal policy for the eurozone via the restrictive Stability and Growth Pact and having an outsized say on monetary policy.

"It remains possible that Weidmann will end up succeeding Mario Draghi at the ECB - an outcome which investors would be concerned about," said Andrew Kenningham chief Europe economist at Capital Economics.

In addition, the Greens and Liberals could push harder for more action on climate change and on taxing polluters as well as multinational companies.

The last of these could increase pressure on Ireland in the bloc. Finance Minister Paschal Donohoe warned on Thursday that unilateral action by the EU risked triggering a trade war.

Irish Independent

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