From Pierre Bose, Head European Investment Strategy, Credit Suisse
With over 90% of votes counted, albeit subject to a final confirmation in four days, the VVD party in Netherlands has defeated the Freedom Party. High voter turnout and good perceived management of the recent row with Turkey seem to have benefited Mr. Rutte’s VVD, which is projected to have won more seats than polls had predicted, albeit 8 less than in the last election.
The Freedom Party have underperformed in the polls winning 20 seats very closely followed by the Christian Democrats (CDA) and D66. Given the heavy losses of the Labour party (PvdA), which was a key member of the incumbent government, the gains by the latter two parties and their centrist or liberal policy inclinations make it feasible for the VVD, CDA and D66 to form the core of a coalition with over 70 seats in the 150 seat parliament. The process of forming government will start on Thursday and may take months. Whilst for much of the election the focus was on the far right, the key to forthcoming discussions may be negotiations with parties on the left including the GreenLeft who quadrupled their representation to 16 seats. A smaller coalition would imply a more stable government with potentially a broader policy mandate.
Overall, the result if confirmed, will help to allay fears over a further spread of populist forces in Europe. It potentially refocuses the attention of voters away from more extreme solutions to commonly held concerns about immigration, terrorism, unemployment and welfare. Thus, the immediate spillover to the French elections, which remain our key focus, is likely to be positive for markets by easing fears of a Le Pen victory. To that extent, we have already seen the euro strengthen overnight and the focus will remain on the currency and government bond yields first thing in the morning. Attention will be centered on both French and Italian bond spreads versus Germany. To the extent that initial polls gave a good indication of the result gains in the Dax futures late yesterday and overnight on the S&P 500 could well be sustained in early European trading hours. Nevertheless, after strong gains year-to-date, significant price appreciation for equities could be more limited over the next few days since the French elections remain a source of event risk and we believe political risk has not yet proven a major handicap to equity markets. (Credit Suisse/mc/ps)