UBS: Was kommt nach den Wahlen in Frankreich?

Europe’s political calendar remains packed – even with the high-profile French presidential race out of the way. Parliamentary elections in France will largely determine President Emmanuel Macron’s ability to enact progrowth reforms. A general election in the UK will helpshape exit talks with the EU, which could turn acrimonious. And votes in Germany and later Italy could generate uncertainty for investors.

Despite this full agenda, CIO believes that political risks should recede over the medium term. Starting with France, the defeat of the anti-EU MarineLe Pen means that the threat of Frexit, a potentially fatal blow for European integration and the euro, has passed for now. Parliamentary elections on June 11 and 18, though important for the country, are unlikely to rattle global markets or shake confidence in the euro. Likewise, the German national elections on September 24should be taken in stride by investors.

Their outcome is still up in the air. CIO expects the contest to lead to agrand coalition at the federal level, headed either by the SPD of Martin Schulz or Angela Merkel’s CDU party. However, both are established pro-European parties and neither would seek to withdraw Germany from the euro. The Brexit talks and the Italian elections have the potential to be more disruptive. But neither is likely to unsettlemarkets anytime soon. The UK’s June general election is on track to increase the parliamentary majority of the ruling Conservative Party. This should improve Prime Minister Theresa May’s position to resist pressure from the extreme anti-EU wing of her party. So the electionshould make it easier for her government to reach a compromise with the EU, lowering the danger of a disruptive collapse of talks.

Elections are looming in France, the UK, Germany, and Italy. But CIO believes none are likely to pose an immediate threat to the euro. With political risks on the backburner for now, investors can focus on the improving Eurozone economy and the potential for a reduction inmonetary stimulus. Italian elections present perhaps the greatest threat to the euro over the coming year. The anti-EU Five Star Movement is running neck-and-neck in the polls with the ruling Democratic Party. And popular support for the euro is low in Italy. Only 53% of the population views the currency union positively, according to a European Commission poll from last autumn. Even so, the return of former Prime Minister Matteo Renzi as head of the Democratic Party has boosted pro-EU forces in Italy. And a national vote is currently likely only next spring.

That should provide investorswith at least a respite from political angst. If political risks come off the boil, markets can focus on good news from economic data. Eurozone GDP grew by an annualized 2% in the first quarter, outpacing the usually faster-growing US, whose economy expandedjust 0.7%. And manufacturing sentiment hit a six-year high in April, according to the purchasing managers’index. These positive indications, along with less political uncertainty, make it likelier that the European Central Bank will soon start preparing the market for reducedstimulus. These factors should support the CIO overweight position in the euro relative to the US dollar. From around USD 1.09 at present, CIO expects the euro to rise to USD 1.15 in the coming six months.