European markets rise as Dutch vote eases populism fears

Stocks rose in markets around Europe on March 16 as traders digested Dutch Prime Minister Mark Rutte's strong showing in a general election the previous day, which eased fears of a wave of right-wing populism sweeping the continent.

Fueled as well by the Federal Reserve's decision to raise U.S. interest rates on the back of a strengthening economy — while expressing caution over the outlook for further rate hikes in 2017 — the benchmark Dutch stock index touched a nearly 10-year high, while the London Stock Exchange's FTSE 100 benchmark reached an intraday record level. Shares in ING Groep NV were up around 0.1% at €14.42 as of 5:30 p.m. Amsterdam time, having risen to as high as €14.69 earlier in the day. Shares in fellow Dutch lender ABN AMRO Group NV were up 1.3%, while insurer NN Group NV gained 1.2%.

The Dutch 10-year government bond yield opened sharply lower at 0.641%, down more than 2 basis points from the prior-day close and 8 basis points from the 0.741% at which it finished March 10. The spread on Dutch bonds over their German equivalent narrowed at one stage to 26 basis points, the lowest level since February, the Financial Times noted.

The yield on French 10-year bonds dipped below 1% in early trading. But by late afternoon, the French 10-year yield had risen to 1.084%, while the yield on Dutch 10-year debt stood at 0.69% and that on 10-year German debt at 0.446%.

The euro was marginally stronger against the dollar, up 0.03% at $1.074.

Rutte's strong showing

Preliminary results showed Rutte's center-right VVD party winning 33 of the 150 seats in the lower house of parliament, well ahead of the 20 claimed by the PVV party of anti-Islam and anti-EU firebrand Geert Wilders. Two other centrist parties, the right-leaning CDA and the left-liberal D66, won 19 seats apiece.

SNL Image

Dutch Prime Minister Mark Rutte, second from right, speaks with PVV leader Geert Wilders, second from left, as party leaders met in The Hague to begin talks over a new coalition. Green Links leader Jesse Klaver is pictured at far right.

Source: Associated Press

Negotiations will begin soon over the formation of a coalition government, with Rutte seen as likely to return as prime minister. The CDA and D66 would be natural coalition partners, but their combined haul of seats is insufficient for the 76-seat majority needed to govern.

The VVD's erstwhile coalition partner, the Labor Party, saw its support plunge, and it claimed just nine seats, a loss of 29 from the previous election. The biggest gain was by the Green Links party, which saw its number of seats rise to 14 from four.

Around Europe, however, the most significant result will be the lower-than-projected showing by Wilders, who had polled strongly in the months leading up to the election, only to see his support fade late on. Rutte was also boosted by his handling of a diplomatic spat with Turkey over the weekend of March 11.

European relief

The Dutch election was the first of three bellwether ballots in 2017 for a Europe rocked by Britain's mid-2016 decision to leave the bloc. Donald Trump's election as U.S. president added to fears of a populist surge spearheaded by Wilders, France's Marine Le Pen and the German AfD party.

Le Pen has campaigned to take France out of the euro and has promised a British-style referendum on its EU membership. She and centrist Emmanuel Macron are neck-and-neck in polling for the first round of elections April 23, trailed by scandal-hit conservative François Fillon. Polls also show that either Macron or Fillon would soundly defeat Le Pen in a second-round runoff.

In the wake of the vote, European leaders offered congratulations to Rutte and hailed the election as an endorsement of the European project.

European Commission President Jean-Claude Juncker said the Dutch had "voted overwhelmingly for the values Europe stands for: free and tolerant societies in a prosperous Europe," while outgoing French President François Hollande congratulated Rutte on his "victory against extremism."

Speaking at the Institute of International Finance's G-20 conference in Frankfurt, ING CEO Ralph Hamers said the election result meant that "the domino of populism has been stopped, at least in Holland. The pressure is now on the French to make sure it doesn't continue there."

BNP Paribas SA Chairman Jean Lemierre, speaking at the same event, cautioned that it would be difficult to draw conclusions about the French vote from the Dutch result, but he said "the signal is good. The worst is not the most likely scenario in the eurozone."

Coalition questions

Hamers also said he foresees two possibilities for an eventual Dutch coalition, both led by the VVD: a "rainbow coalition" of the VVD, CDA and D66, plus one or both of Green Links and Labor; or a "more right-wing" grouping again comprising the VVD, CDA and D66, but joined by two more conservative Christian parties.

Neither, he said, "will create a fiscal stimulus; it's not in the Dutch genes. ... What we do expect is that taxes for households will go down in both coalitions. Taxes for companies will go up, while it will be a simplified tax system."

SNL Image

Dutch Prime Minister Mark Rutte celebrates after exit poll results showed his VVD party finishing a clear first in the March 15 general election.

Source: Associated Press

Analysts from ING said a "rainbow" coalition would be significantly more pro-European than the center-right alternative, and they noted that the most obvious grouping for the latter would include the smaller Christian Union and yield the narrowest possible majority.

The stance on Europe "may be the biggest economic difference between the two types of coalitions," said ING's chief economist for the Netherlands, Marieke Blom. "The hyperglobalized Dutch economy has a lot to win — or lose — from possible reforms of Europe and Brexit negotiations. All doubts about Nexit can be put aside, but in many areas the European course of the Netherlands [is] yet to be determined."

Dutch banks are likely to be watching the coalition negotiations for signs of whether any of the reforms mentioned during the campaign will end up forming part of government policy, analysts at Rabobank said, pointing in particular to proposals to remove the tax deductibility of coupon payments on hybrid Additional Tier 1 bonds, as well as a proposal for a 6% leverage ratio of capital to total assets.

"This is likely to be much further down the line, however, and probably also less likely now the [VVD] has the lead," they said.

The analysts also suggested that the new government should move quickly to introduce legislation allowing banks to issue "senior nonpreferred" debt, as France has done to enable lenders to meet requirements for "bail-in-able" debt. But they acknowledged that this is unlikely to be a major priority in any coalition talks.

Dijsselbloem's future

Also on the line is the future of current Dutch Finance Minister Jeroen Dijsselbloem, a member of the Labor Party and also head of the influential Eurogroup of eurozone finance ministers. With Labor reduced to just nine seats, its prospects of inclusion in any coalition are questionable at best, meaning that Dijsselbloem could well lose his finance minister post.

European statutes do not specify that the president of the Eurogroup must be a serving finance minister, although since the body was formalized in 2009, both its leaders have been. Dijsselbloem became president in 2013, replacing Juncker, and was elected to a second 2.5-year term in mid-2015.

The next meeting of the Eurogroup is scheduled for March 20. A source familiar with the matter said Dijsselboem is expected to remain head of the Eurogroup going forward.

Blom noted that Dijsselbloem is well-respected in the Netherlands, and that the VVD has said he could remain as Eurogroup president until the end of his term regardless of the election result. Dijsselbloem himself has said he would not want to do so, she added.