EU Game of Thrones can now begin

Market movers today

• The week starts out quietly on the data front, so focus will be on politics, notably the outcome and implications of the EU parliamentary elections.

• A key area of interest will be the EU election result implications for the appointment of the next head of the EU Commission, which could also have implications for the ECB presidential appointment . 

• In the UK, the results for the Conservative Party will be scrutinised in light of the impending leadership contest.

Selected market news

Although the EU elections saw shrinking support for established parties in many countries, the influence of Eurosceptic groups will remain limited with a vote share of c.23% (from 20.6% previously). 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. Still, in France, President Macron's party En Marche lost the race against the far-right Rassemblement National, calling into doubt his grand plans for domestic reforms and further EU integration.

Similarly, in Germany, critical voices in the grand coalition are getting louder after another heavy defeat for the SPD party. While national governments will digest the repercussions of the election results in the coming days, focus in Brussels reverts to coalition building and the election of a new Commission presiden. Note that in the UK, the Conservatives only got 9% of the votes, while Nigel Farage's new Brexit Party got 32%. It may further support the hard Brexit camp as the Conservatives prepare to elect the successor to PM May.

All in all, we expect financial markets to react positively to the EU election results (higher equities and yields). But it is not a big market mover, as we see it. The next major events are the ECB and Fed June meetings.

On Friday night, Fitch changed the outlook on Portuguese government bonds from "stable" to "positive". Fitch pointed to falling public debt/GDP and a low headline fiscal deficit and sees little risk of a sharp deviation from current fiscal policy after the October elections. It shows that the positive rating cycle is still intact in Portugal despite the weaker Eurozone outlook. That said, Moody's did not change the rating or the outlook for Spain. However, the Spanish economy is, like Portugal's, in quite good shape and it is just a matter of time, in our view, before Spain receives a positive outlook.

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