By Virginia Furness
LONDON (Reuters) – Investors relieved by the outcome of the EU’s parliamentary election are holding off from celebrating until they see the results of a run of potentially more disruptive votes in member states.
Pro-European parties ended up controlling 503 of the EU parliament’s 751 seats – quelling fears that rising eurosceptics and populists would sweep to power and take control of the bloc’s budgets and posts.
There was a quick relief rally in equities, but markets have failed to build on those gains. Hanging over them is the cooling euro zone economy and a raft of snap elections that could redraw the political map in several countries.
Elections are scheduled in Poland by November 2019 and Austria goes to the polls in September after a government collapse. Greece called snap elections this week and Italy and Britain may follow suit.
“In some countries, including Austria, Greece and Poland, the (EU Parliament) results provide an indication of voting sentiment going into national elections later this year,” ratings agency Moody’s told clients.
That would mean wins for the conservative OVP in Austria, the far-right League in Italy and Greece’s centrist New Democracy. In Britain, the ruling conservatives could see themselves out of power, having endured a drubbing from the eurosceptic Brexit party.
Italy is at the top of the worry list. Already facing the prospect of EU fines for excessive spending, its Prime Minister Matteo Salvini has said his far-right party’s strong EU vote showing justifies abandoning fiscal limits set by the bloc.
Many expect Salvini to dissolve his fractious coalition and go it alone; an election now would see his party “double the number of our MPs,” he has said.
“It reopens the whole agenda of whether Salvini wants to be part of the euro or not,” said Colin Harte, portfolio manager at BNP Paribas Asset Management.
“The danger is that the (dispute between Salvini and the EU) turns out to be more aggressive on both sides, then you will see people switch out of positions.”
Italian 10-year bonds now trade with yields that are almost 300 basis points above their German counterparts, a warning that markets will punish Rome for signs of policy deterioration..
They also now yield just 20 basis points more than Greek 10-year bonds, despite being rated four notches higher – a possible sign of some investors switching from Italy into Greece.
Not everyone sees the snap elections as bad news – Annalisa Usardi, macro-economic research at Amundi, said a new centre-right government in Italy could reduce the instability stemming from bickering in the current coalition.
And in Greece, the prospect of defeat for Prime Minister Alexis Tsipras’ leftist Syriza party has fired up stock markets while bond yields have fallen to record lows near 3%.
Tsipras called the early vote after his leftist Syriza party suffered a heavy defeat to the opposition conservative New Democracy party in Sunday’s election for the European Parliament.
“We are worried about Italy,” said Frederik Ducrozet at Pictet Wealth Management. “But look at Greece. New Democracy is ahead in the polls there and they want reforms.”
Kaspar Hense, portfolio manager at BlueBay Asset Management, likes Greece and also holds an overweight position on Italian debt, comparing both their high yields to negative-yielding German counterparts.
Hense also expects the European Central Bank to step in and support the bloc with more stimulus, which would offset any election-linked volatility.
It still remains unclear how, or even if, Britain will leave the European Union, making it tricky to take positions. As events follow events on a daily if not hourly basis, analysts are constantly redrawing their scenarios, which include the chance of a parliamentary revolt forcing a snap election.
“The problem is both extremes (Brexit or no-Brexit) have become likely and you don’t want to bet the farm on either,” said Colin Asher, senior economist at Mizuho.
One positive, Amundi’s Usardi said. is that Britain’s long-drawn Brexit battles and damage to its economy may have clipped the wings of even the most outspoken eurosceptics on the continent.
“The populist and eurosceptic parties have learned it is not such an easy task,” she said. “In the run-up to the election we didn’t see any mention of countries leaving the EU, so perhaps the confrontation between Italy and the EU with regards to Italy will end in compromise.”
(Reporting by Virginia Furness; grahic by Ritvik Carvalho; additional reporting by Sujata Rao; editing by Sujata Rao and Andrew Heavens)