Good morning,

Holland goes to the polls

This time tomorrow we will know what the electoral map in the Netherlands looks like with polls in the 2017 election opening a few hours ago. Voting will last until 8pm GMT tonight with exit polls announced immediately after. Full results, including the larger metropolitan areas of Amsterdam and Rotterdam should be available by midnight.

No party is forecast to obtain the magic number of 76 seats to hold a majority government in the Lower House of the Dutch parliament, in fact no party will get close to even half of that with the majority of the leading parties scrabbling around for somewhere between 18 and 25 seats. Dutch politics is coalition politics – there has not been a single party majority since WW1 – and the crucial factor will be which party finds itself in the ‘Kingmaker’ role and how many parties are needed to form that majority.

Votes for the Dutch far right do not equal votes for the French far right

Of course, markets will focus on how strong and how vocal the PVV support is and likely transpose that on to fears for the French election next month. Any talk of a referendum on EU membership – although unlikely – would be a massive red warning flag given the natural genesis of that being a referendum on the euro itself. The summer of 2012 was notable for the London Olympics but also the near complete meltdown of the single currency in Greece.

As we have said before we believe that the Dutch elections and the ensuing uncertainty surrounding the ability of a government to be quickly or easily formed at a critical juncture for the European Union represents a real risk for the euro in the early part of 2017.

While the media and commentariat have chosen to focus on the French elections and the cartoon villainy of Marine Le Pen, there is a good chance that her own success is contingent on a victory for the PVV party in Holland, and this will become increasingly priced into the single currency between the Dutch elections in March and the first round of the French elections in April.

We do not believe that she will triumph however, and the French election will end up as a net positive for the European single currency.

For now, the euro looks stable against the USD and has lost a little bit of the gains it managed to put together against the pound given the latter’s own political strife.

Fed to hike once again

It is Federal Reserve day in the States and with investors and markets told overwhelmingly to expect a 25bps increase in borrowing rates then a 25bps increase in borrowing rates will be seen at 6pm GMT tonight. The crucial thing of course is the press conference from Janet Yellen that follows and what she and the wider Federal Reserve say about the outlook for 2018/19.

This hike in March is a tacit endorsement of the economic growth that we have seen in the past 6 months and the Trump rally but a continuation of this positivity in line with market expectations will only stem from an increase in throughput from the Trump administration on taxes and infrastructure. The news cycle will likely instead focus on his tax returns given the publication of a few pages of Trump’s return from 2005 last night.

The data day ahead

Before the Fed we have US CPI and retail sales with the former expected to rise as last year’s fall in oil prices becomes less and less a factor on the calculations and the latter set to remain strong too. The UK’s jobs report is also due this morning and will crucially give us a view of what the environment for pay looks like following the recent run higher in inflation. Inflation with matching pay increases is a lot more preferable to inflation without a boost in wages.

Have a great day

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