- Title: Political risks may be the biggest test for financial markets in 2017
- Date: 30th December 2016
- Summary: TIANJIN, CHINA (FILE - MAY 2010) (REUTERS) CARGO VESSELS IN PORT TRUCKS DRIVING IN PORT LORRY CARRYING CONTAINER
- Embargoed: 14th January 2017 10:26
- Keywords: global economy financial markets. political risks 2017 France Germany elections Trump. Presidency China relationship
- Location: LONDON, ENGLAND, UK / NEW YORK, U.S.A./ TIANJIN, CHINA / PARIS, FRANCE / ESSEN, GERMANY / ALMERE, THE NETHERLANDS
- City: LONDON, ENGLAND, UK / NEW YORK, U.S.A./ TIANJIN, CHINA / PARIS, FRANCE / ESSEN, GERMANY / ALMERE, THE NETHERLANDS
- Country: Various
- Topics: Economic Events
- Reuters ID: LVA0035F2PKZX
- Aspect Ratio: 16:9
- Story Text: The global economy has withstood several crises since 2008 but for financial markets, the biggest tests may be to come. After several shocks this year some investors are looking closely at the many political risks ahead in 2017.
Elections in France, Germany and The Netherlands next year, are flashpoints that could ignite brewing political discontent across the continent.
They are among the biggest risks for 2017, according to analysts, after seeing the surge of right-wing populism that went a long way to determining the surprise outcomes of this year's Brexit referendum and U.S. presidential election.
"It's going to be fascinating the French election. If we predict anybody winning this we are going to look as stupid as we did with Brexit and with Trump or any of the other issues which were apparently dead certs going one way and it'll go the other way. Well, if it is Madam Le Pen that is coming then I don't think she is going to be saving the EU, it may well be that's the end of the euro. But it would seem at the moment that that's unlikely although that is very hard to be able to hang your hat on at the moment. If it is Mousieur Fillon then maybe it is the sort of reforms that are necessary. But there's one caveat to that - the French unions are very strong and very effective, they will literally cut off Paris if they feel they are under attack. So even he does get elected he is going to have a hell of a fight on his hands domestically to get those reforms through," said Justin Urquhart-Stewart, Head of Corporate Development at 7IM.
The mathematics for Le Pen to secure the French presidency are far trickier than those faced by the Brexiteers or Trump. But these two political earthquakes mean investors are going into 2017 with their eyes wide open.
They are selling the bonds of so-called peripheral euro zone countries, pushing the premium they offer over ultra-safe German bonds to the widest levels in months.
In November the 10-year Italian-German spread was nearly 180 basis points, the widest in over two years.
The euro is also coming under pressure as the rise in U.S. Treasury yields and U.S. growth prospects attract investment flows into the dollar. But the bubbling European political risk is also undermining it. There are elections in The Netherlands and Germany in 2017 too.
"The issue with Merkel of course is almost name one other politician in Germany. Obviously we know Herr Schaueble but she has virtually cleared the ground around her so it is only her. So yes, despite the fact that her policies of the last year, particularly with regard to immigration, were unpopular she's likely to be elected but I suspect the majority is going to be much thinner overall. What she has to do if she wants to imbed her changes and reforms is to start building up a team who can carry on after her because Mutte Merkel can't carry on forever," said Urquhart-Stewart.
But the key political risk, according to Urquhart-Stewart, is the U.S. and in particular its relationship with China.
"They need each other, they can't do without each other but sadly the rhetoric or more to the point the tweeting from President-elect Trump and the dangerous reaction from the Chinese, this is very dangerous politics indeed. Already he has cast aside the Pacific Trade Agreement, to which the Chinese are absolutely delighted, but he needs the Chinese - after all they are the second largest holder of American debt and he would probably like them to buy some more and certainly not sell it. But equally the Chinese need the Americans because they are one of their largest trading partners, they need them to be still buying Chinese stuff so the sooner we get away from rhetoric and down to real proper diplomacy and bargaining structures, to actually stop accusing each other dumping and currency manipulation and actually get down to brass tacks and what they can do together, the better." - Copyright Holder: FILE REUTERS (CAN SELL)
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