Anti-EU gains spook investors

Investors will this week be watching election results that could deal a blow to political parties who are key to reform efforts in the EU and could also fan instability in Ukraine.

The bonds of some struggling eurozone governments were sold off last week as investors worried about expected gains for anti-EU parties in European Parliament votes.

In Greece, a strong showing by parties opposed to its EU-led bailout may hurt the fragile coalition government, potentially paving the way for a new national vote.

In Italy, a poor result for Prime Minister Matteo Renzi’s party could undermine his drive for promised swift reforms.

“It looks like we are going to see the far-right parties making further gains and it is going to make it more difficult for the European authorities to deal with any subsequent euro crisis events,” said Victoria Clarke, an economist at Investec.

The ECB is widely expected to cut interest rates, a Reuters poll showed, having clearly flagged that possibility at its last monetary policy meeting.

All this means a three-day ECB forum in Portugal that began last night and features president Mario Draghi and several ECB board members will be keenly watched by the markets.

Eurozone money supply data on Wednesday and Italian and Spanish inflation numbers on Friday may reinforce the case for more easing if they come in weak.

“The euro area’s economic recovery is bedding in, but inflation is well below the ECB’s target and there is a risk that deflation could take hold across the region,” Standard Chartered said in a research note.

“This could elicit more expansionary policy.”

But David Mackie, chief European economist at JP Morgan, does not expect an ECB rate cut in June to be the start of a sustained campaign to provide more stimulus.

“We have not changed our broad macro story, which is that the region is heading towards a 2% growth environment,” he said.

“So we don’t think that what will happen in June would then be followed by more aggressive action later in the year.”

— Reuters

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